Cloudflare’s Disruption

From Protocol:

Cloudflare is ready to launch a new cloud object storage service that promises to be cheaper than the established alternatives, a step the company believes will catapult it into direct competition with AWS and other cloud providers. The service will be called R2 — “one less than S3,” quipped Cloudflare CEO Matthew Prince in an interview with Protocol ahead of Cloudflare’s announcement Tuesday morning. Cloudflare will not charge data-egress fees for customers using R2, taking direct aim at the fees AWS charges developers to move data out of its widely popular S3 storage service.

R2 will run across Cloudflare’s global network, which is most known for providing anti-DDoS services to its customers by absorbing and dispersing the massive amounts of traffic that accompany denial-of-service attacks on websites. It will be compatible with S3’s API, which makes it much easier to move applications already written with S3 in mind, and Cloudflare said that beyond the elimination of egress fees, the new service will be 10% cheaper to operate than S3.

Cloudflare has always framed itself as a disruptor; R2 lives up to its reputation.

Cloudflare’s Evolution

I already wrote earlier this year about Cloudflare’s unique advantages in a world where the Internet is increasingly fragmented, thanks to the distributed nature of its service, and why that positioned the company to compete with the major cloud providers in the long run. What is worth referring to with this announcement, though, is this clip I posted of Prince’s initial launch of Cloudflare at TechCrunch Disrupt 2010, particularly this bit from the Q&A:

So from a competitive standpoint, obviously you’re intruding on some of the stuff that the bigger boys are doing, and they’ve been at this for a long time. What’s to stop them from coming in and replicating your model?

There are companies that are doing things at the high end of the market, and they make very fat margins doing it. I’m really a big fan of Clay Christensen, he was a business school professor of mine, and I like the idea of businesses that come in from below. The big incumbents have an Innovator’s Dilemma trying to come down and deal with a company like ours, but we welcome the competition. We think we make a really great product. It’s designed for a certain type of users that are very different than the users that a larger company might be trying to attract.

Prince was spot-on about the competitive response of incumbents to Cloudflare’s offering for the long-tail of websites: it never came, because Cloudflare was serving a new market. This is how Christensen defined new market disruption in The Innovator’s Solution:

The third dimension [is] new value networks. These constitute either new customers who previously lacked the money or skills to buy and use the product, or different situations in which a product can be used — enabled by improvements in simplicity, portability, and product cost…We say that new-market disruptions compete with “nonconsumption” because new-market disruptive products are so much more affordable to own and simpler to use that they enable a whole new population of people to begin owning and using the product, and to do so in a more convenient setting.

That’s not the end of the story, though: new market disruptors don’t stand still, but can leverage the huge runway provided by the new market to build up their product capabilities in a way that eventually threatens the incumbent. Christensen continued:

Although new-market disruptions initially compete against nonconsumption in their unique value network, as their performance improves they ultimately become good enough to pull customers out of the original value network into the new one, starting with the least-demanding tier. The disruptive innovation doesn’t invade the mainstream stream market; rather, it pulls customers out of the mainstream value network into the new one because these customers find it more convenient to use the new product.

This was Cloudflare Workers, edge compute functionality that was a great match for Cloudflare’s CDN offering, but certainly not a competitor for AWS’s core offerings. Back to Christensen:

Because new-market disruptions compete against nonconsumption, the incumbent leaders feel no pain and little threat until the disruption is in its final stages.

This is where R2 comes in.

The AWS Transformation

In a vacuum, most businesses would prefer making a fixed cost investment instead of paying on a marginal use basis. Consider Spotify’s music-streaming business: one of the company’s core challenges is that the more customers Spotify has the more it has to pay music labels — streaming rights are a marginal cost. A streaming service like Netflix, on the other hand, that spends up front for its own content, gets to keep whatever increased revenue that content drives for itself. This same logic applies to computing capacity: buying your own servers is, in theory, cheaper than renting compute from a service like AWS.

When it comes to compute, however, reality is very different than theory.

  • First, usage may be uneven, whether that be because a business is seasonal, hit-driven, or anything in-between. That means that compute capacity has to be built out for the worst case scenario, even though that means most resources are sitting idle most of the time.
  • Second, compute capacity is likely growing — hopefully rapidly, in the case of a new business. Building out infrastructure, though, is not a linear process: new capacity comes online all at once, which means a business has to overbuild for their current needs so that they can accommodate future growth, which again means that most resources are sitting idle most of the time.
  • Third, compute capacity is complex and expensive. That means there are both huge fixed costs that have to be invested before the compute can be used, and also significant ongoing marginal costs to manage the compute already online.

This is why AWS was so transformative: Amazon would spend all of the up-front money to build out compute capacity for all of its customers, and then rent it on-demand, solving all of the problems I just listed:

  • Customers could scale their compute up-or-down instantly in response to their needs.
  • Customers could rent exactly as much compute as they needed at any moment in time, even as they were able to seamlessly handle growth.
  • AWS would be responsible for all of the up-front investment and ongoing maintenance, and because they would operate at such scale, they would get much better prices from suppliers than any individual company could on its own.

It’s impossible to overstate the extent to which AWS changed the world, particularly Silicon Valley. Without the need to buy servers, companies could be started in a bedroom, creating the conditions for the entire angel ecosystem and the shift of traditional venture capital to funding customer acquisition for already proven products, instead of Sun servers for ideas in PowerPoints. Amazon, meanwhile, suddenly had a free option on basically every startup in the world, positioning itself to levy The Amazon Tax on every company that succeeded.

The scale of these options became clear to the world in 2015 when Amazon broke out AWS’s financials for the first time; I called it The AWS IPO:

The big question about AWS, though, has been whether Amazon can keep their lead. Data centers are very expensive, and Amazon has a lot less cash and, more importantly, a lot less profit than Google or Microsoft. What happens if either competitor launches a price war: can Amazon afford to keep up?

To be sure, there were reasons to suspect they could: for one, Amazon already has significantly more scale, which means their costs on a per-customer basis are lower than Microsoft or Google. And perhaps more importantly is the corporate culture that results from a “your-margins-are-my-opportunity” mindset: Amazon can stomach a few percentage points of margin on a core business far more comfortably than Microsoft or Google, both fat off of software and advertising margins respectively. Indeed, when Google slashed prices in the spring of 2014, Amazon immediately responded and proceeded to push prices down further still, just as they had ever since AWS’s inception (the price cuts in response to Google were the 42nd for the company). Still, the question remained: was this sustainable? Could Amazon afford to compete?

This is why Amazon’s latest earnings were such a big deal: for the first time the company broke out AWS into its own line item, revealing not just its revenue (which could be teased out previously) but also its profitability. And, to many people’s surprise, and despite all the price cuts, AWS is very profitable: $265 million in profit on $1.57 billion in sales last quarter alone, for an impressive (for Amazon!) 17% net margin.

Those numbers last quarter are up to $4.2 billion in profit on $14.9 billion in revenue for a net margin of 28%: Amazon has increased its margins, even as Microsoft and Google have increased their focus on the cloud. A big reason is that Microsoft in particular has pursued different customers, coaxing existing businesses to the cloud, thanks in part to their early focus on hybrid solutions.1 Google, meanwhile, has been even further behind, particularly in terms of matching AWS’s sheer breadth of services (even if they weren’t always technically great), making it harder for businesses already used to AWS to shift.

The egress fees R2 is targeting, though, have played a big role as well.

S3’s Egress Pricing

S3 is the OG Amazon Web Service: it launched on March 14, 2006, with this press release:

Amazon Web Services today announced “Amazon S3(TM),” a simple storage service that offers software developers a highly scalable, reliable, and low-latency data storage infrastructure at very low costs…

Amazon S3 is storage for the Internet. It’s designed to make web-scale computing easier for developers. Amazon S3 provides a simple web services interface that can be used to store and retrieve any amount of data, at any time, from anywhere on the web. It gives any developer access to the same highly scalable, reliable, fast, inexpensive data storage infrastructure that Amazon uses to run its own global network of web sites. The service aims to maximize benefits of scale and to pass those benefits on to developers…

S3 lets developers pay only for what they consume and there is no minimum fee. Developers pay just $0.15 per gigabyte of storage per month and $0.20 per gigabyte of data transferred.

Prices have, as you might expect, come down over the ensuing 15 years:

  • A gigabyte of storage today is $0.023, a decrease of 85%
  • Moving data into S3 is free, a decrease of 100%
  • Moving a gigabyte out of S3 is $0.09, a decrease of 55%

These numbers are the base rates; prices vary based on different storage tiers, whether or not you use Amazon’s CDN, and, more importantly, whether or not you have a long-term contract with AWS (more on this in a moment). What is consistent across all of those variables, though, are differences in cost between moving data into AWS, and the cost of moving data out; a blog post from earlier this year called the difference AWS’s “Hotel California”:

Another oddity of AWS’s pricing is that they charge for data transferred out of their network but not for data transferred into their network…We’ve tried to be charitable in trying to understand why AWS would charge this way. Disappointingly, there just doesn’t seem to be an innocent explanation. As we dug in, even things like writes versus reads and the wear they put on storage media, as well as the challenges of capacity planning for storage capacity, suggest that AWS should charge less for egress than ingress.

But they don’t.

The only rationale we can reasonably come up with for AWS’s egress pricing: locking customers into their cloud, and making it prohibitively expensive to get customer data back out. So much for being customer-first.

Even if companies are careful to not make any of their back-end services AWS-specific, the larger you grow the more data you have on AWS, and moving that data off is an eye-watering expense. And so, when another company builds a service that looks interesting — like, say, Cloudflare Workers — it’s easier to simply wait for Amazon’s alternative and build using that, and oops, now you’re even more locked into AWS!

What is happening in terms of the value chain is straightforward: Amazon paid fixed costs for its infrastructure, and is charging for it on a marginal basis; all of the upside here accrues to AWS, as seen in the service’s margins. That is also an important part of AWS’s retention strategy: for most AWS customers the easiest solution to rising costs is to simply sign a long-term contract, dramatically decreasing their prices (again, Amazon has the margin to spare) while ensuring they stay on AWS that much longer, accumulating that much more data and relying on that many more AWS-specific services. Hotel Seattle, as it were.

That blog post, by the way, was co-written by Prince, where he made the case that based on Cloudflare’s understanding of bandwidth costs, AWS was making a 7959% margin on US/Canada egress fees; Prince’s conclusion at the time was that AWS ought to join the Bandwidth Alliance and discount or waive egress fees when sending data to Cloudflare (which doesn’t cost AWS anything, thanks to an industry-standard private network interface), but two months on, the true point of Prince’s post was clearly this week’s announcement.

R2’s Low-End Disruption

From the Cloudflare blog:

Object Storage, sometimes referred to as blob storage, stores arbitrarily large, unstructured files. Object storage is well suited to storing everything from media files or log files to application-specific metadata, all retrievable with consistent latency, high durability, and limitless capacity.

The most familiar API for Object Storage, and the API R2 implements, is Amazon’s Simple Storage Service (S3). When S3 launched in 2006, cloud storage services were a godsend for developers. It didn’t happen overnight, but over the last fifteen years, developers have embraced cloud storage and its promise of infinite storage space.

As transformative as cloud storage has been, a downside emerged: actually getting your data back. Over time, companies have amassed massive amounts of data on cloud provider networks. When they go to retrieve that data, they’re hit with massive egress fees that don’t correspond to any customer value — just a tax developers have grown accustomed to paying.

Enter R2.

The reason that Cloudflare can pull this off is the same reason why S3’s margins are so extraordinary: bandwidth is a fixed cost, not a marginal one. To take the most simplified example possible, if I were to have two computers connected by a cable, the cost of bandwidth is however much I paid for the cable; once connected I can transmit as much data as I would like for free — in either direction.

That’s not quite right, of course: I am constrained by the capacity of the cable; to support more data transfer I would have to install a higher capacity cable, or more of them. What, though, if I already had built a worldwide network of cables for my initial core business of protecting websites from distributed denial-of-service attacks and offering a content delivery network, the value of which was such that ISPs everywhere gave me space in their facilities to place my servers? Well, then I would have massive amounts of bandwidth already in place, the use of which has zero marginal costs, and oh-by-the-way locations close to end users to stick a whole bunch of hard drives.

In other words, I would be Cloudflare: I would charge marginal rates for my actual marginal costs (storage, and some as-yet-undetermined-but-promised-to-be-lower-than-S3 rate for operations), and give away my zero marginal cost product for free. S3’s margin is R2’s opportunity.

Modular Disruption

Cloudflare, at least in AWS terms, remains a minnow; the company had $152 million in revenue last quarter, 10 percent of AWS’s revenue upon its unveiling six years ago. Prince, though, is thinking big; from that Protocol article:

“We are aiming to be the fourth major public cloud,” Prince said. Cloudflare already offers a serverless compute service called Workers, and Prince thinks that adding a low-cost storage service will encourage more developers and companies to build applications around Cloudflare’s services.

That is one way this could play out: R2 is a compelling choice for a certain class of applications that could be built to serve a lot of data without much compute. Moreover, by virtue of using the S3 API,2 R2 can also be dropped into existing projects; developers can place R2 in front of S3, pulling out data as needed, once, and getting free egress forever-after.

Still, AWS is far more than storage; the second AWS product was EC2 — Elastic Compute Cloud — which lets customers rent virtual computers that by definition are far more capable than a necessarily limited edge computing service like Workers, along with a host of database offerings and the sort of specialized services I mentioned earlier. Not all of these will necessarily translate well to Cloudflare’s distributed infrastructure, either.

Again, though, Cloudflare’s distributed nature is the entire reason the company’s cloud ambitions are so intriguing: R2 may be a direct competitor for S3, but that doesn’t mean that anything else about Cloudflare’s cloud ambitions has to be the same. Go back to Christensen and The Innovator’s Solution:

Modularity has a profound impact on industry structure because it enables independent, nonintegrated organizations to sell, buy, and assemble components and subsystems. Whereas in the interdependent world you had to make all of the key elements of the system in order to make any of them, in a modular world you can prosper by outsourcing or by supplying just one element. Ultimately, the specifications for modular interfaces will coalesce as industry standards. When that happens, companies can mix and match components from best-of-breed suppliers in order to respond conveniently to the specific needs of individual customers.

Clay Christensen's graph of modular disruption

As depicted in figure 5–1, these nonintegrated competitors disrupt the integrated leader. Although we have drawn this diagram in two dimensions for simplicity, technically speaking they are hybrid disruptors because they compete with a modified metric of performance on the vertical axis of the disruption diagram, in that they strive to deliver rapidly exactly what each customer needs. Yet, because their nonintegrated structure gives them lower overhead costs, they can profitably pick off low-end customers with discount prices.

This is where zero egress costs could be an even bigger deal strategically than they are economically. S3 was the foundation of AWS’s integrated cloud offering, and remains the linchpin of the company’s lock-in; what if R2, thanks to its explicit rejection of data lock-in, becomes the foundation of an entirely new ecosystem of cloud services that compete with the big three by being modular? If you can always get access to your data for free, it becomes a lot more plausible to connect that data to best-of-breed compute options built by companies focused on doing one thing well, instead of simply waiting for Amazon to offer up their pale imitation that doesn’t require companies to pay out the nose to access.

Cloudflare's modular cloud

Moreover, like any true disruption, it will be very difficult for Amazon to respond: sure, R2 may lead Amazon to reduce its egress fees, but given the importance of those fees to both AWS’s margins and its lock-in, it’s hard to see them going away completely. More importantly, AWS itself is locked-in to its integrated approach: the entire service is architected both technically and economically to be an all-encompassing offering; to modularize itself in response to Cloudflare would be suicidal.

At the same time, this is also why Cloudflare’s success in becoming the fourth cloud, should it happen, will likely be additive to the market: companies on AWS are by-and-large not going anywhere, but there are new companies being formed all of the time, and a whole bunch of companies that have yet to move to the cloud, as well as the aforementioned Internet fragmentation that plays to Cloudflare’s advantage. Here it is a benefit to Cloudflare that it is a relatively small company: opportunities that seem trivial to giants will be big wins, giving the company the increasing scale it needs to flesh out its offerings and build its new cloud ecosystem. Success is not assured, but the strategy is sound enough to make Prince’s late professor proud.


  1. Amazon resisted hybrid for a long time, because it’s a technically terrible solution relative to just moving everything to the cloud, which is to say that Amazon made the same mistake all of Microsoft’s competitors make: relying on a “better product” instead of actually meeting customers where they are and solving their needs 

  2. Copying APIs is a favorite tactic of Amazon when it comes to open source projects

The Apple v. Epic Decision

The vast majority of Judge Yvonne Gonzalez Rogers decision in Epic v. Apple is both straight-forward and predictable; I wrote that the iPhone company would likely win when the lawsuit was filed, and argued that the law was firmly on Apple’s side in App Store Arguments. That is indeed what happened: Apple won, and it wasn’t particularly close; Epic has already filed an appeal, but I doubt it will succeed.

What was surprising, though — and, frankly, a much more interesting question for the Court of Appeals — is that Judge Gonzalez Rogers also issued an injunction banning Apple’s anti-steering provision; while I do think Apple’s anti-steering provision is anti-competitive, this injunction is an odd outcome of this specific case, and a source of much confusion about what this decision was actually about.

Market Definition

The most important part of any antitrust case is market definition. Epic argued there is a smartphone market consisting of iOS and Android, and then on iOS there is a distinct “iOS App Distribution” market, and downstream from that a “iOS In-App Payment Solutions” market. Apple, on the other hand, argued that all of digital gaming was a market, including not just Android but also consoles and PCs.

Judge Gonzalez Rogers disagreed with both, defining the market as ‘mobile game transactions’. Epic’s argument was, as expected, dismissed out of hand; Supreme Court precedent is extremely skeptical that there are single brand markets, and the primary exception (Eastman Kodak) is only applicable if customers are unaware of aftermarket limitations at the time of purchase. In fact, customers are not only aware of Apple’s walled garden policies, but it is in fact a selling point for the iPhone, which means customers know what they are getting into when they choose the iPhone over Android.

