Stratechery by Ben Thompson

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To what extent are new companies, particularly those in new spaces, pushed versus pulled into existence? Last week I wrote about how Tesla is a Meme Company:

It turned out, though, that TSLA was itself a meme, one about a car company, but also sustainability, and most of all, about Elon Musk himself. Issuing more stock was not diluting existing shareholders; it was extending the opportunity to propagate the TSLA meme to that many more people, and while Musk’s haters multiplied, so did his fans. The Internet, after all, is about abundance, not scarcity. The end result is that instead of infrastructure leading to a movement, a movement, via the stock market, funded the building out of infrastructure.

Electrification of personal vehicles would have happened at some point; it seems fair to argue that Musk accelerated the timeline significantly. Clubhouse, meanwhile, Silicon Valley’s hottest consumer startup, feels like the opposite case: in retrospect its emergence feels like it was inevitable — if anything, the question is what took so long for audio to follow the same path as text, images, and video.

Step 1: Democratization

The grandaddy of independent publishing on the Internet was the blog: suddenly anyone could publish their thoughts to the entire world! This was representative of the Internet’s most obvious impact on media of all types: democratization.

Distributing text no longer required a printing press, but simply blogging software:

1/86 Distributing images no longer required screen-printing, but simply a website:

Distributing video no longer required a broadcast license, but simply a server:

Distributing audio no longer required a radio tower, but simply an MP3:

Businesses soon sprang up to make this process easier: Blogger for blogging, Flickr for photo-sharing, YouTube for video, and iTunes for podcasting (although, in a quirk of history, Apple never actually provided centralized hosting for podcasts, only a directory). Now you didn’t even need to have your own website or any particular expertise: simply pick a username and password and you were a publisher.

Step 2: Aggregation

Making anyone into a publisher resulted in an explosion of content; this shifted value to entities able to help consumers find what they were interested in. In text the big winner was Google, which indexed pre-existing publications, independent blogs, and everything in-between. The big winner in photos, meanwhile, ended up being Instagram: users “came for the tool and stayed for the network”, as Chris Dixon memorably put it:

2/86 Instagram’s initial hook was the innovative photo filters. At the time some other apps like Hipstamatic had filters but you had to pay for them. Instagram also made it easy to share your photos on other networks like Facebook and Twitter. But you could also share on Instagram’s network, which of course became the preferred way to use Instagram over time.

The Internet creates a far tighter feedback loop between content creation and consumption than analog media; Instagram leveraged this loop to become the dominant photo network. YouTube accomplished a similar feat, although the relative difficulty in creating video meant that the ratio of viewers to creators was much more extreme than in the case of photo-sharing. That, though, is exactly what made YouTube so dominant: creators knew that that was where all of their would-be viewers were.

Spotify is trying to do something similar for audio, particularly podcasts. I wrote in a Daily Update after the streaming service signed Joe Rogan to an exclusive contract:

Spotify, meanwhile, has its eyes on an absolute maxima — a podcast industry that monetizes at a rate befitting its share of attention — but as I have explained, that will only be possible with a Facebook-like model that dynamically matches advertisers and listeners in real-time, as they are streaming a podcast…This, by extension, means that Spotify needs a much larger share of the market, so that they can start generating advertising payouts that are better than the current stunted model, thus convincing podcasters to give up their current ads and use Spotify’s platform to monetize instead.

In this view the motivation for the Rogan deal is obvious: Spotify doesn’t just want to capture new listeners, it wants to actively take them from Apple and other podcast players. And, if it can take a sufficient number, the company surely believes it can create a superior monetization mechanism such that the rest of the podcast creator market shifts to Spotify out of self interest.

Capture enough of the audience and the creators will follow.

Step 3: Transformation

Still, even with the explosion of content resulting from democratizing publishing, what was actually published was roughly analogous to what might have been published in the pre-Internet world. A blog post was just an article; an Instagram post was just a photo; a YouTube video was just a TV episode; a podcast was just radio show. The final step was transformation: creating something entirely new that was simply not possible previously.

Start with text: Twitter is not discrete articles but a stream of thoughts, 280 characters long. It was the stream that was uniquely enabled by the Internet: there is no real world analogy to being able to ingest the thoughts of hundreds or thousands of people from all over the world in real-time, and to have the diet be different for every person.

