The regulator’s puzzle


This post is by Benedict Evans from Essays - Benedict Evans

All industries are subject to general legislation – to criminal law, securities law, workplace safety law and so on. But some industries are important enough and complicated enough to get their own specific laws, and their own regulatory agency to manage and enforce that – hence food, aircraft, banks or oil refining are ‘regulated industries’. It’s very clear that technology companies are moving much deeper into this regulated sphere – technology is becoming a regulated industry. This means lawyers and civil servants taking decisions (or at the very least, deciding not to take decisions) in complex ongoing arguments around everything from content moderation to app store competition to encrypted messaging.

These are all interesting problems in their own right, but from a regulator’s perspective, one of the problems to address is just how many problems there are. ‘Tech’ is a very diverse, widely-spread industry that touches on all sorts of different issues, and indeed lots of other industries, some of which are also regulated. These issues generally need detailed analysis to understand, and they tend to change in months, not decades. Regulators have to decide what they think about encryption, but first they need to decide who decides, and what happens when different regulators disagree, and how quickly they can decide, and in which countries, and, perhaps, which problems to put off until after the election.

So, is payday lending online a matter for a financial or consumer regulator, or a digital regulator? Probably financial. But if the financial regulator worries about AI bias in mortgage approvals, should it build its own expertise, or look to a central ‘digital’ resource? What happens if the competition regulator orders Facebook to make it easy to export your friends and all of their interests and activity, and the privacy regulator says that’s illegal? Should the people who assessed a supermarket merger last month decide what APIs Apple should add to iOS? What if their decision gives the ‘cyber’ agency a heart attack, or comes out as the equivalent of ordering General Motors to solve parking in central London?

One answer to complexity is to Do The Work – to dig right into the analysis, data and dynamics of a problem (and, perhaps, bury the other side in PDFs). But absolutely everyone agrees we need to avoid a repeat of the EU case on Google Shopping, which started in 2010, related to actions that began in 2004, and was not concluded until 2017. Companies were born, got married and died while that case was going on. Regulators now talk about this problem a lot, and hence about the need to move faster, and probably to have some ex ante rather than ex post regimes. But we also want to avoid the fiascos of California’s AB5, which aimed to make Uber drivers employees but was so hasty that it accidentally banned all freelance work, and CCPA, which aimed to regulate user data but which was so vague that no-one in the industry knew how to comply. So how do you move fast, but not too fast, and how do you do that if you have not one or two cases but fifty or a hundred?

This tends to take us to a desire for some intermediate level of rules – narrow enough to cover new problems specific to tech, but general enough that you don’t have to open 150 different market studies and can cut straight to ‘that’s against the rules’. This is how I’d categorise Elizabeth Warren’s formulation ‘if you run the platform you can’t compete on it’. Unfortunately, though there is certainly scope for concern in how some platform companies treat people in their sandbox, this particular idea is a rerun of AB5: it’s a great slogan, until you realise you’ve just banned Google Maps, and indeed banned Apple and Google from making any apps at all for iOS or Android… or owning app stores. That doesn’t of itself invalidate the approach, though – for example, there’s a EU suggestion that if you operate a platform in which you control someone’s business, banning them should have due process. One could imagine a right of appeal that covered Airbnb, Amazon Marketplace and Apple’s App Store. Even so, you’d need quite a lot of these ‘general’ rules – a right of appeal wouldn’t cover Googe’s self-preferencing of Meet over Zoom, and a self-preferencing rule would struggle to cover Amazon drone deliveries.  

This will cost a lot of money, on all sides. This autumn’s US Congress report on ‘big tech’ very obviously suffered from a lack of resource: it claimed, for example, that tech startup creation has collapsed in the last decade – which it based on a data set that ended in 2011, while standard industry data shows that startup investment rounds have actually risen at least 4x since then. This is what happens when a handful of staffers are asked to boil the ocean overnight. Hence, California’s recent privacy ballot initiative included provision for a permanent enforcement body, and part of the UK CMA’s proposal for managing competition in search and online advertising includes a new dedicated department (see above). You’ll need institutional capability and institutional knowledge. This is what we do for financial services, airlines, or medicine – it’s part of regulation (not that regulators there necessarily have covered themselves with glory recently).

Meanwhile, the more rules that are set, the more compliance people you need to hire to make sure you’re following them. Regulation tends to privilege incumbents in general, because it’s a regressive tax, because incumbents work the system, and because regulation tends to define and hence channel new models into old patterns. The ongoing and drawn-out US arguments over whether a cryptocurrency is a ‘security’ reflect this – if you make it fit into the ‘security’ bucket then you may remove half the (genuine) reasons to use crypto in the first place. Of course, this is a trade-off in itself: regulation trades off costs and flexility (or at least one set thereof) for other objectives such as, say, safer food or air travel, reduced pollution or other social externalities. One of the challenges in debates about tech at the moment is the lingering belief that we can have everything. That’s not how policy works – everything is trade-offs, and ‘to govern is to choose’.

 

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Silicon Valley Needs a Shakedown with Chamath Palihapitiya


This post is curated by Keith Teare. It was written by Harvard Business Review. The original is [linked here]

Investor Chamath Palihapitiya discusses venture capital, regulation, and investing for change.

Silicon Valley Needs a Shakedown with Chamath Palihapitiya


This post is by HBR.org from HBR.org

Investor Chamath Palihapitiya discusses venture capital, regulation, and investing for change.

“Data Trusts” Could Be the Key to Better AI


This post is by George Zarkadakis from HBR.org

They allow organizations to pool data — while ensuring it’s used responsibly.

Market definitions and tech monopolies


This post is by Benedict Evans from Essays - Benedict Evans

One of the basic building blocks of any competition case is market definition. If you’re claiming that a company has market dominance, and that it’s abusing that dominance, what market are we talking about? Very obviously, the company being prosecuted tries to draw the definition as widely as possible – ‘we compete with the entire planet!’ – and the prosecutor tries to draw it as narrowly as possible – ‘Ferrari has a monopoly of rear-engined Italian sport cars with horse logos!’

The fun part of this is that both of these definitions are true, and so you have dig rather deeper and work out what problem you’re trying to solve to work out what definition to use, because very often, picking the definition decides the outcome of the case, before it’s even started.

These questions come up a lot in talking about Amazon. If you read the accounts and do the numbers, you can work out that it has about 40% of US ecommerce (I wrote about this here). But US ecommerce is only on part of total US retail – it was about 16% in 2019 and this year, with lockdown, it’s spiked to a bit over 20%.

2020 09 New Normal.001.png

So, does Amazon has ~40% of ecommerce or ~10% of retail? Amazon’s lawyers would argue, entirely reasonably, that Amazon competes with Walmart, Costco, Macy’s and Safeway – that it competes with other large retailers, not just ‘online’ retailers. Indeed, many people who argue most strongly for antitrust intervention against Amazon do so because it competes with physical retail – because they worry what Amazon will do not just to Costco but to their neighbourhood stores. On that basis, Amazon’s market is ‘retail’ and its market share in the USA is between 5% and 10%. 

On the other hand, if you’re a book publisher, you don’t care what Amazon’s share of shoe sales is. Amazon has well over half of US book sales, and probably three quarters of ebook sales. So if we’re arguing about how Amazon runs its books business, it unquestionably has market dominance. You have to pull out a segment, not the whole company. Of course, this works both ways – if you’re pulling out segments, then Amazon has 1% of US grocery sales (even Walmart only has 20%), and you can’t complain about it buying Whole Foods. 

Taking this argument further, global retail sales are over $20tr, so Amazon’s market share is truly tiny (!) – but Amazon doesn’t even operate in most of the world. 90% of revenue is in the USA, UK, Germany and Japan, so global share is meaningless. Pick your market. 

Apple is on the other side of a lot of these conversations. An Apple lawyer would say that it sells perhaps 15% of all the phones sold on Earth each year and that clearly doesn’t look like market dominance. However, about 25% of all the smartphones actually in use today are iPhones – there are about 1bn iPhones in use and 3-3.5bn Androids (iPhones have a longer average life). But is the global market what matters? If you’re a US retailer, or a developer trying to reach US consumers, Apple doesn’t have 25% of the installed base – in the USA, it has over half. Google told the DoJ that 60% of its US mobile search traffic comes from iOS devices, and you will hear similar numbers from other companies and indeed the mobile network operators themselves. Taking this further, Piper Sandler’s survey of US teenagers reports that over 80% of them have an iPhone. 

2020 Shoulders of Giants 1.5.001.png

So, if you’re trying to sell to American teenagers, the fact that Apple has 15% of global handset sales is as meaningless as the fact that Amazon has 1% share of global retail. What matter is the install base of your customers, and in that market definition, Apple has 80%. Again – pick your market. Ironically, you can see Apple itself doing this – it uses the high numbers when it talk to developers and the low number when it talks to lawyers.

Looking then at Google and Facebook, no-one would dispute that Google has 80-90% of web search (and this is true everywhere outside China), and Facebook and Google combined have half to two thirds of online ad spending. Online advertising is now about $250bn and total advertising is $500bn or so, and total marketing is $1tr. You could try to argue for a broad, $1tr market definition, but for most of Google and Facebook’s advertisers, online is the market – they’re not going to run a TV campaign. This seems like an easy definition. 

Instead, the interesting argument comes when Google’s lawyer says that the competition in search isn’t Bing, but Amazon, and Facebook, and that the next threat is what Apple does with privacy on iOS. The government’s lawyer would laugh and say ‘that’s what everyone says!’ – and this would be true, but that wouldn’t mean the Google lawyer didn’t have a point. What do we think Sundar Pichai spends more time thinking about – whether Bing will catch up, or how far Amazon moves up the sales funnel and displaces product purchasing away from general web search entirely? How much does he look at DuckDuckGo and how much does he look at Pinterest? 

The big shifts in dominance in tech in the last few decades have not generally come fro a new product that does the same thing as the old one, but from a company doing something that changes the field of play. Microsoft didn’t overturn IBM’s dominance of mainframes – instead, PCs made mainframes irrelevant. Google didn’t make a new Windows, and Facebook didn’t take on Google at web search – instead, they carved out something new. 

Going back to Amazon, you can see exactly this issue in the explosive growth of Shopify. It’s come from nowhere to do $60bn of GMV in 2019 and has already processed close to $80bn in the first three quarters of this year. Shopify isn’t the same thing as Amazon (or indeed eBay). It’s not beating Amazon at doing Amazon, any more than Microsoft beat IBM at doing IBM – it’s doing something adjacent, and different, but deeply competitive. Tiktok is also doing this to Youtube now – Tiktok is not YouTube but it’s a much bigger question than DailyMotion. The threat comes from things that don’t fit inside a straightforward market definition. 

2020 09 New Normal.001.png

The counter-argument to this, of course, is the old line from Keynes – ‘in the long run we’re all dead’. It may well be the case that Google faces existent threats from things that don’t look like Google, but that doesn’t mean that we should ignore how it runs search. AR glasses might overthrow Apple’s dominance of the US smartphone market, but that doesn’t mean we should just ignore how it runs the App Store and tell Spotify to go home. However, you do need to have a theory of what your remedies will achieve in a ‘market’ this complicated. 