In disagreeing with Apple, Judge Gonzalez Rogers first ruled that digital games are a distinct market from general non-gaming apps; the list of reasons are worth noting:1

Having considered and reviewed the evidence, the Court concludes based on its earlier findings of facts that the appropriate submarket to consider is digital game transactions as compared to general non-gaming apps. Indeed, the Court concluded that there were nine indicia indicating a submarket for gaming apps as opposed to non-gaming apps: (i) the App Store’s business model is fundamentally built upon lucrative gaming transactions; (ii) gaming apps constitute a significant majority of the App Store’s revenues; (iii) both the gaming, mobile, and software industry as well as the general public recognize a distinction between gaming apps and non-gaming apps; (iv) gaming apps and their transactions exhibit peculiar characteristics and users; (v) game app developers often employ specialized technology inherent and unique to that industry in the development of their product; (vi) game apps further have distinct producers — game developers — that generally specialize in the production of only gaming apps; (vii) game apps are subject to distinct pricing structures as compared to other categories of apps; (viii) games and gaming transactions are sold by specialized vendors; and (ix) game apps are subject to unique and emerging competitive pressures, that differs in both kind and degree from the competition in the market for non-gaming apps.

Next Judge Gonzalez Rogers ruled that mobile gaming transactions were a distinct market from digital gaming transactions generally:

As an initial matter, Apple’s own documents recognize mobile gaming as a submarket. One industry report describes mobile gaming as a “$100 billion industry by itself” that accounts for 59% of global gaming revenue. While PC and console gaming has grown more slowly, mobile gaming has experienced double-digit growth driven by “the free-to-play model” with in-app purchases. “Remarkably,” this rapid growth “has not significantly cannibalized revenues from the PC or console gaming markets,” which suggests that consumers are not necessarily substituting among them. Another industry report describes distinct user bases for mobile gaming: young children, teenage girls, and older adults are disproportionally likely to be mobile gamers only. Multiplatform gaming, by contrast, is driven by teenage boys and young adults under 25.

Judge Gonzalez Rogers cited further evidence about the extent to which mobile gaming business models differed from consoles and PCs, and Apple’s own expert evidence that showed only a small amount of cross-over in popular titles.

Ultimately, I found Judge Gonzalez Rogers’ market definition reasonable, although Apple could argue on appeal that all of digital gaming should be included. What is more notable, though, is the strong distinction Judge Gonzalez Rogers draws between games and non-gaming apps:

  • First, given this market definition, this case was only about mobile games. That is good news for app developers who have their own antitrust complaints about Apple’s policies, and also a reason for Apple to not take this ruling as a complete endorsement of their policies.
  • Second, this ruling does suggest that Apple ought to — and now has the judicial imprimatur to — treat games differently than other apps.

This is perhaps the most important takeaway from this decision; so much of the company’s App Store troubles have come from applying rules and regulations that are appropriate for games to other areas of the App Store that are totally different, and now the company has license to come up with two sets of rules for what, Judge Gonzalez Rogers ruled, are two different markets.

Market Power

With that definition established Judge Gonzalez Rogers ruled that Apple did not have monopoly power in ‘mobile gaming transactions’:

  • Apple has between 52%-57% share of the mobile gaming transaction market, which is significant but not enough to be a prima facie case of monopoly power.2
  • There is no evidence of a restriction in output, i.e. the mobile gaming transaction market continues to grow, despite the fact there is evidence that Apple’s 30% commission rate is artificially high.
  • While iOS and Android have substantial advantages, there is some evidence of increased competition in the mobile gaming space in the form of the Nintendo Switch and cloud gaming services.

Judge Gonzalez Rogers did note:

Given the totality of the record, and its underdeveloped state, while the Court can conclude that Apple exercises market power in the mobile gaming market, the Court cannot conclude that Apple’s market power reaches the status of monopoly power in the mobile gaming market. That said, the evidence does suggest that Apple is near the precipice of substantial market power, or monopoly power, with its considerable market share. Apple is only saved by the fact that its share is not higher, that competitors from related submarkets are making inroads into the mobile gaming submarket, and, perhaps, because plaintiff did not focus on this topic.

This paragraph explains why Apple may wish to appeal the definition of the market specifically; it is an important consideration in the anti-steering injunction which is addressed below.

What is unaddressed by this ruling, and by antitrust law in general, is the reality that the mobile gaming transaction market is a duopoly; this is a problem with tech regulation generally, as I noted in United States v. Google:

This gets at a larger problem in many tech markets: the tendency towards duopoly, which often lets one company cover for the other acting anti-competitively. In the case of Apple and Google:

  • Android’s presence in the market means that Apple can act anticompetitively with its App Store policies (which Google is happy to ape).
  • Apple’s privacy focus justifies decisions like limiting trackers, restricting cookies, and cutting off in-app analytics; Google happily follows Apple’s lead, which impacts its advertising rivals far more than it does Google, improving their relative competitive position.
  • Apple earns billions of dollars giving its customers the best default search experience, even as that ensures that Google will remain the best search engine (and raises questions about the sincerity of Apple’s privacy rhetoric).

This isn’t the only duopoly: Google and Facebook jointly dominate digital advertising, Microsoft and Google jointly dominate productivity applications, Microsoft and Amazon jointly dominate the public cloud, and Amazon and Google jointly dominate shopping searches. And, while all of these companies compete, those competitive forces have set nearly all of these duopolies into fairly stable positions that justify cooperation of the sort documented between Apple and Google, even as any one company alone is able to use its rival as justification for avoiding antitrust scrutiny.

Judge Gonzalez Rogers does note that it is unclear whether Google “could increase output in the short run in order to erode Apple’s market share”, but the real problem is that Google is content to simply share the market with Apple and earn their own supracompetitive commission rate.

The IAP System

Most of the rest of Judge Gonzalez Rogers’ decision balances Apple’s alleged anticompetitive conduct, including its ability to maintain outsized profit margins on the App Store because of the lack of competition for iOS App Stores and In-App Payment alternatives, with its procompetitive justifications, including enhanced security, intrabrand competition with Android-based phones, and its right to protect its investment in intellectual property.

The first two procompetitive justifications work as a set: Apple convinced Judge Gonzalez Rogers that App Review provided an additional unique and valuable layer of security above-and-beyond operating system-based security measures, and furthermore, that the companies approach to app distribution and monetization was not only not detrimental to customers, but was actually a selling point for the iPhone (as noted above this also explains why the App Store was not covered by the Eastman Kodak exemption).

Apple also won on the intellectual property point, as expected, but this is where the decision starts to get a bit complicated. Judge Gonzalez Rogers emphasized throughout the decision that Apple had a right to a commission on apps, but not necessarily 30%:

First, and most significant, as discussed in the findings of facts, IAP is the method by which Apple collects its licensing fee from developers for the use of Apple’s intellectual property. Even in the absence of IAP, Apple could still charge a commission on developers. It would simply be more difficult for Apple to collect that commission.

Indeed, while the Court finds no basis for the specific rate chosen by Apple (i.e., the 30% rate) based on the record, the Court still concludes that Apple is entitled to some compensation for use of its intellectual property. As established in the prior sections, Apple is entitled to license its intellectual property for a fee, and to further guard against the uncompensated use of its intellectual property. The requirement of usage of IAP accomplishes this goal in the easiest and most direct manner, whereas Epic Games’ only proposed alternative would severely undermine it. Indeed, to the extent Epic Games suggests that Apple receive nothing from in-app purchases made on its platforms, such a remedy is inconsistent with prevailing intellectual property law.

What is important to note is that this was not a complete win for Apple’s argument in court: there the company argued that the intellectual property for which the company deserved to be compensated was not simply the App Store and all of its attendant services, but also its entire stack of developer tools, from APIs to Xcode and everything in-between. This argument enraged developers like Marco Arment:

Apple’s leaders continue to deny developers of two obvious truths:

  • That our apps provide substantial value to iOS beyond the purchase commissions collected by Apple.
  • That any portion of our customers came to our apps from our own marketing or reputation, rather than the App Store…

To bully and gaslight developers into thinking that we need to be kissing Apple’s feet for permitting us to add billions of dollars of value to their platform is not only greedy, stingy, and morally reprehensible, but deeply insulting.

Judge Gonzalez Rogers agreed:

No one credibly disputes that Apple and third-party developers act symbiotically. Apple gives developers an audience and developers make Apple’s platform more attractive. Thus, Apple earns revenue each time a developer earns revenue creating a feedback loop. However, as revenues show, the ultimate effect appears to vary within developer groups depending on how a developer chooses to monetize its app.

Further, there is substantial evidence that Epic Games, and perhaps other larger developers, bring their own audience to iOS. Fortnite was already popular when it arrived on iOS and Apple sought exclusive Fortnite content to attract new users. That said, Epic Games wanted Apple’s user base, to which it did not have access, as it had already saturated its other options. Also, Match Group found that the majority of new users from the App Store organically searched for its apps (e.g., by typing in “Tinder”), while Apple contributed only 6% of discovery. For these developers, Apple’s role in generating in-app purchases was “nothing” but it continued to receive a 30% commission on in-app purchases.

Therefore, the intellectual property to which Apple is entitled to receive a commission is more narrowly defined: IAP, which Judge Gonzalez Rogers defined as such:

Apple’s IAP or “in-app purchasing” system is a collection of software programs working together to perform several functions at once in the specific context of a transaction on a digital device. Apple uses the system to manage transactions, payments, and commissions within the App Store, but it also uses the system in other “stores” on iOS devices, such as “the iTunes Store on iOS, Apple Music, iCloud or Cloud services” and “physical retail stores”. The system is not something that is bought or sold…

More specifically, Apple’s IAP, as used here, is a secured system which tracks and verifies digital purchases, then determines and collects the appropriate commission on those transactions. In this regard, the system records all digital sales by identifying the customer and their payment methods, tracking and accumulating transactions; and conducts fraud-related checks. IAP simultaneously provides information to consumers so that they can view their purchase history, share subscriptions with family members and across devices, manage spending by implementing parental controls, and challenge and restore purchases.

Apple also intends the system to provide the customer with a single interface which can be used, and trusted, with respect to all purchases regardless of the developer. Importantly, the system has become more sophisticated over time, but the record does not detail the various versions…

Creating a seamless system to manage all its e-commerce was not an insignificant feat. Further, expanding it to address the scale of the growth required a substantial investment, not to mention the constant upgrading of the cellphones to allow for more sophisticated apps. Under current e-commerce models, even plaintiff’s expert conceded that similar functionalities for other digital companies were not separate products. Under all models, Apple would be entitled to a commission or licensing fee, even if IAP was optional. Payment processors have the ability to provide only one piece of the functionality. There is no evidence that they can provide the balance. Thus, the Court finds Epic Games has not shown that IAP is a separate and distinct product.

Forgive the long excerpt, but understanding this definition is critical to understanding this case as a whole. What Gonzalez Rogers is saying is that IAP is not the App Store app or the payment processing or any other discrete offering, but rather the totality of its digital e-commerce system. It is the intellectual property undergirding this IAP system that Apple is entitled to monetize in whatever reasonable way that it sees fit. And, to take this section full circle, not only does Apple have a right to monetize IAP, forcing developers to use IAP enhances its other two procompetitive justifications:

If Apple could no longer require developers to use IAP for digital transactions, Apple’s competitive advantage on security issues, in the broad sense, would be undermined and ultimately could decrease consumer choice in terms of smartphone devices and hardware…to a lesser extent, the use of different payment solutions for each app may reduce the quality of the experience for some consumers by denying users the centralized option of managing a single account through IAP. This would harm both consumers and developers by weakening the quality of the App Store to those that value this centralized system.

That was a lot of legalese, but this is the takeaway: IAP is distinct intellectual property from developer tools broadly; it is the entire set of app management tools, not just a payment processor; and Apple has legitimate competitive justification to require IAP be used for in-app purchases.

The Anti-Steering Injunction

I mentioned above that this was where the decision got a bit complicated; notice that I just used “IAP” and “in-app purchases” to represent two distinct concepts. Specifically, it seems clear that Gonzalez Rogers has defined “IAP” to be Apple’s overall commerce system, while “in-app purchases” are purchases made in an app. In other words, Apple is justified in requiring IAP for in-app purchases.

This is the essential bit of context for making sense of the only part of the case that Apple lost: the injunction against the App Store’s anti-steering provisions, which states:

Apple Inc. and its officers, agents, servants, employees, and any person in active concert or participation with them (“Apple”), are hereby permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

As noted above, Gonzalez Rogers maintained throughout the decision that while Apple was certainly entitled to a commission, the appropriate rate was likely lower than 30%; here she argues that the App Store’s anti-steering provisions made the correct rate impossible to discover:

Apple’s own records reveal that two of the top three “most effective marketing activities to keep existing users coming back” in the United States, and therefore increasing revenues, are “push notifications” and “email outreach”. Apple not only controls those avenues but acts anticompetitively by blocking developers from using them to Apple’s own unrestrained gain. As explained before, Apple uses anti-steering provisions prohibiting apps from including “buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase,” and from “encourag[ing] users to use a purchasing method other than in-app purchase” either “within the app or through communications sent to points of contact obtained from account registrations within the app (like email or text).” Thus, developers cannot communicate lower prices on other platforms either within iOS or to users obtained from the iOS platform. Apple’s general policy also prevents developers from informing users of its 30% commission.

These provisions can be severed without any impact on the integrity of the ecosystem and is tethered to legislative policy. As an initial matter, courts have long recognized that commercial speech, which includes price advertising, “performs an indispensable role in the allocation of resources in a free enterprise system.” Restrictions on price information “serve to increase the difficulty of discovering the lowest cost seller . . . and [reduce] the incentive to price competitively[.]” Thus, “where consumers have the benefit of price advertising, retail prices often are dramatically lower than they would be without advertising.” Antitrust scholars have recognized the same: “The less information a consumer has about relative price and quality, the easier it is for market participants to charge supracompetitive prices or provide inferior quality.”

Notice the references to “other platforms”; those are the web, Android, or, in cases like Fortnite, other consoles. Judge Gonzalez Rogers’ argument is not that Apple has to allow different payment options within an app — as noted in the previous section, that is Apple’s right to control, and even mandate — but rather that Apple can’t stop a developer from telling users that they can go outside the app to another platform to acquire digital content.3

The most obvious way this might have an impact is through developers offering lower prices if users are willing to pay on the web. Apple could theoretically counter this by requiring developers to offer the same price everywhere, but it seems unlikely that would pass muster with Judge Gonzalez Rogers. Note, though, that IAP is not going anywhere: external links can sit next to IAP, but they can’t replace it, and they can never be as well-integrated as Apple’s offering is.

Back to the decision:

Thus, although Epic Games has not proven a present antitrust violation, the anti-steering provisions “threaten[] an incipient violation of an antitrust law” by preventing informed choice among users of the iOS platform. Moreover, the anti-steering provisions violate the “policy [and] spirit” of these laws because anti-steering has the effect of preventing substitution among platforms for transactions. Apple has not offered any justification for the actions other than to argue entitlement. Where its actions harm competition and result in supracompetitive pricing and profits, Apple is wrong. Accordingly, the harm from the anti-steering provisions outweighs its benefits, and the provision violates the UCL under the balancing test.

The “UCL” is California’s Unfair Competition Law, which is broader than U.S. antitrust law, and includes provisions for “incipient violations” and “unfair conduct”; this is the legal underpinning for Judge Gonzalez Rogers’ injunction. This is also the other part of the ruling that Apple may appeal: the company already argued in court that Judge Gonzalez Rogers should not consider violations under the UCL separately from violations under federal antitrust law, and while Judge Gonzalez Rogers took particularly scathing interest in Apple’s anti-steering provisions during CEO Tim Cook’s testimony, they were not a major focus of Epic’s case. It’s also unclear on what grounds a case about “mobile game transactions” resulted in wholesale changes to the entire App Store.4 Moreover, the Supreme Court recently ruled in favor of anti-steering provisions in a case about American Express’s policies; Gonzalez Rogers made a good argument that this situation is different, but that is open to interpretation. And, of course, UCL is a California law, but Gonzalez Rogers said the injunction applied nationwide.

Apple’s Next Move

To reiterate what I said at the beginning, this was a near total victory for Apple, and a devastating defeat for Epic. Not only did the Fortnite-maker not gain the opportunity to build their own app store or have their own in-app purchases, Judge Gonzalez Rogers also ruled that Apple was justified in revoking the development license for not just Fortnite but all of Epic’s subsidiaries, including Unreal Engine. That means that Epic, at least for now, can’t work on its licensable engine for other developers.

More broadly, while some of Apple’s claims were curtailed, its App Store model was by-and-large found to be legal (at least for games). Even the injunction against anti-steering made clear that Apple can, if it wishes, insist that apps include its IAP system alongside links to another platform (i.e. the web). Might Apple start insisting that Netflix and Spotify re-add IAP at the same time they put in links to their websites?

I think that would be unwise, for two reasons.

First, while antitrust cases are decided by the courts, it is important to remember that the question at hand is about statute interpretation, not constitutionality. That means that Congress can simply change the statutes, or, in the specific case of the App Store, pass laws explicitly undoing Apple’s approach. If that happens this case is moot, which is to say that Apple would do well to appease would-be regulators, instead of doubling-down on its current policies.

Second, not only did this case demonstrate that games are by far the biggest revenue drivers in the App Store (around 75% of revenue, and 98% of in-app purchases), but Judge Gonzalez Rogers’ decision made the case that the games market is distinct from the broader app market. This is an opportunity that Apple should embrace to treat games differently.

This would result in a two-prong strategy: first, expand on Apple’s recent settlement with the Japan Fair Trade Commission to make clear that all non-game apps (not just “Reader” apps) can link to external websites for payments, effectively ending the anti-steering provision for non-game apps, while second, appeal the anti-steering injunction in this case. Should the company win the latter it can both fully deliver on its commitment to App Store security in terms of games, making all purchases run through IAP, even as loosening the reins on non-game apps both relieves regulatory pressure and, more importantly, expands the economic possibilities of the app economy.

This is biased advice, to be sure; it’s exactly what I’ve been begging Apple to do for years. The risk of taking so long to change course is decisions like this: Apple won on almost every count but one, but that one has the potential to cause Apple a fair bit of trouble. Games have always been a vector for scams and abuse; it would have been much better (and profitable) for Apple to keep tight control of the category while giving ground elsewhere. Now it has to deal with a blanket injunction and critics who still don’t think it is enough.