3/86 What is interesting is the effect this transformation had on blogging; Twitter all but killed it, for three reasons:

First, Twitter was even more accessible than blogging ever was. Just type out your thoughts, no matter how half-formed they may be, and hit tweet. Second, because blogging was so distributed and imperfectly aggregated it was hard to build an audience; Twitter, on the other hand, combined creation and consumption like any other social network, which dramatically increased the reward and motivation for posting your thoughts there instead of on your blog. Third, Twitter, thanks to the way it combined a wide variety of creators in an easily- consumable stream, was just a lot more interesting than most blogs; this completed a virtuous cycle, as more consumers led to more creators which led to more consumers.

Instagram, meanwhile, had always had that transformational feed, which carried the service to its first 500 million users; it was Stories, though, that re-ignited growth:

Stories — which Instagram audaciously copied from Snapchat — combined the customized nature of the feed with the ephemerality inherent in digital’s abundance; the problem with posting what you had for lunch was not that it was boring, but that no one wanted it to stick around forever.

4/86 This too appears to have reduced usage of what came before; while Facebook has never disclosed Stories usage relative to feed viewing, that chart above is from this August 2018 Article about Facebook’s Story Problem — and Opportunity, where I observed:

While more people may use Instagram because of Stories, some significant number of people view Stories instead of the Instagram News Feed, or both in place of the Facebook News Feed. In the long run that is fine by Facebook — better to have users on your properties than not — but the very same user not viewing the News Feed, particularly the Facebook News Feed, may simply not be as valuable, at least for now.

The opportunity came from the fact that dramatically increasing inventory would surely lead to significant growth in the long run, which is exactly what has happened. It didn’t matter that Stories were not nearly as well-composed as pictures in the Instagram feed; in fact, that made them even more valuable, because Stories were easier to both produce and consume.

TikTok is doing the same thing with video; in this case the transformative technology is its algorithm. I explained in The TikTok War:

All of this explains what makes TikTok such a breakthrough product. First, humans like video. Second, TikTok’s video creation tools were far more accessible and inspiring for non- professional videographers. The crucial missing piece, though, is that TikTok isn’t really a social network…

ByteDance’s 2016 launch of Douyin — the Chinese version of TikTok — revealed another, even more important benefit to relying purely on the algorithm: by expanding the library of available video from those made by your network to any video made by anyone on the service, Douyin/TikTok leverages the sheer scale of user-generated content to generate far more compelling content than professionals could ever generate, and relies on its algorithms to ensure that users are only seeing the cream of the crop.

YouTube has invested heavily in its own algorithm to keep you on the site, but its level of immersion is still gated by its history of serving discrete videos from individual creators; TikTok, on the other hand, drops you into a stream of videos that quickly blur together into a haze of engagement and virality.

5/86 There is nothing like it in the real world.

Podcasts and Blogs

What is striking about audio is how stunted its development is relative to other mediums. Yes, podcasts are popular, but the infrastructure and business model surrounding podcasts is stuck somewhere in the mid-2000’s, a point I made in 2019 in Spotify’s Podcast Aggregation Play:

The current state of podcast advertising is a situation not so different from the early web: how many people remember this?

These ads were elaborate affiliate marketing schemes; you really could get a free iPod if you signed up for several credit cards, a Netflix account, subscription video courses, you get the idea. What all of these marketers had in common was an anticipation that new customers would have large lifetime values, justifying large payouts to whatever dodgy companies managed to sign them up.

The parallels to podcasting should be obvious: why is Squarespace on seemingly every podcast? Because customers paying monthly for a website have huge lifetime values. Sure, they may only set up the website once, but they are likely to maintain it for a very long time, particularly if they grabbed a “free” domain along the way. This makes the hassle of coordinating ad reads and sponsorship codes across a plethora of podcasts worth the trouble; it’s the same story with other prominent podcast sponsors like ZipRecruiter or SimpliSafe.

The problem is that the affiliated marketing for large lifetime-value purchases segment is not a particularly large one

One of the takeaways of that piece was that monetization was holding podcasts back, and that Spotify appeared to be positioning itself to expand the podcast advertising market via centralization. Looking back, though, I should have realized that but for a few exceptions,

6/86 advertising never ended up working out for blogs; the premise behind 2015’s Blogging’s Bright Future was that subscriptions made far more sense as a business model:

Forgive me if this article read a bit too much like an advertisement for Stratechery; the honest truth is my fervent belief in the individual blog not only as a product but also as a business is what led to my founding this site, not the other way around. And, after this past weekend’s “blogging-is-dead” overdose, I almost feel compelled to note that my conclusion — and experience — is the exact opposite of Klein’s and all the others’: I believe that Sullivan’s The Daily Dish will in the long run be remembered not as the last of a dying breed but as the pioneer of a new, sustainable journalism that strikes an essential balance to the corporate-backed advertising-based “scale” businesses that Klein (and the afore-linked Smith) is pursuing.

