Prairie Home Companion begins with a mischievous maxim that all children in Lake Wobegon are above average. The equivalent adage in Silicon Valley goes like this: Every insider acts like an outsider.
This adage reflects mythology as well as savvy public relations. The largest technology firms possess names recognized in most households, and they perceive no gain from drawing attention to their privileges as insiders. A frank public discussion would surface an abundance of PR landmines.
Heck. Those concerns never stopped me. Let’s consider an economic perspective on the topic of insiders and see what controversy emerges.
Standard textbook economics analyzes insider status with one of two perspectives. The first perspective stresses the cold logic of market competition, whereas the second stresses the ambiguities of the government’s influence. From either perspective, it is better to be an insider than outsider. More interestingly, troubling questions haunt both perspectives, albeit it takes a bit of explaining.
Who are insiders in technology markets? Everyone would count the frightful five—Alphabet (Google), Amazon, Apple, Facebook, and Microsoft—as insiders. They add up to—no exaggeration—more than $2 trillion in market value, and they sell to billions of users worldwide. In addition, there are reasonable debates about including a few others, such as Oracle, IBM, Intel, Cisco, Alibaba, eBay, although the list is short.
It would take all day to recall the path each firm took to insider status. There is no single cookbook for growing into a firm with hundreds of thousands of employees. It takes a major dose of business clichés to describe the required administrative competence, the great market conditions in multiple countries, and the dozens of lucky runs at the lottery of market opportunity.
And yet, stepping back from details, economics suggests that insiders in technology markets, like insiders everywhere, possess three broad economic features.
• Scale. They face large and (largely) predictable customer demand. Regular demand permits owners and managers to build a large-scale organization to service that demand. Scale confers cost advantages. Many business transactions and contracts build on, and thus build in, those cost advantages. Outsiders lack these scale advantages.
• Attention. The outlooks and strategies of insiders receive inordinate attention. This allows savvy firms to manipulate analysts’ reports and business headlines, and that can yield important advantages in fast-changing technology markets. Outsiders get none of this, and must hustle for what they do get. Outsiders also must plan around an insider’s views, whether or not those views suit their own needs.
• Independence. Insiders tend primarily to use their own assets and employees. In contrast, outsiders can find themselves relying on the assets of others, such as a platform built by leading firms, whether or not those suit an outsider’s needs at a desirable cost. Again, in fast-changing technology markets this type of (in)dependence can make an enormous difference for generating new initiatives.
Economics suggests that insiders in technology markets possess three broad economic features: scale, attention, and independence.
Just look at those three economic attributes. Almost by definition, there are thousands of ways to become an outsider in technology markets. Virtually every entrepreneur seeking VC money will start a firm that becomes an outsider for the first decade of its existence, with the possible exception of Elon Musk’s firms. In addition, legions of online commerce firms outside the top 50 websites also are outsiders. That is just the way it is.
This framework, when presented in its starkest form, as it was above, summarizes the cold logic of market competition. This framework forecasts that insiders will deliver goods at lower cost, perform better at similar activities, capture more market share, make more profit, and reward their employees and stockholders with more returns for their efforts and investments. In this respect, technology markets look about as efficient and heartless as every other market in the US economy in allocating economic activity to insiders.
One might argue that tech markets possess several unique features that alter the calculus of the cold logic.
Technology firms in similar products often do more than compete. They share resources. For example, many firms use the same standards (such as IEEE standards for Wi-Fi). Firms also use the same infrastructure (such as the international network lines). They also benefit from the same open source software groups (and related consortia, such as the W3C). Firms also use the same frontier knowledge (such as new techniques in machine learning).
Once again, however, insiders have advantages. Why? Consider Intel and Wi-Fi as illustration. Many firms benefited from Wi-Fi, but Intel’s benefits extended to all its laptops. Recognizing its self-interest, Intel sent more personnel to IEEE meetings. Their representatives got the upgrades Intel needed.
“But technology markets experience more turnover,” you protest. After all, shared technical advance also plays an outsized role in creating new market opportunities. Changes in the technological frontier afford opportunities for both insiders and outsiders, and insiders perennially miss them. For example, one might speculate that machine learning will open opportunities for many new outsiders, and some may become tomorrow’s insider.
That is correct, but other factors work in the other direction. Technology market competition tends to exhibit “winner-take-all.” In part this is due to the extraordinary speed with which new entrants in technology markets translate small leads into large economies of scale. It is also due in part to the prominence of network effects—namely, the value of service rises with the number of users. Both factors freeze out other entrants, limit the number of insiders to one or two, and reduce many outsiders to irrelevance, if they survive at all.
Lest anyone doubt the importance of rapid scaling and network effects, the Frightful Five benefit(ted) from these factors. Indeed, there is no need to recall the long stories, because they are so well-known in the rise of Google search, Amazon retailing, Apple iTunes, Facebook’s platform, and Microsoft Windows. In each case, a close second was no better than being a lonely outsider. Firms either won insider status or not.