I wrote a follow-up to this Article in this Daily Update.


  1. The full exposition of this reasoning is on Page 61 of the ruling 

  2. This is generally held to require at least 65% market share 

  3. This is admittedly unclear from the one page injunction, so I can see why some observers are arguing that the injunction allows alternative in-app purchase flows; however, this argument simply doesn’t make sense in the context of the entire ruling, which makes clear that alternative platforms are websites and other operating systems 

  4. Not that I’m complaining! 

Tech Epochs and the App Store Trap

Matthew Brooker, writing for Bloomberg Opinion, is worried about Xi Jinping leading China into a trap:

The middle-income trap describes how economies tend to stall and stagnate at a certain level of development, once wages have risen and productivity growth becomes harder. Relatively few make the transition to high-income status. The history of those that have, such as South Korea and Taiwan, points to a need for the state’s role to retreat as markets advance. Ad hoc interventions by governments may work at more basic levels of development. At higher income levels, economies become too complex for command-and-control management by individuals. Systems are increasingly what matters. Rules that are transparent, predictable and fairly applied enable market forces to take over the job of directing economic activity, raising efficiency and allowing innovation to flourish.

This inevitably implies some ceding of power by the rulers. It also potentially implies political change. South Korea and Taiwan both transitioned from authoritarian to democratic political systems as they became richer. The largest high-income economies are almost all democracies. Xi, a believer in the historic mission and preordained victory of the Communist Party, is far from receptive to such a message. The party has embraced markets, but from a position of superiority. Like laws, they are there to be used, when useful; the party remains supreme, above all.

I have spent a fair bit of time over the last few months discussing China’s recent crackdown on its tech industry; to me one of the most interesting questions is whether China’s renewed quest to catch up technologically, particularly in the area of semiconductors, might suffer from the country’s recent crackdown. Dan Wang argued in Foreign Affairs (and previously, in a Stratechery Daily Update interview) that U.S. sanctions were exactly the sort of spur the country needed:

China’s private entrepreneurial firms have driven the bulk of the country’s technological success, even though their interests have not always aligned with the state’s goal of strengthening domestic technology. Beijing has, for example, recently begun cracking down on certain consumer Internet companies and online education firms, in part to redirect the country’s efforts towards other strategic technologies such as computer chips. This has meant that China’s most impressive technological achievements—building state-of-the-art capabilities in renewable energy, consumer Internet services, electronics, and industrial equipment—have as often been driven in spite of state interference as they have because of it.

Then came U.S. President Donald Trump. By sanctioning entrepreneurial Chinese companies, he forced them to stop relying on U.S. technologies such as semiconductors. Now, most of them are trying to source domestic alternatives or design the necessary technologies themselves. In other words, Trump’s gambit accomplished what the Chinese government never could: aligning private companies’ incentives with the state’s goal of economic self-sufficiency.

What happens, though, if the priorities of those private companies shifts from winning in the market to satisfying the Party? Is there a cost to losing world-class founders and entrepreneurs like ByteDance CEO Zhang Yiming and Pinduoduo CEO Colin Huang? It is one thing to align private incentives with state incentives; it is an open question if doing so by removing the drive for dominance and outsized profits ends up being a case of one step forwards, and two steps back.

Tech Epochs

In 2014 I described the The Three Epochs of Consumer Tech to that point; to summarize my argument (which, as is always the case seven years on, isn’t perfect):

Tech's epochs

  • The PC epoch had Windows as its operating system, productivity software as its killer app, and email was the dominant communications medium.
  • The Internet epoch had the browser as its operating system, search as its killer app, and social networking, particularly Facebook, was the dominant communications medium.
  • The mobile epoch had iOS and Android as its operating systems, the sharing economy as its killer app, and messaging was the dominant communications medium.

At the time I posited that the next epoch was unclear; I listed wearables, Bitcoin, and mobile applications like Uber as possibilities, although settled on messaging as being the most likely to be the fourth epoch.

Then, in 2020, I argued we had reached The End of the Beginning:

There may not be a significant paradigm shift on the horizon, nor the associated generational change that goes with it. And, to the extent there are evolutions, it really does seem like the incumbents have insurmountable advantages: the hyperscalers in the cloud are best placed to handle the torrent of data from the Internet of Things, while new I/O devices like augmented reality, wearables, or voice are natural extensions of the phone.

In other words, today’s cloud and mobile companies — Amazon, Microsoft, Apple, and Google — may very well be the GM, Ford, and Chrysler of the 21st century. The beginning era of technology, where new challengers were started every year, has come to an end; however, that does not mean the impact of technology is somehow diminished: it in fact means the impact is only getting started.

Indeed, this is exactly what we see in consumer startups in particular: few companies are pure “tech” companies seeking to disrupt the dominant cloud and mobile players; rather, they take their presence as an assumption, and seek to transform society in ways that were previously impossible when computing was a destination, not a given. That is exactly what happened with the automobile: its existence stopped being interesting in its own right, while the implications of its existence changed everything.

That article was about the overall shift in computing from mainframes to PCs to mobile, which mirrored the shift from one room computing to desktop computing to cloud computing:

A drawing of The Evolution of Computing

This is a progression where the potential for crypto-based computing and its inherent decentralization fits right in (especially as politically-motivated tech companies provide the impetus).

Note, though, that these two articles don’t mirror each other exactly: Epoch 2, the Internet epoch, wasn’t really about the underlying hardware at all; rather, it was the PC epoch that provided the foundation for the Internet epoch. Google and Facebook would have been much less valuable if there weren’t already hundreds of millions of people with PCs and Internet connections; a similar reduction in value would have occurred if Microsoft had been able to control what people accessed on the web, and on what terms.

It was the Internet, meanwhile, that gave mobile the fuel to get off of the ground; remember how Steve Jobs introduced the iPhone:

Jobs wasn’t wrong — Apple absolutely did reinvent the phone — but it did so on the back of concepts that already existed: the iPod, mobile phones, and, most importantly, the Internet. And then Apple introduced the App Store.

The App Store Economy

Thirteen years on and its easy to lose sight of just how important Apple’s approach to the App Store was not only for the iPhone but also developers. John Gruber, in the wake of South Korea passing a law opening up in-app payments, wrote on Daring Fireball:

I think the latter half of Apple’s statement is true — user trust in in-app purchases will decline…there’s no denying that the result of any of these laws would be to make iOS and Google’s Android more like Macs and PCs. There’s also no denying that people make far more digital purchases and install far more apps on their mobile devices (iOS or Android) than their PCs (Mac or Windows)…

But I am confident that the overwhelming majority of typical users are more comfortable installing apps and making in-app purchases on their iOS and Android devices than on their Mac and Windows PCs not despite Apple and Google’s console-like control over iOS and Android, but because of it. And if these measures come to pass and iOS and Android devices are forced by law to become pocket PCs, I think there’s a high chance it’ll prove unpopular with the mass market. The masses are not clamoring for the app stores to be opened up. These arguments over app stores are entirely inside baseball for the technical and business classes. I’ve had non-technical friends and relatives complain to me about all sorts of things related to their iPhones over the last 10 years, but never once have any of them said to me, “Boy, I sure wish iPhone apps and games could ask me for my credit card number to make purchases, and that the overall experience of using apps was more like the anything-goes nature of using the web or my desktop computer.” Never. It doesn’t just seem that the unintended consequences of such legislation is being under-considered; it seems as though it’s not being considered or acknowledged at all.

Perhaps I’m wrong, and it’ll all work out just fine. Anyone who claims to know how such a scenario will turn out is full of shit. But from what I’ve seen over the last few decades, the quality of the user experience of every computing platform is directly correlated to the amount of control exerted by its platform owner. The current state of the ownerless world wide web speaks for itself.

It’s easy for developers to measure the 30% that Apple takes of their earnings, or the cost it takes to implement the company’s in-app purchasing APIs, or the time it takes to deal with App Review. It’s much harder, particularly in 2021, to appreciate the extent to which Apple increased the total addressable market for everyone, not simply by inventing a device that could be used everywhere, but also by enforcing a distribution model that made consumers feel safe and thus willing to try out far more apps than they ever did on PC. And Gruber is right, that even now it is possible that loosening the App Store rules might have unintended consequences on those same developers chafing under Apple’s control.

At the same time, I think that Gruber underrates the impact of the “ownerless world wide web”; yes, I myself wrote an article in 2015 entitled Why Web Pages Suck,1 and yes, that is an inevitable outcome of a lack of centralized quality control. An arena where anything goes, though, doesn’t simply make it possible to produce garbage, but also things that are completely new to the world: rules that limit bad things have the unfortunate side effect of limiting good things that the rule-maker never considered.

One example, if I may be so immodest, is this site: not only did I not have the wherewithal to build an app in 2013, the App Store only offered Newsstand subscriptions for established publications; I could, though, build a web page, and leverage services like Stripe to charge subscriptions. Yes, Apple has since expanded the use of App Store subscriptions, but in almost all cases that support has chased use cases, from streaming to reading to video to collaboration and cloud services, that were first pioneered on the ownerless world wide web.

What is new to the App Store are the shift of more and more productivity applications to subscription billing. This trend, to be fair, started with Microsoft and Adobe, but even basic utility apps have followed suit. What is not clear is if, in a vacuum, this is particularly good for their business: for years small apps thrived on the PC and especially the Mac by leveraging Internet distribution and monetizing via paid upgrades, which struck a balance between making more money from your best customers, a necessity for every business, without introducing subscription fatigue and a sense of resentment from marginal customers not sure if they can justify the ongoing expense.

The App Store, though, is not a vacuum: it is an economy where Apple sets the rules, and I’ve been writing about how traditional developer business models simply weren’t enabled for as long as this site has been around; by 2015 it seemed clear that the era of mobile productivity apps was going to be a disappointing one:

That, then, means that Cook’s conclusion that Apple could best improve the iPad by making a new product isn’t quite right: Apple could best improve the iPad by making it a better platform for developers. Specifically, being a great platform for developers is about more than having a well-developed SDK, or an App Store: what is most important is ensuring that said developers have access to sustainable business models that justify building the sort of complicated apps that transform the iPad’s glass into something indispensable.

That simply isn’t the case on iOS. Note carefully the apps that succeed on the iPhone in particular: either the apps are ad-supported (including the social networks that dominate usage) or they are a specific type of game that utilizes in-app purchasing to sell consumables to a relatively small number of digital whales.

Six years on and not much has changed; iPad hardware continues to improve, the consumption experience remains fantastic, and the Pencil has unlocked interesting new use cases. Killer apps, though, that are uniquely possible on the iPad, are still quite rare; Apple pitches the device as a PC replacement, but even then the most advanced demo is Photoshop. It is as if the iPad specifically and productivity software on iOS generally is in a sort of “middle-income trap”: the obvious tools are there, and giant software developers with their subscription plans can justify building complex apps, but the innovation in the ecosystem has never lived up to Jobs’ vision.

Challenges, Creators, and Metaverses

I do think the mobile productivity ship has sailed, particularly in terms of the iPad. It’s a fine device with fine apps, and it’s great for consuming media. And, I should note, Apple sold $30 billion worth of the devices over the last 12 months. That is hardly a flop — quite the opposite, in fact.

Go back to the analogy at the beginning of this Article, though: a country in the middle income trap is by nearly every objective measure a massive success. That is certainly the case for China, the development and growth of which has done more to alleviate human poverty than any event in human history. Today China is in many sectors, particularly labor-centric manufacturing, the most advanced economy in the world, with world-class cities and infrastructure that puts much of the U.S. to shame. The challenge now, though, is to not simply catch up to the West but to surpass it, and that means innovation in ways that go beyond applying Western technology to China-specific use cases and taking advantage of leapfrog opportunities (like payments); whether that innovation can be achieved as control is re-centralized is one of the most important questions of the next decade.

Apple, meanwhile, is seeing more challenges to its centralized control of the app economy than ever before, from antitrust lawsuits to potential legislation to run-ins with regulators around the world. At the same time there is an ongoing explosion in completely new digital-first business models, including the so-called creator economy and meta-verses like Roblox, and over the horizon, the crypto-economy.

It is those challenges that will, slowly but surely, force Apple to give up control. Last week’s news that Apple, after settling with the Japan Fair Trade Commission, will allow “a single link” to ‘reader’ apps2 on a worldwide basis suggests a new more open approach and a stubborn refusal to give up iron-fisted control of the App Store economy all at the same time. Time will tell if Apple decides to rethink the App Store in one fell swoop, or if regulators dismantle Apple’s regime piece-by-piece, and potentially geography-by-geography, in a way that harms Apple’s core business.

What is important, though, is that these changes happen sooner rather than later, for the sake of tech’s fourth epoch.

The Fourth Epoch

If consumer tech’s second epoch — the Internet — was built on and enabled by the first — the PC — then it follows that the fourth epoch is built on and enabled the third. Both the creator economy and metaverses fit the bill: yes, some creators can make a go of it on the web, but I’ll be the first to say that that is only possible because of social networks. What seems more likely are that creators emerge on platforms built to accommodate them, and those platforms themselves will sit on top of mobile. That is even more likely to be the case when it comes to metaverses, which are likely able to deliver superior experiences as a native app than as a web app.3

Tech Epochs

The problem is the App Store: if Apple is taking 30% of every transaction, and the platform owner their own share for having created the opportunity and toolset for the creator, then that means creators need that many more fans to make a living, reducing the number who are successful. It’s the same story for metaverses: Roblox isn’t remotely profitable, even as it pays its developers pennies-on-the-dollar, thanks in large part to Apple taking 30% for the pleasure of existing on iOS. Apple is absolutely right that the App Store created economic opportunity; it is also taking it away from an expanding universe of creators and developers who have no reason to interact with iOS APIs.

What is particularly frustrating about this state of affairs is that it is not as if Apple is making things easier for creator platforms: look no further than Twitter’s new super-follows feature, which is easy-to-understand from a user perspective — pay X amount of dollars to get access to subscriber-only tweets — but only because Twitter is creating in-app subscriptions by hand for every super-tweeter, and even then is limited to 10,000 in-app purchase options. Other creator platforms like Twitch create convoluted token-based subscription schemes to get around Apple’s in-app purchase limitations that obfuscate prices and result in worse outcomes for the creators in terms of retaining customers; customers, meanwhile, pay more in the app than they do on the web to cover Apple’s fees; these fees, quite clearly, exist because of the company’s total control of apps, not because any value is being provided.

Of course these are big well-known companies fighting with the biggest, most well-known company; the question, as always, is about the companies that aren’t formed, the creators that aren’t empowered, the metaverses that die on the vine because developers couldn’t make money, or the platform creator couldn’t justify the risk. Looking back it’s easy to see how Microsoft and Windows could have stifled the Internet epoch; Apple (and Google!) ought not hold back the full potential of the app-platform epoch.

Epoch Bridges

I’ve written a lot about the App Store over the entire course of Stratechery generally, and over the last year specifically. Yes things are hopefully changing, and that is a reason for analysis, but I could see an argument that emerging technologies like crypto are much more interesting.

To that point, though, it’s worth noting that there is one additional reason beyond greed or control of the customer experience why Apple and Google might not be motivated to loosen their control of apps: if crypto is tech’s fifth epoch — and there is a very good chance that is the case — then it is very much in the crypto-industry’s interest to pay attention to and weigh in on these App Store battles. Remember that the Internet provided the bridge from the PC to mobile; in a well-functioning market apps and platform-level APIs would provide the bridge from mobile to crypto. Just think about all of the obstacles there are in making crypto applications user-friendly and accessible to general users, and how much more would be possible if mobile were as open and configurable as the PC.

And, of course, it is worth considering how bad that might be in the long run for Apple and Google. If those in power are primarily concerned with protecting their position then perhaps it is inevitable that innovation is a casualty.

I wrote a follow-up to this Article in this Daily Update.


  1. Also in response to Gruber

  2. “Reader” apps are defined in the App Store Guidelines as apps that “allow a user to access previously purchased content or content subscriptions (specifically: magazines, newspapers, books, audio, music, and video).” 

  3. The question as to whether Apple is handicapping mobile Safari is separate but related. 

Regulators and Reality

It is coming up on two weeks since the FTC refiled its case against Facebook;1 from the Wall Street Journal:

The Federal Trade Commission filed a new version of its antitrust lawsuit against Facebook Inc. on Thursday, seeking to jump-start its case with bolstered allegations that the company is abusing a monopoly position in social media…The FTC’s amended complaint comes after a federal judge in June dismissed the agency’s original lawsuit, saying it didn’t make sufficient allegations to support claims that Facebook engaged in unlawful monopolization.

With its new, 80-page lawsuit, the FTC seeks to tell a longer, more detailed story about why it believes Facebook is a dominant force that uses its power to hobble any rival that might threaten its market position.

As a quick refresher, the original lawsuit was filed last December and, as I noted at the time, completely failed to characterize Facebook as a monopoly. U.S. District Judge James Boasberg agreed; from his opinion dismissing the case:

Although the Court does not agree with all of Facebook’s contentions here, it ultimately concurs that the agency’s Complaint is legally insufficient and must therefore be dismissed. The FTC has failed to plead enough facts to plausibly establish a necessary element of all of its Section 2 claims — namely, that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services. The Complaint contains nothing on that score save the naked allegation that the company has had and still has a “dominant share of th[at] market (in excess of 60%).” Such an unsupported assertion might (barely) suffice in a Section 2 case involving a more traditional goods market, in which the Court could reasonably infer that market share was measured by revenue, units sold, or some other typical metric. But this case involves no ordinary or intuitive market. Rather, PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear. In this unusual context, the FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague “60%-plus” assertion too speculative and conclusory to go forward. Because this defect could conceivably be overcome by re-pleading, however, the Court will dismiss only the Complaint, not the case, and will do so without prejudice to allow Plaintiff to file an amended Complaint.

As I noted in June, the FTC’s problem was not laziness, but that Facebook doesn’t have a monopoly; given that, you won’t be surprised to learn that I don’t find the FTC’s new case compelling.