Interestingly enough, of the three authors cited in that paragraph, both Ezra Klein — formerly of Vox — and Ben Smith — formerly of BuzzFeed — are now at the New York Times, which is thriving with a subscription model. Sullivan, meanwhile, is at Substack — itself modeled after Stratechery — where within a month of launch he had reached a $500,000 run rate.

When you think about the Twitter-driven shake-out of blogging this evolution makes sense: Twitter captured the long-tail of blogs, in the process dramatically expanding the market for publishing text, but that by definition meant that the blogs that remained popular had readers that would jump through hoops — or at least click a link — to consume their content. It makes sense that the most sustainable way for those bloggers to pay the bills was by directly charging their readers, who already had demonstrated an above-average interest in their content.

My personal bet is that podcasts will follow a similar path. Podcasts, even more than blogs, require a commitment on the part of the listener, but that commitment is rewarded by a connection to the podcast host that feels even more authentic; host-read podcast advertising leverages this authenticity, but for most medium-sized podcasts charging listeners directly will make more sense in the long run.

Implicit in this prediction, though, is that podcasts actually fade in relative importance and popularity to an alternative that doesn’t simply further democratize audio publishing, but also transforms it. Enter Clubhouse.

Clubhouse’s Opening

The most obvious difference between Clubhouse and podcasts is how much dramatically easier it is to both create a conversation and to listen to one. This step change is very much inline with the shift from blogging to Twitter, from website publishing to Instagram, or from YouTube to TikTok.

7/86 Secondly, like those successful networks, Clubhouse centralizes creation and consumption into a tight feedback loop. In fact, conversation consumers can, by raising their hand and being recognized by the moderator, become creators in a matter of seconds.

This capability is enabled by the “only on the Internet” feature that makes Clubhouse transformational: the fact that it is live. In many mediums this feature would be fatal: one isn’t always free to watch a live video, and believe me, it is not very exciting to watch me type. However, the fact that audio can be consumed while you are doing something else allows the immediacy and vibrancy of live conversation to shine.

Being live also feeds back into the first quality: Clubhouse is far better suited than podcasts to discuss events as they are happening, or immediately afterwards. For example, both Clubhouse and Locker Room, its sports-focused competitor, have become go-to destinations for sports reaction conversations, both during and after games; it’s only a matter of time before secondary market of play-by-play announcers develops, and not only for sports: anything that is happening can be narrated and discussed.

Make no mistake, most of these conversations will be terrible. That, though, is the case for all user-generated content. The key for Clubhouse will be in honing its algorithms so that every time a listener opens the app they are presented with a conversation that is interesting to them. This is the other area where podcasts miss the mark: it is amazing to have so much choice, but all too often that choice is paralyzing; sometimes — a lot of

8/86 times! — users just want to scroll their Twitter feed instead of reading a long blog post, or click through Stories or swipe TikToks, and Clubhouse is poised to provide the same mindless escapism for background audio.

COVID, China, and Controversy

Much of what I’ve written is perhaps obvious; to me that lends credence to the idea that Clubhouse is onto something substantial. To that end, though, why now?

One reason is hardware:

The fact that Clubhouse makes it so easy to drop in and out of conversation is matched by how easy AirPods make it to drop into and out of audio-listening mode.

An even more important reason, though, is probably COVID. Clubhouse launched last April in the midst of a worldwide lockdown, and despite its very rough state it provided a place for people to socialize when there were few other options. This was likely crucial in helping Clubhouse achieve its initial breakthrough. At the same time, just because COVID helped Clubhouse get off the ground does not mean its end will herald the end of the audio service, any more than improved iPhone cameras heralded the end of Instagram simply because its filters were no longer necessary; the question is if the crisis was sufficient to bootstrap the network.

I suspect so. For one there is the brazenness with which Clubhouse is leveraging the iPhone’s address book to build out its network; getting on the app requires an invitation, or signing up for the waiting list and hoping someone in your address book is already on the service, which lets you “jump the line”. This incentivizes both existing and prospective members to allow Clubhouse to ingest their contacts and get their friends on as quickly as possible.

