Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (12 page)

The main figure they cite, the Gini coefficient of income inequality, measures how much income has been monopolized by the shareholders at the top. A Gini coefficient of 0 would mean that everyone has the same amount of money; a coefficient of 1 means that all the income is being taken by just one person or corporation. According to Beth Ann Bovino, chief economist at S&P, once that coefficient goes above 0.4 or 0.45—where
we are as of this writing—it hurts growth for everyone. “It’s good for a market economy to have income inequality but to extremes, it can actually damage growth long term and make it less sustainable.”
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Bovino showed that it’s not just the extreme of inequality that’s to blame but the decline of labor and business income in the face of rising capital gains. Simply stated, it’s harder to make money by working or creating value when the scales tip too far in favor of investors and shareholders.

In a sense, though, the aim of the original corporate program has been achieved: those who create value have been utterly subsumed by those who passively invest. But as Bovino is trying to warn us, corporate shareholders can’t take this much money out of circulation without killing the goose. Those who run real businesses or, worse, work for a living end up like the musicians on the bad end of the long tail. Meanwhile, passive investors who depend on economic growth end up sitting on their bags of money, unable to find new productive investments.

That’s why the S&P cut its growth forecasts for U.S. corporations, which are still flummoxed by the whole situation. Corporations saw themselves as so abstract, so foreign to any real place or market, they had no idea they were destroying the economic ecosystem on which they were themselves depending.

A corporation can’t really see itself or gauge its overall contribution to the economy, much less society. It has always depended on people in order to execute its functions. No matter how much like a person the corporation became, no matter how many rights of personhood it won from Congress and the courts, it was still entirely abstract. It needed our arms, legs, mouths, and brains to function.

Digital technology, though, might finally give corporations the autonomy they need to make decisions without us, and even the bodies they need to execute their choices in the real world. What they want from us and for us is being determined right now—in most cases by corporations
that are already running without fully conscious human intervention. They will soon be software running software.

No question, digital technology has created tremendous new avenues for growth. Apple, Google, Facebook, Amazon, Microsoft, and many other corporations have created new opportunities and new millionaires. But as a result of their extractive, monopolistic practices, the landscape is left with less total activity and potential for growth. The pie is smaller, or at best staying the same, but these digital businesses have managed to get bigger pieces of it—making it harder for every other corporation around, including themselves in the long term.

In large part, this is because they’re still operating as if they were twentieth-century industrial corporations—only the original corporate code is now being executed by entirely more powerful and rapidly acting digital business plans. What algorithms do to the trading floor, digital business does to the economy. In the purely rational light of the computer program, a digital corporation is optimized to convert cash into share price—money and value into pure capital. Most of the people enabling this have no reason to believe it is harmful to the business landscape, much less to human beings.

At worst, argue today’s generation of technopreneurs, we are undergoing a whole lot of “creative destruction.” That’s the process, first coined by Marx but popularized by Austrian-American economic philosopher Joseph Schumpeter,
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through which the economy achieves a natural churn. Simply put, it’s a description of how young companies with superior technologies or processes invariably unseat established ones. Old ways of doing things are replaced by better ones. There’s pain, as companies go out of business and people lose jobs, but ultimately there’s gain, as the new market establishes itself. Automobiles replace horses, destroying a host of horse-and-buggy-related businesses while replacing them with auto shops and gas stations. Portraiture is replaced by photography, and in turn Kodak, the dominant photography company, is brought down by the advent of digital cameras and smartphones. Independent bookshops are destroyed by superstores such as Barnes & Noble or Borders, which are themselves destroyed by Amazon.

In other words, this activity may be destructive to the companies or categories that die, but opportunities for new enterprises are created in the process. It sounds really promising on the surface, more like the young replacing the old or a more developed species replacing a weaker one. As Schumpeter suggests, it’s just another form of evolution.

This rationale has been enough to keep most thoughtful Silicon Valley entrepreneurs from worrying too hard about the repercussions of their actions. After all, digital corporations will necessarily carry out corporate code better than their predecessors. They apply the engineer’s logic to every situation or choice and always optimize for the best and most defensible outcomes. For example, last century’s retailers mailed out catalogues and then used sales feedback to adjust the offerings for the next quarter. A digital company will A/B test its Web page, display ad, or online catalogue in real time. Every interaction is a test of a bigger/smaller font, a higher/lower price, friendly/formal language, and so on. The thousandth time a page is rendered, it has evolved into a much better selling mechanism. Digital is better.