The DoJ’s current case against Google is a great illustration of how hard this is. Google is paying Apple to be the search default on iOS. The DoJ says this is Google abusing its search dominance (and consequent cashflows) to shut out competition, but you could equally well argue that this is a case of Apple using its smartphone dominance to squeeze $5-10bn a year out of Google. DuckDuckGo might be squashed either way, but who do you sue? Is this a search market case or a smartphone OS market case? And what happens next year? If Apple makes a search engine and uses the market dominance of iOS to create completion in search, what market definition is that? 

Market definitions and tech monopolies


This post is by Benedict Evans from Essays - Benedict Evans

One of the basic building blocks of any competition case is market definition. If you’re claiming that a company has market dominance, and that it’s abusing that dominance, what market are we talking about? Very obviously, the company being prosecuted tries to draw the definition as widely as possible – ‘we compete with the entire planet!’ – and the prosecutor tries to draw it as narrowly as possible – ‘Ferrari has a monopoly of rear-engined Italian sport cars with horse logos!’

The fun part of this is that both of these definitions are true, and so you have dig rather deeper and work out what problem you’re trying to solve to work out what definition to use, because very often, picking the definition decides the outcome of the case, before it’s even started.

These questions come up a lot in talking about Amazon. If you read the accounts and do the numbers, you can work out that it has about 40% of US ecommerce (I wrote about this here). But US ecommerce is only part of total US retail – it was about 16% in 2019 and this year, with lockdown, it’s spiked to a bit over 20%.

2020 09 New Normal.001.png

So, does Amazon have ~40% of ecommerce or ~10% of retail? Amazon’s lawyers would argue, entirely reasonably, that Amazon competes with Walmart, Costco, Macy’s and Safeway – that it competes with other large retailers, not just ‘online’ retailers. Indeed, many people who argue most strongly for antitrust intervention against Amazon do so because it competes with physical retail – because they worry what Amazon will do not just to Costco but to their neighbourhood stores. On that basis, Amazon’s market is ‘retail’ and its market share in the USA is between 5% and 10%. 

On the other hand, if you’re a book publisher, you don’t care what Amazon’s share of shoe sales is. Amazon has well over half of US book sales, and probably three quarters of ebook sales. So if we’re arguing about how Amazon runs its books business, it unquestionably has market dominance. You have to pull out a segment, not the whole company. Of course, this works both ways – if you’re pulling out segments, then Amazon has 1% of US grocery sales (even Walmart only has 20%), and you can’t complain about it buying Whole Foods. 

Taking this argument further, global retail sales are over $20tr, so Amazon’s market share is truly tiny (!) – but Amazon doesn’t even operate in most of the world. 90% of revenue is in the USA, UK, Germany and Japan, so global share is meaningless. Pick your market. 

Apple is on the other side of a lot of these conversations. An Apple lawyer would say that it sells perhaps 15% of all the phones sold on Earth each year, and that clearly doesn’t look like market dominance. But if you’re trying to reach smartphone users, then it’s the share of users that matters, not the share of unit sales, and this isn’t the same number. 25% of all the smartphones actually in use today are iPhones – there are about 1bn iPhones in use and 3-3.5bn Androids (iPhones have a longer average life). Again, though, this is a global number, and is it the global market that matters? If you’re a US retailer, or a developer trying to reach US consumers, Apple doesn’t have 25% of the installed base – in the USA, it has over half. Google told the DoJ that 60% of its US mobile search traffic comes from iOS devices, and you will hear similar numbers from other companies and indeed the mobile network operators themselves. Taking this further, Piper Sandler’s survey of US teenagers reports that over 80% of them have an iPhone. 

2020 Shoulders of Giants 1.5.001.png

So, if you’re trying to sell to American teenagers, the fact that Apple has 15% of global smartphone unit sales is as meaningless as the fact that Amazon has 1% share of global retail. What matter is the install base of your customers, and in that market definition, Apple has 80%. Again – pick your market. Ironically, you can see Apple itself doing this – it uses the high numbers when it talks to developers and the low number when it talks to lawyers.

Looking then at Google and Facebook, no-one would dispute that Google has 80-90% of web search (and this is true everywhere outside China), and Facebook and Google combined have half to two thirds of online ad spending. Online advertising is now about $250bn and total advertising is $500bn or so, and total marketing is $1tr. You could try to argue for a broad, $1tr market definition, but for most of Google and Facebook’s advertisers, online is the market – they’re not going to run a TV campaign. This seems like an easy definition. 

Instead, the interesting argument comes when Google’s lawyer says that the competition in search isn’t Bing, but Amazon, and Facebook, and that the next threat is what Apple does with privacy on iOS. The government’s lawyer would laugh and say ‘that’s what everyone says!’ – and this would be true, but that wouldn’t mean the Google lawyer didn’t have a point. What do we think Sundar Pichai spends more time thinking about – whether Bing will catch up, or how far Amazon moves up the sales funnel and displaces product purchasing away from general web search entirely? How much does he look at DuckDuckGo and how much does he look at Pinterest? 

The big shifts in dominance in tech in the last few decades have not generally come from a new product that does the same thing as the old one, but from a company doing something that changes the field of play. Microsoft didn’t overturn IBM’s dominance of mainframes – instead, PCs made mainframes irrelevant. Google didn’t make a new Windows, and Facebook didn’t take on Google at web search – instead, they carved out something new. 

Going back to Amazon, you can see exactly this issue in the explosive growth of Shopify. It’s come from nowhere to do $60bn of GMV in 2019 and has already done close to $80bn in the first three quarters of this year. Shopify isn’t the same thing as Amazon (or indeed eBay). It’s not beating Amazon at doing Amazon, any more than Microsoft beat IBM at doing IBM – it’s doing something adjacent, and different, but deeply competitive. Tiktok is also doing this to Youtube now – Tiktok is not YouTube but it’s a much bigger question than DailyMotion. The threat comes from things that don’t fit inside a straightforward market definition. 

2020 09 New Normal.001.png

The counter-argument to this, of course, is the old line from Keynes – ‘in the long run we’re all dead’. It may well be the case that Google faces existential threats from things that don’t look like Google, but that doesn’t mean that we should ignore how it runs search today. AR glasses might overthrow Apple’s dominance of the US smartphone market, but that doesn’t mean we should just ignore how it runs the App Store and tell Spotify to go home. However, you do need to have a theory of what your remedies will achieve in a ‘market’ this complicated. 

The DoJ’s current case against Google is a great illustration of how hard this is. Google is paying Apple to be the search default on iOS. The DoJ says this is Google abusing its search dominance (and consequent cashflows) to shut out competition, but you could equally well argue that this is a case of Apple using its smartphone dominance to squeeze $5-10bn a year out of Google. DuckDuckGo might be squashed either way, but who do you sue? Is this a search market case or a smartphone OS market case? And what happens next year? If Apple makes a search engine and uses the market dominance of iOS to create competition in search, what market definition is that? 

(Note: I wrote an analysis of the DoJ’s Google case for premium subscribers to my newsletter)

Resetting online commerce


This post is by Benedict Evans from Essays - Benedict Evans

“Aunt Agatha’s demeanour now was rather like that of one who, picking daisies on the railway, has just caught the down express in the small of the back.” – P.G. Wodehouse

I’ve spent a lot of time in the last few years looking at ecommerce and discovery – how do people decide what to buy online, when a shop can’t show it to them? It seems to me that pretty much every part of that question is being reset this year. There are half a dozen huge industries where all of the cards are being thrown up in the air, and no-one really knows where they’re going to land. The Covid lockdowns of 2020 and 2021 are catalysing and accelerating all sorts of changes – we’re getting five years of adoption in a few quarters, and five years of inevitability in the back of the neck. 

Physical retail itself has been a ‘boiling frog’ for 20 years. Every year ecommerce gets a little bigger and the problem gets a little worse, but the growth in any given year was never big enough for people to panic, and you could always tell yourself that sure, people would buy that other industry’s product online, but not yours. I think we all now understand that anyone will buy anything online, given the right experience, and if your retail model is based on being an end-point to a logistics chain then you have an existential problem. 

Misc slides.001.png

This is accelerated by lockdowns, partly because growth in ecommerce penetration that we all expected has been pulled forward, and partly because everyone is now forced to try buying things online that they might not have considered before (most obviously groceries, where UK online penetration has doubled from 5% of sales to 10% this year).

But the reduction in footfall itself also has cascading consequences. It’s pretty obvious that many US malls are anchored by large retailers that could very easily now go out of business, and then the other retailers in that mall that might have though they were OK now aren’t – and then the mall itself goes as well. That purchasing won’t automatically go to those retailers’ websites, and it might also go to entirely different categories. If you change the channel then you change what gets bought. 

A further and perhaps more interesting question is that a shift to working remotely might be a permanent change for many retail areas in big cities. Even if people now work from home only one day a week, how many retailers will experience that as a 20% decline in footfall, and how many cannot survive that? In some areas that might also be a vicious circle: more people working from home means less retail, and less retail in Canary Wharf or Hudson Yards might mean more people working from home. I’ve seen people call this a ‘donut’ effect – office districts of a city are hollowed out. 

Then, what gets sold in those shops? In the last couple of years there’s been an explosion and arguable a bubble in so-called direct to consumer or ‘D2C’ brands. The bubble burst at the beginning of this year (ironically just before everyone had to buy everything online), partly prompted by the realisation that if you’re not renting a store on Fifth Avenue, that money doesn’t go to the bottom line – you’ll almost certainly have to spend it on delivery, advertising, Amazon placement or returns instead (in other words, there are no free lunches). But the reasons why that explosion had happened remain: you can now make and sell a consumer product without the same kind of fixed cost and upfront capital investment in a national retail footprint, inventory and marketing that would have been necessary 20 years ago. But what does that mean? What is a sustainable customer acquisition model? For how many brands, and what aggregation and discovery models? Is there any role for ‘software’ or is this really entirely a CPG and marketing story? And at what point do you need to get bought by P&G, or LVMH, or partner with Sephora, in much the way that you would have in 2000? (One part of the question – do these kinds of companies produce venture returns?)

I’m a terrified dinosaur” – Jorge Paulo Lemann, co-founder of 3G Capital, recent purchaser of Kraft Heinz

Those traditional brand owners are also scrambling. Many of the big consumer brands we all know have historically been B2B businesses. P&G doesn’t sell soap – it sells pallets of soap. Now all of these companies are trying to work out what a customer relationship would be, and how many companies can have that (hence, for example, Lululemon buying Mirror for $500m earlier this year). What does it mean to be a brand, or a brand owner, or for manufacturing, distribution and capital for those brands, when all of that is being unbundled and rebundled? 

Misc+slides.035.jpeg

Meanwhile, if you’re now spending your acquisition budget on advertising instead of rent, what does that advertising look like? Again, no-one quite knows. Print advertising has collapsed. TV has been pretty resilient as the internet has grown (though the chart above suggests that its share of GDP has fallen significantly), but subscriptions and audiences are now decisively switching away from the old model, so what will that look like in 5 years?

Misc slides.001.png

And then there’s internet advertising, and that looks more uncertain than almost anything else I’ve written about here. Over the past 25 years, a huge inverted pyramid has been built up on top of cookies, much of which can often look more like rent-seeking, arbitrage and general spivery than rational economic optimisation. Earlier this year PwC carried out a study of UK online advertising suggesting that not only does half of ad spending not actually make it to publishers, but that 15% couldn’t be traced at all. 

Source: PwC for ISBA

Source: PwC for ISBA

Today, privacy changes by Google and Apple on one side (in Chrome, Safari and iOS), and GDPR, CCPA and a whole bunch of other blunderbuss regulation on the other, are shoving over that whole tottering mess of tracking, targeting, interest and identity management. I’ve sometimes had the impression that almost no-one in Silicon Valley that doesn’t actually work on an ad team really pays any attention to ‘ad tech’, but now that whole business is being reset.