Secondly, any suggestion that Clubhouse is limited to Silicon Valley is very much off the mark. I almost fell out of my chair while playing board games when my not-at-all- technical sister-in-law started listening to a Clubhouse while we were playing board games over the weekend, and by all accounts Taiwan is one of a whole host of markets where the app has taken off. Locker Room, as noted, appears to be the app of choice for NBA Twitter, but I suspect that is a function of Clubhouse being both gated and iPhone- only; I expect both to be rectified sooner-rather-than-later. And, of course, there is the fact the service has been banned in China.

9/86 Unfortunately, that is not the only China angle when it comes to Clubhouse; the service is powered by Agora, a Shanghai-based company. The Stanford Internet Observatory investigated:

The Stanford Internet Observatory has confirmed that Agora, a Shanghai-based provider of real-time engagement software, supplies back-end infrastructure to the Clubhouse App. This relationship had previously been widely suspected but not publicly confirmed. Further, SIO has determined that a user’s unique Clubhouse ID number and chatroom ID are transmitted in plaintext, and Agora would likely have access to users’ raw audio, potentially providing access to the Chinese government. In at least one instance, SIO observed room metadata being relayed to servers we believe to be hosted in the PRC, and audio to servers managed by Chinese entities and distributed around the world via Anycast. It is also likely possible to connect Clubhouse IDs with user profiles.

That certainly puts Clubhouse’s aggressive contact collection in a more sinister light; it also very much fits the stereotype of a new social network scrambling to capture the market first, and worrying about potential downsides later. Given the importance of network effects, I’m not surprised, but the choice of a Chinese infrastructure provider in particular is disappointing for a service launching in 2020.

The perhaps sad reality, though, is that most users probably won’t care: the payoff from uploading contacts is clear, and even if you don’t, you still need a phone number to register, which means that Clubhouse is probably reconstructing your contact list from your friends who did. The company has been far more aggressive in implementing blocking and user-reported content violations mechanism; I suspect this reflects the reality that content controversies are, in the current environment, more damaging than China connections, despite the fact that the former are an inescapable reality of user- generated content, while the latter is a choice.

Whither Facebook?

The one social network that I have barely mentioned in this Article is the social network that the FTC has sued for being a monopoly. That sentence, on close examination, certainly seems to raise some rather obvious questions about the strength of the FTC’s case.

Still, the discussion of all of these different networks really does highlight how Facebook is unique: while Twitter, Instagram, YouTube, and TikTok are all first and foremost about the medium, and only then the network, Facebook is about the network first. That is how the service has evolved from text to images to video and, I wouldn’t be surprised, to audio. This also explains why Facebook managed the shift to mobile so well; for these other networks, meanwhile, it was mobile that was the foundation for their transformative breakthroughs.

That is why I would actually give Facebook’s upcoming Clubhouse competitor a better chance than Twitter’s already-launched offering. Facebook takes innovations developed in different apps for interest-based networks and adds them to its relationship-based

10/86 network; at the same time, this also means that Facebook is never going to be a real competitor for Clubhouse, which seems more likely to recreate Twitter’s interest-based network than Twitter is likely to recreate the vibrancy of Clubhouse.

The other way that Facebook looms large in the social networking discussion is monetization: it is obvious that there is an endless human appetite for social networks, but advertisers would much rather focus on Facebook’s integrated suite of properties. It is not clear that Clubhouse will even pursue advertising, though; the company has announced its intention to help creators monetize via mechanisms like tipping. This has already been proven out on platforms like Twitch in the West, and is a massive success in China (there is a reason, I should note, why the best available live streaming technology was offered by a Chinese company). It’s a smart move for Clubhouse to move in this direction early, both as a means of locking in creators, and also going where Facebook is less likely to follow.

One potential loser, meanwhile, is Spotify; the company has bet heavily on podcasts, which could be similar to betting on blogs in 2007. Still, the fact the company’s most important means of monetization is subscriptions may be its saving grace; it may turn out that Spotify is the obvious home for highly produced content, available in a more consumer-friendly bundle than the a la carte pricing that followed from blogging’s decentralized nature.

For now I don’t expect Clubhouse to be too concerned about the competition; the company said on its website when it reportedly became a unicorn:

We’ve grown faster than expected over the past few months, causing too many people to see red error messages when our servers are struggling. A large portion of the new funding round will go to technology and infrastructure to scale the Clubhouse experience for everyone, so that it’s always fast and performant, regardless of how many people are joining.

