In late 2017, the European Commission asked us to research innovation in the digital economy. Our earlier work, including Virtual Competition, raised the concern of policymakers around the world as we uncovered several significant risks of the digital economy including algorithmic collusion. But on innovation, we, like many others, were optimistic and trusted in the market’s ability to deliver. As we dug into the data over the next few years, however, we found multiple fallacies about innovation in the digital economy. Our counterintuitive findings were unsettling.
After submitting our report to European policymakers, we began getting calls from other policymakers who had seen our report, and they too had similar concerns. That led to further research and more unsettling truths, and our latest book, How Big-Tech Barons Smash Innovation—And How to Strike Back.
Intuitively we know something is amiss. Lots of us, as surveys reveal, are concerned about corporate power in many markets, including in the digital economy. But seemingly, people still believe, as we initially did, that innovation has been unaffected. It remains synonymous with the digital economy. Innovation and creativity, we are told, are the keys to success. And the underlying assumption is that the digital economy is contestable: If you are good at what you do and are willing to experiment and quickly learn from your customers’ behavior, you could make it! The prevailing message is that while many innovators might fail, some that quickly identify and exploit opportunities will succeed.
But the reality is more complex and far less promising.
While the innovation gospel might have been valid in the 1990s, that is not true today. A few powerful firms (whom we call the “Tech Barons”) are now the critical gatekeepers in their vast ecosystems, where contestability is carefully orchestrated. Think, for example, of Alphabet (Google), Apple, Meta (Facebook), Amazon, and Microsoft (GAFAM for short). These Tech Barons not only govern the competition within their tightly controlled ecosystems, but they also affect the nature of innovation that makes it to the market. And to protect their interest, they make sure to only advance and allow innovation that does not disrupt their business models and profits. As their ecosystems expand to the health industries, the metaverse, and beyond, so too will the Tech Barons’ power.
As we increasingly go online to socialize or shop, we instinctively understand that many innovations coming from the Tech Barons’ ecosystems have a dark side—whether to our privacy, well-being, or autonomy. The heady tech utopia of the 1990s now seems like a dystopia. Based on our research and discussions with market participants, several things become clear:
- How the Tech Barons differ from powerful platforms and apps. If apps are worth millions, and platforms are worth billions, then Tech Barons, in controlling the ecosystems, are worth more than billions. They are quasi-sovereigns. While the Tech Barons tolerate innovations that do not threaten their ecosystems, they will smash companies with disruptive technologies that add significant value, whom we call the Tech Pirates. Our book explores the fate of several Tech Pirates, including the privacy app Disconnect (which Google kicked out of its ecosystem), the search engine DuckDuckGo (which promotes privacy, but many have never heard of because of Apple’s revenue-sharing agreement with Google); Aptoide (which was subject to Google’s dark patterns); Sonos (which was forced to limit its innovations of speakers with multiple digital assistants), and WhatsApp and Waze (who were acquired by the Tech Barons).
- How the Tech Barons, unlike past monopolies, have multiple weapons to kill or marginalize these innovation pirates and influence the scope and nature of innovation that reaches the market. Tech Barons can distort the supply of innovation (for example, by excluding disruptors from the ecosystem or reducing interoperability), and the demand for innovation (for example, by controlling the interface, and using dark patterns and friction to affect our choices). Their strategies also affect and distort the paths of innovation outside their ecosystems. As a result, the market delivers fewer disruptive innovations that add significant value, more innovations that sustain the Tech Barons’ power, and more innovations that extract or destroy value.
- How the innovations have become toxic. Under the guise of personalization, the Tech Barons and those within their ecosystem innovate in finding better ways to harvest data and predict and manipulate our behavior. Among the many patents and innovations to implement these strategies, you could find, for example:
- Technologies that scan your private communications to learn more about you, your interests, and your needs;
- Mechanisms that enable third parties to access your correspondence;
- Technologies that use available microphones, including on your smartwatch, to listen to your environment; and
- “Sniffer” algorithms that listen to background conversations (at times, without requiring a “wake word”).