Quite separately, Google and Facebook’s own ad market position (they have at least half of all online advertising) is attracting very serious scrutiny from competition regulators, especially in the UK and EU, with all sorts of suggestions of highly technical and specific intervention into the mechanics of their market dominance – many of which incidentally are in direct conflict with what the privacy regulator next door is demanding. The competition regulator says ‘make it easy to move data around’ and the privacy regulator says ‘don’t’. 

Online advertising is now worth perhaps $250bn, but advertising in total is $500bn and all global marketing is closer to $1tr. Telling people about things they might like or be interested has value, and it isn’t actually evil a priori, but if you can’t ‘track’ people across the web anymore, how do you do that? And how do you reconcile that with wanting more competition to Google or Amazon? I hope that the answer is not that the only companies that can do interest-based ads are Google and Facebook on one hand and brands with their own huge audiences and data such as the Guardian or New York Times on the other. Will one or other of the various industry data initiatives work? Will Apple try a generalised identity or interest platform? I don’t know, but I do know that a trillion dollar industry is up in the air. 

I don’t know the answer to most of these question – more importantly, I don’t really know the questions. What will happen in TV? I don’t know – ask a TV analyst! What will happen to all these D2C CPG companies? I don’t know – ask a CPG analyst! But of course, they don’t know either.

A Measured Approach to Regulating Fast-Changing Tech


This post is by Larry Downes from HBR.org

Disruptive innovation isn’t a panacea. It isn’t a poison either.

The end of the American internet


This post is by Benedict Evans from Essays - Benedict Evans

When Netscape launched in 1994 and kicked off the consumer internet, there were maybe 100m PCs on earth, and over half of them were in the USA. The web was invented in Switzerland, and computers were invented in the UK, but the internet was American. American companies set the agenda and created most of the important products and services, and American attitudes, cultures and laws around regulation and speech dominated.

This is not quite so true anymore. 80-90% of internet users are now outside the USA, there are more smartphone users in China than in the USA and western Europe combined, and the creation of venture-based startups has gone global.

2020 09 New Normal.003.png

2020 09 New Normal.002.png

Meanwhile, of course, the internet has become vastly more important. in the last decade it has gone from being interesting and exciting but not really an important part of most people’s lives to being a central part of society. This is my favorite way to illustrate this – by 2017, almost half of new (straight) relationships in the USA started online.

2020 09 New Normal.001.png

This has two pretty basic sets of consequences.

First, as I discussed in some detail here, technology is becoming a regulated industry, if only because important and specialised industries are always regulated, and that regulation will not only be determined by the USA. Other countries have their own laws, cultures and constitutions, and so we are entering a period of increasing regulatory expansion, overlap and competition from different jurisdictions, from the EU and UK to Singapore or Australia and, of course, China.

Second, you can no longer assume that the important companies and products themselves are American.

Both of these are captured in Tiktok. This is the first time that Americans have really had to deal with their teenagers using a form of mass media that isn’t created in their country by people who mostly share their values. It’s from somewhere else. That’s compounded by the fact that the ‘somewhere else’ is China, with all of the political and geopolitical issues that come with that, but I’d suggest that the core, structural issue is that it’s foreign. This is, of course, a problem that the rest of the world has been wrestling with since 1994, but it comes as something of a shock in Washington DC. There’s an old joke that war is how God teaches Americans geography – now it’s regulation.

There are many arguments that flow out of this. One, for example, is how far and how many Chinese consumer internet companies will spread globally as opposed to being constrained by their domestic environment (this would be the ‘Galapagos Effect’ often suggested of Japanese tech. Tiktok worked, but WeChat failed). Another is how many ‘unicorns’ come from Europe – how fast does its population, economic, scientific and educational base produce a proportionate number of big tech companies (or if not, why not?). Yet another is the ‘Is Silicon Valley Over?’ debate, which goes back decades – when my old colleague Marc Andreessen arrived there in the early 1990s, he thought the whole thing was over and he’d missed it.

You can argue about the details of all of these all day, but it does seem inarguable that we should just presume a global diffusion of software creation and internet company creation. It doesn’t really matter if Silicon Valley ends up as 25% or 75% of the next 100 important companies – America doesn’t have a monopoly on the agenda any more.

Hence, there are all sorts of issues with the ways that the US government has addressed Tiktok in 2020, but the most fundamental, I think, is that it has acted as though this is a one-off, rather than understanding that this is the new normal – there will be hundreds more of these. You can’t one-at-a-time this – you need a systematic, repeatable approach. You can’t ask to know the citizenship of the shareholders in every popular app – you need rules that apply to everyone. Today, the rules come from Apple, or California, both of which are increasingly becoming America’s privacy regulators by default. But they will also come from the EU, which is increasingly writing laws that, intentionally or not, change how American companies do business in America, and the more different rules we have in different places, the more fragmented and complicated things get. Regulation is an export industry, and a competitive industry.

The end of the American internet


This post is by Benedict Evans from Essays - Benedict Evans

When Netscape launched in 1994 and kicked off the consumer internet, there were maybe 100m PCs on earth, and over half of them were in the USA. The web was invented in Switzerland, and computers were invented in the UK, but the internet was American. American companies set the agenda and created most of the important products and services, and American attitudes, cultures and laws around regulation and speech dominated.

This is not quite so true anymore. 80-90% of internet users are now outside the USA, there are more smartphone users in China than in the USA and western Europe combined, and the creation of venture-based startups has gone global.

2020 09 New Normal.003.png

2020 09 New Normal.002.png

Meanwhile, of course, the internet became vastly more important. In the last decade it has gone from being interesting and exciting but not really an important part of most people’s lives to being a central part of society. This is my favorite way to illustrate this – by 2017, almost half of new (straight) relationships in the USA started online.

2020 09 New Normal.001.png

This has two pretty basic sets of consequences.

First, as I discussed in some detail here, technology is becoming a regulated industry, if only because important and specialised industries are always regulated. That regulation will not only be determined by the USA. Other countries have their own laws, cultures and constitutions, and so we are entering a period of increasing regulatory expansion, overlap and competition from different jurisdictions, from the EU and UK to Singapore or Australia and, of course, China.

Second, you can no longer assume that the important companies and products themselves are American.

Both of these are captured in Tiktok. This is the first time that Americans have really had to deal with their teenagers using a form of mass media that isn’t created in their country by people who mostly share their values. It’s from somewhere else. That’s compounded by the fact that the ‘somewhere else’ is China, with all of the political and geopolitical issues that come with that, but I’d suggest that the core, structural issue is that it’s foreign. This is, of course, a problem that the rest of the world has been wrestling with since 1994, but it comes as something of a shock in Washington DC. There’s an old joke that war is how God teaches Americans geography – now it’s regulation.

There are many questions that flow out of this. One, for example, is how far and how many Chinese consumer internet companies will spread globally as opposed to being constrained by their domestic environment (this would be the ‘Galapagos Effect’ often suggested of Japanese tech. Tiktok worked, but WeChat failed). Another is how many ‘unicorns’ come from Europe – how fast does its population, economic, scientific and educational base produce a proportionate number of big tech companies (or if not, why not?). Yet another is the ‘Is Silicon Valley Over?’ debate, which goes back decades – when my old colleague Marc Andreessen arrived there in the early 1990s, he thought the whole thing was over and he’d missed it.

You can argue about the details of these all day, but it does seem clear that we should just presume a global diffusion of software creation and internet company creation. It doesn’t really matter if Silicon Valley ends up as 25% or 75% of the next 100 important companies – America doesn’t have a monopoly on the agenda any more.

Hence, there are all sorts of issues with the ways that the US government has addressed Tiktok in 2020, but the most fundamental, I think, is that it has acted as though this is a one-off, rather than understanding that this is the new normal – there will be hundreds more of these. You can’t one-at-a-time this – you need a systematic, repeatable approach. You can’t ask to know the citizenship of the shareholders in every popular app – you need rules that apply to everyone. Today, the rules come from Apple, or California, both of which are increasingly becoming America’s privacy regulators by default. But they will also come from the EU, which is increasingly writing laws that, intentionally or not, change how American companies do business in America, and the more different rules we have in different places, the more fragmented and complicated things get. Regulation is an export industry, and a competitive industry.

Antitrust Isn’t the Solution to America’s Biggest Tech Problem


This post is by Bhaskar Chakravorti from HBR.org

162 million Americans don’t have reliable internet access.

Breaking Up Facebook Won’t Fix Social Media


This post is by Sinan Aral from HBR.org

We need better policies around data privacy, hate speech, election integrity, and misinformation.

Companies Used to Share How Each Dollar of Revenue Was Spent


This post is by Ethan Rouen from HBR.org

Why these disclosures went out of fashion — and how to bring them back.

Data Privacy Rules Are Changing. How Can Marketers Keep Up?


This post is by Einat Weiss from HBR.org

Analytics and automation technologies make it easier than you might expect.

It’s Time to Tie Bank Profits to Customers’ Financial Health


This post is by Todd H. Baker from HBR.org

A three-step proposal for U.S. regulators.

App stores, trust and anti-trust


This post is by Benedict Evans from Essays - Benedict Evans

We all, I think, understand that the iPhone was a generational change in computing, but that change came in two parts. The multitouch interface is obvious, but the change in the software model was just as important. Apple changed how software development worked, and by doing so expanded the number of people who could comfortably, safely use a computer from a few hundred million to a few billion.

Specifically, Apple tried to solve three kinds of problem.

  • Putting apps in a sandbox, where they can only do things that Apple allows and cannot ask (or persuade, or trick) the user for permission to do ‘dangerous’ things, means that apps become completely safe. A horoscope app can’t break your computer, or silt it up, or run your battery down, or watch your web browser and steal your bank details.

  • An app store is a much better way to distribute software. Users don’t have to mess around with installers and file management to put a program onto their computer – they just press ‘Get’. If you (or your customers) were technical this didn’t seem like a problem, but for everyone else with 15 copies of the installer in their download folder, baffled at what to do next, this was a huge step forward.

  • Asking for a credit card to buy an app online created both a friction barrier and a safety barrier – ‘can I trust this company with my card?’ Apple added frictionless, safe payment.

All of this levelled the playing field. You knew you could trust Adobe or EA with your credit card, and you knew you could trust them not to abuse your PC too much. PanicRogue Amoeba or Basecamp have accumulated reputations that mean they get trust too, for tech insiders who’ve known about them for years. But what about a random Vietnamese developer who’s made a fun little game about a bird that flaps? The iOS software model removed trust as a problem, and as an advantage for big companies. You still have to hear about the app – the App Store solves distribution but not discovery – but you don’t have to worry about paying for it and you don’t have to worry what it might do to your computer.

This model has enabled an explosion of software. A billion people use iPhones today, the App Store has 500m weekly users, and those users both buy and install far more software than ever before. The new software model has, objectively, been great for software development, and also and much more importantly has been hugely and unambiguously good for actual consumers. Trust and rules are good.

The trouble is, if you have a curated, managed sandbox, where a company decides what’s safe, you have to do a good job of managing and curating, and Apple has not, always, done a good job at all.