That is, obviously, the best sort of problem to have, and one that evinces product-market fit (the only thing missing is a fail whale); the fact it all seems so obvious is simply because we have seen this story before.

Paul Krugman, back in 1998, was pretty sure he had this Internet thing figured out:

The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law” — which states that the number of potential connections in a network is proportional to the square of the number of participants — becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

It is obviously easy to dunk on this statement, but back in 2015, I came, ever so slightly, to Krugman’s defense; my argument was that the reason he was wrong was not because he overrated user-generated content, but rather because he underrated the effectiveness of Aggregators giving people what they wanted:

11/86 Still, this outcome depends on Facebook driving ever-more engagement, and I’m not convinced that more “content posted by the friends [I] care about” is the best path to success. Everyone loves to mock Paul Krugman’s 1998 contention about the limited economic impact of the Internet…[but] it’s worth considering…just how much users value what their friends have to say versus what professional media organizations produce.

Again, as I noted above, Facebook made the 2013 decision to increase the value of newsworthy links for a reason, and in the time since, BuzzFeed in particular has proven that there is a consistent and repeatable way to not only reach a large number of people but to compel them to share content as well. Was Krugman wrong because he didn’t appreciate the relative worth people put on what folks in their network wanted to say, or because he didn’t appreciate that people in their network may not have much to say but a wealth of information to share?

I was definitely more right than Krugman — easy to say about an article written in 2015 versus 1998, of course — but the truth is that I too missed the boat, both narrowly in the case of Facebook, and broadly in the case of the Internet.

Mistake One: Focusing on Demand

In that article where I quoted Krugman I added:

I suspect that Zuckerberg for one subscribes to the first idea: that people find what others say inherently valuable, and that it is the access to that information that makes Facebook indispensable. Conveniently, this fits with his mission for the company. For my part, though, I’m not so sure. It’s just as possible that Facebook is compelling for the content it surfaces, regardless of who surfaces it. And, if the latter is the case, then Facebook’s engagement moat is less its network effects than it is that for almost a billion users Facebook is their most essential digital habit: their door to the Internet.

That phrase, “Facebook is compelling for the content it surfaces, regardless of who surfaces it”, is oh-so-close to describing TikTok; the error is that the latter is compelling for the content it surfaces, regardless of who creates it. I noted in a Daily Update last year:

What I got right [in that 2015 Article] is that your social network doesn’t generate enough compelling content, but, like Facebook, I assumed that the alternative was professional content makers. The key to TikTok, as I explained yesterday, is that it is not a social network at all; the better analogy is YouTube, and if you think of TikTok as being a mobile-first YouTube, the strategic opening is obvious.

To put it another way, I was too focused on demand — the key to Aggregation Theory — and didn’t think deeply enough about the evolution of supply. User-generated content didn’t have to be simply picture of pets and political rants from people in one’s network; it could be the foundation of a new kind of network, where the payoff from Metcalfe’s Law is not the number of connections available to any one node, but rather the number of inputs into a customized feed.

Mistake Two: Misunderstanding Supply

12/86 The second mistake is much more fundamental, because it touches on what makes the Internet so profound. From The Internet and the Third Estate:

What makes the Internet different from the printing press? Usually when I have written about this topic I have focused on marginal costs: books and newspapers may have been a lot cheaper to produce than handwritten manuscripts, but they are still not-zero. What is published on the Internet, meanwhile, can reach anyone anywhere, drastically increasing supply and placing a premium on discovery; this shifted economic power from publications to Aggregators.

Just as important, though, particularly in terms of the impact on society, is the drastic reduction in fixed costs. Not only can existing publishers reach anyone, anyone can become a publisher. Moreover, they don’t even need a publication: social media gives everyone the means to broadcast to the entire world. Read again Zuckerberg’s description of the Fifth Estate:

People having the power to express themselves at scale is a new kind of force in the world — a Fifth Estate alongside the other power structures of society. People no longer have to rely on traditional gatekeepers in politics or media to make their voices heard, and that has important consequences.

It is difficult to overstate how much of an understatement that is. I just recounted how the printing press effectively overthrew the First Estate, leading to the establishment of nation- states and the creation and empowerment of a new nobility. The implication of overthrowing the Second Estate, via the empowerment of commoners, is almost too radical to imagine.

