How the consolidation of tech providers is impacting innovation

When Facebook was hit with the Cambridge Analytica scandal in March of last year, the backlash was swift and brutal. The scandal was unlike anything the social media giant had faced before and prompted many users to delete their accounts and boycott the service. Although as bad as the scandal was, now that we’re about 12 months since the news broke, there is evidence to suggest that the company hasn’t really been substantially impacted in the long run.

While 2018 definitely couldn’t be described as Facebook’s year, it’s monthly active user count continued to grow steadily during the period. To top this off, the company’s latest earnings call was fantastic, posting strong ad revenue growth and healthy regional performances. This obviously indicates the company is back on track, despite initial slowed growth, drops in stock prices, and a lot of bad press.

So, Facebook soldiers on, but the fact that it has done so with such speed is nonetheless interesting. While many platforms would have suffered tremendous, almost irreversible top-line damage as a result of Cambridge Analytica – which saw data from 87 million users stolen and used for malicious political campaigns – Facebook has effectively brushed it off, even bearing a widely publicized dour period.

Big pond, gargantuan fish

Noting Facebook’s resilience, a question arises over whether Facebook is indeed too big to fail and the truth is that it might be, and it isn’t alone. Many of the world’s biggest tech companies are inextricably massive and command so much of their respective markets that it can be hard for others to keep up. The highest-value tech conglomerates in Apple, Amazon, Microsoft, Facebook and Alphabet are worth around $4 trillion combined, and they put huge budgets behind ensuring they stay at the top of the pile, through things like R&D spend and acquisitions.

‘big tech’ also has an incredible capacity to monitor the market through their huge data-streams, ensuring they stay ahead and outcompete companies that edge into their markets. In the same way, they can use their data streams – or enormous market influence – to prioritise their own services or products. Numerous antitrust suits have been filed against the big players as a result, such as when Google was fined €2.4 billion by the EU for giving priority placement to its own shopping service. Although, while these antitrust fines can be effective, an argument could be made that they aren’t enforced enough.

It could also be argued that the very largest don’t even compete against each other all too much. Amazon corners retail, Microsoft delivers commercial and consumer software, Apple sells prestigious consumer hardware, Facebook are the kings of targeted advertising and Google offers search-based advertising. Obviously, there are multiple interweaving competitive lines but their predominant top-line sources of revenue always differ, at least slightly.

The concentration of market forces isn’t only limited to consumer-focused products, with the major powers constantly expanding their B2B offerings as well. An obvious example is the concentration of public cloud providers, with AWS, Microsoft and Google firmly planted at the top of the pile, offering thousands of business platforms, infrastructure and software through their services.  In many regards, options for businesses are becoming more and more refined with each passing year.

Although a case could be made that the format, as it is currently operating, is actually beneficial for the B2B sphere. Consolidation is a natural evolution as industries and markets mature and the big vendors of enterprise technology will always argue that their power and reach prove to be an asset for customers, boosting the quality of product and innovation they can deliver through their massive economies of scale. However, this sentiment may be an overreach, as there are many ways that the concentration of the market could be stifling innovation

Therefore, as market consolidation becomes more prevalent and obvious, the question then becomes; what is the extent of consolidation and how exactly does it impact business, both in terms of the providers of technology and their customers?

Deep levels of consolidation

While we can all relate to the major web platform consolidation by the biggest tech companies, there are levels of concentration that extend beyond this, to the inner machinations of the internet itself.

In its report entitled Consolidation in the Internet Economy, The Internet Society broke down how the consolidation of the big tech meccas are shaping the market. It reports that the major internet platforms are becoming increasingly dominant across infrastructure, services and applications, stifling user choice and control over their online experience, arguing that this could lead to the proliferation of ‘’walled gardens”, or closed platforms and proprietary ecosystems that users struggle to get away from.

The report details wide-scale consolidation of internet organisations and services across internet applications (such as search and social networking), access provision and services infrastructure. While the web application layer might be a little more obvious, the services infrastructure layer paints a picture of market consolidation that perhaps many organisations wouldn’t be aware of.

In an interview with IDG Connect, Internet Society Senior Director of Global Internet Policy, Constance Bommelaer elaborated on the degree to which the internet Itself is becoming refined. She outlined that the market concentration acutely extends to services infrastructure in a few key ways. One of the most notable of which is transit consolidation, or the narrowing of organisations that provide long-haul connection between multiple international networks. Smaller ISPs and networks use transit operators (tier 1 networks), who have access to all other networks on the internet, to connect to the internet. An example of this concentration can be demonstrated through in US-based Level 3 (CenturyLink), who controls nearly 53% of all registered ‘customer’ networks.

In terms of other aspects of consolidation, Bommelaer highlights infrastructure, both to operate services and run applications (which are increasingly run in cloud and edge environments) and delivery of services. On the latter, she says, ‘’Delivery of standard internet services is consolidating in large providers. For several years now, for example, most Simple Mail Transport Protocol (SMTP) traffic has come from just a few mail service providers, who provide that service for a very large percentage of internet users, including businesses.