And, it matters if Apple doesn’t do a good job, because when Apple launched the app store it had sold fewer than 10m iPhones ever, but today a billion people use iPhones, and more importantly so does over half of the US market and 80% of American teenagers. For a lot of big companies, iPhone users are the market. When your product has a few points of market share you can make whatever choices you like, but when you dominate the market, other rules start applying. Apple isn’t the pirates anymore – it’s the navy, the port and the customs house. In the last few weeks, Microsoft, Google, Facebook and Epic have been stopped at customs.

2020 Shoulders of Giants 1.5.001.png

So, what kinds of decision does Apple make about what you can do on an iPhone or iPad, and where are the problems? Splitting this apart:

  1. Most decisions do actually have a solid, rational engineering basis. You can’t run in the background and record what every other app does.You can’t run the battery down, or read all my photos without permission, or hijack my network connection and CPU to mine crypto. 

  2. But some seem to be just personal preference, or taste – most obviously, the decision in the last few weeks to block streaming games services from Microsoft and Google. This may partly be about revenue, but the real issue seems to be that Apple thinks that games on iOS ’should’ use native APIs, and, perhaps, that they ‘should’ work without you needing to buy a separate games controller. But whatever it is, there’s no safety, security or privacy issue – Apple just does’t like those apps.

  3. Some decisions in both of two previous categories cause difficulties for third party apps that compete with Apple products. That isn’t necessarily the aim, but it also might not go un-noticed at Apple.

  4. Then, there are endless horror stories around curation of the store. Apps are rejected in arbitrary, capricious, irrational and inconsistent ways, often for breaking completely unwritten rules. Only Apple actually knows how much this happens, but far too many people have far too many bad experiences. This has done real damage to Apple’s brand amongst developers.

  5. And then there are the payment rules.

Apple’s payment rules, made mandatory in 2011, created a whole load of new problems:

  • United Airlines and Uber aren’t covered at all – only content consumed on the device is affected.

  • There are apps where there’s a clear logic for Apple’s payment system to be compulsory – there are coherent, consistent reasons why that random horoscope app should use the build-in payment and not be allowed to offer extra value if you give it a card, and a level playing field means the same rules for everyone (except, we just discovered that Amazon is ‘only’ paying 15% for some Prime Video signups on iOS).

  • However, there’s a huge grey area around services that are consumed both on and off the platform – for example, Netflix, Disney and newspapers and magazines. How and where, exactly, should Apple get a cut?

  • Worse, there are companies that just can’t pay. Ebooks or music apps have to give a fixed percentage of their top line to rights-holders and don’t have a 30% margin to give Apple.

We had all these arguments in 2011 and very little has changed since: I wrote this report at the time and it’s still a pretty good summary.

View fullsize

Screenshot 2020-06-21 at 12.28.29 pm.png

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Screenshot 2020-06-21 at 12.29.23 pm.png

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Screenshot 2020-06-21 at 12.29.43 pm.png

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Screenshot 2020-06-21 at 12.29.53 pm.png

View fullsize

Screenshot 2020-06-21 at 12.30.01 pm.png

View fullsize

Screenshot 2020-06-21 at 12.30.13 pm.png

Meanwhile, none of this is a surprise to Apple. As part of the recent US congress competition hearings, we saw an email from early 2011 in which Steve Jobs explicitly accepted and embraced the fact that the payment rules would be a fundamental problem for some companies.  The result, for almost a decade, has been a horrible muddle, with people using those products forced into a bad user experience.

Screenshot 2020-08-13 at 2.35.17 pm.png

(Of course, when this email was written, Apple was still a fair way away from market dominance: there were only 150-160m iOS devices in use, and iPhones were maybe 10% of all the mobile phones being used in the USA, where today they’re over 50%.)

Ironically, Epic is not in this ‘can’t pay’ category at all, and it built a huge and very profitable business following Apple’s rules. Unlike Spotify, it doesn’t have marginal cost for in-app purchases and there’s no structural reason why it can’t pay Apple (or indeed Google). It just doesn’t want to, or wants to pay less than 30%. Indeed, one could point out that the real issue is that Epic just doesn’t ’like’ Apple’s model, just as Apple doesn’t ‘like’ Stadia.

At this point, many people suggest that we can cut a Gordian knot here – that we can slash through the complexity by letting people have a choice. Allow any payment service, perhaps in parallel to Apple’s; allow third-party app stores; allow side-loading of apps; and of course let users turn off the sandboxed restrictions on the phone. Then you can have the security if you want it, or the freedom.

Unfortunately, you can’t have your cake and eat it. A secure system with a switch to turn off the security might work for Linux and a highly technical user, but when you’ve given smartphones to a few billion people, a secure system with a switch to turn off the security is just a target for malware. That horoscope app can tell you’ll get more accurate results if it has access to some computer gibberish, so please press OK, and guess what? Everyone will press OK. A computer should not ask a question that the user won’t understand, and when you have billions of users that list looks different. This has been Google’s experience with Android: it chose a less restrictive sandbox than iOS and had many more malware problems, and Google has spent the last decade slowly rowing towards Apple’s approach.

A limited version of this argument, incidentally, is that all the problems are with the store, and you could get rid of it without security problems, relying on software sandboxing on the phones to handle all security and safety issues. But there are also policies people object to on the phone itself (no replacing the default Maps app, say), and policies that we want to keep that are enforced in the store rather than on the phone (no ads in apps for kids, say). You have to tackle the whole policy question, not just part of it, and you cannot rely on the sandbox on the phone to solve all safety and security attacks.

All of this is to say that the demands Epic makes in its lawsuit are not, in fact, merely arguing that the smartphone apps market should be more competitive, with more payment options. The sandboxed app store model is not some curious, incidental feature of modern smartphones – rather, this is an essential and hugely important part of why they have such a strong software ecosystem. Epic is explicitly arguing that we should abandon the smartphone software model and security model almost entirely, and switch to what would actually be the old Windows model. Its arguments would also of course mean that we should abandon any level playing field, and move to a model where big companies and big brands have an even bigger advantage, because a trusted platform is replaced by a trusted reputation. This would be good for big established brands – like Epic – but not for may other people.

Epic’s proposal is full of holes, and Epic’s problem is really pretty peripheral, but I’m much more interested in Spotify and Stadia, where the situation now looks unsustainable, and that’s where we’re more likely to see changes. So, I think we should try to draw one more set of distinctions.

First, the App Store moderation problems are infuriating but they’re not rent-seeking or necessarily market abuse – they’re an execution failure, and indeed we’ve been here before. However, the EU, which is becoming the tech regulator by default, is already working on plans for the store review model to be regulated, with real, external rights of appeal and review, and external transparency. Apple could try to get ahead of this, or it might be too late. It might have no choice but to allow Stadia, and ‘we just don’t like that’ won’t do anymore. 

Second, I think Apple is going to have to make fundamental changes to the payment model. Epic only has margin at stake, but Spotify can’t pay at all, it’s a direct competitor, and there’s no user benefit at all to Apple’s policy, just confusion and annoyance. The EU is now pursuing two separate competition policy cases against Apple: one over the App Store, with Spotify a complainant, and the other over Apple Wallet and Apple Pay. This second one is instructive: the EU is taking the view that Apple has a monopoly of payment on the iPhone. Market definition is everything. I-am-not-a-lawyer, but I don’t see how Apple can win on Spotify (or Kindle), and I don’t think it should.

That might mean changes in who and what is covered by payment rules, but it probably also means changes to the 30%. There’s a lot of argument about principle, but there’s also a price: if the rate was, say, 10%, I’m not sure that we would be having the same conversation, and Epic would certainly get less sympathy.

That 30% adds up to real money, incidentally. When the store launched, Steve Jobs said it was aiming to break even – the 30% was to cover the running costs, and it is worth remembering how how many huge companies are getting the App Store, the manual review and the file downloads to hundreds of millions of users for nothing more than their $100 a year developer subscription. But the App Store is not running at break even anymore: in 2019 it made somewhere between $10bn and $15bn of commission – 20-30% of the ‘service revenue’ Apple likes to talk about.

Finally – we’ve been arguing about this since the store launched in 2008, but really, some of this debate is as old as personal computers. Right back to the 1970s, there’s been a religious split between people who want computers that they’re free to change however they like, and people who want computers that are easy and safe to use for as many people as possible. This is a trade-off, but there’s a certain kind of person in tech that thinks app stores and the iOS sandbox have nothing to do with the success of smartphones and the iPhone – they’re just a stupid Apple thing you could get rid of with no ill effects. 30 years ago they thought the same about GUIs, and indeed a lot of Epic’s PR comes straight out of furious Usenet posts from the 1990s about how GUIs are evil and infantilising. But the whole direction of computing since the Apple 1 has been about more abstraction, less access to the lower levels of the system and inherent in that more accessibility for more people.

Apple has always been at one, extreme, end of that debate, taking a strong opinion on how it thought a good computer ‘should’ work and letting you choose it or not. From 1976 to, say, 2015 or so, it was just one fairly niche vendor, and some people chose Apple’s opinion and some didn’t. But with the iPhone, Apple finally won the argument with users’ wallets, and that means it’s not niche anymore – Apple has become the navy, and different rules apply.

Subscribers to my premium newsletter were sent a version of this on Sunday.

App stores, trust and anti-trust


This post is by Benedict Evans from Essays - Benedict Evans

We all, I think, understand that the iPhone was a generational change in computing, but that change came in two parts. The multitouch interface is obvious, but the change in the software model was just as important. Apple changed how software development worked, and by doing so expanded the number of people who could comfortably, safely use a computer from a few hundred million to a few billion.

Specifically, Apple tried to solve three kinds of problem.

  • Putting apps in a sandbox, where they can only do things that Apple allows and cannot ask (or persuade, or trick) the user for permission to do ‘dangerous’ things, means that apps become completely safe. A horoscope app can’t break your computer, or silt it up, or run your battery down, or watch your web browser and steal your bank details.

  • An app store is a much better way to distribute software. Users don’t have to mess around with installers and file management to put a program onto their computer – they just press ‘Get’. If you (or your customers) were technical this didn’t seem like a problem, but for everyone else with 15 copies of the installer in their download folder, baffled at what to do next, this was a huge step forward.

  • Asking for a credit card to buy an app online created both a friction barrier and a safety barrier – ‘can I trust this company with my card?’ Apple added frictionless, safe payment.

All of this levelled the playing field. You knew you could trust Adobe or EA with your credit card, and you knew you could trust them not to abuse your PC too much. PanicRogue Amoeba or Basecamp have accumulated reputations that mean they get trust too, for tech insiders who’ve known about them for years. But what about a random Vietnamese developer who’s made a fun little game about a bird that flaps? The iOS software model removed trust as a problem, and as an advantage for big companies. You still have to hear about the app – the App Store solves distribution but not discovery – but you don’t have to worry about paying for it and you don’t have to worry what it might do to your computer.

This model has enabled an explosion of software. A billion people use iPhones today, the App Store has 500m weekly users, and those users both buy and install far more software than ever before. The new software model has, objectively, been great for software development, and also and much more importantly has been hugely and unambiguously good for actual consumers. Trust and rules are good.

The trouble is, if you have a curated, managed sandbox, where a company decides what’s safe, you have to do a good job of managing and curating, and Apple has not, always, done a good job at all.

And, it matters if Apple doesn’t do a good job, because when Apple launched the app store it had sold fewer than 10m iPhones ever, but today a billion people use iPhones, and more importantly so does over half of the US market and 80% of American teenagers. For a lot of big companies, iPhone users are the market. When your product has a few points of market share you can make whatever choices you like, but when you dominate the market, other rules start applying. Apple isn’t the pirates anymore – it’s the navy, the port and the customs house. In the last few weeks, Microsoft, Google, Facebook and Epic have been stopped at customs.

