The platforms have a cheat code
The platforms have a cheat code
What if the foundation of our most vaunted American companies is an invisible tax being shouldered largely by the public?
I recently finished reading Fulfillment: Winning and Losing in One-Click America, by Alec MacGillis. It got me wondering about the business models of some of the most recognizable consumer-facing companies in the world: Amazon, Facebook, Google (Alphabet), and Uber, in particular. These 4 companies, which boast a combined market capitalization of approximately $4.5 trillion, are all platforms, meaning that their value derives in large part from their enormous sizes, their roles as core infrastructure within multi-sided markets, and (most relevantly here) their ability to exact a sort of “tax” on all transactions that flow through them.
Amazon.com’s third-party e-commerce business is a platform: it’s a web site connecting millions of people who want to buy items online with people who sell them. Facebook and Google likewise connect consumers who demand free products with advertisers who are willing to subsidize them in exchange for their attention. Uber, of course, connects people in search of transportation with drivers willing to transport them. Each of these companies collects revenue on the resulting transactions: Amazon.com product sales, Facebook and Google ad impressions, and Uber car rides.
But a platform’s value isn’t necessarily confined to transaction fees, especially when it’s not just a platform. Amazon doesn’t merely facilitate third-party sales: it sells many of its own products, and (despite denying this to Congress) ensures that its products show up more prominently than third-party sellers’ do.
This month an investigation by The Markup found that “knowing only whether a product was an Amazon brand or exclusive could predict in seven out of every 10 cases whether Amazon would place it first in search results.” Another investigation this month by Reuters revealed that “the e-commerce giant ran a systematic campaign of creating knockoff goods and manipulating search results to boost its own product lines in India,” corroborating a Wall Street Journal exposé from last year that came to similar conclusions. (It should be noted that brick-and-mortar retailers have employed similar tactics for years, although Amazon’s market share — depending on how it’s defined, as high as 52% — potentially renders its behavior more concerning.)
This scenario, MacGillis observes, is “reminiscent of the railroad giants in the late nineteenth century, which controlled both the tracks and much of the oil and coal that was being transported on the tracks.” Or in Senator Elizabeth Warren’s even simpler formulation: “You can either be the umpire or a player on the field. But you can’t be both. That’s what Amazon does.”
In a broader, less direct, sense, Amazon, Walmart, and the retail sector at large have also benefited from a more diffuse flavor of corporate exceptionalism: the stagnation of working-class wages thanks to a broad, multi-decade conservative assault on workers’ rights (a movement Amazon has joined enthusiastically), decimating bargaining power and resulting in today’s working class making no more (in real terms) today than they did in the 1970s. A recent analysis by Bloomberg found that “in 68 counties where Amazon has opened one of its largest facilities, average industry compensation slips by more than 6% during the facility’s first two years.”
Perhaps most egregiously, Amazon (as well as McDonald’s, Walmart, and others) employs thousands of workers at wages so low that they still receive food stamps and/or Medicaid, a de facto subsidy of one of the largest corporations in the world, borne by American taxpayers. (This contradicts the cliched portrayal of food stamp recipients as lazy or entitled: a government study of low-wage employers’ workers last year stated that 70% of food stamp recipients work full-time.) And the cherry on top? Cities and states have showered Amazon with over $4 billion in subsidies, creating a double whammy for the American public: our income taxes pay to keep Amazon employees from sliding into abject poverty, while our property taxes cover the company’s warehouses and data centers. In 2017 and 2018, in fact, Amazon didn’t pay any federal income tax at all.
But Amazon isn’t alone. Let’s take a look at (the much smaller) Uber. To its credit, its founders mainstreamed an actual novel concept: easy ride-hailing from a mobile phone. But its business strategy’s execution relied heavily on two factors: 1) barreling into urban markets (often extralegally) where virtually its only competitor was the highly-regulated taxi industry, and 2) classifying its drivers as independent contractors rather than employees, thus exempting them from benefits that would cost Uber more money.
Most American cities strictly limit the available taxi supply via the use of permits (or medallions): this increases the costs to taxi companies and drivers, who need to charge higher rates in order to break even. (In New York, a single taxi medallion once fetched $1.3 million.)
Uber, meanwhile, was able to produce an almost infinite supply of cars because no permit was required to operate them1: virtually all you need to become an Uber driver is a driver’s license and a car. One need not be a defender of the ruinous medallion system2 — nor blame Uber for ruthlessly exploiting it — in order to recognize the inherent unfairness of such a competitive landscape.
Similarly, by declaring its drivers contractors rather than employees, Uber evaded the significant labor costs potentially associated with in-house employment — minimum wage and workers' compensation laws, for example, and also payroll taxes (which fund Social Security and Medicare), unemployment insurance, and holiday pay. Indeed, it is no accident that the term “gig worker” blossomed in the American lexicon almost simultaneously with Uber’s ascent — an opportunistic reinvention of an age-old concept (part-time or contracted employment) shorn of its associated downsides (the possibility of having to pay benefits).
