Two tech companies, two contrasting trajectories. Snap (formerly Snapchat) hit the headlines this week when a post-IPO bidding frenzy saw it soar to a $34 billion valuation.
Uber, meanwhile, saw its reputation and potential valuation plummet after a blog about workplace sexism unleashed a firestorm of criticism, culminating in grovelling promises from the CEO to be a better leader and a better human being.
Yet beneath the surface, there are actually striking similarities between the two firms. Both are enormously valuable. Both are losing money hand over fist. And both manage to reconcile the two because they promise investors untold riches, delivered via monopolising the market.
Let’s take Uber first. Its price advantage over the cab firms, it turns out, doesn’t just come from the fact that its drivers aren’t formal employees or that it escapes much of the traditional regulation (both of which have been and will be the subject of innumerable court cases). It comes from subsidy: overall, Uber’s customers only pay 41 per cent (£) of the cost of their trips. Effectively, its investors are giving us a handout every time we use the service.
The idea, of course, is to gain market share and at some point make a profit – either because of efficiencies of scale, or because of whizzy new technology such as self-driving cars, but more probably through driving enough of its rivals from the marketplace to ratchet up prices again. Indeed, a widely read series of articles by Hubert Horan recently argued that this is third option is the only one that makes any kind of sense – but also that it is doomed to failure.
I’m much more charitable than Horan when it comes to Uber’s worth – it has definitely exposed and exploited inefficiencies in the marketplace, not to mention saved me quite a bit of cash. But he’s right that its ultimate goal is monopoly. Because that’s how the tech marketplace works.
Take Snap, for example. It justifies its sky-high valuation by promising that it will have a monopoly (or very significant share) of an entire generation’s attention span – that generation being those who are actually able to understand what the hell it does, apart from producing terrifying face-swapped images of Jeremy Corbyn.
But in Snap’s case, its main obstacle is another, much larger company which has a very similar goal: Facebook.
Recently, Facebook’s Instagram subsidiary launched an unashamed clone of Snapchat called Stories. The aim was to cut Snap’s growth off at the knees – and it seems to have worked. Talk of Snap as the next Facebook has given way to worried discussions about whether it is in fact the next Twitter – that is to say, a breakthrough firm with millions of customers but no monopoly position, and therefore no profits, rather than advertising-hoovering, attention-devouring leviathan.
I’ve written before on CapX about how the structure of capitalism is increasingly tending towards monopoly, or at least oligopoly. But because of the network effects involved, this tendency is particularly pronounced in tech. Indeed, the more ambitious your plans to disrupt and dominate, the greater the market opportunity, and the more eager the venture capitalists.
For capitalism to best serve the consumer, it needs the level playing field that permits cut-throat, relentless competition. But how to achieve that in markets which increasingly operate on a winner-takes-all basis?
Ben Thompson of Stratechery, one of the most consistently interesting analysts of the digital ecosystem, recently argued that Facebook has become too powerful for anyone’s good, not least given its additional control of WhatsApp and Instagram, and would – in an ideal world – be brought down to size.
For policy-makers and regulators, this is going to be one of the great challenges of the coming years. Snap and Uber may fulfil their founders’ lofty goals, or come crashing down to earth. But the question of how big is too big will continue to vex the would-be trustbusters for many years to come.
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