2020 Shoulders of Giants 1.5.001.png

So, what kinds of decision does Apple make about what you can do on an iPhone or iPad, and where are the problems? Splitting this apart:

  1. Most decisions do actually have a solid, rational engineering basis. You can’t run in the background and record what every other app does.You can’t run the battery down, or read all my photos without permission, or hijack my network connection and CPU to mine crypto. 

  2. But some seem to be just personal preference, or taste – most obviously, the decision in the last few weeks to block streaming games services from Microsoft and Google. This may partly be about revenue, but the real issue seems to be that Apple thinks that games on iOS ’should’ use native APIs, and, perhaps, that they ‘should’ work without you needing to buy a separate games controller. But whatever it is, there’s no safety, security or privacy issue – Apple just does’t like those apps.

  3. Some decisions in both of two previous categories cause difficulties for third party apps that compete with Apple products. That isn’t necessarily the aim, but it also might not go un-noticed at Apple.

  4. Then, there are endless horror stories around curation of the store. Apps are rejected in arbitrary, capricious, irrational and inconsistent ways, often for breaking completely unwritten rules. Only Apple actually knows how much this happens, but far too many people have far too many bad experiences. This has done real damage to Apple’s brand amongst developers.

  5. And then there are the payment rules.

Apple’s payment rules, made mandatory in 2011, created a whole load of new problems:

  • United Airlines and Uber aren’t covered at all – only content consumed on the device is affected.

  • There are apps where there’s a clear logic for Apple’s payment system to be compulsory – there are coherent, consistent reasons why that random horoscope app should use the build-in payment and not be allowed to offer extra value if you give it a card, and a level playing field means the same rules for everyone (except, we just discovered that Amazon is ‘only’ paying 15% for some Prime Video signups on iOS).

  • However, there’s a huge grey area around services that are consumed both on and off the platform – for example, Netflix, Disney and newspapers and magazines. How and where, exactly, should Apple get a cut?

  • Worse, there are companies that just can’t pay. Ebooks or music apps have to give a fixed percentage of their top line to rights-holders and don’t have a 30% margin to give Apple.

We had all these arguments in 2011 and very little has changed since: I wrote this report at the time and it’s still a pretty good summary.

View fullsize

Screenshot 2020-06-21 at 12.28.29 pm.png

View fullsize

Screenshot 2020-06-21 at 12.29.23 pm.png

View fullsize

Screenshot 2020-06-21 at 12.29.43 pm.png

View fullsize

Screenshot 2020-06-21 at 12.29.53 pm.png

View fullsize

Screenshot 2020-06-21 at 12.30.01 pm.png

View fullsize

Screenshot 2020-06-21 at 12.30.13 pm.png

Meanwhile, none of this is a surprise to Apple. As part of the recent US congress competition hearings, we saw an email from early 2011 in which Steve Jobs explicitly accepted and embraced the fact that the payment rules would be a fundamental problem for some companies.  The result, for almost a decade, has been a horrible muddle, with people using those products forced into a bad user experience.

Screenshot 2020-08-13 at 2.35.17 pm.png

(Of course, when this email was written, Apple was still a fair way away from market dominance: there were only 150-160m iOS devices in use, and iPhones were maybe 10% of all the mobile phones being used in the USA, where today they’re over 50%.)

Ironically, Epic is not in this ‘can’t pay’ category at all, and it built a huge and very profitable business following Apple’s rules. Unlike Spotify, it doesn’t have marginal cost for in-app purchases and there’s no structural reason why it can’t pay Apple (or indeed Google). It just doesn’t want to, or wants to pay less than 30%. Indeed, one could point out that the real issue is that Epic just doesn’t ’like’ Apple’s model, just as Apple doesn’t ‘like’ Stadia.

At this point, many people suggest that we can cut a Gordian knot here – that we can slash through the complexity by letting people have a choice. Allow any payment service, perhaps in parallel to Apple’s; allow third-party app stores; allow side-loading of apps; and of course let users turn off the sandboxed restrictions on the phone. Then you can have the security if you want it, or the freedom.

Unfortunately, you can’t have your cake and eat it. A secure system with a switch to turn off the security might work for Linux and a highly technical user, but when you’ve given smartphones to a few billion people, a secure system with a switch to turn off the security is just a target for malware. That horoscope app can tell you’ll get more accurate results if it has access to some computer gibberish, so please press OK, and guess what? Everyone will press OK. A computer should not ask a question that the user won’t understand, and when you have billions of users that list looks different. This has been Google’s experience with Android: it chose a less restrictive sandbox than iOS and had many more malware problems, and Google has spent the last decade slowly rowing towards Apple’s approach.

A limited version of this argument, incidentally, is that all the problems are with the store, and you could get rid of it without security problems, relying on software sandboxing on the phones to handle all security and safety issues. But there are also policies people object to on the phone itself (no replacing the default Maps app, say), and policies that we want to keep that are enforced in the store rather than on the phone (no ads in apps for kids, say). You have to tackle the whole policy question, not just part of it, and you cannot rely on the sandbox on the phone to solve all safety and security attacks.

All of this is to say that the demands Epic makes in its lawsuit are not, in fact, merely arguing that the smartphone apps market should be more competitive, with more payment options. The sandboxed app store model is not some curious, incidental feature of modern smartphones – rather, this is an essential and hugely important part of why they have such a strong software ecosystem. Epic is explicitly arguing that we should abandon the smartphone software model and security model almost entirely, and switch to what would actually be the old Windows model. Its arguments would also of course mean that we should abandon any level playing field, and move to a model where big companies and big brands have an even bigger advantage, because a trusted platform is replaced by a trusted reputation. This would be good for big established brands – like Epic – but not for may other people.

Epic’s proposal is full of holes, and Epic’s problem is really pretty peripheral, but I’m much more interested in Spotify and Stadia, where the situation now looks unsustainable, and that’s where we’re more likely to see changes. So, I think we should try to draw one more set of distinctions.

First, the App Store moderation problems are infuriating but they’re not rent-seeking or necessarily market abuse – they’re an execution failure, and indeed we’ve been here before. However, the EU, which is becoming the tech regulator by default, is already working on plans for the store review model to be regulated, with real, external rights of appeal and review, and external transparency. Apple could try to get ahead of this, or it might be too late. It might have no choice but to allow Stadia, and ‘we just don’t like that’ won’t do anymore. 

Second, I think Apple is going to have to make fundamental changes to the payment model. Epic only has margin at stake, but Spotify can’t pay at all, it’s a direct competitor, and there’s no user benefit at all to Apple’s policy, just confusion and annoyance. The EU is now pursuing two separate competition policy cases against Apple: one over the App Store, with Spotify a complainant, and the other over Apple Wallet and Apple Pay. This second one is instructive: the EU is taking the view that Apple has a monopoly of payment on the iPhone. Market definition is everything. I-am-not-a-lawyer, but I don’t see how Apple can win on Spotify (or Kindle), and I don’t think it should.

That might mean changes in who and what is covered by payment rules, but it probably also means changes to the 30%. There’s a lot of argument about principle, but there’s also a price: if the rate was, say, 10%, I’m not sure that we would be having the same conversation, and Epic would certainly get less sympathy.

That 30% adds up to real money, incidentally. When the store launched, Steve Jobs said it was aiming to break even – the 30% was to cover the running costs, and it is worth remembering how many huge companies are getting the App Store, the manual review and the file downloads to hundreds of millions of users for nothing more than their $100 a year developer subscription. But the App Store is not running at break even anymore: in 2019 it made somewhere between $10bn and $15bn of commission – 20-30% of the ‘service revenue’ Apple likes to talk about.

Finally – we’ve been arguing about this since the store launched in 2008, but really, some of this debate is as old as personal computers. Right back to the 1970s, there’s been a religious split between people who want computers that they’re free to change however they like, and people who want computers that are easy and safe to use for as many people as possible. This is a trade-off, but there’s a certain kind of person in tech that thinks app stores and the iOS sandbox have nothing to do with the success of smartphones and the iPhone – they’re just a stupid Apple thing you could get rid of with no ill effects. 30 years ago they thought the same about GUIs, and indeed a lot of Epic’s PR comes straight out of furious Usenet posts from the 1990s about how GUIs are evil and infantilising. But the whole direction of computing since the Apple 1 has been about more abstraction, less access to the lower levels of the system and inherent in that more accessibility for more people.

Apple has always been at one, extreme, end of that debate, taking a strong opinion on how it thought a good computer ‘should’ work and letting you choose it or not. From 1976 to, say, 2015 or so, it was just one fairly niche vendor, and some people chose Apple’s opinion and some didn’t. But with the iPhone, Apple finally won the argument with users’ wallets, and that means it’s not niche anymore – Apple has become the navy, and different rules apply.

Subscribers to my premium newsletter were sent a version of this on Sunday.

App stores, trust and anti-trust


This post is by Benedict Evans from Essays - Benedict Evans

We all, I think, understand that the iPhone was a generational change in computing, but that change came in two parts. The multitouch interface is obvious, but the change in the software model was just as important. Apple changed how software development worked, and by doing so expanded the number of people who could comfortably, safely use a computer from a few hundred million to a few billion.

Specifically, Apple tried to solve three kinds of problem.

  • Putting apps in a sandbox, where they can only do things that Apple allows and cannot ask (or persuade, or trick) the user for permission to do ‘dangerous’ things, means that apps become completely safe. A horoscope app can’t break your computer, or silt it up, or run your battery down, or watch your web browser and steal your bank details.

  • An app store is a much better way to distribute software. Users don’t have to mess around with installers and file management to put a program onto their computer – they just press ‘Get’. If you (or your customers) were technical this didn’t seem like a problem, but for everyone else with 15 copies of the installer in their download folder, baffled at what to do next, this was a huge step forward.

  • Asking for a credit card to buy an app online created both a friction barrier and a safety barrier – ‘can I trust this company with my card?’ Apple added frictionless, safe payment.

All of this levelled the playing field. You knew you could trust Adobe or EA with your credit card, and you knew you could trust them not to abuse your PC too much. PanicRogue Amoeba or Basecamp have accumulated reputations that mean they get trust too, for tech insiders who’ve known about them for years. But what about a random Vietnamese developer who’s made a fun little game about a bird that flaps? The iOS software model removed trust as a problem, and as an advantage for big companies. You still have to hear about the app – the App Store solves distribution but not discovery – but you don’t have to worry about paying for it and you don’t have to worry what it might do to your computer.

This model has enabled an explosion of software. A billion people use iPhones today, the App Store has 500m weekly users, and those users both buy and install far more software than ever before. The new software model has, objectively, been great for software development, and also and much more importantly has been hugely and unambiguously good for actual consumers. Trust and rules are good.

The trouble is, if you have a curated, managed sandbox, where a company decides what’s safe, you have to do a good job of managing and curating, and Apple has not, always, done a good job at all.

And, it matters if Apple doesn’t do a good job, because when Apple launched the app store it had sold fewer than 10m iPhones ever, but today a billion people use iPhones, and more importantly so does over half of the US market and 80% of American teenagers. For a lot of big companies, iPhone users are the market. When your product has a few points of market share you can make whatever choices you like, but when you dominate the market, other rules start applying. Apple isn’t the pirates anymore – it’s the navy, the port and the customs house. In the last few weeks, Microsoft, Google, Facebook and Epic have been stopped at customs.

