Enter the kill zone: Is big tech stifling startup innovation?

The modern iteration of capitalism is cannibalistic. The end goal of corporations is not to provide the consumer with abundant alternatives. It’s to dominate. What we end up with is four or five companies that run the world. Major political implications aside, what is this doing to startups? Does it provide ample opportunity for acquisition? Or does it simply devour them before they can find their feet?

If it was startup versus startup, it would have been a fair fight, but startup versus Amazon and it’s game over.

The startup founder who made this despairing statement chose to remain anonymous. Their choice is telling. Amazon has grown so powerful and so intimidating that no one wants to take its name in vain (except for certain socially cynical comedians).

Apple, Google, and arguably Microsoft carry equal sway. Chances are you’re reading this article on an operating system built by one of them. You might’ve arrived from a link posted on Facebook or LinkedIn. And when the page loaded, like many others on the Internet, it connected to one of Amazon’s ubiquitous data centres.

The Big Four (Amazon, Apple, Facebook, and Google) dominate a shocking volume of our daily digital interactions. But they didn’t reach this dominance independently. The current position of these companies is the cumulative result of hundreds of strategic acquisitions. To be exact, in the past 10 years, 431 companies were acquired by the Big Four at a total value of $155.7 billion

Their ascendancies follow a similar pattern. First, they become dominant in their original industry (e-commerce for Amazon, search for Google). Then they grow tentacles, making acquisitions in new sectors to add revenue streams and outflank competitors.

Ten or twenty years ago we looked to startups as a font of future wonders. Today, the energy and momentum shifts to the big guys. Over the ‘Big Four’ moniker, critics might prefer the less affectionate ‘Frightful Five’ (Microsoft constitutes the plus one).

The number of new business launches is at a 30-year low. Some economists, investors, and entrepreneurs point the fingers at Big Tech.

But is this finger-pointing fair? Are startups really the victims? Or can they still thrive within the environment Big Tech has created?

Is Big Tech creating “kill zones” for startups?

Monolithic tech companies acquiring startups is not inherently a bad thing. In many cases, it’s the explicit goal of the startup to get acquired by way of exit.

But it’s arguable that Amazon and its Frightful Five counterparts are not acquiring these companies in good faith. Critics are feeding in from diverse positions. Examples include politicians like Senator Elizabeth Warren, founders and CEOs like Sonos CEO Patrick Spence, and VCs like Albert Wenger. They suggest big corporations are creating calculated “kill zones” to absorb and destroy the competition. This doesn’t just stifle current innovation. It deters would-be innovators from even trying. 

Mergers and acquisitions are cornerstones of building major conglomerates and corporations, whether in Big Tech, Big Media, Big Food, or Big Pharma. But the number of mergers and acquisitions made means little compared to how much of the market these merger monsters vacuum up.

The unspoken end goal of every capitalist organisation is to become a monopoly. You can’t gain infinite capital unless you are always absorbing or eliminating more of the competition. By nature, the whole point of competition is not coexistence, it’s domination. In a capitalist society, we have trouble acknowledging this inconvenient truth.

Google and Facebook monetise by data mining their audiences for advertisers. All they need is to buy more eyeballs – in other words, acquire dominant social channels like YouTube, Whatsapp, Instagram.

Amazon is slightly different. It captures value via the creative destruction caused when physical retail migrates to ecommerce. Their revenue is influenced by behavior change, efficiency gains, and death of old, inefficient retail systems. When they can sell you their spare compute cycles (AWS) while they’re at it, that’s another major efficiency win.

The victims’ graveyard: 3 examples

Danger Inc, creator of the early smartphone Sidekick, was acquired by Microsoft in 2008 for a rumoured USD $500 million. All employees were absorbed into Microsoft teams and set to work on developing a new mobile platform. But after a savaging in the press for lack of features when the platform was released, the original Danger team were dispersed, and the Sidekick service neglected so badly it suffered a 6-day data outage.

Google’s acquisition of Motorola was a “fail[ure] on so many levels it’s hard to quantify the extent of the incompetence that surrounds it”. After acquiring the handset and tablet division of Motorola for $12.5 billion in 2012, Google seemed to forget about it in favour of budding partnerships with Samsung and LG. Google simply continued to release its own smartphones, with the exception of the Moto X, which bombed in the market. After just two years, Google sold Motorola at a massive loss for USD $2.91 billion. On the plus side for Google, the rising threat of Moto’s late 2000’s popularity was neutralised.

Amazon sellers are no safer despite the fact their presence generates revenue for Amazon. Peak Design addressed Amazon’s shameless facsimile of its ‘Everyday Sling’ bags in this cutting and hilarious video, illustrating that Amazon had quite literally cloned the product, stripped the features (and the quality), and listed it at a considerable undercut to its own vendor. Amazon didn’t even bother to change the product name.