The FTC’s Case

Here is the FTC’s new attempt to define Facebook’s market of “personal social networking services” (all quotes are from the amended complaint):

Personal social networking services consist of online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space. Personal social networking services are a unique and distinct type of online service. Three key elements distinguish personal social networking services from other forms of online services provided to users.

First, personal social networking services are built on a social graph that maps the connections between users and their friends, family, and other personal connections…

Second, personal social networking services include features that many users regularly employ to interact with personal connections and share their personal experiences in a shared social space, including in a one-to-many “broadcast” format…

Third, personal social networking services include features that allow users to find and connect with other users, to make it easier for each user to build and expand their set of personal connections. The social graph also supports this feature by informing which connections are suggested or available to users. Within the United States, the most widely used personal social networking services are Facebook Blue, Instagram, and Snapchat.

The next several paragraphs attempt to explain why these are the only three apps in the space:

Personal social networking is distinct from, and not reasonably interchangeable with, mobile messaging services. Mobile messaging services do not feature a shared social space in which users can interact, and do not rely upon a social graph that supports users in making connections and sharing experiences with friends and family…

Personal social networking is distinct from, and not reasonably interchangeable with, specialized social networking services that are designed for, and are utilized by users primarily for, sharing a narrow and highly specialized category of content with a narrow and highly specialized set of users for a narrow and distinct set of purposes…

Personal social networking is distinct from, and not reasonably interchangeable with, online services that focus on the broadcast or discovery of content based on users’ interests rather than their personal connections. Prominent examples are Twitter, Reddit, and Pinterest…

Personal social networking is distinct from, and not reasonably interchangeable with, online services focused on video or audio consumption such as YouTube, Spotify, Netflix, and Hulu. Users employ such services primarily for the passive consumption of specific media content (e.g., videos or music) from and to a wide audience of typically unknown users…

TikTok is a prominent example of a content broadcasting and consumption service that is not an acceptable substitute for personal social networking services. TikTok users primarily view, create, and share video content to an audience that the poster does not personally know, rather than connect and personally engage with friends and family. The purpose for which users employ TikTok, and the predominant form of interaction on the platform, is not driven by users’ desire to interact with networks of friends and family.

There are two major problems with this argument: the FTC’s own definitions, reasonably understood, don’t reflect reality, and second, the definitions themselves have no relation to the actual market for online services.

Start with the parameters laid out by the FTC:

  • First, WhatsApp is a mobile messaging service. So how is Facebook acquiring it illegal? The FTC’s suit attempts to make the case that Facebook was worried that WhatsApp would evolve into a competitor had Facebook not purchased it, but then why doesn’t that concern apply to every other mobile messaging service? It is the height of motivated reasoning to spin the WhatsApp acquisition as anticompetitive while simultaneously excluding the entire category in which WhatsApp resides.
  • Second, arguing that Facebook is unique from every other social network other than Instagram and Snapchat completely ignores what the product actually does. Apparently the fact that LinkedIn lets you feature your resume (as does Facebook, by the way) means the fact that it is explicitly focused on maintaining and facilitating communications and connections doesn’t matter, despite the fact anything you can do on Facebook can be done on LinkedIn.
  • Third, while it is nice that the FTC bothered to include TikTok in their complaint — the December complaint didn’t mention the app once — any definition that says that Instagram is like Facebook but is not like TikTok is ridiculous. Both let you connect with people you know, but both are primarily focused on broadcast-follow dynamics, not interpersonal communication. This distinction, in conjunction with the previous one, is again motivated reasoning: Facebook is much more like LinkedIn, and Instagram is much more like TikTok, but that’s a problem for the FTC because it ruins their case.

The far bigger problem, though, is that everything I just wrote is meaningless, because everything listed above is a non-rivalrous digital service with zero marginal costs and zero transactional costs; users can and do use all of them at the same time. Indeed, the fact that all of these services can and do exist for the same users at the same time makes the case that Facebook’s market is in fact phenomenally competitive.

What, though, is Facebook competing for? Competition implies rivalry, that is, some asset that can only be consumed by one service to the exclusion of others, and the only rivalrous good in digital services is consumer time and attention. Users only have one set of eyes, and only 24 hours in a day, and every second spent with one service is a second not spent with another (although this isn’t technically true, since you could, say, listen to one while watching another while scrolling a third while responding to notifications from a fourth, fifth, and sixth). Note the percentages in this chart of platform usage:

Most American adults use multiple online services

The total is not 100, it is 372, because none of these services exclude usage of any of the others. And while Facebook is obviously doing well in terms of total users, TikTok in particular looms quite large when it comes to time, the only metric that matters:

Users spend more time on TikTok than other social media platforms

This, of course, is why all of these services, including Instagram, Snapchat, and YouTube are trying to mimic TikTok as quickly as possible, which, last time I checked, is a competitive response, not a monopolistic one. You can even grant the argument that Facebook tried to corner the social media market — whatever that is — a decade ago, but you have to also admit that here in 2021 it is clear that they failed. Competition is the surest sign that there was not actually any anticompetitive conduct, and I don’t think it the FTC’s job to hold Facebook management accountable for failing to achieve their alleged goals.

Prices and Politics

Judge Boasberg, in his opinion dismissing the original FTC case, hinted at what seemed to be the FTC’s political motivations:

The Court’s decision here does not rest on some pleading technicality or arcane feature of antitrust law. Rather, the existence of market power is at the heart of any monopolization claim. As the Supreme Court explained in Twombly, itself an antitrust case, “[A] district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed.” Here, this Court must exercise that power. The FTC’s Complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined antitrust product market. It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist. After all, no one who hears the title of the 2010 film “The Social Network” wonders which company it is about. Yet, whatever it may mean to the public, “monopoly power” is a term of art under federal law with a precise economic meaning: the power to profitably raise prices or exclude competition in a properly defined market.

Facebook clearly can’t exclude competitors, and, it should be noted, doesn’t even have the means to raise prices; the FTC, frustratingly enough, doesn’t appear to understand how Facebook’s digital ad market works. Eric Seufert wrote in an article entitled Dear FTC, repeat after me: ad platforms don’t set prices:

Multiple times throughout the complaint, the FTC declares that Facebook’s monopoly control over the market for personal social networking resulted in unnaturally high “advertising prices.” This is simply incorrect, and it reveals a lack of understanding of the digital advertising ecosystem and how advertising inventory is priced…

Digital advertising inventory on large platforms like Facebook is sold through an auction: advertisers bid for impressions, the highest bidder wins, and, depending on the auction design used, either the second-highest (in some flavor of a second-price auction, such as the Vickrey-Clarke-Groves auction design that Facebook employs) or the highest (in a first-price auction) bid sets the price for the placement. Most modern, sophisticated ad platforms allow advertisers to bid against conversions — purchases, registrations, etc. — versus simply bidding for an impression, and the ad platforms use campaign performance to throttle delivery based on calculated click and conversion probabilities for any given user…

The price that an advertiser bids on inventory is wholly dependent on the value of conversions that are produced by that platform. And the degree to which advertisers win auctions is dependent on the competition for that inventory. There is no reason to believe that any advertiser would be paying less for advertising inventory on the Facebook Blue app (or website) today if Facebook had not acquired Instagram or WhatsApp, or if any number of competitive products (but not TikTok!) had entered the very-specifically-defined market in which the FTC believes Facebook operates.

This is why Judge Boasberg’s line that “it is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist” stings: Facebook is obviously not particularly popular in Washington D.C., but that is a wholly distinct matter from it being a monopolist. If the powers that be decide that the company needs new kinds of regulation, the answer should be new laws, not redefining antitrust to be about the specific implementation of a non-rivalrous digital service, destroying the credibility of the FTC as a regulator along the way.

Government and Private Industry

That noted, I have to be honest: the prospect of new laws makes me increasingly nervous as well. I absolutely get the case that these platforms are powerful in a way that is deeply suspicious to Americans, and understand the impetus for new regulation, but for me the last two years have been an eye-opening experience about capacity and capability. We have witnessed the federal government, under two different administrations, fumble its way through a pandemic, while its supposedly most capable branch oversaw a disastrous withdrawl from a 20-year nation-building effort that collapsed in a matter of days. The tech industry, meanwhile, has kept the entire world economy running remote with hardly a hiccup, even as other private companies conceived of, tested, and distributed over a billion vaccines and counting. Are we sure we want the former dictating how the latter run their businesses?

China, meanwhile, is going in the opposite direction, taking seats on the board’s of the country’s most innovative companies, driving out founders and killing IPOs, and even limiting when kids can play video games. The most favorable reading of China’s actions is that at least its state has demonstrated the capacity for action — witness how China has brought COVID under control within its borders — but that comes with a level of interference with fundamental freedoms that Americans will never tolerate, and still unanswered questions about just where innovation will come from when pleasing the government is every company’s top priority.

The appropriate response to this challenge — and China is absolutely a challenge — is to reject a top-down approach conducted via regulators with less capacity and greater encumbrances than Beijing, and instead let the tech industry and private companies generally continue to do what they do best: compete. This administration’s antitrust crusaders, unfortunately, don’t really get how markets work. This snippet from The Ezra Klein Show with Tim Wu, a National Economic Council member in charge of technology and competition policy, has stuck with me ever since I heard it in 2016; this was Wu’s takeaway from working in Silicon Valley for a silicon valley startup guilty of accounting fraud:

It kind of changed my thinking about the market and private industry. This was the height of the 90s, government doesn’t have the answers, trust the market, the era of government is over, and I worked in government. The Supreme Court wasn’t perfect, it was relatively public-minded, I don’t think the justices were on the take or anything like that, then I went to private industry, and you know, this was maybe a bad sample — it was WorldCom/Enron era — but these guys didn’t seem to possess any particular wisdom or any special insight into their industry even, they just were all about convincing people to buy a stock, move it up, and then dump it. It really changed my thinking. I actually think I changed my politics, both at the Supreme Court and in Silicon Valley, to become much more suspicious of private actors.

That certainly is about as bad a sample as you can get — I can see why Wu was disillusioned — but here’s the thing: Riverstone Networks, the startup he worked for, ended up in bankruptcy and no longer exists. That is the beauty of the private market — not that everyone is somehow smarter than government, but that there is actual accountability for failure. It’s why Silicon Valley celebrates startups, even though most fail, or are acquired: the best way to innovate is not through top down dictates, but more rolls of the dice.

Lessons Learned

This isn’t my first article about the FTC and tech; back in February 2020, when the FTC requested data from the big five tech companies and their history of acquisitions, I wrote First, Do No Harm; my argument then was that while it would have been better had Facebook not acquired Instagram, thanks to the company’s dominance, regulators risked over-reacting and upsetting a Silicon Valley ecosystem that was driving the U.S. economy.

Two years later, and I have to update my position: in a perfect world with perfect regulators I still think the Instagram acquisition shouldn’t have happened, but you can no longer plausibly argue that Facebook has any sort of monopoly power; look no further than recent tech earnings, where the prevailing story was how company after advertising-supported company was absolutely crushing it, in stark contrast to six years ago when Facebook really did look unstoppable. The market worked.

And, over that same post-February 2020 time period, we have been reminded regulators are not perfect, not even close, even as the tech industry has proven itself to be an even more important and capable asset than ever. Sure it may be a 90s cliché to argue “government doesn’t have the answers, trust the market”, but at some point the reality of the government we have, the competition we face, and the assets we can unleash, has to matter more than holding onto politics for politics’ sake.


  1. I was on vacation 🤷‍♂️ 

Apple’s Mistake

It was in August 2009, two months after the release of the iPhone 3GS, that the barbarians crashed the gates; from The Online Photographer:

The leading photo sharing site, flickr.com, charts the popularity of the cameras used by its membership. Recently the Apple iPhone has jumped into a virtual tie for first place with the Canon XTi. Furthermore, flickr states on its “Camera Finder” page that it can only detect the camera used about 2/3rds of the time, and that, therefore, cameraphones are under-represented on the graphs. Yikes.

When the iPhone became the most popular camera on Flickr

The iPhone would go on to not only be the number one camera on Flickr, but in a far more compelling measure of its impact, create the conditions for Instagram, the photo-sharing network that eclipsed Flickr like Google once eclipsed Yahoo (Yahoo, of course, owned Flickr). Instagram itself was soon acquired by Facebook, which itself had benefited tremendously from the iPhone camera; having a good and ever-improving camera with you everywhere, paired with constant connectivity, transformed photos from memorials for special occasions to, in the words of Snap CEO Evan Spiegel, “part of the communication fabric of our daily lives.”

How is it, then, that a company like Facebook, which is mostly used on mobile — i.e. Android or iOS — made 20.3 million reports of Child Sexual Abuse Material (CSAM) in 2020, while Apple made only 265?1 After all, there are almost certainly more photos on smartphones than there are on social networks — the former is in large part a superset of the latter.

18 USC § 2258A

U.S. Code Title 18 Part 1 Chapter 110 Section 2258A lays out how companies must handle CSAM (complete text here):

(a)Duty To Report.—

(1)In general.—

(A) Duty.—In order to reduce the proliferation of online child sexual exploitation and to prevent the online sexual exploitation of children, a provider—

(i) shall, as soon as reasonably possible after obtaining actual knowledge of any [CSAM], take the actions described in subparagraph (B); and
(ii) may, after obtaining actual knowledge of any facts or circumstances [suggesting imminent child abuse], take the actions described in subparagraph (B).

(B)I Actions described.—The actions described in this subparagraph are—

(i) providing to the CyberTipline of NCMEC [National Center for Missing & Exploited Children], or any successor to the CyberTipline operated by NCMEC, the mailing address, telephone number, facsimile number, electronic mailing address of, and individual point of contact for, such provider; and
(ii) making a report of such facts or circumstances to the CyberTipline, or any successor to the CyberTipline operated by NCMEC.

There is no escaping this responsibility when and if CSAM is discovered:

(e)Failure To Report.—A provider that knowingly and willfully fails to make a report required under subsection (a)(1) shall be fined—

(1) in the case of an initial knowing and willful failure to make a report, not more than $150,000; and
(2) in the case of any second or subsequent knowing and willful failure to make a report, not more than $300,000.

What is not required is that companies actively seek out CSAM on their services:

(f)Protection of Privacy.—Nothing in this section shall be construed to require a provider to—

(1) monitor any user, subscriber, or customer of that provider;
(2) monitor the content of any communication of any person described in paragraph (1); or
(3) affirmatively search, screen, or scan for facts or circumstances described in sections (a) and (b).

These two provisions get at why Facebook and Apple’s reported numbers have historically been so different: it’s not because there is somehow more CSAM on Facebook than exists on Apple devices, but rather that Facebook is scanning all of the images sent to and over its service, while Apple is not looking at what is in your phone, or on their cloud. From there the numbers make much more sense: Facebook is reporting what it finds, while Apple is, as the title of Section (3) suggests, protecting privacy and simply not looking at images at all.

Apple Protects Children

Last week Apple put up a special page on their website entitled Expanded Protections for Children:

At Apple, our goal is to create technology that empowers people and enriches their lives — while helping them stay safe. We want to help protect children from predators who use communication tools to recruit and exploit them, and limit the spread of Child Sexual Abuse Material (CSAM).

Apple is introducing new child safety features in three areas, developed in collaboration with child safety experts. First, new communication tools will enable parents to play a more informed role in helping their children navigate communication online. The Messages app will use on-device machine learning to warn about sensitive content, while keeping private communications unreadable by Apple.

Next, iOS and iPadOS will use new applications of cryptography to help limit the spread of CSAM online, while designing for user privacy. CSAM detection will help Apple provide valuable information to law enforcement on collections of CSAM in iCloud Photos.

Finally, updates to Siri and Search provide parents and children expanded information and help if they encounter unsafe situations. Siri and Search will also intervene when users try to search for CSAM-related topics.

John Gruber at Daring Fireball has a good overview of what are in fact three very different initiatives; what unites, them, though, and continues to differentiate Apple’s approach from Facebook’s, is that Apple is scanning content on your device, while Facebook is doing it in the cloud. Apple emphasized repeatedly that this ensured that Apple does not get access to your content. From the “Communications Safety in Messages” section:

Messages uses on-device machine learning to analyze image attachments and determine if a photo is sexually explicit. The feature is designed so that Apple does not get access to the messages.

From the “CSAM Detection” section:

Apple’s method of detecting known CSAM is designed with user privacy in mind. Instead of scanning images in the cloud, the system performs on-device matching using a database of known CSAM image hashes provided by NCMEC and other child safety organizations…This innovative new technology allows Apple to provide valuable and actionable information to NCMEC and law enforcement regarding the proliferation of known CSAM. And it does so while providing significant privacy benefits over existing techniques since Apple only learns about users’ photos if they have a collection of known CSAM in their iCloud Photos account. Even in these cases, Apple only learns about images that match known CSAM.

There are three ways to think about Apple’s approach, both in isolation and relative to a service like Facebook:2 the idealized outcome, the worst case outcome, and the likely driver.

Capability Versus Policy

Apple’s idealized outcome solves a lot of seemingly intractable problems. On one hand, CSAM is horrific and Apple hasn’t been doing anything about it; on the other hand, the company has a longstanding commitment to ever increasing amounts of encryption, ideally end-to-end. Apple’s system, if it works precisely as designed, preserves both goals: the company can not only keep end-to-end encryption in Messages, but also add it to iCloud Photos (which is not currently encrypted end-to-end), secure in the knowledge that it is doing its part to not only report CSAM but also help parents look after their children. And, from a business perspective, it means that Apple can continue to not make the massive investments that companies like Facebook have in trust-and-safety teams; the algorithm will take care of it.

That, of course, is the rub: Apple controls the algorithm, both in terms of what it looks for and what bugs it may or may not have, as well as the input, which in the case of CSAM scanning is the database from NCMEC. Apple has certainly worked hard to be a company that users trust, but we already know that that trust doesn’t extend everywhere: Apple has, under Chinese government pressure, put Chinese user iCloud data on state-owned enterprise servers, along with the encryption keys necessary to access it. What happens when China announces its version of the NCMEC, which not only includes the horrific imagery Apple’s system is meant to capture, but also images and memes the government deems illegal?