And yet, blessed with these twin advantages and a veritable geyser of venture capital cash, Uber has nevertheless lost enormous sums of money for its entire existence. (It shed $6.77 billion last year alone.) Indeed, its post-IPO incarnation — the first time anything resembling a traditional business model has ever been demanded of it — has revealed the vulnerability of Uber’s strategy, as fares have become much more expensive and users now suffer long wait times. (Uber has also claimed its product reduces traffic and car ownership; neither claim is clearly borne out by available evidence.)
To underline this point, the regulatory milieu that spawned Uber has gifted it the corporate equivalent of being born on third base, and yet it has — repeatedly, and in spectacular fashion — failed to score.3 Moreover, Uber is so reliant on the continued existence of the regulatory inequities it enjoys that it’s spent years tangled in legislative and court battles around the globe to prevent its drivers from being classified as employees and its business from being classified as a taxi company. Even as a disproportionately advantaged rentier enterprise, Uber’s core business is effectively a failure.
Facebook and Google, however, represent the nadir of responsibility evasion: through their ad technology, news feeds, and YouTube, millions if not billions of users have been inundated with disinformation, conspiracies, and propaganda, with the emergence of the anti-vaccine movement and of political disinformation being two of the most prominent examples.
Due to Section 230 of the U.S. Communications Decency Act, Facebook and YouTube — each of which relies on content recommendation and discovery engines — are nevertheless afforded the same liability protection for this content that telephone companies and Internet Service Providers are for the unfiltered data passing through their wires.
Picture The New York Times, but with all the articles stripped out and only a (badly moderated) ad-supported and algorithmically-filtered comments section remaining.4 That’s Facebook and Google. Like the Times, they collect ad revenue for the content they display on their properties. But unlike the Times, they neither produce nor pay for virtually any of it themselves.5
Neither Facebook nor YouTube invented the notion of collecting a broad array of content, hosting it on a web site, and monetizing that content with advertising. That’s been the business model of newspapers since Benjamin Day’s New York Sun. What’s different is the implicit stance that they’re not responsible for anything that shows up there. Facebook and Google are the Internet’s resident toll collectors, taxing the consumption of content while eschewing most responsibility for its quality.
This is not strictly regulatory arbitrage, as the Times, the Washington Post, and others are similarly under no legal content restrictions. But the deliberate positioning of Facebook and YouTube as platforms, rather than publishers, is just a fancy way of obscuring their desire to dump the colossal externalities associated with dangerous content onto the public.
Like Uber, these platforms’ most important innovation was not the underlying technology — if anything, Facebook was a latecomer to social, and Google didn’t build YouTube: it bought it — but perfecting the business model: monetizing third-party content without absorbing most of the underlying costs.
And the negative externalities? Oy, where to begin. You can hardly visit a news site today without osmotically absorbing bits and pieces of the latest Facebook perfidy. Start with the Wall Street Journal’s “Facebook Files” series and go from there. Disseminating disinformation. Facilitating genocide and human trafficking. Traumatizing moderators. Vaporizing competition. As early Facebook investor and now critic Roger McNamee summarized it: “These people are selling fear and outrage. It is not a fluke. It is a business model.”
Google seems to have a better PR team but is no less predatory. Large sections of YouTube have long comprised a sushi roll of anti-science and conspiracy-laden drivel wrapped inside an (increasingly thick) layer of car insurance ads, and the pandemic only exacerbated the problem. A study last year found that “over one-quarter of the most viewed YouTube videos on COVID-19 contained misleading information, reaching millions of viewers worldwide.” Over and over again, research has shown that YouTube’s recommendation engine often leads users to a very dark place:
When his program found a seed video by searching the query “who is Michelle Obama?” and then followed the chain of “up next” suggestions, for example, most of the recommended videos said she “is a man”. More than 80% of the YouTube-recommended videos about the pope detected by his program described the Catholic leader as “evil”, “satanic”, or “the anti-Christ”. There were literally millions of videos uploaded to YouTube to satiate the algorithm’s appetite for content claiming the earth is flat. “On YouTube, fiction is outperforming reality,” Chaslot says.
But Google's problems are not limited to YouTube. A recently unredacted filing by the attorneys general of over a dozen U.S. states in a lawsuit against Google once again makes explicit the gap between the public perception of tech companies as innovation powerhouses and the far grimmer reality:
Google, however, did not accrue its monopoly power through excellence in the marketplace or innovations in its services alone….Rather, to cement its dominance across online display markets, Google has repeatedly and brazenly violated antitrust and consumer protection laws. Its modus operandi is to monopolize and misrepresent. Google uses its powerful position on every side of online display markets to unlawfully exclude competition…
Having reached its monopoly position, Google now uses its immense market power to extract a very high tax of 22 to 42 percent of the ad dollars otherwise flowing to the countless online publishers and content producers such as online newspapers, cooking websites, and blogs who survive by selling advertisements on their websites and apps. These costs invariably are passed on to the advertisers themselves and then to American consumers. The monopoly tax Google imposes on American businesses—advertisers like clothing brands, restaurants, and realtors—is a tax that is ultimately borne by American consumers through higher prices and lower quality on the goods, services, and information those businesses provide. Every American suffers when Google imposes its monopoly pricing on the sale of targeted advertising.