Most recently, Aussie company Unlockd is officially suing Google for allegedly “dodg[ing] attempts to resolve” problems that led to Google removing the app from its store, and investing “heavily” in a competitor offering very similar advertising software. Founder Matt Berriman’s $200m startup has now collapsed and one of his investors even laid claim to his house!

De-incentivising independent ventures

Acquiring and destroying are not the only ways Big Tech deters future founders. Due to the comfortable salaries offered by powerful corporations, the appeal for bright minds to leave and set up alone is somewhat dulled.

The Big Four offer security, benefits, pensions, lifestyle perks. Why throw it all away only to risk destruction by previous employers?

Acquisition doesn’t mean advancement

Acquisition is nice for founders. It’s lucrative for investors. And as we know, it’s what’s fuelled the stratospheric success of Big Tech. But is there another group we’re forgetting?

Everyday consumers benefit when their lives are enhanced by transformative products. The reason we have cars and washing machines and refrigerators is because of the freedom historic inventors had to push innovation to the brink.

Now, it’s far better for the balance sheet to flog existing products than pour millions in R&D funds to develop new IP.

90% of AI startups were acquired by big tech firms between 2013-18. But the man who produced this statistic, Cape Analytics’ CEO Ryan Kottenstette, believes that 95% of AI’s potential impact on the global economy has been undercut. When a company is acquired, they are no longer pushed to reach their potential. Their ideas are either spliced and integrated into other offerings, or shelved altogether. 

This is a two pronged attack. It both stifles competing companies, and protects existing product ranges. In order to keep consumers buying current stock, monopolising companies have an impetus to slow down innovation and invention. It’s not just startups that miss out because of this. It’s the consumer too.

Infamous in Silicon Valley circles for being the “don of the PayPal mafia”, VC and PayPal co-founder Peter Theil claims that “the way to build a big company is to never get acquired.” It’s the only surefire way to stay in control of whether your products are launched or abandoned.

These arguments characterise the fears plaguing startup culture today. But a market without mergers, acquisitions, and partnerships between big and little fish is a stagnant and divided market. What if Big Tech isn’t the enemy it’s portrayed to be.

Big Tech provides a central exit strategy for startups.

Acquisition is good news for founders and investors alike. It throws money, intelligence, and resources at budding enterprises and, if successful, can turn millions in revenue into billions. 

We can fairly speculate that without the lure of the acquisition exit, many startups would never have been founded, and an untold number of “next big things” may never have existed. Serial entrepreneurs  wouldn’t have created the next big thing if their previous company wasn’t acquired.

Secured exit strategies also free up investor funds to funnel into the next idea, keeping that investment dollar churning through new industry.

Are kill zones as devastating as the name implies?

There are several key counter arguments to the “kill zone” and “shelf and let die” theories critics are using to badmouth Big Tech.

  1. If kill zones were as broad and common a problem as some commentators claim, venture capitalist investment would not have grown 28% in the past year.
  2. Neutralising threat is not the sole raison d’être of acquisitions
    Companies are often acquired for their workforce as much as their product. The acquirer benefits from the workforce’s unique skills and experience, and ‘aqui-hired’ employees are given tools and resources that boost innovation and productivity rather than quash it. Although quashing undoubtedly happens (see the Google/Picasa fiasco for another example), the fact remains that the Frightful Five can develop and scale technology like no other.
  3. Challenger brands sometimes benefit the founders more than society at large
    They seek to turn oversized profits by turning out their version of things we already have. While some ‘do good’ by doing things more affordably, sustainably, or quickly, most are focusing their budgets and brilliance on existing technologies rather than developing new ones. As consumers, we can all agree: we don’t need yet another home assistant or messaging app or toothbrush. We are already overwhelmed with options. It’s arguable that Big Tech’s absorption of competing companies works to mitigate this tyranny of choice.

Nothing is forever… even Facebook

Those opposing Big Tech tend to speak of it as an immutable force. But there are a few ways giants can fall.

Microsoft has always been the tagalong to the Big Four fraternity. It’s long been Apple’s uncool colleague, with stagnating operating systems and slow-moving product lines. Now it’s slowly losing Windows mindshare to MacOS/Linux. It’s diversified, and seems to be galvanising its product range at long last, but it’ll never relive its mid-00’s heyday.

Google is locked into a business model of advertising that it can’t break out of. Ads are substantially less profitable than they were 20 years ago, and are losing margin every year.

Facebook is facing similar challenges. It depends on advertising, but the appetite for a “paid-for” Facebook product with no adverts is almost non-existent. Facebook is being ceaselessly investigated for data privacy policy and misinformation. Even Forbes has advocated for intervention

Amazon makes most of its money from AWS, and still hasn’t declared a dividend after 25 years. At some point, shareholders are going to come for their returns.

