Jeremy Edberg has some advice: Don't build a business on Amazon's digital turf.
Edberg, a veteran infrastructure architect for Netflix, Reddit, and PayPal, has seen the movie many times: A software startup launches, catering to the millions of companies that use Amazon Web Services, and quickly attracts customers--and then Amazon, with its God's-eye view of its platform, spots it and trots out a cheaper product boasting full AWS integration. Within six months, the startup folds. But, contrary to his own advice, Edberg chose to build his new cloud-management startup, MinOps, on the AWS platform. "My hope is I can diversify faster than they can build the same functionality," he says.
These days, what can founders do but hope? Starting a business now invariably means going through one or more of the biggest tech companies: Amazon, Apple, Facebook, Google. Those giants say they give startups what they crave--instant access to vast markets, efficient ads, cheap and reliable infrastructure.
This isn't a fiction. Tech startups once bought servers; now they rent Amazon's and Google's cloud-computing power. Facebook is the most cost-effective marketing tool in history. Apple's and Google's app stores let developers reach hundreds of millions of customers overnight; Amazon Marketplace does the same for makers of physical products. "You can get wind in the sails for an early-stage idea much faster, and at lower cost, than ever before," says Justin Hendrix, executive director of NYC Media Lab.
The platform players want to see companies take wing, because they impose a tax on everything those companies do. Apple, the world's most profitable company, takes 30 percent of every sale in the App Store; merchants pay Amazon $40 per month or more to sell there--and don't forget those Facebook and Google ads and AWS fees. The tech giants plow those profits into ever more new businesses, where they compete with their own customers.
Like Edberg, more and more entrepreneurs now understand what that means: the leviathans using market power to favor their own offerings. A 2016 investigation by ProPublica found Amazon's search algorithm steers users away from bargains, often to Amazon's white-label offerings, which yield fatter margins. Google saw Yelp building a nice business around restaurant reviews. So it created its own listings and privileged them in searches; Yelp's stock price was halved.
Facebook, Google, Apple, and Amazon "are developing a concentration of power that fosters the premature death of big companies and infanticide for small firms," says Scott Galloway, a professor at NYU's Stern School of Business and author of The Four, a new book about digital monopolies. "A press release with 'Amazon' on it has the power to bring down the value of an entire industry within hours."
Economists like Marshall Steinbaum of the Roosevelt Institute agree. They point at these quasi-monopolies as a cause, if not the main cause, of the recent slowdown in American startup creation. Once confined to old-line sectors like retail, this sluggishness has recently spread, alarmingly, to technology.
Edberg believes taxes and regulations most discourage startup formation. But he recognizes the platforms' power. Their profits permit high six- and even seven-figure compensation packages for engineers; to anyone considering a startup, "that kind of money is hard to walk away from." And the rewards of risk taking are diminishing. "Companies are getting bought earlier and having smaller exits," he says. "The big companies come in and say, 'We can buy you or crush you.' " This influences which startups investors back, and how those startups conceive themselves.
Opportunities to build large businesses are still there, but mainly in the weedy patches between those already in existence, and those patches shrink as the biggest players expand. Instacart, the grocery-delivery business, claimed a key advantage with its exclusive partnership with Whole Foods. Then Amazon launched its own grocery delivery service and acquired Whole Foods. Competition, increasingly, happens only between the giants.
It's been decades since the federal government has seriously policed market concentration. Too bad: Even inconclusive or threatened antitrust actions can create space for new entrants. There's a good chance Google wouldn't exist were it not for the Justice Department's clumsy tilt at Microsoft in the mid-'90s. Dick Reisman, an entrepreneur and investor who worked at Bell System before a federally mandated breakup in the 1980s created the modern telecom industry, sees the need for similar action now. "You have these monolithic platforms. They need to be made more modular"--by, say, splitting Facebook and Instagram, or divorcing Amazon's retail business from its sellers' marketplace.
That's the last thing the leviathans want, of course, so they present themselves as champions of the new entrepreneur. Programs like Microsoft for Startups and Google Launchpad have put hundreds of millions of dollars into accelerators and other resources for new firms. That may be as much for politicians and regulators as for entrepreneurs, but that's not to say the sentiment behind them isn't sincere. Big tech loves small business. Just as long as it stays small.