- How toxic innovation will increase. The Tech Barons design their ecosystems to favor their interests (at the cost of crushing beneficial innovations). As a result, the Tech Barons’ value chain will often dictate the type and scope of innovation that one will find, and in looking at the value chains, we can predict that innovations will become even scarier. As a result, potentially beneficial innovations that offer value will likely be deployed in a manner that extracts or destroys value. For example, in July 2021, an algorithm successfully decoded for the first time speech from brain activity. When the study’s participant, who, because of paralysis, could not speak, was asked, “How are you today?” AI was able to decode from the participant’s brain activity his response: “I am very good.” No doubt, these innovations can create significant value, particularly for those with speech paralysis. The critical point is that with market power, control over the ecosystem, and existing value chains, these technologies will likely be implemented in ways that do not necessarily serve our interests. In an environment where the Tech Barons eliminated disruption and potential competition, they will likely drive the innovation to deliver the ultimate goal—profits. With power comes the ability and incentive to implement innovations to exploit us. As more participants’ internal thoughts are converted into code, algorithms will more accurately decipher what we are thinking. Just as our DNA has been mapped out, so too will our emotions, thoughts, and thought processes. So, who is sponsoring this “speech neuroprosthesis” AI? Facebook. This research aligns with the company’s goal of transitioning from a social media company to a metaverse company, where AI, in decoding our thoughts, will redefine the virtual reality experience. Facebook can’t protect us currently from the sex traffickers and drug cartels on its platforms. So, expect the same groups that currently promote on Facebook’s platforms violence, exacerbate ethnic divides, and delegitimize social institutions to also be in Facebook’s metaverse. And expect Facebook to be deciphering our thoughts while we experience this discord in the metaverse.
- How one cannot easily avoid the ripple effects of the toxic innovations flowing from the Tech Barons’ ecosystems. After seeing the inflow of toxic innovations, your reaction might be to avoid the Tech Barons’ ecosystems. Some of you might already have deleted your Facebook and Instagram accounts, switched to DuckDuckGo or another private search engine, and canceled Amazon Prime. But one cannot easily escape the ripple effects of the toxic innovations. Our book examines how these innovations are harming our children, ripping apart our social fabric, and undermining political stability and democracy. And the Tech Barons know this. This is problematic, especially as the Tech Barons’ ecosystems expand.
- Why the “ideological buffet” which calls for limited intervention, is so alluring. Some of you might still hesitate. Consider some of the policymakers who responded along these lines: Granted these companies wield a lot of power, but we don’t want to chill innovation. Why is it that some policymakers are adamant that we should simply keep calm and allow the market to work its magic (never mind that these Tech Barons have remained dominant despite their abuses)? The answer is found in the ideological buffet served up by the Tech Barons and interest groups on their payroll. The ideology is so alluring precisely because we have heard it so often, and it often contains kernels of truth. Google, Apple, Facebook, and Amazon and their third-party interest groups reportedly spend millions of dollars in lobbying, and with the pending antitrust legislation in Congress, expect the lobbying and the “chilling innovation” claims to intensify.
- Why the legislative proposals to rein in the Tech Barons won’t necessarily stem toxic innovation. While the Tech Barons are in the news for their mounting antitrust attacks, the likely relief including Europe’s Digital Markets Act, Digital Services Act, and Data Act, will not fix the underlying problems. As our book explores, toxic innovation remains a significant blind spot for policymakers, enforcers, and courts. Even if all the legislation in the US passes, even if the competition agencies around the world win all their lawsuits against the Tech Barons, and even if some of the Tech Barons are broken up, it won’t necessarily end toxic innovation. Part of the answer lies in duck hunting. One doesn’t aim where the duck is, but where it is heading. One problem is that the enforcers are aiming at the Tech Barons’ past anticompetitive practices, which the Tech Barons may not need to rely upon going forward. Another problem is their focus. The agencies typically focus on the impact of the Tech Barons’ behavior in narrowly defined markets. But the power that the Tech Barons wield does not come from their control over particular markets, but their control over ecosystems. Moreover, rather than simply asking whether the behavior is anti-competitive, policymakers should also ask why the Tech Barons behave the way they do. They need to inquire how the ecosystem’s value chain affects incentives and innovation paths.
As we continue along the current policy path, valuable innovations will be increasingly stifled and toxic innovations (which primarily extract or destroy value) will flourish. The digital platforms are often analogized to a coral reef, where various app developers and technologies ultimately contribute to the platform’s structural complexities. Instead, we’ll see putrid red algae that attack these coral reefs—where the Tech Barons kill off healthy innovators by depriving them of the “oxygen” needed to survive.
Should we care?
Yes—whether you are a company seeking to exploit an opportunity online, a parent concerned about the effect these technologies have on you and your children’s mental health, or a policymaker seeking to restore competition online and make these markets more contestable.