‘’Similarly, the Domain Name System (DNS) services were historically operated in a highly distributed way. Today, a small number of large providers serve the domains of most commercially-significant domains on the internet, and actual resolution of names (turning the names we click on into numbers that connect between computers) is often provided by a small number of resolvers. The DNS protocols are even changing in a way that reinforces this trend.”

Entrepreneurialism and startups

The Internet Society’s paper also highlighted the effects of consolidation – in all of its regards – on entrepreneurialism and start-up tech companies, in regard to their capacity to compete. They observe that a small number of major vendors and service providers concentrate their power by absorbing potential threats, before those companies have a real chance to disrupt the market. This is a huge concern given that startups have traditionally paved the way to innovation, especially in regard to high-tech startups.

They say there is an out to this situation though, noting that the internet often moves faster than anyone can predict. As a result, the organisation says, ‘’Economic growth and business opportunity will increasingly depend on a dynamic and innovative market, which, in turn, will depend on open, interoperable standards and permissionless innovation.” The Internet Society says the big players may, therefore, compete against unforeseen emerging rivals, even from traditional industries.

research project carried out by the Information Technology & Innovation Foundation seemed to partially support this theory, as they detailed a 47% rise in tech-based startups (firms younger than 10 years) in the US between 2007 – 2016. It also says employment at tech start-ups rose by 20%, accompanying a 20% rise in average wages. However, while these numbers are promising, the research organisation also found that early-stage technology start-ups decreased from 15% of total tech-based firms to 10%. Employment in those early-stagers also decreased quite sharply, from 160,000 to 100,000 workers. Perhaps most worrying was the survival rates of newer companies, with 78% surviving past their first year of business and only 41% surviving through their fifth year.

This paints a picture of a tech startup sphere that is increasingly hard to break into. While perhaps this has always been the case, there is a lot of evidence to suggest that big tech isn’t making it any easier. In The Economist’s take on big tech consolidation, they highlight a ‘Kill-Zone’ where big tech either consume startups or drive them out of the market. They argue that this has made venture capitalists nervous of companies who operate in the internet arena, citing a study by Pitchbook which states the total number of venture capital financings of startups in the United States reduced by 22% from 2012 to 2017.

In its article, The Economist points to many examples of this entrepreneurial instability as caused by the big fish, including a practice where AWS signs on startups as partners and then copies their services. They say one notable instance of this is when the cloud giant copied Elastic’s Elasticsearchdata management product and launched Amazon Elasticsearch Service, causing Elastic to lose sales.

With big tech constantly expanding their products and services – covering everything from online search and advertising to smart software, AI and VR – it’s becoming more and more difficult to find a niche that won’t be targeted by the ‘killzone’. This has led entrepreneurs to craft businesses for sale, rather than for innovation, meaning startups are focusing on more-singular, complimentary projects (rather than a complete platform), so that they can be bought up.

Should we regulate?

With all of that in mind, the question then becomes whether it would be worth introducing regulations to ring in, or indeed break up, the big tech companies. Obviously increased regulation would address some of the issues we have discussed, although governments need to be careful that additional regulation doesn’t serve to stifle innovation instead of promote it.

As an example, the regulation of acquisitions in the US is often allowed on the basis that certain startups are too small to innovate on their own and gain a lot from being picked up by billion-dollar organisations. Although, as we mentioned earlier, this can sometimes be a bad move for smaller firms. An out to this particular situation, as MIT Sloan economist John Van Reenen has mentioned, is to ensure that any acquisition is proven to be beneficial to the startup themselves, perhaps by putting the impetus of proving this on the acquirer, rather than anti-trust bodies.

Another possible avenue is to promote data privacy regulation, which can have knock-on effects for large conglomerate businesses, limiting their capacity to use their wealth of data to prioritise their own services and providing things like data portability for consumers. The EU is leading the way for data privacy regulation through GDPR, but there might be some work to do for other jurisdictions.

Overall, regulation becomes a tricky issue as market concentration does actually have benefits for businesses, as Bommelaer explains.

‘’Large internet companies are increasingly the go-to platforms for innovation and have become useful in lowering the threshold for new innovators to engage in the internet economy,” she says.

‘’For example, social login functions offered by some social media platforms enable new developers to outsource the need for developing complex systems for managing not only membership and login credentials, but also the security and legal requirements related to these.”

Bommelaer says the public cloud is a particularly interesting aspect of market consolidation for businesses, as it actually allows smaller or mid-size organisations to deliver innovation at higher scales than before, vastly promoting their ability to deliver innovation and grow quickly.

‘’Similarly, large cloud service providers like AWS, Microsoft, and Google are increasingly offering a full suite of services, from DNS hosting to CDNs,” she continues.

‘’This move enables new business to scale and take advantage of a service infrastructure that might have previously been reserved to a small set of businesses. These evolutions can significantly strengthen traditional industries and users’ ability to innovate by developing and deploying new services and applications.”

Still, as the big tech giants get larger and their capacity to compete and acquire increases, there must be a tipping point. Common sense regulation, without crippling innovation, is the path forward and regulators must strive for a more even, and perhaps more populated, playing ground. An idea that even Mark Zuckerberg himself has subscribed to.