2020 Shoulders of Giants 1.5.001.png

So, what kinds of decision does Apple make about what you can do on an iPhone or iPad, and where are the problems? Splitting this apart:

  1. Most decisions do actually have a solid, rational engineering basis. You can’t run in the background and record what every other app does.You can’t run the battery down, or read all my photos without permission, or hijack my network connection and CPU to mine crypto. 

  2. But some seem to be just personal preference, or taste – most obviously, the decision in the last few weeks to block streaming games services from Microsoft and Google. This may partly be about revenue, but the real issue seems to be that Apple thinks that games on iOS ’should’ use native APIs, and, perhaps, that they ‘should’ work without you needing to buy a separate games controller. But whatever it is, there’s no safety, security or privacy issue – Apple just does’t like those apps.

  3. Some decisions in both of two previous categories cause difficulties for third party apps that compete with Apple products. That isn’t necessarily the aim, but it also might not go un-noticed at Apple.

  4. Then, there are endless horror stories around curation of the store. Apps are rejected in arbitrary, capricious, irrational and inconsistent ways, often for breaking completely unwritten rules. Only Apple actually knows how much this happens, but far too many people have far too many bad experiences. This has done real damage to Apple’s brand amongst developers.

  5. And then there are the payment rules.

Apple’s payment rules, made mandatory in 2011, created a whole load of new problems:

  • United Airlines and Uber aren’t covered at all – only content consumed on the device is affected.

  • There are apps where there’s a clear logic for Apple’s payment system to be compulsory – there are coherent, consistent reasons why that random horoscope app should use the build-in payment and not be allowed to offer extra value if you give it a card, and a level playing field means the same rules for everyone (except, we just discovered that Amazon is ‘only’ paying 15% for some Prime Video signups on iOS).

  • However, there’s a huge grey area around services that are consumed both on and off the platform – for example, Netflix, Disney and newspapers and magazines. How and where, exactly, should Apple get a cut?

  • Worse, there are companies that just can’t pay. Ebooks or music apps have to give a fixed percentage of their top line to rights-holders and don’t have a 30% margin to give Apple.

We had all these arguments in 2011 and very little has changed since: I wrote this report at the time and it’s still a pretty good summary.

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Meanwhile, none of this is a surprise to Apple. As part of the recent US congress competition hearings, we saw an email from early 2011 in which Steve Jobs explicitly accepted and embraced the fact that the payment rules would be a fundamental problem for some companies.  The result, for almost a decade, has been a horrible muddle, with people using those products forced into a bad user experience.

Screenshot 2020-08-13 at 2.35.17 pm.png

(Of course, when this email was written, Apple was still a fair way away from market dominance: there were only 150-160m iOS devices in use, and iPhones were maybe 10% of all the mobile phones being used in the USA, where today they’re over 50%.)

Ironically, Epic is not in this ‘can’t pay’ category at all, and it built a huge and very profitable business following Apple’s rules. Unlike Spotify, it doesn’t have marginal cost for in-app purchases and there’s no structural reason why it can’t pay Apple (or indeed Google). It just doesn’t want to, or wants to pay less than 30%. Indeed, one could point out that the real issue is that Epic just doesn’t ’like’ Apple’s model, just as Apple doesn’t ‘like’ Stadia.

At this point, many people suggest that we can cut a Gordian knot here – that we can slash through the complexity by letting people have a choice. Allow any payment service, perhaps in parallel to Apple’s; allow third-party app stores; allow side-loading of apps; and of course let users turn off the sandboxed restrictions on the phone. Then you can have the security if you want it, or the freedom.

Unfortunately, you can’t have your cake and eat it. A secure system with a switch to turn off the security might work for Linux and a highly technical user, but when you’ve given smartphones to a few billion people, a secure system with a switch to turn off the security is just a target for malware. That horoscope app can tell you’ll get more accurate results if it has access to some computer gibberish, so please press OK, and guess what? Everyone will press OK. A computer should not ask a question that the user won’t understand, and when you have billions of users that list looks different. This has been Google’s experience with Android: it chose a less restrictive sandbox than iOS and had many more malware problems, and Google has spent the last decade slowly rowing towards Apple’s approach.

A limited version of this argument, incidentally, is that all the problems are with the store, and you could get rid of it without security problems, relying on software sandboxing on the phones to handle all security and safety issues. But there are also policies people object to on the phone itself (no replacing the default Maps app, say), and policies that we want to keep that are enforced in the store rather than on the phone (no ads in apps for kids, say). You have to tackle the whole policy question, not just part of it, and you cannot rely on the sandbox on the phone to solve all safety and security attacks.

All of this is to say that the demands Epic makes in its lawsuit are not, in fact, merely arguing that the smartphone apps market should be more competitive, with more payment options. The sandboxed app store model is not some curious, incidental feature of modern smartphones – rather, this is an essential and hugely important part of why they have such a strong software ecosystem. Epic is explicitly arguing that we should abandon the smartphone software model and security model almost entirely, and switch to what would actually be the old Windows model. Its arguments would also of course mean that we should abandon any level playing field, and move to a model where big companies and big brands have an even bigger advantage, because a trusted platform is replaced by a trusted reputation. This would be good for big established brands – like Epic – but not for may other people.

Epic’s proposal is full of holes, and Epic’s problem is really pretty peripheral, but I’m much more interested in Spotify and Stadia, where the situation now looks unsustainable, and that’s where we’re more likely to see changes. So, I think we should try to draw one more set of distinctions.

First, the App Store moderation problems are infuriating but they’re not rent-seeking or necessarily market abuse – they’re an execution failure, and indeed we’ve been here before. However, the EU, which is becoming the tech regulator by default, is already working on plans for the store review model to be regulated, with real, external rights of appeal and review, and external transparency. Apple could try to get ahead of this, or it might be too late. It might have no choice but to allow Stadia, and ‘we just don’t like that’ won’t do anymore. 

Second, I think Apple is going to have to make fundamental changes to the payment model. Epic only has margin at stake, but Spotify can’t pay at all, it’s a direct competitor, and there’s no user benefit at all to Apple’s policy, just confusion and annoyance. The EU is now pursuing two separate competition policy cases against Apple: one over the App Store, with Spotify a complainant, and the other over Apple Wallet and Apple Pay. This second one is instructive: the EU is taking the view that Apple has a monopoly of payment on the iPhone. Market definition is everything. I-am-not-a-lawyer, but I don’t see how Apple can win on Spotify (or Kindle), and I don’t think it should.

That might mean changes in who and what is covered by payment rules, but it probably also means changes to the 30%. There’s a lot of argument about principle, but there’s also a price: if the rate was, say, 10%, I’m not sure that we would be having the same conversation, and Epic would certainly get less sympathy.

That 30% adds up to real money, incidentally. When the store launched, Steve Jobs said it was aiming to break even – the 30% was to cover the running costs, and it is worth remembering how many huge companies are getting the App Store, the manual review and the file downloads to hundreds of millions of users for nothing more than their $100 a year developer subscription. But the App Store is not running at break even anymore: in 2019 it made somewhere between $10bn and $15bn of commission – 20-30% of the ‘service revenue’ Apple likes to talk about.

Finally – we’ve been arguing about this since the store launched in 2008, but really, some of this debate is as old as personal computers. Right back to the 1970s, there’s been a religious split between people who want computers that they’re free to change however they like, and people who want computers that are easy and safe to use for as many people as possible. This is a trade-off, but there’s a certain kind of person in tech that thinks app stores and the iOS sandbox have nothing to do with the success of smartphones and the iPhone – they’re just a stupid Apple thing you could get rid of with no ill effects. 30 years ago they thought the same about GUIs, and indeed a lot of Epic’s PR comes straight out of furious Usenet posts from the 1990s about how GUIs are evil and infantilising. But the whole direction of computing since the Apple 1 has been about more abstraction, less access to the lower levels of the system and inherent in that more accessibility for more people.

Apple has always been at one, extreme, end of that debate, taking a strong opinion on how it thought a good computer ‘should’ work and letting you choose it or not. From 1976 to, say, 2015 or so, it was just one fairly niche vendor, and some people chose Apple’s opinion and some didn’t. But with the iPhone, Apple finally won the argument with users’ wallets, and that means it’s not niche anymore – Apple has become the navy, and different rules apply.

Subscribers to my premium newsletter were sent a version of this on Sunday.

App stores, trust and anti-trust


This post is curated by Keith Teare. It was written by Benedict Evans. The original is [linked here]

We all, I think, understand that the iPhone was a generational change in computing, but that change came in two parts. The multitouch interface is obvious, but the change in the software model was just as important. Apple changed how software development worked, and by doing so expanded the number of people who could comfortably, safely use a computer from a few hundred million to a few billion.

Specifically, Apple tried to solve three kinds of problem.

  • Putting apps in a sandbox, where they can only do things that Apple allows and cannot ask (or persuade, or trick) the user for permission to do ‘dangerous’ things, means that apps become completely safe. A horoscope app can’t break your computer, or silt it up, or run your battery down, or watch your web browser and steal your bank details.

  • An app store is a much better way to distribute software. Users don’t have to mess around with installers and file management to put a program onto their computer – they just press ‘Get’. If you (or your customers) were technical this didn’t seem like a problem, but for everyone else with 15 copies of the installer in their download folder, baffled at what to do next, this was a huge step forward.

  • Asking for a credit card to buy an app online created both a friction barrier and a safety barrier – ‘can I trust this company with my card?’ Apple added frictionless, safe payment.

All of this levelled the playing field. You knew you could trust Adobe or EA with your credit card, and you knew you could trust them not to abuse your PC too much. PanicRogue Amoeba or Basecamp have accumulated reputations that mean they get trust too, for tech insiders who’ve known about them for years. But what about a random Vietnamese developer who’s made a fun little game about a bird that flaps? The iOS software model removed trust as a problem, and as an advantage for big companies. You still have to hear about the app – the App Store solves distribution but not discovery – but you don’t have to worry about paying for it and you don’t have to worry what it might do to your computer.

This model has enabled an explosion of software. A billion people use iPhones today, the App Store has 500m weekly users, and those users both buy and install far more software than ever before. The new software model has, objectively, been great for software development, and also and much more importantly has been hugely and unambiguously good for actual consumers. Trust and rules are good.

The trouble is, if you have a curated, managed sandbox, where a company decides what’s safe, you have to do a good job of managing and curating, and Apple has not, always, done a good job at all.

And, it matters if Apple doesn’t do a good job, because when Apple launched the app store it had sold fewer than 10m iPhones ever, but today a billion people use iPhones, and more importantly so does over half of the US market and 80% of American teenagers. For a lot of big companies, iPhone users are the market. When your product has a few points of market share you can make whatever choices you like, but when you dominate the market, other rules start applying. Apple isn’t the pirates anymore – it’s the navy, the port and the customs house. In the last few weeks, Microsoft, Google, Facebook and Epic have been stopped at customs.

2020 Shoulders of Giants 1.5.001.png

So, what kinds of decision does Apple make about what you can do on an iPhone or iPad, and where are the problems? Splitting this apart:

  1. Most decisions do actually have a solid, rational engineering basis. You can’t run in the background and record what every other app does.You can’t run the battery down, or read all my photos without permission, or hijack my network connection and CPU to mine crypto. 

