Summary

Big Tech companies are acquiring startups at an unprecedented rate, posing a threat to domestic competition and potentially leading to monopolistic practices.

Abstract

The article discusses the alarming trend of Big Tech firms aggressively acquiring startups, a strategy that could stifle competition and innovation within the technology sector. It highlights that tech giants, once startups themselves, are now using their financial power to eliminate potential threats to their market dominance, as seen with Facebook's acquisitions of WhatsApp and Instagram. This behavior is detrimental to the economy as it reduces competition, leading to higher prices, lower wages, and reduced consumer surplus. The piece underscores the importance of competition in driving productivity and consumer benefits and warns that regulatory inaction could result in significant consumer harm.

Opinions

The author suggests that Big Tech's acquisition of startups is a strategic move to maintain market dominance and eliminate future competition.
Competition is seen as vital for a healthy economy, fostering innovation, productivity, and consumer welfare.
The article criticizes the current regulatory environment for allowing Big Tech to engage in practices that could lead to monopolization and reduced consumer choice.
There is a concern that once-innovative tech companies, now incumbents, are actively working to close the competitive system and protect their positions.
The author expresses a personal connection to the tech companies in question but emphasizes the need for critical scrutiny of their market strategies.
The piece implies that the lack of competition could lead to complacency among tech giants, reducing their incentive to innovate.

Economics | Technology

Big Tech Is Gorging Startups

It’s a threat to domestic competition.

Compared to the dot-com bubble’s peak, tech firms have spent twice as much money on startup acquisitions.

To understand the significance of their actions, let’s discuss why they do it and why it matters.

Why they do it

Big tech firms were once startups. They struggled to acquire funding, sell their radical viewpoints, and battle competitors.

Over time, those who failed were forgotten, and those who succeeded became incumbents.

The cycle repeats.

New startups enter the landscape. They struggle to acquire funding, sell their radical viewpoints, and battle competitors: last cycle’s startups, this cycle’s incumbents.

Some will fail and be forgotten. But others will become a real threat to incumbents.

Like WhatsApp.

Facebook had the communications market cornered. Their revolutionary social platform connects people in every corner of the world. Messenger, their direct-messaging interface, allowed users to text each other from anywhere.

WhatsApp did it better. They became a rising star. They marketed their product to Asians, Islanders, and Hispanics. Today, few phones in these countries don’t have WhatsApp installed.

The graph below shows the rise of monthly WhatsApp users over time. Their growth was astonishing—enough to make any social media company jealous.

Facebook, the incumbent, knew WhatsApp posed a significant threat to their business. WhatsApp could grow, acquire users, and compete with Facebook; and that was unacceptable.

So, Facebook acquired WhatsApp for a whopping $19 billion.

When Instagram began to grow on its own, Facebook recognized their competitive strength and did the same thing. They solved their future problems with a $1 billion payment.

Facebook no longer worries about competing with either rising star.

Why it matters

Competition is essential to maximizing productivity and consumer surplus in an economy. When competition fades, incumbents abuse their market power to maximize margins at a cost to consumers.

Philippon said it best in The Great Reversal:

The beneficiaries of an open, competitive system often work to close the system and stifle competition once they are established.

Once firms have risen to the top, they actively prevent other firms from challenging their positions. In doing so, they monopolize their field by driving concentration so high consumers have no alternative.

Every startup acquisition by big tech is one less future competitor.

Every startup acquisition by big tech is higher market concentration, less competition, higher prices, lower wages, and less consumer surplus.

Competition is essential to a free, productive, consumer-efficient market.

When lawmakers and regulators look the other way as big tech eliminates its future competition, consumers lose.

They’re forced to pay more for the same goods. They’re forced to interact with the same companies due to lack of alternatives.

And at the same time, incumbents no longer need to innovate.

I love Apple, Google, and Amazon. I wrote this on a MacBook I bought on Amazon, and found sources through Google.

But we must be critical of each strategic move they make.

Sources and References

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.