Despite the vast and infinitely complex range of issues plaguing Big Tech, sometimes the reasons they fail are simple and predictable.

  1. They become too myopic in their worldview, fail to notice new competition and shifting consumer preferences, and go the way of Yahoo.
  2. Tech shifts away from IT, IT becomes a more traditional business (similar to cars and appliances), and tech giants become solidified in IT. Meanwhile, tech moves on to make some more giants in newer, more exciting spaces.

Successful tech giants almost always emerge from sea changes in technology. Newer players like Uber and Lyft wouldn’t exist without Apple ushering in smartphones. Netflix expanded exponentially following the move to cloud computing.

The lifecycle for businesses is:

  1. Business starts small and ultra-focused on a market, gains great traction in that market
  2. Business expands and grows out of its niche to expand into other niches
  3. Business acquires other, related businesses
  4. Business grows to the point where it has dominated its industry and acquired most of its competitors
  5. Business can only continue to increase its profit by becoming more efficient, which means specialising in its market and removing flexibility
  6. Business becomes unable to keep up with market changes because flexibility and efficiency are a trade-off and management bonuses depend on efficiency. Business becomes more irrelevant over time as the market moves away from it.

Tech giants are not immune from this. No company is. They either traverse the cycle, or hunker down into a niche they’ll never escape from.

This is one of the most compelling arguments as to why the Frightful Five may not be so frightful. Everything has a sell-by date, even if it’s almost impossible to envision.

Can bureaucracy save us from Big Tech?

US Senator Elizabeth Warren’s stance on the matter is no half-measure. Her Medium article, candidly titled ’it’s time to break up Amazon, Google, and Facebook’, is nothing short of a war cry. Warren writes that they have “bulldozed competition, used our private information for profit, and tilted the playing field against everyone else.”

It’s true that the fear Big Tech has swiftly and quietly instilled is almost gang-like. Many venture capitalists are willing to admit they wouldn’t touch a startup wading into Amazon or Facebook’s territory with a ten foot pole. 

But the truth is that many VCs and entrepreneurs are reluctant to jump on the antitrust bandwagon. They want to get acquired by big firms. As noted before, this was the fate of 90% of AI startups in Silicon Valley throughout the 2010s.

Warren’s legislation proposed to break up Big Tech seeks to:

  1. Require companies with $25 billion+ global revenue to be designated as ‘Platform Utilities’, meaning they do not own the platform or any participants on or of it
  2. Appoint regulators that have the power to reverse ‘anti-competitive’ mergers and acquisitions.

In the UK, a move to make companies prove their acquisitions would be beneficial to startups was considered in 2019. In many countries, measures to give governments more time to review, intervene in, and even reverse mergers and acquisitions have been considered. These measures rarely gain traction due to the considerable increase in government resources they  would require, and the huge uncertainty it would cultivate between acquirer and acquiree (why bother if it could all be undone further down the line?).

The truth is, if acquisitions are banned or over-regulated, companies may instead need to waste vast amounts of time and resources doing their own research, rather than acquiring existing knowledge. This is inefficient for everyone involved, consumers included.

Big Tech and startups must continue to coexist 

Big Tech has been demonised for the loud but relatively infrequent instances where it expressly acquires a company just to neglect, neutralise, or subdue it. But to slam heavy regulation on it with regards to the acquisition process would be to throw the baby out with the bathwater. 

Without startups, and fostering startup ecosystems, innovation is in danger.

Acquisition remains a key motivator for new commerce. Even if getting acquired is a startup’s express goal, they’re still bringing innovation into the commercial ecosystem.

Startups are also providing an alternative for investment capital which would otherwise be funnelled without interruption into corporate behemoths. And that’s not good for anyone…except perhaps Canva.

There are other options. Tech giants have recently realised that partnerships may be “cheaper, sometimes briefer, better targeted, and often more demonstrably successful than a lot of mergers”. It’s an undeniably superior option to have startup and acquirer on more level footing.

Startup founders who have gone through the system are also taking action. A number of new venture funds are being created by entrepreneurs of successful Australian tech companies like AfterPay’s Touch Ventures and Atlassian Ventures, with the express purpose of “fostering the community” and “enhancing the health of our ecosystem”.

Having strong and reliable guidance from your startup’s inception is one of the best lines of defence against the danger of decimation. A carefully selected advisory board can lend valuable and unbiased opinions when it comes to getting circled by corporate sharks. An operational VC can also insulate you with advice, community connections, and strategic consideration of exit strategies from the start.

Please sir, I want some more opportunity: rethinking ‘sophisticated’ investing

Please sir, I want some more opportunity: rethinking ‘sophisticated’ investing

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