Regulation Is A Distraction 🔨

Starship prepping for primetime. Planting trees is a viable business model. Ms. Tree catches a fairing.

What’s next for technology regulation?

The narrative surrounding the current batch of Big Techcompanies is increasingly negative; too much reach, power, and a lack of ethics around privacy and data have contributed to a growing sentiment that regulation is needed. Each organization is dealing with the pushback in the same way: by doubling down on the fact that they are actually not a monopoly, and reinforcing their commitment to building the next wave of consumer-forward innovations in privacy.

  • Apple recently launched the Sign-In with Apple feature for developers, allowing users to bypass the email tracking that has become standard experience.

  • Google announced during their annual I/O conference a feature that enables users to automatically scrub their data after a set time period.

  • Facebook’s vision for a privacy focused social networking experience came after a particularly large backlash from Zuckerberg’s Congress appearance.

Today, when politicians call for regulation of these companies, it seems to be out of familiarity, rather than a clear understanding of how the sanctions would solve current problems. This isn’t a new story — the last generation of technology companies faced similar issues.

So, what does regulatory action mean for technology companies?

In 2001, Microsoft was embroiled in a lawsuit with the U.S. government defending actions related to the packaging of the Windows operating system with Internet Explorer, effectively shutting out other browsers from competing in the arena. The lawsuit was eventually settled, but the case focused the attention of the company during that time on preserving their browser and OS teams, and not on the burgeoning mobile market.

During a recent talk at the Economic Club in Washington D.C., Bill Gates addressed a question related to Microsoft’s mobile efforts at the turn of the century and the implied missed opportunity to capture the global mobile market. The underlying assumption is that Microsoft “would have” won the mobile market, but they were distracted by the antitrust trials and, as a result, misallocated talent to the project, ceding the win to Motorola and the Android operating system.

It’s interesting to note the effect these lawsuits actually have on technology companies. Gates was aware of the mobile opportunity, but spent management and financial resources on successfully settling the case. The result was a short term win for Microsoft, but the loss of an opportunity that was much bigger. Today, Android supports 88% of global smartphone use.

So what did regulatory action do? The actual result of Microsoft’s lawsuit was not the settlement, but instead the distraction that lead to mismanagement of company strategy.

Drawing parallels to today’s political suggestions to “break up” Facebook, what are the opportunities that would be missed through a lengthy legislative battle? Beyond that, what non-critical activities would be de-prioritized to ensure the WhatsApp-Instagram-Facebook conglomerate remains whole?

The most obvious opportunities arise from increased ad-tech personalization (machine learning) and new revenue sources (crypto). Machine learning capabilities scale with data, among other things. If the growth of Facebook’s user base continues to follow the proliferation of mobile devices, then these capabilities will improve until the S-curve flattens. For regulatory action to succeed in hindering Facebook’s ability to capture this trend, it would need to impact its ability to drive growth globally. This seems unlikely, as the majority of new growth will continue to happen outside of US jurisdiction.

Facebook’s foray into crypto with the Libra project has raised concerns from international governments, but it is too early to tell how well-coordinated the legislation will be. Crypto offers the interesting feature of decentralization — if one country insists on strict legislation, then founders will simply avoid building organizations there, and the country will forfeit revenue in the form of lost taxes. Facebook is a US-based company, yet Libra (the network) will be available globally, and not subject to the same laws in all jurisdictions. In this sense the US may succeed in keeping a lid on a corporate owned monetary service, but will risk the center of power shifting elsewhere. Once again, the majority of growth here is primed for emerging markets that have been left out of the existing financial system.

Perhaps more concerning is how a distracting regulatory battle would impact Facebook services that are not core to the business model. For a third of the world, Facebook is the internet, and this responsibility requires massive focus to execute. Connecting the world also means connecting bad actors, and the rapid spread of information on the platform has incited military conflict in Myanmar, radicalized young men into joining hate groups, and spread child pornography related content.

Zuckerberg has been adamant in his request for increased legislation in these areas to shift the responsibility back to government. Lacking this, Facebook recently launched a Global Oversight Board composed of independent experts to help guide these content moderation decisions. Notice the distinction - Facebook is seeking increased clarity for governments on what to moderate, but wishes to be left to its own devices on how to implement the guidelines.

The logical lines that existed within the last generation of technology companies have blurred, and given way to a murkier structure that requires finer untangling than what is possible with a heavy-handed regulatory approach. For an antitrust lawsuit to succeed, regulators would need to show that the breakup of technology companies reduces monopolistic behavior and improves the consumer experience.

Consider a thought experiment: Facebook is subjected to regulation that splits up Facebook, Instagram, and WhatsApp back into separate entities with distinct corporate governance and talent. Furthermore, it is prevented from making new acquisitions in the social space. What happens next?

In this scenario, Facebook can no longer target my unique tastes for artistically-styled bungalows from Instagram’s discover page, and their ad-tech will be less effective. As the other platforms invariably shift over time, this is seen as a success for consumer’s choice.

On the other hand we will have lost valuable pattern-matching capabilities that prevent the proliferation of hate speech and violence. Revenues will suffer, engineering talent will be redeployed to improve engagement, and the focus will shift from today’s market expansion policy to a defensive strategy. Facebook’s ability to identify trends across platforms applies not only to advertisements, but also to malicious behavior. The dominance of the Facebook empire means that it can afford to deploy premier engineering talent on solving problems related to identifying and flagging content, without needing to justify the behavior to shareholders. Splitting the conglomerate across organizational lines without addressing the scale of the problem will lead to a worse outcome for consumers and provide marginal benefit to competing platforms. If Facebook is unable to buy new companies for fear of retribution, then a large number of startup founders will lose incentive to create tools that make the experience better, securing an exit for themselves in the process.

For now, the best course of action for legislators is to involve themselves in the process of creating the guidelines enforced by these companies. America is run by lawyers, and Facebook’s engineering staff does not have the subject matter expertise nor the authority to determine what is free speech and what is not. What they do have is the disposable income offered by one of the most profitable companies in the world, and the scale to execute. Until the access story plays out, the opportunities provided by continued growth will continue to happen globally, regardless of US regulatory action.

The next generation of technology companies will not look like the ones we have today, and applying tactics that decrease incumbents’ ability to act as stewards of the platform, while allowing the underlying capability to remain unchecked will have potentially disastrous results.


📚 Reading

An update from David Marcus (Head of Calibra) in response to recent feedback on the Libra project. Link.

Summary of The Earnings Mirage by O’Shaughnessy Asset Management. Big picture: inflation is not represented in corporate earning statements, and free cash flow remains the best predictor of long term success. Link.

The Hyperledger Foundation announced a new open source project called “Hyperledger Transact” designed to improve interoperability between smart contract implementations. Link.

SpaceX has announced plans for its Starship first commercial launch in 2021. Starship (formerly known as BFR or Big F*cking Rocket) is designed to carry up to 100 humans. Link.

A new study from Science reveals that Earth’s capacity for forested area is currently underutilized by 25%. Reforestation remains one of the best ways to reduce greenhouse gases and reverse effects of climate change. Link.

An Arctic Fox covers a seemingly impossible amount of ground over a 2 1/2 month journey. Link.


📺 Video

My favorite thing about engineering is the ability to come up with ridiculous ideas that turn into reality. In this case, the ridiculous idea is to attach a giant net to a boat and catch a rocket that falls from space. During SpaceX’s recent launch of the Falcon Heavy, the team successfully captured the fairing using a boat dubbed “Ms. Tree”.

Image result for mr steven boat

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