Companies that seek to innovate and expand in the digital economy are directly affected by these dynamics. They will need to know what drives the Tech Barons’ strategies and how the Tech Barons will likely perceive them and react to their innovation efforts. While the Tech Barons may change over time, the underlying forces of the digital economy will not. So, companies need to understand how their innovations will affect the prevailing Tech Barons’ value chain, where they can safely disrupt, and what opportunities exist for disruption as the Tech Barons’ ecosystems expand.
Consumers need to understand what innovations to expect and how they’ll likely affect their well-being, privacy, and autonomy. While no one can predict the exact form of these innovations, we can get a glimpse by better understanding the Tech Barons’ incentives. Indeed, based on the patents we’ve reviewed, we’ll likely continue to see some truly toxic innovations.
Policymakers should be rightfully concerned since innovation is necessary for economic growth and addressing global warming, wealth inequality, social unrest, growing population, and the present threats to democracy. To address these pressing needs, we need disruptive innovations, and we need them sooner rather than later. Leaving the Tech Barons to determine the scope and trajectory of digital innovation will undoubtedly leave us worse off.
Of course, the Tech Barons prefer that we stick with the current policies, which were designed many years ago and are ill-suited to deter their power over the supply and demand of innovation across their vast ecosystems. Although nearly all the Tech Barons are being sued across several jurisdictions, they have little to fear. This is especially the case when antitrust reforms have stalled in Congress, and when some elected officials, like Senator Rand Paul (R., Ky.), opine: “Rather than pursue even stronger antitrust laws, Congress should allow the free market to thrive where consumers, not the government, decide how big a company should be.” That ideology, as we explore, is wrong on several fundamental levels, including that this vision of a “free market” does not reflect the reality of the many captured markets dominated by a handful of Tech Barons.
But the scary part is that even if the antitrust enforcers prevail over this “free-market” rhetoric and win every case, the relief will likely be too little and too late. And even if all the recent policy proposals, including the multiple bills pending in Congress, were all enacted, they will unlikely prevent the toxic innovations. The current Tech Barons and their successors will continue to distort the path of digital innovation absent corrective policies. The costs of going off course are huge—to our well-being, autonomy, and democracy.
Why it’s not hopeless.
There are many reasons to be gloomy: high inflation eating into our earnings; Congressional leadership unresponsive to the bipartisan concerns over the Tech Barons’ power, and a digital economy careening off course. Our democracies are in peril. The Tech Barons always seem to be several steps ahead of the policymakers. And while companies must compete and disrupt online, their journey is more perilous than what the business literature depicts.
Our children already stand less of a chance of a better life than ours. Are they doomed to the precariat worker class?
The upside is that we can restore contestability and fairness in the digital economy. Toward that end, our book offers three fundamental principles for policymakers:
- Our First Principle is Value -- Consider the type of innovation and ask whether it creates, destroys, or extracts value. As we explore, innovation is neither inevitable nor invariably desirable. Since not all innovation increases value, policymakers and enforcers must inquire about the type of innovation (sustaining or disruptive) and whether it increases or reduces our well-being (that is, whether it destroys, extracts, or increases value).
- Our Second Principle involves Incentives -- Ask who's designing the ecosystem and influencing the innovation paths, what is the ecosystem's value chain, and what incentives it fosters. What's good for the Tech Baron is not necessarily what's good for us. And so, one must understand the incentives at play (that flow from the value chain) and ensure these incentives align with our interests. Every ecosystem is regulated--whether by Tech Barons, informal norms, or laws, rules, and regulations. If policymakers assume that the marketplace is naturally self-regulating and that the market participants' incentives will always align with our interests, they are ill-informed.
- Our Third Principle promotes Diversity – We need to foster an effective competitive process that enables disruption and innovation plurality and offers Tech Pirates a viable opportunity to prosper. The diversity of innovation paths is crucial for future prosperity. We cannot predict who will emerge as the next Tech Pirate, given their high rate of failure and the evolutionary selection on which we rely to ensure that the right innovations prosper. But we can hedge our bets by fostering a plurality of innovators and the ensuing collision of ideas from different fields.
We also offer two ways to operationalize these principles. If betting on the Tech Barons and their ecosystems for the disruptive innovations to solve today’s problems is such a terrible bet, where should policymakers place their bets? One startling insight, at least for us, is cities. Consequently, we explore why need to fundamentally overhaul our policies, and invest in general research (which will benefit the Tech Pirates), cities, regional innovation clusters, and more generally, in diversity. If we do so, then the digital economy will more likely help us address today’s critical challenges, rather than contributing to them.