The fundamental issue — and the first reason why I think Apple made a mistake here — is that there is a meaningful difference between capability and policy. One of the most powerful arguments in Apple’s favor in the 2016 San Bernardino case is that the company didn’t even have the means to break into the iPhone in question, and that to build the capability would open the company up to a multitude of requests that were far less pressing in nature, and weaken the company’s ability to stand up to foreign governments. In this case, though, Apple is building the capability, and the only thing holding the company back is policy.

Then again, Apple’s policy isn’t the only one that matters: both the UK and the EU are moving forward on bills that mandate online service companies proactively look for and report CSAM. Indeed, I wouldn’t be surprised if this were the most important factor behind Apple’s move: the company doesn’t want to give up on end-to-end encryption — and likely wants to expand it — which leaves on-device scanning as the only way to satisfy governments not (just) in China but also the West.

Cloud Versus Device

I think that there is another solution to Apple’s conundrum; what is frustrating from my perspective is that I think the company is already mostly there. Consider the status quo: back in 2020 Reuters reported that Apple decided to not encrypt iCloud backups at the FBI’s request:

Apple Inc. dropped plans to let iPhone users fully encrypt backups of their devices in the company’s iCloud service after the FBI complained that the move would harm investigations, six sources familiar with the matter told Reuters. The tech giant’s reversal, about two years ago, has not previously been reported. It shows how much Apple has been willing to help U.S. law enforcement and intelligence agencies, despite taking a harder line in high-profile legal disputes with the government and casting itself as a defender of its customers’ information.

This has a number of significant implications for Apple’s security claims, and is why earlier this year I ranked iMessage as being less secure than Signal, WhatsApp, Telegram, and Facebook Messenger:

iMessage encrypts messages end-to-end by default; however, if you have iCloud backup turned on, your messages can be accessed by Apple (who has the keys for iCloud backups) and, by extension, law enforcement with a warrant. Unlike WhatsApp, though, this is both on by default and cannot be turned off on a granular basis.

This caveat applies to almost everything on your iPhone: if you give in to the never-ending prompts to sign-in to iCloud and its on-by-default backup solution, your data is accessible to Apple and, by extension, law enforcement with a warrant. I actually think this is reasonable! I wrote this when that Reuters report came out:

Go back to what I said above: determined actors will have access to encryption and facial recognition. Anyone trying to argue whether or not these technologies should exist is not living in reality. It follows then, that we should take care to ensure that good actors have access to these technologies too. That means not making them illegal.

Second, though, legitimate societal concerns about the needs of law enforcement and the radicalizing nature of the Internet should be taken seriously. That means we should think very carefully about making encryption the default…This also splits the difference when it comes to principles: users have agency — they can ensure that everything they do is encrypted — while total privacy is available but not given by default.

I actually think that Apple does an excellent job of striking that balance today. When it comes to the iPhone itself, Apple is the only entity that can make it truly secure; no individual can build their own secure enclave that sits at the root of iPhone security. Therefore, they are right to do so: everyone has access to encryption.

From there it is possible to build a fully secure environment: use only encrypted communications, use encrypted backups to a computer secured by its own hardware-based authentication scheme, etc. Taking the slightly easier route, though — iCloud backups, Facebook messaging, etc. — means some degree of vulnerability that, let’s not forget, is sometimes justifiably leveraged. Law enforcement can get a warrant for those backups or chat logs, just as they can install a wire tap.

Again, this isn’t going to stop determined bad actors, but as I noted, nothing is. The question is what of the rest, those that get swept up by the worst sort of communities, and who commit legitimate crimes: what should their defaults be?

I made a similar argument about Facebook’s plans to encrypt-by-default Facebook Messenger conversations, which I opposed, even as I supported encryption-by-choice: I am not anti-encryption, and am in fact very much against mandated backdoors. Every user should have the capability to lock down their devices and their communications; bad actors surely will. At the same time, it’s fair to argue about defaults and the easiest path for users: I think the iPhone being fundamentally secure and iCloud backups being subject to the law is a reasonable compromise.

Apple’s choices in this case, though, go in the opposite direction: instead of adding CSAM-scanning to iCloud Photos in the cloud that they own and operate, Apple is compromising the phone that you and I own and operate, without any of us having a say in the matter. Yes, you can turn off iCloud Photos to disable Apple’s scanning, but that is a policy decision; the capability to reach into a user’s phone now exists, and there is nothing an iPhone user can do to get rid of it.

A far better solution to the “Flickr problem” I started with is to recognize that the proper point of comparison is not the iPhone and Facebook, but rather Facebook and iCloud. One’s device ought to be one’s property, with all of the expectations of ownership and privacy that entails; cloud services, meanwhile, are the property of their owners as well, with all of the expectations of societal responsibility and law-abiding which that entails. It’s truly disappointing that Apple got so hung up on its particular vision of privacy that it ended up betraying the fulcrum of user control: being able to trust that your device is truly yours.

I wrote a follow-up to this Article in this Daily Update.


  1. Google made 547k 

  2. Beyond the fact that it may be illegal  

Metaverses

Satya Nadella, for the record, was first: on May 25, 2021, during the keynote for Microsoft’s Build developer conference, he characterized a collection of Azure offerings as a metaverse:

Finally, as the virtual and physical worlds converge the metaverse made up of digital twins, simulated environments, and mixed reality, is emerging as a first-class platform. With the metaverse the entire world becomes your app canvas. With Azure Digital Twins you can model any asset or place with Azure IoT and keep the digital twin live and up-to-date. Synapse tracks the history of digital twins and finds insights to predict future states, and with Azure you can build autonomous systems that continually learn and improve. Power Platform enables domain experts to expand on and interact with digital twin data using low-code/no-code solutions. And Mesh and Hololens brings real-time collaboration.

The term “enterprise metaverse” came a month later at the Microsoft Inspire sales force keynote, but it was only on last week’s earnings call that most of the press caught on. As usual, no one cares unless Facebook is involved.

Metaverse Definitions

Facebook’s metaverse coming out party was this conversation between CEO Mark Zuckerberg and Casey Newton, which came on the heels of an internal presentation Zuckerberg gave at Facebook.

Newton: You told your employees that your future vision of Facebook is not the two-dimensional version of it that we’re using today, but something called the metaverse. So what is a metaverse and what parts of it does Facebook plan to build?

Zuckerberg: This is a big topic. The metaverse is a vision that spans many companies — the whole industry. You can think about it as the successor to the mobile internet. And it’s certainly not something that any one company is going to build, but I think a big part of our next chapter is going to hopefully be contributing to building that, in partnership with a lot of other companies and creators and developers. But you can think about the metaverse as an embodied internet, where instead of just viewing content — you are in it. And you feel present with other people as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or webpage, like dancing, for example, or different types of fitness.

I think a lot of people, when they think about the metaverse, they think about just virtual reality — which I think is going to be an important part of that. And that’s clearly a part that we’re very invested in, because it’s the technology that delivers the clearest form of presence. But the metaverse isn’t just virtual reality. It’s going to be accessible across all of our different computing platforms; VR and AR, but also PC, and also mobile devices and game consoles. Speaking of which, a lot of people also think about the metaverse as primarily something that’s about gaming. And I think entertainment is clearly going to be a big part of it, but I don’t think that this is just gaming. I think that this is a persistent, synchronous environment where we can be together, which I think is probably going to resemble some kind of a hybrid between the social platforms that we see today, but an environment where you’re embodied in it.

The key difference between the Internet and the metaverse is the idea of “presence”; Matthew Ball, who has written extensively about the concept, including a ten-part Metaverse Primer earlier this summer, defined the Metaverse in 2020 as having these seven qualities:

  1. Be persistent – which is to say, it never “resets” or “pauses” or “ends”, it just continues indefinitely
  2. Be synchronous and live – even though pre-scheduled and self-contained events will happen, just as they do in “real life”, the Metaverse will be a living experience that exists consistently for everyone and in real-time
  3. Be without any cap to concurrent users, while also providing each user with an individual sense of “presence” – everyone can be a part of the Metaverse and participate in a specific event/place/activity together, at the same time and with individual agency
  4. Be a fully functioning economy – individuals and businesses will be able to create, own, invest, sell, and be rewarded for an incredibly wide range of “work” that produces “value” that is recognized by others
  5. Be an experience that spans both the digital and physical worlds, private and public networks/experiences, and open and closed platforms
  6. Offer unprecedented interoperability of data, digital items/assets, content, and so on across each of these experiences – your “Counter-Strike” gun skin, for example, could also be used to decorate a gun in Fortnite, or be gifted to a friend on/through Facebook. Similarly, a car designed for Rocket League (or even for Porsche’s website) could be brought over to work in Roblox. Today, the digital world basically acts as though it were a mall where every store used its own currency, required proprietary ID cards, had proprietary units of measurement for things like shoes or calories, and different dress codes, etc.
  7. Be populated by “content” and “experiences” created and operated by an incredibly wide range of contributors, some of whom are independent individuals, while others might be informally organized groups or commercially-focused enterprises

As for the term “Metaverse”, it was coined by Neal Stephenson in 1992’s Snow Crash; this is how Stephenson introduced the idea:

The top surface of the computer is smooth except for a fisheye lens, a polished glass dome with a purplish optical coating. Whenever Hiro is using the machine, this lens emerges and clicks into place…The lens can see half of the universe—the half that is above the computer, which includes most of Hiro. In this way, it can generally keep track of where Hiro is and what direction he’s looking in…

A narrow beam of any color can be shot out of the innards of the computer, up through that fisheye lens, in any direction. Through the use of electronic mirrors inside the computer, this beam is made to sweep back and forth across the lenses of Hiro’s goggles, in much the same way as the electron beam in a television paints the inner surface of the eponymous Tube. The resulting image hangs in space in front of Hiro’s view of Reality. By drawing a slightly different image in front of each eye, the image can be made three-dimensional. By changing the image seventy-two times a second, it can be made to move. By drawing the moving three-dimensional image at a resolution of 2K pixels on a side, it can be as sharp as the eye can perceive, and by pumping stereo digital sound through the little earphones, the moving 3-D pictures can have a perfectly realistic sound track.

So Hiro’s not actually here at all. He’s in a computer-generated universe that his computer is drawing onto his goggles and pumping into his earphones. In the lingo, this imaginary place is known as the Metaverse. Hiro spends a lot of time in the Metaverse. It beats the shit out of the U-Stor-It.

Stephenson’s Metaverse had many of qualities Zuckerberg and Ball highlighted, including persistence, being synchronous and live, and the quality of being filled with “content and experiences created and operated by an incredibly wide range of contributors”; the vision in Snow Crash, though, had two crucial differences that made it fundamentally different.

The Missing Internet

The fact of the matter is that, contra Zuckerberg, the Metaverse of Snow Crash is virtual reality; when Hiro Protagonist, the, uhm, protagonist, wants to look up information in the Library, he needs to enter the Metaverse by putting on his goggles (he can ask the Librarian to speak to him while he is in the real world, but only after establishing his presence). What happens in the Metaverse does not impact what happens in reality (with the exception of Snow Crash — that is part of the mystery of the novel). This all makes sense in the book because the Internet does not exist.

Zuckerberg, however, is announcing Facebook’s new mission in a world with the Internet, which is why he tried to expand his definition to basically be Internet+. After all, we can already connect to the Internet from anywhere, and from any device; the Internet, too, is about not just gaming and entertainment, but all aspects of life. There is, admittedly, not much dancing, until you remember that Epic makes a fortune selling emotes, which lets your Fortnite character dance.

From this perspective Facebook’s grand metaverse mission sounds an awful lot like VR re-branded. And honestly, that’s perfectly fine! I’ve long been skeptical about Facebook’s investments in VR, but over the last year in particular, as Apple’s iOS changes have highlighted Facebook’s platform risk, I’ve come around to Zuckerberg’s point of view. There are far worse things for a massively profitable company to invest in than what could very well be a key platform of the future. And, naturally, whatever Facebook builds for VR will be accessible elsewhere, whether that be AR, mobile, or your computer; Facebook’s goal isn’t the Internet, it’s bigger than that.

The Missing Monopolist

Stephenson, for his part, never anticipated a company like Facebook. From a 2017 interview with Vanity Fair:

One of the things that’s been interesting to observe with the rise of social media is the way in which the same technologies that initially seemed to be uniting us have in fact driven us further apart. Do you see virtual reality as ultimately contributing to the same political polarization that we’ve seen divide Twitter and Facebook?

Well, first, I should make full disclosure that I totally did not see that coming. Even a few years ago, to say nothing of 25 years ago, I really didn’t see the whole social-media bubble thing coming and didn’t — even when I became aware of it — didn’t really get its significance until November 8, 2016. So, that one I missed. The way that the Metaverse is designed — keeping in mind that this was pre-Internet as we know it, pre-Worldwide Web, just me making shit up — there’s only one Metaverse. You have to go there, you can’t set up your own.

This is, in retrospect, the most unrealistic part of Snow Crash. The Metaverse is governed by the Association for Computing Machinery’s Global Multimedia Protocol Group; it is accessed and maintained by a fiber optic monopoly owned by one L. Bob Rife. Rife is the bad guy in the story, running a cult from an aircraft carrier and trying to use Snow Crash to break the minds of hackers like Hiro; it never occurs to Rife to leverage the fact that he owns the wires Hiro and everyone else depends on.

Indeed, Rife is, from the Ball perspective, a bit of a hero: his monopoly is a hands-off one, creating the conditions for not just persistence and being synchronous but also a virtual economy with full interoperability between the various entities in the Metaverse. The Metaverse simply exists in a way that, well, the Internet does: anyone can set up a server on the Internet, and anyone can buy a plot of land in the Metaverse.

In truth, though, this vision of the Internet feels increasingly obsolete: actually keeping a server online means having an Internet Service Provider, which may impose bandwidth constraints at best, and cut you off for arbitrary content rules at worse; national regulators in an increasing number of countries want to control the bits on local bandwidth, professing outrage at China’s Great Firewall even as their actions evince a certain degree of envy. The most economical and secure solution is to use the public cloud, but that subjects you to a private company’s terms of use, the violations of which make its unaccountable and unreachable executives prosecutor, judge, and jury. The situation is even worse if you want to reach potential customers: the vast majority of computing devices in the world are access-controlled by Apple and Google, which not only impose limits on content but also tax their economies at a 30% rate; the only interoperability that exists are the remains of the open Internet. One can certainly make the case that Stephenson didn’t see this coming either — except that he kind of did.

The Snow Crash Dystopia

Not all of the events of Snow Crash take place in the Metaverse; Stephenson’s real world is, arguably, far more interesting. Nearly everything is privatized, from neighborhoods to roads to law enforcement; private corporations (including the Mafia) operate “Franchise-Organized Quasi-National Entities” that own properties across the country and include citizenship and privileged access. Hiro, for example, is a citizen of “Mr. Lee’s Greater Hong Kong” (which is not affiliated with the city), and he flees to one of its properties midway through the book:

“Welcome to Mr. Lee’s Greater Hong Kong, Mr. Protagonist,” the security system says through a P.A. speaker. “And welcome to your guest, Ms. Y.T.”

The other taxis have stopped in formation along the curb. Several of them overshot the Hong Kong franchise and had to back up a block or so. A barrage of doors thunking shut. Some of them don’t bother, just leave the engines running and the doors wide open. Three jeeks linger on the sidewalk, eyeing the tire shreds impaled on spikes: long streaks of neoprene sprouting steel and fiberglass hairs, like ruined toupees. One of them has a revolver in his hand, pointed straight down at the sidewalk.

Four more jeeks run up to join them. Y.T. counts two more revolvers and a pump shotgun. Any more of these guys and they’ll be able to form a government. They step carefully over the spikes and onto the lush Hong Kong lawngrid. As they do, the lasers appear once more. The jeeks turn all red and grainy for a second.

Then something different happens. Lights come on. The security system wants better illumination on these people.

Hong Kong franchulates are famous for their lawngrids — whoever heard of a lawn you could park on? — and for their antennas. They all look like NASA research facilities with their antennas. Some of them are satellite uplinks, pointed at the sky. But some of them, tiny little antennas, are pointed at the ground, at the lawngrid.

Y.T. does not really get this, but these small antennas are millimeter-wave radar transceivers. Like any other radar, they are good at picking up metallic objects. Unlike the radar in an air traffic control center, they can rez fine details. The rez of a system is only as fine as its wavelength; since the wavelength of this radar is about a millimeter, it can see the fillings in your teeth, the grommets in your Converse high-tops, the rivets in your Levi’s. It can calculate the value of your pocket change.

Seeing guns is not a problem. This thing can even tell if the guns are loaded, and with what sort of ammunition. That is an important function, because guns are illegal in Mr. Lee’s Greater Hong Kong.

The folks with the guns are summarily disarmed by a cyborg dog — this is a science fiction novel! — but the point is that the rules in Greater Hong Kong are different than the rules in Nova Sicilia or Metazania or New South Africa or Narcolombia, despite the fact they all exist in what was nominally the United States (the actual government only actually exists in secured enclaves of its own). They are, quite literally, walled gardens.

In this way the Metaverse is actually a unifying force for Stephenson’s dystopia: there is only one virtual world sitting beyond a real world that is fractured between independent entities. There are connections in the real world — roads and helicopters and airplanes exist — but those connections are subject to tolls and gatekeepers, in contrast to the interoperability and freedom of the Metaverse.

In other words, I think that Stephenson got the future exactly backwards: in our world the benevolent monopolist is the reality of atoms. Sure, we can construct borders and private clubs, just as the Metaverse has private property, but interoperability and a shared economy are inescapable in the real world; physical constraints are community. It is on the Internet, where anything is possible, that walled gardens flourish. Facebook has total control of Facebook, Apple of iOS, Google of Android, and so on down the stack. Yes, HTTP and SMTP and other protocols still exist, but it’s not an accident those were developed before anyone thought there was money to be made online; today’s APIs have commercial intent built-in from first principles.

The Future of Metaverses

This is why I don’t think it is absurd that Nadella was the first tech executive to endorse the metaverse as a strategic goal. There is likely to be good business in building private metaverses for private companies, in a not-dissimilar way to Stephenson’s Franchise-Organized Quasi-National Entities made it easy for small-scale entrepreneurs to set up their own franchise-states.