Each and every choice and process can be made more efficient, more responsive to market conditions, and more persuasive to users. And why shouldn’t companies optimize for victory? Whether it’s MOOCs replacing in-person college courses, Web sites replacing stores, apps replacing newspapers, or streaming MP3s replacing radio, it’s only creative destruction. Either get with the program or get run over by it.

That’s the sanguine interpretation of creative destruction, held by the winners since industrialism began. If you’re the unhappy victim of a plant closing, the resident of an abandoned community, or the owner of an undercut small business, you are an unfortunate but necessary sacrifice to business innovation and free-market competition. Free-market advocates celebrate creative destruction as the way that scrappy young upstarts come and unseat the most powerful companies on the block. But Schumpeter also suggested that each new winner takes over its sector in a much more complete way than its predecessors, potentially destroying more businesses and opportunities than it creates—certainly in the short term. It’s
like big fish swallowing up smaller ones until only a few really big fish remain. And with enough influence, those big fish can change the rules and further disadvantage those who would rise up to eat them.

Take the toy industry, which grew highly consolidated through the 1980s and 1990s. The top four global companies each have revenues over $4 billion,
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after which a long tail of much smaller players begins. In 2007, after thousands of toys manufactured in China were recalled for having lead paint, the four industry leaders worked with U.S. government agencies to develop new regulations—all in the name of protecting children. The testing protocols they developed, however, cost over $40,000 per product, which made sense only for high-volume manufacturers.
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In spite of their protests, independent toy makers were not even invited to the table. Craftspeople making toys by hand or in smaller runs had no way of complying with the testing process and were forced out of business—even though they weren’t the companies outsourcing their production to begin with. Under the guise of consumer protection, the incumbents create regulations to entrench their monopolies.

Creative destruction accelerates whenever there’s a major new technology capable of fostering entrepreneurial activity, so the fact that we’re seeing so much churn right now shouldn’t surprise us. Nor should it upset us, at least not if we take Schumpeter to heart and accept that without pain in the form of lost employment and social destruction, we won’t get gain in the form of new markets for capital. But the entrepreneurs fomenting today’s upheavals appear more aware than their predecessors of how to create monopolies, leverage networks, and exploit their technological advantages—even without a government to manipulate. The digital difference is that monopoly-favoring regulation needn’t occur at the political level when it can be embedded in the operating systems themselves.

Uber, as we’ve seen, means to be the creative destroyer of the current taxi industry. It bills itself as a way of connecting drivers and passengers. According to this way of thinking, it is primarily a platform and payment system, not a taxi or limousine service. Passengers register their credit
card with Uber, which sets prices, charges payment, takes its 20 percent cut, and pays the driver.
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By calling itself a platform rather than a taxi dispatcher, Uber has been able to work in a regulatory gray area that slashes overhead while inflating revenue. Unlike traditional, regulated livery services, Uber is under no obligation to the public good, freeing the company to implement “surge pricing” during peak use periods, as it did during Hurricane Sandy and other disasters—a practice indistinguishable from price gouging.
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Uber also claims that its status as a mere platform significantly reduces its responsibilities to its drivers. This issue is still being hashed out in the courts and city councils, but relative to traditional livery services, the difference is clear: Uber drivers take on greater personal liability than any driver working for a legitimate, licensed cab company. When an Uber driver, in between passengers, struck and killed a six-year-old girl, Uber claimed no liability. A traditional livery service must legally assume liability for all on-the-clock drivers, whether they’re currently transporting a passenger or not.
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This is how Uber can be valued at over $18 billion while many of its drivers make below minimum wage after expenses. Meanwhile, the company’s path to success involves destroying the dozens or hundreds of independent taxi companies in the markets it serves. On the surface, it’s the creative destruction of centralized taxi commissions and bureaucracy. The result, however, is the elimination of independently operating businesses and their replacement with a single platform. Former business owners become Uber’s unprotected contractors.
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Market pricing and competition are replaced by a monopoly’s algorithmic price-fixing.