These companies are just four of many examples. Airbnb, which derives value in part by sidestepping hotel zoning laws and suing localities to avoid paying taxes,6 while driving up housing costs for residents7 and diminishing neighbors’ quality of life around the globe, is an additional example I could have examined. WeWork, which for years was a real estate firm playing dress-up as a growth tech startup, is yet another.
The point is not that these companies have not generated real value. Nor is regulation or antitrust enforcement the answer to every ill in the American economy.8 But the companies’ legacy is as much a tale of their hidden costs as their public virtues.
These American behemoths’ almost inconceivable market values, in other words, are not simply the products of technological innovation, but also of a combination of regulatory or legal maneuvering and negative externalities. Their success is in part a consequence of their ability to circumvent rules, act anticompetitively, and offload risk onto society, rather than merely a testament to the quality of their user experiences — which, as documented above, are at turns chaotic, inaccurate, unsafe, fraud-infested, toxic, and veritably overrun with disinformation and lies.
As the U.S. House of Representatives’ antitrust subcommittee noted in its investigative report of Amazon, Apple, Facebook, and Google: “These firms typically run the marketplace while also competing in it — a position that enables them to write one set of rules for others, while they play by another.”
They have managed to cut their costs and boost profitability by rebranding longstanding, legacy business verticals as new and different, thereby dumping the burden of taxes, wages, and other liabilities onto the American public and shielding themselves from costs they should justifiably accrue. In this way they are like the proverbial chemical company flushing industrial waste into a town’s water supply: reaping the benefits of their business while jettisoning costs onto the public.
For these companies, the economic incentive for evading these costs is so overwhelming that the screeching cognitive dissonance required to justify it is nary a problem. Thus we end up with upside-down concepts like “Facebook is not a publisher” even as it hosts and monetizes content, strikes deals with creators, (unevenly) moderates posts, and launches projects with names like the Facebook Journalism Project. Similarly surreal are Uber’s protestations that it is not a taxi company and its drivers are not employees, even though they are quite literally the only people associated with Uber that users ever interact with.
A fuller accounting of Google’s and Facebook’s market dominance should incorporate the monetary value they have captured by shifting the responsibility for fact-checking and policing their users’ voluminous content to journalists, Wikipedia, and society at large. An honest evaluation of Amazon’s e-commerce dominance, similarly, must credit the American taxpayer with footing the bills of its low wages and property tax waivers. And Uber — despite built-in advantages many corporate peers could only dream of — can barely stay afloat now, despite years of venture capital infusions before entering the harsher limelight of the public market.
Opponents of antitrust action allege that regulation will stifle the innovation that produced so much of the value these companies have created. To the contrary, it is the very lack of competent, balanced regulation, legislation, and enforcement that has blinded Americans to the paucity of genius underwriting these companies’ astounding growth. It’s like a balance sheet where all the assets are printed in bold type while all the liabilities are scrawled in invisible ink.
It’s tempting to wonder what these companies would look like, without all of their subsidies and tax breaks and regulatory arbitrage and anticompetitive actions. The answer is unknowable, but the status quo should be sufficient to prove that “the devils we know” are no longer worth the benefit of the doubt relative to the devils we don’t.
This is not strictly true. As Mike Isaac’s Super Pumped: The Battle for Uber makes clear, despite enjoying a huge advantage over the rigid taxi regulatory scheme, Uber nevertheless made breaking local laws and ordinances a key part of its strategy. We’re not even out of the book’s prologue before we read about the transportation commissioner of Portland screaming “Get your fucking company out of our city!” to Uber’s policy chief David Plouffe.
And at least in New York, you’d have to be crazy to be one.
I am not suggesting that Travis Kalanick should have foregone the chance to take on a taxi industry mired in a feudalistic and cost-intensive permit regime. But the fact that such an opportunity existed for Uber in the first place must surely revise our assessment of his genius. As longtime critic Hubert Horan put it, “Narrative construction is perhaps Uber’s greatest competitive strength.”
This would be a substantial improvement over the Times’ current political coverage.
In that sense they’re a bit more like Jayson Blair.
That same article includes an anecdote illustrating that Airbnb is following Uber’s well-worn playbook: rebranding a well-established business category as something else entirely. Airbnb “says it follows local and state laws but considers itself a ‘platform,’ serving merely to connect hosts and visitors, rather than a lodging provider—more akin to Facebook than Marriott.”
An earlier analysis by Friend of the Newsletter Ariel Stulberg for Five Thirty Eight showed less definitive causal ties between Airbnb and increased housing costs.
Just a lot of them.