Facebook’s goal is more audacious: the company already serves 3.5 billion users, which means creating a shared reality for over half of the world is a plausible goal. That reality, though, will likely sit alongside other realities, just as Facebook the app sits alongside other social networks. This metaverse is universal, but not exclusive.

What I am skeptical of is the idea of there being one Metaverse to rule them all; we already have that, and in this case the future is, in William Gibson’s turn of phrase, here — it’s just not very evenly distributed. I speak from personal experience: for two decades I have lived and worked primarily on the Internet; it’s where I experience friendship and community and make my living. Over the last year-and-a-half hundreds of millions of people have joined me, as the default location for the work has switched from the office to online (that “online” is primarily experienced at home does not mean that home is intrinsic to the work — “work from home” is a misnomer). This too is an inverse of Snow Crash, where most jobs are in the real world, and recreation in the Metaverse; the future of work is online,1 and the life one wants to live in the reality of one’s choosing.


  1. At least for a privileged minority; notably, in Snow Crash only a minority of people have access to the Metaverse 

Instagram’s Evolution

Last week Head of Instagram Adam Mosseri posted a video on Instagram about Instagram:

Hey everyone, I thought it would be good to start sharing more about what we’re currently working on at Instagram just to give you a sense of what is coming before it comes. Right now, we are trying to build new experiences primarily in four areas. The first is creators, and I’ve talked a lot about creators and trying to help them make a living. And this has to do with the shift in power from institutions to individuals across industries. The second is video. Video is driving an immense amount of growth online for all the major platforms right now, and I think it’s something we need to lean into more — and I’m actually going to talk about that more in a minute. The third is shopping. Now the pandemic shifted, or accelerated the shift of commerce from offline to online by a number of years, and we’re trying to lean into that trend. And the fourth is messaging. How people connect with their close friends has changed a lot over the last five years or so and it has moved primarily to Messaging and away from Feed and Stories products.

But today I actually want to talk a bit more about video. And I want to start by saying we’re no longer a photo-sharing app or a square photo-sharing app. The number one reason that people say that they use Instagram in research is to be entertained. So people are looking to us for that. So actually, this past week in our internal all hands, we shared, or I shared, a lot about what we’re trying to do to lean into that trend — into entertainment and into video. Because let’s be honest: there’s some really serious competition right now. TikTok is huge, YouTube is even bigger, and there’s lots of other upstarts as well. And so people are looking to Instagram to be entertained, there’s stiff competition and there’s more to do, and we have to embrace that. And that means change.

So what you’re going to see over the next couple of months really is us start to experiment more in the space of what we call recommendations, so showing you things in Feed that you may not be following yet. We just started testing an early version of this last week. This week is a new version that’s coming out with topics where you can say which topics you want to see more of or less of. But we’re also going to be experimenting with how do we embrace video more broadly — full screen, immersive, entertaining, mobile-first video. And so you’ll see us do a number of things, or experiment with a number of things in this space over the coming months. Now we have an idea of where we want to end up in half a year or a year’s time, but I’m sure things are going to change many times between now and then. This isn’t something that we can just do overnight. So you’ll see us iterate and try and be very public about what we’re doing and why with videos like this one. Anyhow, hopefully you’ll enjoy it.

Everyone that I’ve seen, from Twitter to my teenage daughter, is quite certain they will not enjoy it. Why does the beloved photo-sharing service have to copy everyone else, and not simply do what it is best at?

The reality, though, is that this is what Instagram is best at. When Mosseri said that Instagram was no longer a photo-sharing app — particularly a “square photo-sharing app” — he was not making a forward-looking pronouncement, but simply stating what has been true for many years now. More broadly, Instagram from the very beginning — including under former CEO Kevin Systrom — has been marked first and foremost by evolution.

From Tool to Network

It may be hard to remember now, but Instagram didn’t even start as primarily a photo-sharing app: it was a photo-filter app, focused on making photos look good on ancient iPhone cameras and posting them on other social networks. It was, to use Chris Dixon’s parlance, a tool that evolved into a network:

Instagram’s initial hook was the innovative photo filters. At the time some other apps like Hipstamatic had filters but you had to pay for them. Instagram also made it easy to share your photos on other networks like Facebook and Twitter. But you could also share on Instagram’s network, which of course became the preferred way to use Instagram over time.

This was certainly an innovative approach, but even then Instagram didn’t get off the ground in isolation: the app famously booted up its initial network on top of the Twitter graph, allowing you to easily discover and follow everyone you already followed on Twitter. Instagram’s success in doing so remains one of the most powerful arguments for interoperability as a means of driving competition; it is disappointing that regulations like GDPR have redefined privacy to make it impossible to carry your contacts to other services. The important takeaway for this article, though, is that Instagram was defined by evolution from the very beginning.

Video on Instagram

To that end, the idea that Instagram isn’t simply a photo-app is hardly original to Mosseri; Instagram founder Kevin Systrom defined the service this way in 2013:

When we joined Facebook, a lot of people asked me this question: What is Instagram? What is Instagram all about? It’s a tough question, not because it’s not discoverable, not because it’s intangible, but instead because it takes on a different form depending on who asks the question and who answers it. When I think about what Instagram is I think about moments, and I think about visual imagery. What I can tell you is that at our core visual imagery is everything. It’s in our DNA, and it’s what drives us…

Photos are certainly “moments” and “visual imagery”, but only a subset; video was the obvious evolution.

If we’re about capturing and sharing the world’s moments, what’s next? What do we work on? We’ve taken photos and made them beautiful, we’ve connected people from all different countries around the world, all different cultures. What do we work on next? I’m going to tell you a story. That story is September of 2010, and Mike, my co-founder, and I were sitting in front of a whiteboard pondering what’s next. Two entrepreneurs not really knowing what to do, what’s next. We were working on a small location-sharing app called Bourbon. As part of Bourbon you could share your location, and the two parts of sharing your location were posting a photo and posting a video. We decided that we needed to do something new, so we created Instagram out of Bourbon.

The one part that we brought was photos, but we left video on the side. Why is that? Because we said the three things we want to be really good at are speed, simplicity, and beauty. And I’ll you, at the time two years ago, with the devices as they were, speed, simplicity and beauty were definitely possible with photos. But it was really hard with video. Today that all changes, and Instagram is going to be at the center of it. I’d like to introduce Video on Instagram.

One of the defining characteristics of digital services relative to analog services is that they need not be limited by medium: a magazine can only ever have photos, while a television show can only ever be videos, but when everything is 1s and 0s there is no need to be constrained by one particular manifestation of those 1s and 0s. Instagram has understood this from the beginning; the fact it started as only a photo app was due to the constraints of technology, not ideology.

Algorithmic Feed

Instagram’s third evolution was the introduction of the algorithmic feed, which was met with handwringing that sounds rather similar to the responses to Mosseri’s video. I wrote in 2016 in a Daily Update:

As is their wont, The New York Times got comments from not only analysts and Instagram executives but also a person-on-the-street, and this one delivered:

Vickie Mulkerin, a 49-year-old Instagram user…said she appreciated the immediacy of the Instagram feed. “I like how I can open the app and see what my stepsister Ashley is doing today with my niece and nephew, right in that very moment,” she said. “I want to judge what’s important, not have some algorithm tell me what it thinks is important.”

If you think that quote looks familiar, well, welcome to pretty much every story about the Facebook algorithm: users are sure they know better, but as any Facebook executive will tell you, users are much more engaged with an algorithmic feed…

One common misconception about why Facebook has an algorithmic feed is that it is to allow for advertising; that, though, doesn’t really make much sense. Facebook could include advertising in a time-based feed just as easily; indeed, that’s what the company does with Instagram today. Rather, an algorithmic feed is exactly what Facebook says it is: a way to drive engagement by showing users more of what they actually want to see, and, by virtue of driving engagement, gaining the opportunity to show users that many more ads.

Mosseri cited user research showing that Instagram users use the app for entertainment, but I strongly suspect that the service is even more convinced by the way users actually use the app: Facebook knows better than anyone that, when it comes to their services, revealed preference — what users actually do — is a far more powerful indicator than stated preference — what they say they want.

This was the biggest lesson from one of the most important episodes in Facebook’s history: the introduction of the News Feed, which was met by protests both on Facebook (naturally), and even outside of the company’s offices in Palo Alto. The irony, as David Kirkpatrick noted in The Facebook Effect, is that the reason protests sprung up so quickly is that the News Feed worked: it surfaced and organized information that users cared about in a way that was only possible with an algorithmically-driven Internet service. Facebook added some token privacy controls to mollify those initial objections, but the company didn’t compromise on the concept itself, which became the foundation of the company’s explosive growth and, it should be noted, was copied by everyone else — including Instagram.

Stories

Instagram’s biggest shift, though, and the episode from which you can draw a straight line to Mosseri’s video, was its introduction of Stories. While a feed was native to digital — endless content, customized to you — Stories, pioneered by Snapchat, were native to mobile specifically. They filled your entire screen and either advanced on their own or with a simple tap; their ephemeral nature was also a powerful lure to keep you coming back to the app day-after-day.

What was impressive about this shift was, in fact, the shamelessness; I called it The Audacity of Copying Well. What differentiated Instagram was the product of its initial evolution — the network — and adding a new format to that network was, broadly speaking, no different than adding an algorithmic feed. Now you could access “Moments”, to use Systrom’s parlance, in what was frankly a better format. That may have seemed controversial at the time, but five years on Instagram knows better than anyone the degree to which users prefer Stories to a feed; speaking for myself I find myself only scrolling the Instagram Feed once my Stories have been exhausted — which rarely happens.

This shift did cause Facebook some short-term pain; advertisers were used to feed advertising, and it took a couple of years and some painful earnings calls for them to catch up to user behavior, but catch up they did. From a Daily Update earlier this year:

The most notable takeaway from last quarter’s results was the increase in prices-per-ad for the first time since the end of 2017.

Facebook's advertising metric growth rates over time

That 2018 decline was driven by the push to monetize Stories, and while many interpreted Facebook’s somewhat middling results in 2018 as a reason to be bearish, I was optimistic Stories were a big opportunity; I predicted in a Daily Update from August 2018:

The key thing to remember is that advertisers always lag users: there were millions of people using the Internet on desktops before advertisers really got on board, and then there were hundreds of million of people using mobile before advertisers came along. In every case some analysts made the mistake of assuming that advertising would never catch up, but it eventually did, and it seems far more likely than not that the story will be the same for Stories…

This is exactly what has happened. Increasing usage of Stories increased impressions, which is deflationary, but as advertisers have embraced the format that has increased competition for those impressions, ultimately increasing prices.

Facebook’s business results give credence to my anecdotal observation about user behavior: people click through Stories far more than they scroll through their feed.

Taking on TikTok

One thing that Mosseri was certainly right about is that TikTok is a serious competitive threat to Facebook. App Annie reported in its State of Mobile 2021 report that in the United States time spent on TikTok had surpassed both the Facebook app and Instagram:

TikTok has the most usage in the U.S. according to AppAnnie

While the FTC didn’t even mention TikTok in its antitrust case against Facebook — small wonder the suit was dismissed for lacking a reasonable market definition — this is clearly a big problem for an advertising-based business. The defining characteristic of digital is abundance, thanks to the zero marginal cost nature of transmitting 1s and 0s, which means that time, thanks to its inherent scarcity, is the most important plane of competition.

TikTok, though, has been particularly difficult for Facebook and Instagram to respond to for three reasons:

  • First, if Instagram has been defined by sharing moments, TikTok has been about manufacturing them, with easy-to-use tools that commoditize creation.
  • Second, TikTok has defined a new format, distinct from both a scrollable feed and tappable stories: swipeable videos that are melding of both. TikTok provides both an endless feed and a full-screen immersive experience that is easily navigable.
  • Third, TikTok isn’t really a social network at all, which freed the service to surface the most compelling content from anywhere in the world, not simply from your network.

The first issue was easier to address, which is how we came by Instagram Reels. Sure, it may not be as intuitive as TikTok’s video editor, but Reels is improving rapidly. The problem for Instagram, though, is that building tools is relatively easy; creating a virtuous cycle of creation and consumption is much more difficult.

This is where the shift to Stories created an opportunity: if you look at the Instagram home screen, the vast majority of time is spent in a relatively small amount of space:

Much of Instagram's UI is devoted to the legacy feed

While Reels did recently get its own tab at the bottom, I suspect that Instagram’s plan is to push Reels content into that main feed, and as Mosseri noted, that includes content from creators “you may not be following yet.” In other words, Instagram, having shifted the primary use case of the app from the Feed to Stories, is going to transform said feed to address its two remaining shortcomings relative to TikTok: a new consumption experience, and content from anywhere.

This is a risky shift, to be sure, but so was the shift to Stories; I wrote at the time:

It’s not certain Facebook and Instagram will succeed, and the risk is significant: the only thing harder than rewiring users’ expectations for a massively successful product is ensuring said rewiring doesn’t turn them off from the app entirely, destroying the very value you are trying to leverage.

Facebook, though, also knows the danger of standing still.

The Entertainment Goal

To this point I have framed Mosseri’s announced changes in the context of Instagram’s continual evolution as an app, from photo filters to network to video to algorithmic feed to Stories. All of those changes, though, were in the spirit of Systrom’s initial mission to capture and share moments. That is why perhaps the most momentous admission by Mosseri is that Instagram’s new mission is simply to be entertainment.

In truth, though, this has always been social media’s most important job. Back in 2015 I argued in Facebook and the Feed that the company was constraining itself by only thinking in terms of its network:

I suspect that Zuckerberg for one subscribes to the first idea: that people find what others say inherently valuable, and that it is the access to that information that makes Facebook indispensable. Conveniently, this fits with his mission for the company. For my part, though, I’m not so sure. It’s just as possible that Facebook is compelling for the content it surfaces, regardless of who surfaces it. And, if the latter is the case, then Facebook’s engagement moat is less its network effects than it is that for almost a billion users Facebook is their most essential digital habit: their door to the Internet…

This course, though, depends on Facebook giving users exactly what they want, or at least a good enough mix, in their News Feed, and as I noted, I’m not convinced personal updates is enough. Moreover, while Facebook may view “the network” as their differentiator, the fact is that a lot of “friend” sharing is indeed moving to alternative networks like Snapchat and LINE and WhatsApp. With this News Feed update I am concerned that Facebook is limiting itself and committing to a battle — the private sharing of information — it can’t necessarily win.

Consider Facebook’s smartest acquisition, Instagram. The photo-sharing service is valuable because it is a network, but it initially got traction because of filters. Sometimes what gets you started is only a lever to what makes you valuable. What, though, lies beyond the network? That was Facebook’s starting point, and I think the answer to what lies beyond is clear: the entire online experience of over a billion people. Will Facebook seek to protect its network — and Zuckerberg’s vision — or make a play to be the television of mobile?

Six years on and it seems likely that Facebook’s usage is at best holding steady — it was reportedly declining before the pandemic — and at a minimum declining relative to the competition; meanwhile, the service has been transitioning to much more of a utility, with a greater focus on Groups and offerings like Marketplace. Perhaps that was ultimately the best path for an app so deeply tied to the idea of a social network, but it also gives that much more of an impetus for Instagram to shift to an even broader vision: a one-stop shop for entertainment on your phone.

Of course the network isn’t going away: Facebook has leaned into the aforementioned shift to private messaging across its platforms, including Instagram; I probably should have added the 2013 addition of Instagram Direct to the number of ways the service has evolved over the years — it’s a long list! Indeed, that is the real answer as to what Instagram, particularly under Facebook, is ultimately about: moments, yes, but their fleeting nature. Instagram may have started with a goal of preserving them, but it has never been a service particularly concerned about getting stuck in them.

I wrote a follow-up to this Article in this Daily Update.

The Lightness of Windows

From Ian Sherr, writing about last week’s Windows 11 announcement for CNET:

When you choose a computer or smartphone to buy these days, you have to pick between several factions. There’s Apple world, which includes the Mac computer, iPhones and iPads, all designed to work together to help you share files, video chat and watch TV as easily as possible. There’s also Google land, whose Android software powers an array of phones, tablets and computers. But with Windows 11, Microsoft wants to break that mold.

The software giant said Thursday that its next major version of Windows will launch as a free upgrade this fall, offering a host of new features that in some ways appear designed to position Microsoft as the company whose products work with ones from Apple, Google and pretty much anyone else.

The company’s expanding its support for the Android app for example, allowing people to more easily run phone apps on their computer. Microsoft’s building its Teams software into Windows in a similar way as Apple’s FaceTime is built into Macs — except Microsoft doesn’t want it to be exclusive. There’s already a Microsoft Teams app for Mac, iPhones and Androids. (Microsoft CEO Satya Nadella even told a reporter he’d be happy to accept FaceTime onto Microsoft computers.)

I really enjoyed this event; coming in at a tight 44 minutes and 51 seconds, it had a sort of playfulness and lightness that felt like a big contrast to Apple’s COVID-era commercial-like presentations. It feels like a bit of a role reversal from twenty years ago when Microsoft would have grand over-produced events at CES while Apple put on budget productions at Macworld.

That’s not a surprise, when you think about it: back then new versions of Windows meant new experiences for basically everyone who used a computer, new opportunities for developers, and new reasons to worry for competitors scared that this might be the year Microsoft made their products a feature. Apple, on the other hand, had nothing to lose.

Today is the opposite: Apple reigns supreme over the computing landscape. iOS 15 will bring new experiences to a billion users, new APIs provide new opportunities for developers, and Apple isn’t just building in features that hurt competitors, but creating new ones (i.e. Facebook and app install advertising); it is Windows that feels like it has nothing to lose.