Creative destruction? Perhaps—but with a twist: the new businesses of the digital era aren’t stand-alone companies like stores or manufacturers but, as they say, entire
platforms
. This makes them capable of
reconfiguring their whole sectors almost overnight. They aren’t just the operators—they are the environment.

To become an entire environment, however, a platform must win a rather complete monopoly of its sector. Uber can’t leverage anything if it’s just one of several competing ride-sharing apps. That’s why the company must behave so aggressively. Uber’s rival, Lyft, documented over 5,000 canceled calls made to its drivers by Uber recruiters, allegedly in an effort to get drivers to change platforms.
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It’s not that there’s too little market share to go around; it’s that Uber doesn’t mean to remain a taxi-hailing application. In order to become our delivery service, errand runner, and default app for every other transportation-related function, Uber first has to own ride-sharing completely. Only then can it exercise the same sort of command as the chartered monopolies on whose code these modern digital corporations are still running.

Union Square Ventures founder Fred Wilson worries aloud on his company blog that digital entrepreneurs are more focused on creating monopolies and extracting value than they are on realizing the Internet’s potential to promote value creation by many players. Wilson is excited about the possibility of new platforms that allow new sorts of exchange, “but,” he says, “there is another aspect to the Internet that is not so comforting. And that is that the Internet is a network and the dominant platforms enjoy network effects that, over time, lead to dominant monopolies.”
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The fact that digital companies can build platform monopolies brings creative destruction to a whole new level.

Amazon provides the clearest example of traditional corporate values amplified through a digital platform monopoly. As the
New York Times
explained, “At first, those in the publishing business considered it a cute toy (you could see a book’s exact sales ranking!) and a useful counterweight to Barnes & Noble and Borders, chains willing to throw their weight around. Now Borders is dead, Barnes & Noble is weak and Amazon owns the publishing platform of the digital era.”
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It all started so innocently. With Amazon, everyone got equal footing, so small publishers could more effectively compete against the majors. No
more battles over getting B&N to stock your book; this Web site sold everything to everyone. Consumers could find what they wanted more easily, read peer recommendations, and feel assured of getting the best price. Authors and others with Web sites could become Amazon Associates and make a little money for recommending books through links. As the company grew, its catalogue became a replacement for Books in Print—the industry’s original title index—and its rankings became the new best-seller list. Up to that point, it appeared that an entire industry had been cracked open and democratized, thanks to the disruptive power of the Internet.

Of course, with hindsight, we now see that Amazon is less a bookseller than a business plan. As
Forbes
put it, only half admiringly, “Unlike the other big companies that symbolize our times—Google, Apple, Facebook, Microsoft—Amazon did not rise to power by inventing a new product or service. It came to power by systematically taking down an entire existing industry.”
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In all of the company’s moves, in each of the ways it leverages its platform monopoly, we see the digital activation of the earliest tenets of corporatism.

Amazon amplifies the power of central authorities. It first appeared that it would empower the independent publisher by giving everyone a place on its infinite shelf space. But it eventually grew into the center of the publishing universe. Everyone is the same size—tiny—compared to the platform on which they sell and interact. Amazon sets the prices, the terms, the technologies, the copy protection, the privacy of readers . . . everything.

Nonparticipation is not a real option. Publishers and authors must decide whether to submit to its terms and pricing or go it utterly alone. Resistance to any of the platform’s demands results in Amazon pulling the rebellious publisher’s books from search results. That’s a form of bullying available only to a near-monopoly like Amazon, whose selling platform also amounts to the Wikipedia of publishing. Yes, publishing information is available elsewhere, but Amazon has become a default—as Google is to search.

Amazon’s ubiquity lets it demand better pricing from publishers, which are themselves struggling to survive in the new scheme. The company doesn’t particularly care, as it will do better if publishers fold and it can distribute authors’ works directly. In the fashion of the Dutch East India Company making its own rope, Amazon sees any service provided by an outsider as a profit opportunity to absorb: printing, publishing, e-books, readers, tablets, and even smartphones, streaming media, and movie studios. It has even reached ubiquity in Web-based cloud services—the platform on which all the other platforms, from Netflix to Airbnb, are based. It leverages and defends its position by having companies conform to its own proprietary software configurations. Once you’re in, it’s a bit like putting all your music into iTunes; good luck getting it all out again.