  2. But some seem to be just personal preference, or taste – most obviously, the decision in the last few weeks to block streaming games services from Microsoft and Google. This may partly be about revenue, but the real issue seems to be that Apple thinks that games on iOS ’should’ use native APIs, and, perhaps, that they ‘should’ work without you needing to buy a separate games controller. But whatever it is, there’s no safety, security or privacy issue – Apple just does’t like those apps.

  3. Some decisions in both of two previous categories cause difficulties for third party apps that compete with Apple products. That isn’t necessarily the aim, but it also might not go un-noticed at Apple.

  4. Then, there are endless horror stories around curation of the store. Apps are rejected in arbitrary, capricious, irrational and inconsistent ways, often for breaking completely unwritten rules. Only Apple actually knows how much this happens, but far too many people have far too many bad experiences. This has done real damage to Apple’s brand amongst developers.

  5. And then there are the payment rules.

Apple’s payment rules, made mandatory in 2011, created a whole load of new problems:

  • United Airlines and Uber aren’t covered at all – only content consumed on the device is affected.

  • There are apps where there’s a clear logic for Apple’s payment system to be compulsory – there are coherent, consistent reasons why that random horoscope app should use the build-in payment and not be allowed to offer extra value if you give it a card, and a level playing field means the same rules for everyone (except, we just discovered that Amazon is ‘only’ paying 15% for some Prime Video signups on iOS).

  • However, there’s a huge grey area around services that are consumed both on and off the platform – for example, Netflix, Disney and newspapers and magazines. How and where, exactly, should Apple get a cut?

  • Worse, there are companies that just can’t pay. Ebooks or music apps have to give a fixed percentage of their top line to rights-holders and don’t have a 30% margin to give Apple.

We had all these arguments in 2011 and very little has changed since: I wrote this report at the time and it’s still a pretty good summary.


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Screenshot 2020-06-21 at 12.30.01 pm.png


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Screenshot 2020-06-21 at 12.30.13 pm.png

Meanwhile, none of this is a surprise to Apple. As part of the recent US congress competition hearings, we saw an email from early 2011 in which Steve Jobs explicitly accepted and embraced the fact that the payment rules would be a fundamental problem for some companies.  The result, for almost a decade, has been a horrible muddle, with people using those products forced into a bad user experience.

Screenshot 2020-08-13 at 2.35.17 pm.png

(Of course, when this email was written, Apple was still a fair way away from market dominance: there were only 150-160m iOS devices in use, and iPhones were maybe 10% of all the mobile phones being used in the USA, where today they’re over 50%.)

Ironically, Epic is not in this ‘can’t pay’ category at all, and it built a huge and very profitable business following Apple’s rules. Unlike Spotify, it doesn’t have marginal cost for in-app purchases and there’s no structural reason why it can’t pay Apple (or indeed Google). It just doesn’t want to, or wants to pay less than 30%. Indeed, one could point out that the real issue is that Epic just doesn’t ’like’ Apple’s model, just as Apple doesn’t ‘like’ Stadia.

At this point, many people suggest that we can cut a Gordian knot here – that we can slash through the complexity by letting people have a choice. Allow any payment service, perhaps in parallel to Apple’s; allow third-party app stores; allow side-loading of apps; and of course let users turn off the sandboxed restrictions on the phone. Then you can have the security if you want it, or the freedom.

Unfortunately, you can’t have your cake and eat it. A secure system with a switch to turn off the security might work for Linux and a highly technical user, but when you’ve given smartphones to a few billion people, a secure system with a switch to turn off the security is just a target for malware. That horoscope app can tell you’ll get more accurate results if it has access to some computer gibberish, so please press OK, and guess what? Everyone will press OK. A computer should not ask a question that the user won’t understand, and when you have billions of users that list looks different. This has been Google’s experience with Android: it chose a less restrictive sandbox than iOS and had many more malware problems, and Google has spent the last decade slowly rowing towards Apple’s approach.

A limited version of this argument, incidentally, is that all the problems are with the store, and you could get rid of it without security problems, relying on software sandboxing on the phones to handle all security and safety issues. But there are also policies people object to on the phone itself (no replacing the default Maps app, say), and policies that we want to keep that are enforced in the store rather than on the phone (no ads in apps for kids, say). You have to tackle the whole policy question, not just part of it, and you cannot rely on the sandbox on the phone to solve all safety and security attacks.

All of this is to say that the demands Epic makes in its lawsuit are not, in fact, merely arguing that the smartphone apps market should be more competitive, with more payment options. The sandboxed app store model is not some curious, incidental feature of modern smartphones – rather, this is an essential and hugely important part of why they have such a strong software ecosystem. Epic is explicitly arguing that we should abandon the smartphone software model and security model almost entirely, and switch to what would actually be the old Windows model. Its arguments would also of course mean that we should abandon any level playing field, and move to a model where big companies and big brands have an even bigger advantage, because a trusted platform is replaced by a trusted reputation. This would be good for big established brands – like Epic – but not for may other people.

Epic’s proposal is full of holes, and Epic’s problem is really pretty peripheral, but I’m much more interested in Spotify and Stadia, where the situation now looks unsustainable, and that’s where we’re more likely to see changes. So, I think we should try to draw one more set of distinctions.

First, the App Store moderation problems are infuriating but they’re not rent-seeking or necessarily market abuse – they’re an execution failure, and indeed we’ve been here before. However, the EU, which is becoming the tech regulator by default, is already working on plans for the store review model to be regulated, with real, external rights of appeal and review, and external transparency. Apple could try to get ahead of this, or it might be too late. It might have no choice but to allow Stadia, and ‘we just don’t like that’ won’t do anymore. 

Second, I think Apple is going to have to make fundamental changes to the payment model. Epic only has margin at stake, but Spotify can’t pay at all, it’s a direct competitor, and there’s no user benefit at all to Apple’s policy, just confusion and annoyance. The EU is now pursuing two separate competition policy cases against Apple: one over the App Store, with Spotify a complainant, and the other over Apple Wallet and Apple Pay. This second one is instructive: the EU is taking the view that Apple has a monopoly of payment on the iPhone. Market definition is everything. I-am-not-a-lawyer, but I don’t see how Apple can win on Spotify (or Kindle), and I don’t think it should.

That might mean changes in who and what is covered by payment rules, but it probably also means changes to the 30%. There’s a lot of argument about principle, but there’s also a price: if the rate was, say, 10%, I’m not sure that we would be having the same conversation, and Epic would certainly get less sympathy.

That 30% adds up to real money, incidentally. When the store launched, Steve Jobs said it was aiming to break even – the 30% was to cover the running costs, and it is worth remembering how many huge companies are getting the App Store, the manual review and the file downloads to hundreds of millions of users for nothing more than their $100 a year developer subscription. But the App Store is not running at break even anymore: in 2019 it made somewhere between $10bn and $15bn of commission – 20-30% of the ‘service revenue’ Apple likes to talk about.

Finally – we’ve been arguing about this since the store launched in 2008, but really, some of this debate is as old as personal computers. Right back to the 1970s, there’s been a religious split between people who want computers that they’re free to change however they like, and people who want computers that are easy and safe to use for as many people as possible. This is a trade-off, but there’s a certain kind of person in tech that thinks app stores and the iOS sandbox have nothing to do with the success of smartphones and the iPhone – they’re just a stupid Apple thing you could get rid of with no ill effects. 30 years ago they thought the same about GUIs, and indeed a lot of Epic’s PR comes straight out of furious Usenet posts from the 1990s about how GUIs are evil and infantilising. But the whole direction of computing since the Apple 1 has been about more abstraction, less access to the lower levels of the system and inherent in that more accessibility for more people.

Apple has always been at one, extreme, end of that debate, taking a strong opinion on how it thought a good computer ‘should’ work and letting you choose it or not. From 1976 to, say, 2015 or so, it was just one fairly niche vendor, and some people chose Apple’s opinion and some didn’t. But with the iPhone, Apple finally won the argument with users’ wallets, and that means it’s not niche anymore – Apple has become the navy, and different rules apply.

Subscribers to my premium newsletter were sent a version of this on Sunday.

Would breaking up ‘big tech’ work? What would?


This post is by Benedict Evans from Essays - Benedict Evans

We’re clearly going to be arguing about the size, power and market share of large technology companies a great deal in the next couple of years. Many of the underlying concerns we have around technology are complicated, and involve deep-seated trade-offs where we actually have to make choices, and not everything is a competition problem anyway ( I wrote about this here). But if we presume that something is a competition problem, what do we do about it? The discussion here tends to jump straight to ‘break them up’, which also means presuming that break-ups would actually work. I’m not sure about that. 

The folk memory here, of course, is Standard Oil. John Rockefeller built a network of production, processing and distribution companies that he bundled, tied and cross-leveraged in all sorts of ruthless and devious ways to squeeze out competition. Then in 1911, when Standard Oil was forcibly split up into over 30 different companies, that market power was broken and the oil industry became competitive again, or so the story goes. 

This is a great story, but I’d suggest it’s more useful to look at, and contrast, the breakup of AT&T and the proposed breakup of Microsoft, which give a rather more mixed picture. 

In 1982 AT&T settled an anti-trust case by splitting off its local access telephone network into seven regional companies (the Regional Bell Operating Companies or ‘Baby Bells’), keeping long-distance and the telecoms equipment business (which was also later split off and is now part of Nokia). This is another of the stories that anti-trust lawyers tell their young around the campfire, but its real effect was limited in important ways. Splitting local from long-distance opened up a new market for competitive long-distance carriers, and the market for telecoms equipment was liberated by breaking one customer into eight. It also led to the emergence of companies building fibre networks in city centres to connect corporate customers. However, if you were a normal consumer, and lived in the suburbs of New York or Miami, and wanted a telephone, there was still a monopoly. There was commotion for long-distance, but not for your phone line; a national (near) monopoly had just been replaced by local monopolies. 

There’s a pretty good law-of-physics reason for this: fixed-line local access telephone networks are a natural monopoly, in much the same way as water, gas or electricity networks. split the wires in half, and Building a network of copper wires to every home in a neighbourhood is not quite as expensive as laying water pipes, but it’s expensive enough, with a long payback period, and it’s very hard to cover the cost of building two parallel networks. It’s not impossible – cable TV companies did it by selling a separate and much more expensive product, but then we also don’t have multiple, parallel CATV networks either. And, of course, you can’t split the wire going into your home into two and give each half to a different company.

If local access telephone networks are mostly a natural monopoly that cannot be made competitive by break-ups, what about network effects? Two decades after AT&T was broken up, the DoJ proposed that Microsoft should be broken up – that it be split into Office and Windows. As we know, this didn’t happen, but what it it had? What would that have changed?

Going back to 1911, splitting up Standard Oil did three things. First, it replaced a company that was often the only buyer or the only seller with many competing companies. Second, it addressed the cross-leveraging, bundling and tying whereby the oil fields, refineries, pipelines, rail cars and retailers all worked together to squeeze out competition, by breaking those into separate competing companies. And third, more abstractly, it replaced a huge company with huge financial and market power with many smaller companies with less individual mass. 

Now suppose that Windows and Office had become separate companies. So what? Well, the third point would be addressed; the overall mass of the company would be reduced. So, arguably, would the second; to the extent that you believe Microsoft was cross-leveraging Windows and Office, that would be ended. There would be no more Office/Windows bundles. 