The End of Windows

Of course Windows remains essential software, with a billion-plus userbase of its own, and a critical part of the enterprise landscape in particular (although, as the company highlighted in the presentation, COVID re-established the importance of the PC for consumers as well). What gives Microsoft more freedom-of-movement, though, is that Windows is no longer the core of its business. This remains CEO Satya Nadella’s biggest triumph; I recounted how he shifted the company away from its Windows-centricity in 2018’s The End of Windows:

The story of Windows’ decline is relatively straightforward and a classic case of disruption:

  • The Internet dramatically reduced application lock-in
  • PCs became “good enough”, elongating the upgrade cycle
  • Smartphones first addressed needs the PC couldn’t, then over time started taking over PC functionality directly

What is more interesting, though, is the story of Windows’ decline in Redmond, culminating with last week’s reorganization that, for the first time since 1980, left the company without a division devoted to personal computer operating systems (Windows was split, with the core engineering group placed under Azure, and the rest of the organization effectively under Office 365; there will still be Windows releases, but it is no longer a standalone business). Such a move didn’t seem possible a mere five years ago, when, in the context of another reorganization, former-CEO Steve Ballmer wrote a memo insisting that Windows was the future…

Thus my assertion at the top, that the story of how Microsoft came to accept the reality of Windows’ decline is more interesting than the fact of Windows’ decline; this is how CEO Satya Nadella convinced the company to accept the obvious.

The rest of that article walks through how Nadella led Microsoft to that point, including Office on iPad, several of his strategy memos, and killing Windows Phone; I know it’s a cliché to say that something makes for a great business case study, but this really makes for a great business case study!

What Nadella’s change management also enabled was, to steal the title from Joanna Stern’s delightful interview with Nadella, a new “Start” for Windows:

A new "Start" for Windows

Yes, the reference was about moving the ‘Start’ menu to the center, but it applies to the Windows opportunity as well, and that opportunity only exists because what came before was already ended.

Apple’s Self-Reliance

To return to the Windows/Mac comparison of twenty years ago, Apple’s problem was certainly a lack of developers, but that was, above all, because the company simply didn’t have enough users. The way the company fixed the problem was exactly what you would expect from Apple: they relied on themselves. One of the most brilliant and underrated moves of the Steve Jobs era was the development of the iLife suite of apps — iMovie, iPhoto, iTunes, iDVD, and GarageBand. I noted last year in Apple’s Shifting Differentiation:

OS X brought software to the forefront, delivering not simply a technically sound operating system, but one that was based on Unix, making it particularly attractive to developers. And, on the consumer side, Apple released iLife, a suite of applications that made a Mac useful for normal users. I myself bought my first Mac in this era because I wanted to use GarageBand; 16 years on and my musical ambitions are abandoned, but my Mac usage remains.

By that point I was buying a Mac despite its hardware: while my iBook was attractive enough, its processor was a Motorola G4 that was not remotely competitive with Intel’s x86 processors; later that year Jobs made the then-shocking-but-in-retrospect-obvious decision to shift Macs to Intel processors. In this case having the same hardware as everyone else in the industry would be a big win for Apple, the better to let their burgeoning software differentiation shine.

The point of that article, which I wrote upon the release of the M1 Macs, is that Apple’s software differentiation, particularly in the case of the Mac, was the smallest it had been in many years, which is why it was appropriate that the company’s differentiation was shifting back to hardware. Interestingly, though, that means that Microsoft is by definition on the other side of that coin: to the extent that Apple Silicon is superior to x86 (or other ARM chips) is the extent to which Windows is at a disadvantage.

The Bill Gates Line

Microsoft, like Apple, is responding by doing what they do best, but, because it’s Microsoft, it’s the exact opposite of Apple: instead of more deeply integrating and doing everything themselves in an attempt to appeal to consumers, they are opening up and removing limitations in an attempt to appeal to developers, and by extension consumers who don’t want to be bound into Apple’s ecosystem.

Nadella expounded on this in a really excellent interview with Nilay Patel at The Verge:

Patel: That brings me to some of the big changes in Windows, which are fundamentally about what kind of operating system Windows is going to be and what kind of businesses you can run on it and what kind of business will that be for Microsoft.

There is a new user interface. The Start button is in the center of the screen. There’s cosmetic differences. But you’re also allowing Android apps to run on Windows. You are integrating the Amazon Android app store. You’ve made some changes to the store economics. You’ve reduced Microsoft’s cut to 15 percent. That’s in comparison to the very controversial 30 percent that Apple charges.

Then you’re saying to developers, “You can be in our store and you can not pay us a cut at all if you want to use your own payment model.” How much of that is opportunistic changes — you’re seeing all the controversy and you sense a market opportunity? And how much of it is this being the correct way to shift your business?

Nadella: I think it’s driven by competition. What I mean by that is – what should Microsoft do to manage the platform and the platform rules such that we can thrive in that role?

The way I’ve interpreted what platforms do is: they have to create opportunity for people who build on the platform. That’s the way to keep a platform relevant. If you’re creating a great opportunity for others to be born on your platform and scale on your platform — that’s the Microsoft I grew up in. That’s the Windows I grew up with. Whether it is the Adobe folks creating their Creative Cloud or SAP building their ERP [enterprise resource planning] business. Or in today’s world, whether it’s Discord building their community for gamers on Windows or any other business.

To me, how do we make Windows more vibrant going forward?

I sense a real opportunity, because the other two ecosystems that are at scale, for their own internally consistent set of reasons, have conflated — at least in my mind — the platform and the aggregation layer with one set of rules. There’s no reason why there should be one set of rules. They can be disaggregated. After all, we do have a store. We do have commerce. You can use it all or you can bring your own. That’s [a] practical thing for Microsoft to do.

I’m not even trying to make some value statement that Microsoft is virtuous here and others are not. Others have chosen it for whatever reasons they have. This is a design choice and a business model choice. I want to make our own set of design and business model choices so that creators find more choice.

It’s easy — and right! — to note that Microsoft definitely has nothing to lose when it comes to app stores. They don’t make that much money from the Windows App Store, and they (still) need to get more consumer apps for their platform. At the same time, Nadella’s framing of history very much fits with how Microsoft has always thought about Windows; I called it The Bill Gates Line:

Over the last few weeks I have been exploring what differences there are between platforms and Aggregators, and was reminded of this anecdote from Chamath Palihapitiya in an interview with Semil Shah:

Semil Shah: Do you see any similarities from your time at Facebook with Facebook platform and connect, and how Uber may supercharge their platform?

Chamath: Neither of them are platforms. They’re both kind of like these comical endeavors that do you as an Nth priority. I was in charge of Facebook Platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after — like our funding history was $5M, $83 M, $500M, and then $15B. When that 15B happened a few months after Facebook Platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”

By this measure Windows was indeed the ultimate platform — the company used to brag about only capturing a minority of the total value of the Windows ecosystem — and the operating system’s clear successors are Amazon Web Services and Microsoft’s own Azure Cloud Services. In all three cases there are strong and durable businesses to be built on top.

Nadella referenced this exact point in the interview:

Nadella: In our case at Microsoft, I’ve always felt that, at least the definition of a platform is: if something bigger than the platform can’t be born, then it’s not a platform. The web, it grew up on Windows. Think about it. If we said, “All of commerce is only mediated through us,” Amazon couldn’t exist, if we had somehow said, “We’re going to have our own commerce model.”

Therefore I think each company has to choose and see what aggregation layer, what platform layer, [and] what rules work for them and their ecosystem. But, in our case, it’s very clear to us that we do want to solve for the same security issues, [and] discoverability issues, because that’s one of the reasons why we’re emphasizing the store. At the same time, the store can be used at different levels by different creators. We want to have that flexibility be a competitive differentiation.

There is, to be clear, some amount of motivated reasoning here; in response to a question as to whether Microsoft would allow Google’s Play Store on Windows (the answer is yes), one of the examples Nadella cited positively was the existence of multiple marketplaces for games, from the Microsoft Store to the XBox Game Pass to Steam to Epic. I can tell you, though, that when I worked on the initial version of the Microsoft Store a decade ago there was a lot of consternation that Steam had built what Microsoft felt it should have; what if the company had realized the app store opportunity first? Would it be so laid back about competing models if there were billions of dollars at stake?

Perhaps not, but I think that is a blessing in disguise. It’s hard to feel great about the impact of the App Store on Apple from any angle other than a financial one; it’s not simply a strategy tax, but a cultural one, not only poisoning the company’s relationship with developers but actually resulting in a worse experience for users, and it carries huge regulatory risk.

Return of Windows?

Back in 2005 Paul Graham wrote Return of the Mac:

All the best hackers I know are gradually switching to Macs. My friend Robert said his whole research group at MIT recently bought themselves Powerbooks. These guys are not the graphic designers and grandmas who were buying Macs at Apple’s low point in the mid 1990s. They’re about as hardcore OS hackers as you can get. The reason, of course, is OS X. Powerbooks are beautifully designed and run FreeBSD. What more do you need to know?…

If you want to attract hackers to write software that will sell your hardware, you have to make it something that they themselves use. It’s not enough to make it “open.” It has to be open and good. And open and good is what Macs are again, finally.

So Windows is open, both in terms of the software you can write on it, the software you can run, and the business models you can employ; Microsoft has thrown the doors wide open to everyone. That leads to the next obvious question: is it good? Certainly this approach is going to lead to a lot of inconsistency; Patel asked Nadella what was the best argument against Android apps on Windows:

Nadella: I think always the argument will be, “do we have to have a consistent app model?” Because if you think about innovation — is there is some kind of NUI or even an AI chip that we want to light up? How can the APIs of that be lit up in such a way that this application can take advantage of it? When you have multiple subsystems and multiple app models, can you surface your platform system-level innovation such that all apps light up?

That is going to be the fundamental challenge in such a world, but we feel that there are ways. One of the ways I look at this is you can light an Android app or a PWA app or a UWP app on Windows in the future, or even today, for some of the new AI APIs.

At Microsoft we build for iOS, we build for Android, we build for Windows. That’s one of [our] fundamental challenges. We’re trying to make sure that as developers, we can leverage as much of the common code base, as much of the cloud, but at the same time, be native on each platform.

Nadella’s last point actually leads to another answer to Graham’s challenge: does it matter? Apple’s shift to increasingly differentiate the Mac via hardware isn’t simply a function of the M1 being possible, but of the reality that for Macs and PCs the vast majority of essential software are web apps, or run on web technologies like Electron; meanwhile, in the one category where being native matters most — high performance games — Windows is as dominant as ever.

Perhaps that is why this presentation felt so playful and light: it might not matter. Windows is an essential business, but Nadella reduced its importance to Microsoft not out of spite, but because the the world had already changed before the company did.

Pandemic Progress

If the Internet Archive is to be believed, Marc Andreessen’s April 2020 coronavirus-driven exhortation It’s Time to Build never actually included that futuristic picture of skyscrapers; it’s in the metadata so that it shows up on social media like Twitter:

Marc Andreessen's "It's Time to Build" tweet

What is even more intriguing is when, exactly, the building happened; after all, Andreessen wrote last week in Technology Saves the World:

Last April, I issued a call to our technology industry that it was time to build — and I am so proud of how we delivered. Please join me in an enthusiastic — virtual! — round of applause for all of the amazing workers in our spectacular technology industry who made all this possible. The experience of COVID has made crystal clear both how important our technology is to human flourishing, and how well we can deliver. Technology helped save the world.

Mission accomplished?

Future Business Models

Andreessen’s new essay was published on Andreessen Horowitz’s (a16z) much-ballyhooed new media property Future; you will recall much of the media establishment losing its mind over the announcement in January; I argued in Publishing is Back to the Future that the announcement seemed to be part of a much larger shift in media from a world of scarcity, where newspapers were profitable thanks to geographic monopolies, to one of abundance, where publications succeeded based on their ability to attract audiences who could visit any website on the Internet:

To put it another way, what the New York Times has become is not so different from what Andreessen Horowitz is proposing to build. Margit Wennmachers said in that introductory post that “Our lens is rational optimism about technology and the future”; as a long time subscriber of the New York Times, I think it is fair to call their lens rational skepticism about technology and its effects. What is notable about both is that their lenses are perfectly aligned with their business models (and, I would note, both claim to be motivated to change the world).

a16z’s business model is, of course, venture capital, and Wennmachers, in an interview with Bloomberg’s Emily Chang, was clear that driving a16z’s venture business was the primary focus of Future:

I’m trying to accomplish a business goal. Our firm wants to advance the future and thinks that technology is a good force in the world, and by implication we think that will make us attractive to entrepreneurs, and that’s what our business is all about. The three things that matter in venture capital are seeing the deals, picking the deals, and very importantly, winning the deals. If my function can help us see the deals then I’m making a contribution to advancing the future.

Wennmachers added that Future wasn’t going to be focused on traditional news reporting, and, for the record, none of this is in conflict with the original announcement; that’s not to say the media’s overreaction wasn’t warranted: I can only imagine how many page views and subscription dollars were driven by said overreaction. Understanding business models has always been one of the most reliable ways to understand the behavior of organizations.

Technology Saves the World

One could certainly make a similar argument about the striking differences between It’s Time to Build and Technology Saves the World; in How Tech Can Build I noted that the venture capital business model, which is biased towards zero marginal cost business models, wasn’t particularly well-suited to the sort of industrial policy that Andreessen seemed to be espousing:

I agree with Andreessen that much of the software revolution is inevitable; I also agree that tech’s seeming exclusivity on innovation has also been about the online space being the one place without the inertia and regulatory capture Andreessen decries. If you are talented and ambitious, what better place to be?

What I also sense in Andreessen’s essay, though, is the acknowledgment that tech too has chosen the easier path. Instead of fighting inertia or regulatory capture, it has been easier to retreat to Silicon Valley, justify the massive costs of doing so by pursuing infinite-upside outcomes predicated on zero marginal costs, which means relying almost exclusively on software as the means of innovation.

Technology Saves the World seems to imply that is sufficient; Andreessen cites a number of ways that technology has excelled during the pandemic:

  • Vaccines, particularly those developed using mRNA, were created, tested, and delivered at scale within a year.
  • Telemedicine was enabled at scale.
  • The majority of businesses continued to function thanks to technology platforms that enabled remote work.
  • Huge numbers of small businesses moved online, thanks to platforms like Facebook, Instacart, Doordash, and more.
  • Schools figured out online learnings, laying the groundwork for a huge expansion in educational opportunities.
  • Online entertainment kept people entertained, and online networks kept people connected.
  • The realization that people can work remotely separated the link between geography and economic opportunity.

This leads to the cynical argument: all of the pieces for these success stories were built before the pandemic hit — that’s why the U.S. was able to navigate the pandemic as well as it did. Which, conveniently enough, means that venture capital was already getting things right. It’s not-so-much “Time to Build” as it is “Keep Building the Things We Were Building All Along.” The business model is safe!

Revisiting Compaq and Coronavirus

Your ears may have perked up at the phrase “that’s why the U.S. was able to navigate the pandemic as well as it did”; wasn’t the American response an abject disaster? It certainly seemed so a year ago; Andreessen opened It’s Time to Build by writing:

Every Western institution was unprepared for the coronavirus pandemic, despite many prior warnings. This monumental failure of institutional effectiveness will reverberate for the rest of the decade, but it’s not too early to ask why, and what we need to do about it. Many of us would like to pin the cause on one political party or another, on one government or another. But the harsh reality is that it all failed — no Western country, or state, or city was prepared — and despite hard work and often extraordinary sacrifice by many people within these institutions. So the problem runs deeper than your favorite political opponent or your home nation.

I had struck a similarly despondent tone a couple of weeks earlier in Compaq and Coronavirus:

The fact of the matter is that we do make tradeoffs between human lives and economic activity all the time — speed limits are perhaps the most banal example. What is truly tragic is the utter lack of resolve and lack of a bias for action in this so-called tradeoff. The only options are to give up the economy or give in to the virus: the possibility of actually beating the damn thing is completely missing from the conversation. To put it another way, the West feels like Compaq in the 1990s, relying on its brand name and partnerships with other entities to do the actual work, forgetting that it was hard work and determination that made it great in the first place.

I drew a contrast to Taiwan, which responded rapidly to limit the spread of the coronavirus, and then kept it at bay for over a year, allowing life to operate normally. Today, though, the tables have turned: the U.S. is almost completely open, thanks to vaccines, while Taiwan, like many other Asian countries, is struggling with outbreaks and imposing lockdowns, and pinning their hopes in part on U.S. vaccine exports.

That’s not to minimize the massive suffering that occurred over the last year: over 600,000 deaths in the U.S., and a fatality rate of 183/100,000 people, 20th in the world (Taiwan, even with the recent outbreak, is at a mere 2/100,000 people). It is, though, a reminder that making grand pronouncements in the first inning is often a mistake. I reflected earlier this year in a Daily Update:

If one were to have presented you with a hypothetical in which the U.S. population was impossible to coordinate during a crisis, yet it was the U.S. that the led the way technologically and logistically in ending the crisis, that would make total sense, right? Moreover, it seems clear that the failure in the beginning is related to the triumph in the end: the U.S. remains a dynamic place with more variance than anywhere in the West, which is why you should expect both the highest highs (when there is a clear goal with an uncertain route to success) and the lowest lows (when there is an unclear goal with top down control).

Everything is indeed a trade-off, but what is important to remember is that the trade-off extends beyond a single pandemic as well. I don’t think it’s an accident that China both crushed the pandemic and also was the place where it originally spiraled out of control, thanks in part to the suppression of the spread of information; the country is also nowhere near opening up even as its vaccines are of questionable efficacy. Is it a stretch to wonder if a bias towards top-down control might be better for mass coordination problems, and worse for innovative and dynamic responses?

The Promise of Remote Work

I suspect this sort of reflection is just as much of a driver of Andreessen’s change of tone as is the a16z business model; after all, the first non-pandemic example he gave in It’s Time to Build of American sclerosis was housing:

You see it in housing and the physical footprint of our cities. We can’t build nearly enough housing in our cities with surging economic potential — which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future. We also can’t build the cities themselves anymore. When the producers of HBO’s “Westworld” wanted to portray the American city of the future, they didn’t film in Seattle or Los Angeles or Austin — they went to Singapore. We should have gleaming skyscrapers and spectacular living environments in all our best cities at levels way beyond what we have now; where are they?

However Technology Saves the World, as noted, highlights remote work:

For thousands of years, until the time of COVID, the dominant fact of every productive economy has been that people need to live where we work. The best jobs have always been in the bigger cities, where quality of life is inevitably impaired by the practical constraints of colocation and density. This has also meant that governance of bigger cities can be truly terrible, since people have no choice but to live there if they want the good jobs.