That tension between new opportunities and winner-take-all also suggests why so many observers worry about the future of market competition, both in the specific markets just mentioned and in technology markets more generally. There is nothing worse for competitive innovation than insiders with unassailable positions, and/or markets possessing a paucity of outsiders to potentially threaten new entry. That is called a monopoly.
The tension between new opportunities and winner-take-all suggests why so many observers worry about the future of market competition.
There is one additional factor to consider. To motivate it, start with a seemingly simple question: are AT&T, Comcast, and Verizon insiders? The above suggests the answer is yes. Look at the scale of their demand and operations supporting tens of millions of customers, the attention they receive from analysts, and the hundreds of billions of dollars of assets they own.
Now consider this next question: did the government’s action cause them to obtain insider status, or did these insiders interact with government as a byproduct of achieving their status? Ah, there lies a debate.
This is a difficult question to address in the carrier business. Carriers need to obtain rights of way at low cost, and they need to maintain franchise agreements and invest in ways to pass regulatory scrutiny. Carriers also need to get involved in the process of lobbying government actors to make reasonable rules in the first place.
More to the point, outsiders may be unfamiliar with the existing rules and either misunderstand them or pay high fees to get the expertise to understand them properly. That means outsiders will be at a disadvantage when they try to enter with new products and services or nibble away at existing carrier markets.
This debate is also challenging to resolve for another reason: technology executives possess different attitudes about working with government, and that translates into different types of actions. That can make it especially difficult to discern who caused what. Consider these three categories of attitude: disdain, transactional //just “transaction” to make this parallel?//, and engagement.
Some technology executives disdain government processes. While this attitude is entertaining over a drink, few executives actually translate it into action. Disdain tends to show up most often in entrepreneurial actions, if it shows up anywhere.
Disdain for government rules typically leads to (predictable) failure. Look no further than Napster, whose founder showed willful contempt for straightforward copyright law and did something blatantly illegal. The business became famous, but it got shut down by lawsuits.
At its best, this attitude can serve a savvy purpose. Consider Uber’s early history. Uber bet that they could initially ignore city regulators, operate in a gray zone of ambiguous legality, establish a service with more popularity than local taxis, and (eventually) use that popularity to make their case with city regulators. That approach did work in most cities, albeit not all. Lucky for them.
Many technology executives maintain a transactional view of their relationship with the government. This type of executive delegates to lawyers and professional lobby firms and puts programs in place to get stuff accomplished. They do it because they must.
The attitude is common in many communications markets, but it does not always work out well, especially when this attitude leads firms to get things done for the sake of getting them done. For example, Motorola’s executives used to boast about their ability to get permits for operating satellites in more than 200 countries. The boast was accurate, but, alas, it was such a pity for stockholders that this ability was put in the service of Iridium, which lost billions of dollars.
At its best, this attitude supports innovative new businesses. For example, Shure developed wireless microphones and earpieces by cleverly employing the “white spaces”—that is, unlicensed and unused spectrum between UHF television channels. This equipment is popular today with entertainers in large arenas. Shure’s lobbyists largely stick to educating policy makers about those user benefits. Otherwise, the company’s products adapt to changing government rules.
Another attitude leads to the Full Monty of political engagement. It is rare, but it can be found at many of America’s oldest telephone companies.
If you ever want to see this in a public forum, just tune in Congressional hearings in front of a communications panel on CSPAN. Try to stay awake, and watch the professionals. Every congressional representative will know the name of the company lobbyist, who will speak in measured but quick phrases, use precise and unforced words, and lace it with charm that does not come across as too slick. They will always stay on script.
At its worst, it puts a firm’s bottom line above the needs of its customers and protects a monopolist from competitive substitutes. At its best, this approach helps these firms get privileges that none other can get, such as lines in a statute that benefit one of their businesses.
A litmus test for your views of this type of engagement might be the laws in almost two dozen states outlawing competition in cable from other municipal organizations in the state. Defenders of such laws say these provide relief from potential competitors with unfair advantages. Opponents look at successful municipal entry outside these states and say they unnecessarily restrict user choice, leading to state-sanctioned monopoly. The critics view them as a detriment to the interests of local customers.
Is the relationship between insiders and outsiders less stable in technology markets than elsewhere? It is difficult to say. The three most powerful destabilizing forces in technology markets are lawsuits, entrepreneurs, and elections.
Novel lawsuits—typically antitrust lawsuits—aim to break up cozy monopolies or shame an insider into reducing egregious behavior. Entrepreneurial novelty, sometimes aided by a lawsuit, is another of society’s other escape valve from the doldrums of excessive insider privilege. Elections in democracies can also introduce new political currents into regulatory processes, albeit in the rare case when political actors care about reducing insider privileges.
None of these destabilizes a situation much or often, in my opinion. At best, these three factors matter sporadically and selectively and do not provide a general antidote to insider privileges. The ultimate restraint most often is merely an insider’s own sense of propriety.
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