However, it’s not clear that this would have resulted in more actual competition for Office or for Windows. There would not have been a wave of new companies making new PC operating systems, nor new PC productivity suites, any more than there was a wave of companies building new phone networks in American suburbs in the 1980s. Microsoft might have been doing all sorts of mean and sneaky things, but people used Windows and Office because of network effects, and those network effects were and are internal to each product. People used Windows because it had the software and people wrote software for Windows because it had the users, and that had very little to do with Office. If Office had been in a different company, that wouldn’t have prompted Adobe to port Photoshop to BeOS, nor id Software to write Quake for Mac before Windows. 

The strength of Windows was not that it was bundled or tied or leveraged, but that it had a network effect. The same for Office – everyone used Office because everyone used it, not because it was part of the same company as Windows. Breaking it up wouldn’t have changed this. 

Indeed, these network effects would have limited the companies emerging from a broken-up Microsoft (the ‘Baby Bills’) in just the same way that they limited everyone else. The Office company could not have made a new PC operating system to compete with Windows – no-one would have written software for it. The Windows company could not have made a new productivity suite to compete with Office – no-one would have used it, any more than anyone used Open Office. These are hypotheticals, but Microsoft really was caught by exactly this mechanic in mobile a decade later – no-one made apps for Window Phone because it had no users, and it had no users because no-one wrote apps for it, and all the power Microsoft had in Office and Windows meant nothing. 

In other words, one should think of network effects as comparable to a natural monopoly. In a network effect product as for a natural monopoly, once you have market dominance, that dominance persists not because of any anti-competitive behaviour by the company that owns it (even if there appears to be plenty) but because of the mechanics and economics of the product. 

Network effects do not dictate that there can be only one network – it depends on the market, just as you can have both cable TV and telephones on one street but only one water pipe. Hence, in early 1990s the PC market, with only 50-100m users globally, was too small to sustain more than one network – Microsoft won, Apple clung on in a niche and almost disappeared and the other contenders did disappear. The global smartphone market, with now over 4bn global users, is big enough for two networks – iOS and Android. In the early days of social networks many people thought there would be a winner in each region – Bebo was strong in the UK, Orkut in Brazil and so on – and this had happened with instant messaging in the first internet boom, but in the end Facebook turned out to have mostly global network effects. A few years later we had the same discussion about on-demand car services – many people thought thought that the network effects would be city-by-city, but in fact we had national and regional winners. However, in some countries the market did turn out to be big enough to sustain more than one network – in the USA both Lyft and Uber. 

Now, a generation after Microsoft’s antitrust case and two generations after AT&T’s breakup, we come to talking about Google, Apple, Facebook or Amazon. There is little serious talk of breaking up Apple, perhaps because it’s so obviously a single unit. There is some argument for splitting AWS apart from Amazon – I find this unconvincing (and I’ll return to this in a future essay) but regardless, that would still leave the Amazon retail business itself as a single hugely powerful company that’s generating a torrent of cash. But there’s a lot of talk of breaking apart Google and Facebook, and here I think comparisons with Standard Oil, AT&T and Microsoft are most interesting. On one hand, there are clearly divisible component parts (Youtube, Instagram etc) in a way that’s much less true for Apple and Amazon. But on the other hand, I’d suggest that, as for Office and Windows, the competitive strength of these component parts doesn’t come from the combined ownership, but from networks effects. Hence, breaking them apart might achieve very little.

As a first observation, Google and Facebook have two-sided business models: they address advertisers and they address consumers. There’s no question that they have market dominance in online advertising (especially if you define the relevant market for Google as search advertising and for Facebook as social advertising). Equally, there isn’t much question that they bundle and cross-leverage all of their different properties when doing business with advertisers. Break them up, and advertisers would have more leverage and the successor companies to Google and Facebook would have less leverage and less market power.

(Ironically, more leverage for advertisers over search or social networking companies would, all things being equal, mean less privacy for consumers, which isn’t typically what anti-trust advocates argue for and points to the fact that privacy isn’t necessarily a straightforward competition problem – but then, real policy is about trade-offs). 

However, though advertisers could now play Facebook off against Instagram and Google against Youtube, consumers would have the same choices that they had before. Just as breaking up AT&T liberalised the telecoms equipment market but not the natural monopoly local access market, changing who owns Instagram doesn’t alter the network effects that make Instagram strong, nor YouTube, nor WhatsApp, because, as for Office or Windows, the network effects are internal to the product. You don’t use WhatsApp because Facebook owns it. Google Search isn’t far ahead of Bing because it also owns Youtube. And yes, just as Microsoft was accused of doing all sorts of things to cross-leverage its businesses, so are these companies, but that’s ultimately peripheral – the market dominance comes from the products themselves.

At this point it’s sometimes suggested that if Google and YouTube became separate companies, Google would build a new video sharing product and Youtube would make an important new search engine. This is hard to take seriously – all the reasons that ‘Office Inc’ and ‘Windows Inc’ could not have competed with each other apply here in the same ways. ‘Youtube Inc’ would have none of the data and much more importantly none of the ongoing network effects that make Google a leader in search – it would start not just far behind Google but far behind Bing. Equally, there’s no reason for Google’s new video site to do any better than its last one – it would be on the wrong side of network effects. Indeed, the basic problems with this idea becomes clearer if one asks, rhetorically, why it is that Facebook does not already compete with Google in search, or why Google has failed so many times at creating social products itself? Why would Youtube Inc’s search engine do any better than Bing – what special advantage would it have? This is all so much magical thinking.

🤔

If network effects are equivalent to natural monopolies, and the market position of some of the companies that you worry about are based by network effects, what do you do? Well, when faced by a natural monopoly with problems, we don’t just shrug and give up – we regulate it. 

Going back to AT&T, the local access network is a natural monopoly, but you can unbundle competitive access to that ‘last mile’ of copper at the local exchange, with wholesale access to the data streams or direct physical access to the actual copper wire itself as it comes into the building. The trigger for this was DSL. In the USA unbundling this access this was called ‘UNE-P’ and lasted a short while before being shut down, returning the copper monopoly to the Baby Bells – outside the USA regulators persevered (calling it ‘unbundling the local loop’), creating an entire new competitive layer in local access. The chart below shows the result: in pretty much every large country in Europe the former monopoly (‘the ‘incumbent’) now has less than 50% share of DSL. It still owns the copper, but it rents it out for other people to provide services on top, under a legally controlled wholesale model. The result is that in these countries most consumers have a choice of a dozen or more broadband providers. You can, in fact, combine a natural monopoly with competition.

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A little later, something similar happened to roaming prices in Europe. Phone calls and data had become cheap, but roaming prices had not, and stories were widespread of hapless tourists getting vast bills for trivial amounts of use when they turned their phone on abroad. The EU responded with a set of rules that removed the consumer harm, and today roaming in Europe is effectively free.

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The EU went about this by constructing an argument that this was a competition problem: the roaming price you were charged was a function of the wholesale rate agreed between the host operator and your operator, and you had no say in this. You could argue that this is this pretty tendentious, but it doesn’t matter – the regulator found a legal mechanism to address a real consumer harm. (Ironically, a decade earlier Vodafone, which had networks in most European markets, had tried to sell a discounted roaming deal across those networks and was blocked by the EU on the grounds that since other operators could not match this it was anti-competitive.)

Something rather similar has happened over the last five years in European credit card interchange rates. When you swipe your card the retailer is charged a fee by Visa, MasterCard or Amex; the retailer can’t negotiate this and can’t chose not to support those card providers, so this really is a competitive question. Starting from 2015, the EU has capped these pieces, pushing down interchange rates. (These rates are where loyalty points come from, so this has also reduced the value of such schemes to Europeans).

What all of these have in common is that regulators inserted competition, cut prices, or both, by digging deep inside a monopoly or oligopoly and addressing mechanics, infrastructure and internal pricing schemes that consumers never saw. They didn’t ‘break them up’ – they mandated wholesale access or price changes to things that you would never see on the P&L. Local loop unbundling came with very specific rules and pricing about every aspect connecting to the local access network. As we look at the regulation of parts of the technology industry today, we can see some pretty similar things coming.

Hence, the UK’s competition authority, the CMA, analyses Google’s dominance position in search, and doesn’t propose breaking it up, because it understands that search is (mostly) a natural monopoly. Instead, it proposes a long list of highly specific internal, mechanical interventions. For example:

  • “The power to require Google to provide click and query data to third-party search engines to allow them to improve their search algorithms”

  • “The power to restrict Google’s ability to secure default positions, to restrict the monetisation of default positions on devices (i.e. Apple selling the default search engine slot to Google) and to introduce choice screens”

  • “ Facebook should offer a defined find contacts service to users of a third-party platform, but rival platforms should not be required to reciprocate”

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There’s lots to argue about in specific proposals like this (including how much of it will be enacted), but that’s not really the point – rather, one should ask which problems you can resolve by splitting the company apart, or by fining people, and which by getting right inside the operations and writing rules. As I pointed out here, we didn’t make cars safer by breaking up GM or Ford, but by writing rules about how you can make a car.

However, while the US does regulates cars (and many other things), most of my examples come from Europe, and this points to two distinct problems. 

First, what happens when monolithic global software systems are regulated by different authorities in different places? What if they mandate things that are mutually contradictory? Worse, what if those contradictions reflect fundamental differences in philosophy? Adtech is relatively apolitical, but attitudes to free speech vary in important ways even between different liberal democracies. 

Second, different jurisdictions can have rather different operating models for regulation itself. The US tends to have a rules-based, lawyer-led system that moves forward one court case at a time, whereas Europe tends to have a principle-based, outcome-based, practitioner-led system. You can see that very clearly in the images of the CMA report above. The US discussion tends to circle back to the Sherman Antitrust act of 1890 and what is or is not a violation, whereas the CMA argues for a new regulator that can write new rules about the operations of Google’s data centre whenever it thinks necessary.

Finally – markets change, and in technology they change vey fast. Detailed, line-by-line regulation of the internal operations of a company might make sense when the market is set in place for 50 years, but IBM’s mainframes dominated the tech industry for only 15 years, and Windows/Intel for only another 15, and as I wrote here, neither one lost their dominance because of anti-trust, but because the whole basis of of their dominance became irrelevant. There are people applying to YC now who weren’t born the last time anyone started a company to write Windows software. 

This of course takes us back to the shift in regulatory models. Competition regulators are very conscious that they move too slowly. If you take five or ten years to resolve a complaint, then the company being harmed might have disappeared, the people who did the harm have moved to other jobs and forgotten all about it, and more fundamentally the whole market structure might have changed again – you can fine people, but it’s far too late. Hence, a big part of the shift in regulator attitudes is a shift to ex ante regulation – to thinking about what might happen instead of what did happen. (In the same vein, US regulators are also starting to think about whether moving away from their historic narrow focus on low prices for consumer might be a good idea, when looking at companies whose entire model is to be cheap or free.)

Of course, predictions are hard. The main reason that Americans do now have a (moderately) competitive market for telephones is that a completely different set of physics came along, in the form of cellular, where you actually can justify building three or four competing networks. Ironically, the legendary McKinsey study that said mobile would be a tiny market, and that there would only be 900,000 mobile subscribers in the USA by 2000, was commissioned by AT&T as part of this process – when AT&T was broken up, no-one expected mobile to provide mass-market competition for telephone service. Equally, the anti-trust process that Microsoft went through 20 year ago was utterly ineffective – but then a few years later smartphones turned Windows PCs into accessories. That’s not an argument against regulation, but it may be an argument for humility.