What we have learned — what we were forced to learn — during the COVID lockdowns has permanently shattered these assumptions. It turns out many of the best jobs really can be performed from anywhere, through screens and the Internet. It turns out people really can live in a smaller city or a small town or in rural nowhere and still be just as productive as if they lived in a tiny one-room walk-up in a big city. It turns out companies really are capable of organizing and sustaining remote work even — perhaps especially — in the most sophisticated and complex fields.

This is, I believe, a permanent civilizational shift. It is perhaps the most important thing that’s happened in my lifetime, a consequence of the Internet that’s maybe even more important than the Internet. Permanently divorcing physical location from economic opportunity gives us a real shot at radically expanding the number of good jobs in the world while also dramatically improving quality of life for millions, or billions, of people. We may, at long last, shatter the geographic lottery, opening up opportunity to countless people who weren’t lucky enough to be born in the right place. And people are leaping at the opportunities this shift is already creating, moving both homes and jobs at furious rates. It will take years to understand where this leads, but I am extremely optimistic.

There are echoes here of the self-serving arguments proffered by business executives who profited massively from moving jobs abroad: look at how much life improved for billions of people (particularly in China)! It’s a complicated argument because it is, objectively speaking, true; the human race as a whole is in a far better place today than it was forty years ago, thanks to globalization. At the same time, who believes that human betterment was the goal, as opposed to corporate profits? And what costs were incurred, both to middle class Americans and to America’s industrial capacity, in the meantime?

Still, the unbundling of work and geography seems like the only way to cut the Gordian Knot that is the U.S. housing crisis; NIMBY housing policies are a perhaps unavoidable outcomes of any democratic system that inherently favors those who live in a particular location over those that wish they did. It seems far more compatible with our ideals to overcome those problems with competition than top-down fiat, and technology has created the conditions for that sort of competition to occur. Perhaps it is appropriate that It’s Time to Build only had skyscrapers in metadata; the actual solution may be small towns and suburbs.

Progress

“Progress” is an interesting term nowadays; self-described Progressives like Ezra Klein, for example, responded to It’s Time to Build by bemoaning our inability to pass new laws:

The question, then, is why don’t we build? What’s stopping us? Here’s my answer: The institutions through which Americans build have become biased against action rather than toward it. They’ve become, in political scientist Francis Fukuyama’s term, “vetocracies,” in which too many actors have veto rights over what gets built. That’s true in the federal government. It’s true in state and local governments. It’s even true in the private sector.

I’m not against soliciting more ideas of what to build. But what we need is sustained funding, focus, and organizing to make building in America possible again. And that requires patiently engaging with the kinds of institutions that frustrate builders.

Klein is very sharp on the changes in U.S. politics that have driven increased polarization and the difficulty in passing new laws; at the same time, it is notable that the solution to an array of progressive priorities have come from competitive impulses. Take privacy, as an example: Apple’s iOS 14 changes, which are great for Apple’s business, have done far more to change the advertising industry than Europe’s GDPR, which only entrenched the biggest players. It’s the same thing with climate change: Tesla has driven a wholesale shift in the automative industry first-and-foremost by being cool, while solar prices have plummeted far faster than expectations; both are poised to succeed not by telling customers what they can’t do, but by making it more attractive to do what is better for the environment.

This for me is one of the biggest lessons from the last year: solutions that give customers what they want, from cooler cars to the ability to work from anywhere, are the way out of intractable problems, particularly if we want to remain true to Western values of self-determination and individual choice. That’s exactly what happened in the case of the pandemic: the U.S. didn’t beat the coronavirus by locking people up in their homes against their will, but by inventing new technology that let them live their lives as they wish. The ultimate governor on progress is the human condition, and catering to that reality, both in terms of what we build as well as why we build it, is a feature, not a bug.

One more point: it is notable, I think, that Technology Saves the World — along with most of Future’s initial slate of posts, I would add — didn’t really move the needle, particularly in contrast to the viral sensation that was It’s Time to Build. Even for Andreessen bad news is popular news!

That, though, is another feature-disguised-as-a-bug. Give me a world of invention and dynamism with media eagle-eyed for where things go wrong, over a world of conformism and stagnation with declarations that everything is going great. The value of what is built is borne out by reality on the ground — including the value of technology in the pandemic — while narratives are only as good as the restrictions on freedom necessary to make them unquestioned.

The Cicilline Salvo

From the Wall Street Journal:

House lawmakers proposed a raft of bipartisan legislation aimed at reining in the country’s biggest tech companies, including a bill that seeks to make Amazon.com Inc. and other large corporations effectively split in two or shed their private-label products. The bills, announced Friday, amount to the biggest congressional broadside yet on a handful of technology companies — including Alphabet Inc.’s Google, Apple Inc. and Facebook Inc. as well as Amazon — whose size and power have drawn growing scrutiny from lawmakers and regulators in the U.S. and Europe. If the bills become law—a prospect that faces significant hurdles—they could substantially alter the most richly valued companies in America and reshape an industry that has extended its impact into nearly every facet of work and life.

These bills are the ultimate outcome of the House Subcommittee on Antitrust’s investigation of tech companies that I have covered on Stratechery, including the hearing with the CEOs of Apple, Amazon, Google, and Facebook, and the ensuing report.

One of the bills — the Merger Filing Fee Modernization Act — is a straightforward increase in the filing fees for mergers (and tying said fees to inflation), meant to finance more in-depth review of said mergers. I agree that mergers ought to be an increased focus of regulators, and support this bill.

Definitions

The other four, meanwhile, vary in radicalness — and at times conflict with each other — but take care to target the same set of companies, specifically:

  • Companies with at least 50 million US-based monthly active users or at least 100,000 U.S.-based monthly active business users (defined as businesses operating on the platform) and:
  • Companies with net annual sales of or market capitalization greater than $600 billion, adjusted for inflation and:
  • Companies that are “a critical trading partner for the sale or provision of any product or service offered on or directly related to the online platform.”

“Critical trading partner” is defined as follows:

“The term “critical trading partner” means a trading partner that has the ability to restrict or impede:
(A) the access of a business user to its users or customers; or
(B) the access of a business user to a tool or service that it needs to effectively serve its users or customers

“Online platform” means:

A website, online or mobile application, operating system, digital assistant, or online service that:
(A) enables a user to generate content that can be viewed by other users on the platform or to interact with other content on the platform;
(B) facilitates the offering, sale, purchase, payment, or shipping of goods or services, including software applications, between and among consumers or businesses not controlled by the platform; or
(C) enables user searches or queries that access or display a large volume of information.

The bill is obviously targeting the aforementioned big four consumer tech companies, but Microsoft, despite not being a target of the subcommittee, clearly falls under the definition. There may be more covered companies as well, if not now then in the near future:

  • Visa has a market cap of $515 billion, and processes $11 trillion in payments. Obviously the vast majority of those payments go to merchants, and the largest portion of credit card fees go to banks, but “net annual sales” is not clearly limited to a company’s actual revenue; meanwhile, the company is clearly covered under the second definition of an online platform (Mastercard has a market cap of $363 billion).
  • JPMorgan Chase has a market cap of $477 billion and total assets of $3.7 trillion. Obviously the bank would argue it is not an “online platform” and that “net annual sales” is different than assets, but the former in particular seems like a questionable distinction.
  • Walmart has a market cap of $394 billion and a gross merchandise volume (GMV) of around $439 billion and is estimated to have 80,000 marketplace sellers, up from 50,000 a year ago.
  • PayPal has a market cap of $323 billion and total payment volume of $277 billion, up 39% year-over-year.
  • Shopify has a market cap of $162 billion and GMV of $119 billion, which nearly doubled year-over-year.

At a minimum “net annual sales” needs to be more clearly defined: is it total payment volume, gross merchandise value, or company revenue? And what specifically makes something an online platform — and why do we care about the difference?

The Four Bills

Here is what each of the four bills covers, presented in the order they are listed on Antitrust Subcommittee Chairman David Cicilline’s press release:1

American Innovation and Choice Online Act link

This bill, sponsored by Cicilline (D-RI) and co-sponsored by Lance Gooden (R-TX), bans covered platforms from giving an advantage to their own products, services, and lines of business over competitors; disadvantaging competing products, services, and lines of business; or discriminating between similarly situated business users. It further:

  • Bars any restrictions on interoperability that do not similarly apply to the platform owner
  • Explicitly bans tying (i.e. conditioning the use of one product on use of another)
  • Bans the use of data about the activities of third-party businesses to improve the platform’s own product
  • Forbids the platform from restricting the right of third-party businesses to use their own data generated on the platform
  • Requires platform owners to allow users to uninstall pre-installed applications and change defaults
  • Bans anti-steering provisions (i.e. Spotify being able to tell iOS users to subscribe online or link to the web)
  • Restricts the platform owner from treating the platform’s own products differently in search or rankings
  • Restricts the platform owner from controlling a business user’s pricing
  • Restricts the platform owner from limiting a business user’s interoperability
  • Bans retaliation by the platform owner against any business user that raises concerns with regulators

The bill does provide a privacy exception: actions that violate the above provisions can be legal if the platform owner can prove they were necessary to preserve user privacy while being narrowly tailored, non-discriminatory, and nonpretextual.

The bill also allows regulators to force the divesture of lines of business if it determines that said line of business presents a conflict of interest that leads to violation of this act.

Platform Competition and Opportunity Act link

This bill, sponsored by Hakeem Jeffries (D-NY) and co-sponsored by Ken Buck (R-CO), completely bans acquisitions by covered companies, unless the acquiring company proves that:

  • The acquired company does not compete with the platform in any way and:
  • Does not provide potential competition for the platform in any way and:
  • Does not enhance the platform’s offering in any way.

For good measure the act includes “user attention” as one of the vectors of competition; like I said, it bans all acquisitions.

Ending Platform Monopolies Act link

This bill, sponsored by Pramila Jayapal (D-WA) and co-sponsored by Lance Gooden (R-TX), is in many respects a repeat of the American Innovation and Choice Online Act, but instead of banning discriminatory behavior it simply bans platforms from owning any product or service that rest on top of its platform and compete with 3rd-parties in any way. The provision is as broad as it sounds, which is interesting to think about in a historical context: operating systems used to sell the networking stack separately — would it be illegal now for iOS to include TCP/IP? That’s just one obvious example of how this bill would quickly devolve into product design by the judiciary.

Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act link

This bill, sponsored by Mary Gay Scanlon (D-PA) and co-sponsored by Burgess Owens (R-UT), mandates API-driven data portability and interoperability, subject to “privacy and security standards for access by competing businesses or potential competing businesses to the extent reasonably necessary to address a threat to the covered platform or user data.” Platforms will have to petition the Federal Trade Commission (FTC) to make any changes to their interoperability interface. The FTC, meanwhile, will establish technical committees to enforce the measure with a clear charge to reduce network effects while establishing data security and privacy protections.

I am encouraged that this bill, unlike the GDPR, does not explicitly limit the sharing of information like a user’s contacts; at the same time, it doesn’t explicitly allow it either. This is the most important issue in terms of The Web’s Missing Interoperability: photos from five years ago aren’t what is keeping people on a particularly platform; their relationships are, and true portability and interoperability mean the social graph.

Cicilline’s Anchoring Strategy

I don’t think it is an accident that these bills were presented as a package, but I think it has been a mistake in a lot of coverage to view the package as one bill. It seems to me that Chairman Cicilline has played his cards very deftly here: start with the fact that while every bill was authored by a Democrat, they all have a Republican co-sponsor; if some combination of these regulations pass they will likely be with overwhelmingly Democratic support, but the fact they are starting out as nominally bi-partisan efforts is savvy.

The real tell about Cicilline’s strategy, though, is the seeming contradictions between his own bill and that of Representative Jayapal. Cicilline seeks to restrict platforms from behaving in non-discriminatory ways, with the threat of break-up if they don’t, while Jayapal jumps straight to break-up. This strikes me as an anchoring strategy: Jayapal’s approach is both unworkable and undesirable — it leaves the FTC and ultimately the courts as the ultimate arbiter of what is part of a core platform’s offering and what rests on top, and not only does that evolve as technology matures, it also makes it impossible to deliver an experience that is approachable for regular consumers. As I noted above, is a networking stack part of an operating system? Is a browser? Is an App Store? Moreover, Jayapal’s bill, if enacted, makes Cicilline’s bill immaterial: there would be nothing to discriminate against.

That’s why I suspect that Cicilline’s goal is to stake out the most extreme position — the Jayapal bill — with the goal of getting his own bill passed as a compromise, perhaps with Scanlon’s as well. Certainly the tech industry would be right to push back against not only Jayapal’s bill but also Jeffries anti-acquisition bill; I explained in First, Do No Harm why a blanket ban on acquisitions would be so destructive to the Silicon Valley ecosystem and consumer welfare.

Platforms and Integration

That is also why I gave the most detailed overview of Cicilline’s bill: if anything passes Congress this is likely to be a starting point, and it has a lot of compelling points. What is notable is that while there are a couple of provisions clearly targeted at Google Search, the company most clearly impacted is Apple and iOS (and Android). I think this is appropriate: as I have argued repeatedly on Stratechery, including in A Framework for Regulating Competition on the Internet, platforms are in more pressing need of regulation than are Aggregators:

This is where the distinction between platforms and Aggregators is critical. Platforms are the most powerful economic and innovation engines in technology: they create the possibility for products that never existed previously, and are the foundation for huge amounts of innovation. It is in the interest of society that there be more and larger platforms, not fewer and smaller.

At the same time, the danger of platform abuse is significantly greater, because users and 3rd-party developers have no other alternative. That means that not only are anticompetitive actions unfair to products that already exist, they also foreclose the creation of an untold number of new products. To that end, regulators should simultaneously encourage the formation of new platforms while ensuring those platforms do not abuse their position.

Regulations on tying, defaults, anti-steering provisions, control of pricing and interoperability, and most of the other parts of Cicilline’s bill are about restricting platforms from exercising the total control entailed by owning the APIs third-parties need to exist; Aggregators, which win by controlling demand, already have built-in pressure release valves given the fact that competition is a URL away.

That’s not to say that Cicilline’s approach doesn’t have its own downsides: the American Innovation and Choice Online Act would make it much more difficult to deliver an integrated product that appeals to customers by being easier-to-use, and make it more difficult to bring new technologies to market if every improvement has to be accessible to everyone on the platform. This is the exact danger I wrote about last week in Integrated Apple and App Store Risk:

One of the central planks of many of those pushing for new laws in this area are significant limitations on the ability of platforms to offer apps and services, or integrate them in any way that advantages their offerings. In this potential world it’s not simply problematic that Apple charges Spotify 30%, or else forces the music streaming service to hope that users figure out how to subscribe on the web, even as Apple Music has a fully integrated sign-up flow and no 30% tax; it is also illegal to incorporate Apple Music into SharePlay or Shared-with-you or Photos, or in the most extreme versions of these proposed laws, even have Apple Music at all. This limitation would apply to basically every WWDC announcement: say good-bye to Quick Note or SharePlay-as-an-exclusive-service, or any number of Apple’s integrated offerings.

I think these sorts of limitations would be disappointing as a user — integration really does often lead to better outcomes sooner — and would be a disaster for Apple. The entire company’s differentiation is predicated on integration, including its ability to abuse its App Store position, and it would be a huge misstep if the inability to resist the latter imperiled the former.

This, more than anything, is why Apple should rethink its approach to the App Store. The deeper the company integrates, the more unfair its arbitrary limits on competing services will be. Isn’t it enough that Spotify will never be as integrated as Apple Music, or that 1Password will not be built-in like Keychain, or that SimpleNote will only ever be in its sandbox while Apple Notes is omnipresent? Apple, by virtue of building the underlying platform, has every advantage in the world when it comes to offering additional apps and services, and the company at its best leverages that advantage to create experiences that users love; in this view demanding 30% and total control of the users of its already diminished competition isn’t simply anticompetitive, it is risking what makes the company unique.

These risks just took a step towards becoming a reality; Apple’s insistence that it not only give its services an advantage but also tax its competitors means that both are at risk.

The other company that deserves opprobrium is Amazon: while I agree that it is silly that Amazon’s private label service is being held to some sort of higher standard than its retail competitors, particularly given the clear consumer benefits from private labels, Brad Stone’s compelling account in Amazon Unbound of how Amazon prioritized revenue over customer satisfaction in search — particularly in terms of advertising, but also its private labels — is an example of where pursuing short term business gains risked long term repercussions.

The End of the Beginning

I am, as a rule, wary of regulation: unintended consequences always loom large, particularly in an industry as dynamic as tech. Then again, tech hasn’t necessarily been that dynamic as of late: the big five companies today are the same big five companies as a decade ago, and change does not appear to be on the horizon. From The End of the Beginning:

What is notable is that the current environment appears to be the logical endpoint of all of these changes: from batch-processing to continuous computing, from a terminal in a different room to a phone in your pocket, from a tape drive to data centers all over the globe. In this view the personal computer/on-premises server era was simply a stepping stone between two ends of a clearly defined range.

The implication of this view should at this point be obvious, even if it feels a tad bit heretical: there may not be a significant paradigm shift on the horizon, nor the associated generational change that goes with it. And, to the extent there are evolutions, it really does seem like the incumbents have insurmountable advantages: the hyperscalers in the cloud are best placed to handle the torrent of data from the Internet of Things, while new I/O devices like augmented reality, wearables, or voice are natural extensions of the phone.

To the extent this is true (and the intrusion of politics may make it less so) it argues for regulation, but of a particular sort: I think it is fruitless for lawmakers to try and create the conditions for direct competitors to Google Search or iOS or AWS. The goal should not be to engender competition with platforms and services that have overwhelming advantages in the current paradigm, but rather to make sure that today’s winners don’t have unfair advantages in owning the future, or restricting what can be built on top of their platforms. That today’s winners haven’t had the grace to compete for said future fairly means they are ultimately responsible that these sort of blunt infringements on their businesses are now a matter of negotiation, not just theory.


  1. I am linking to each of the bills in question; at times my language will be the exact same as the bill in question — they are bills that are appropriately defining what they do — but I am not using quotation marks for the sake of readability