Ben Thompson: Elizabeth Warren's blind spot

Want to dismantle the candidate’s break-up plan for big tech? Get in line.

From “Where Warren’s Wrong,” e-mailed Tuesday to Stratechery ($) subscribers, but available on the web for all:

Perhaps it is best for Senator Warren’s argument that her article never does explain how these companies became so big, because the reason cuts at the core of her argument: Google, Facebook, Amazon, and Apple dominate because consumers like them. Each of them leveraged technology to solve a unique user need, acquired users, then leveraged those users to attract suppliers onto their platforms by choice, which attracted more users, creating a virtuous cycle that I have christened Aggregation Theory. Specifically:

• Google solved search, which attracted users; Google’s supply (web pages), thanks to the fundamental nature of the web, were already effectively “on Google”, but even then web pages have worked diligently to deliver content in a way that Google expects. Why? Because users start at Google — demand is what matters.
• Facebook digitized offline relationships, which attracted users, which were both consumers and suppliers of content; professional content creators followed, not only linking to their content on Facebook but creating content specifically tailored for Facebook’s audience, making Facebook that much more attractive for users. Again, what mattered was demand, not supply.
• Amazon leveraged the Internet to achieve a dominant strategy of offering superior selection and the lowest price, starting with books. This gained Amazon customers, which gave the company leverage to bring on first other media like CDs and DVDs, which gained them more users, and later goods of all types; Amazon then launched the Amazon Marketplace, through which suppliers could come onto Amazon directly. Why? Because that is where demand was.
• Apple defined the modern smartphone, gaining users who were blown away by Apple’s first-party apps; that attracted app developers, who were soon clamoring for access to iPhone users. Apple closed that loop by creating the App Store, which attracted more users, which attracted more developers, etc. Critically, though, the users came first; one of Microsoft’s many mobile mistakes was believing it could effectively “buy” a supply of apps and thus earn users, but that doesn’t work in a world where owning demand matters most.

Aggregation Theory is the reason why all of these companies have escaped antitrust scrutiny to date in the U.S.: here antitrust law rests on the consumer welfare standard, and the entire reason why these companies succeed is because they deliver consumer benefit.

The European Union does have a different standard, rooted in a drive to preserve competition; given that the virtuous cycle described by Aggregation Theory does tend towards winner-take-all effects, it is not a surprise that Google in particular has faced multiple antitrust actions from the European Commission. Even the EU standard, though, struggles with the real consumer benefits delivered by Aggregators.

My take: Thompson’s theory is a useful analytical tool. It helps explain the dynamics of a world, as he puts it succinctly, “where owning demand matters most.”