Who, for example, imagined this?

13/86 There have been a thousand stories about what the GameStop saga has been about: a genuine belief in GameStop, a planned-out short squeeze, populist anger against Wall Street, boredom and quarantine, greed, hedge fund pile-ons, you name it there is an article arguing it. I suspect that most everyone is right, much as the proverbial blind men feeling an elephant are all accurate in their descriptions, even though they are completely different. What seems clear is that the elephant is the Internet.

This is hardly a profound observation. It has been clear for many years that the Internet made it possible for new communities to form, sometimes with astonishing speed. The problem, as Zeynep Tufekci explained in Twitter and Tear Gas, is that the ease of network formation made these communities more fragile, particularly in the face of determined opposition:

The ability to use digital tools to rapidly amass large numbers of protesters with a common goal empowers movements. Once this large group is formed, however, it struggles because it has sidestepped some of the traditional tasks of organizing. Besides taking care of tasks, the drudgery of traditional organizing helps create collective decision-making capabilities, sometimes through formal and informal leadership structures, and builds a collective capacities among movement participants through shared experience and tribulation. The expressive, often humorous style of networked protests attracts many participants and thrives both online and offline, but movements falter in the long term unless they create the capacity to navigate the inevitable challenges.

Tufekci contrasts many modern protest movements with the U.S. Civil Rights movement:

What gets lost in popular accounts of the civil rights movement is the meticulous and lengthy organizing work sustained over a long period that was essential for every protest action. The movement’s success required myriad tactical shifts to survive repression and take advantage of opportunities created as the political landscape changed during the decade.

In Tufekci’s telling, the March on Washington was the culmination of years of institution building, in stark contrast to more sudden uprisings like Occupy Wall Street:

In the networked era, a large, organized march or protest should not be seen as the chief outcome of previous capacity building by a movement; rather, it should be looked at as the initial moment of the movement’s bursting onto the scene, but only the first stage in a potentially long journey. The civil rights movement may have reached a peak in the March on Washington in 1963, but the Occupy movement arguably began with the occupation of Zuccotti Park in 2011.

It’s interesting to reflect on the Occupy movement in light of the Gamestop episode two weeks ago; on one hand, you could squint and draw a line from Zuccotti Park to /r/WallStreetBets, but the only thread that actually exists is expressions of anger, at least from some number of Redditors, with Wall Street and its role in the 2008 financial crisis

14/86 and the recession that followed. There was certainly no organizational building in the meantime that culminated in taking on the shorts (and, unsurprisingly, enriching others on Wall Street along the way).

What actually happened — to the extent anything meaningful happened at all — is that instead of storming the barricades of Wall Street i.e. living in a tent two blocks away from a building long since removed from actual trading, /r/WallStreetBets used the system against itself. They didn’t protest short sellers; they took the other side of the bet.

The Meme Stock

Who, though, is “they”? Sure, there was /u/DeepFuckingValue, who according to a profile in the Wall Street Journal started buying GameStop stock in 2019, and making YouTube videos to promote his comeback thesis last summer. There was also /u/Jeffamazon, who made the case on Reddit that GameStop was primed for a short squeeze last fall. There were all of those folks who wanted to get back at Wall Street, and those that simply wanted to make a buck. There was Twitter, and CNBC, and there were hedge funds themselves.

This is why everyone has a story about what happened with GameStop, and why they are all true. The 2019 story was correct, but so was the summer 2020 story, and the fall 2020 story, and the January 2021 story. None of those stories, though, existed in isolation: they built on the stories that came before, duplicating and mutating them along the way. This is my second mistake: it turns out the Internet isn’t a cheap printing press; it’s a photocopier, albeit one that is prone to distorting every nth copy.

Go back to the time before the printing press: while a limited number of texts were laboriously preserved by monks copying by hand, the vast majority of information transfer was verbal; this left room for information to evolve over time, but that evolution and its impact was limited by just how long it took to spread. The printing press, on the other hand, by necessity froze information so that it could be captured and conveyed.

This is obviously a gross simplification, but it is a simplification that was reflected in civilization in Europe in particular: local evolution and low conveyance of knowledge with overarching truths aligns to a world of city-states governed by the Catholic Church; printing books, meanwhile, gives an economic impetus to both unifying languages and a new kind of gatekeeper, aligning to a world of nation-states governed by the nobility.

The Internet, meanwhile, isn’t just about demand — my first mistake — nor is it just about supply — my second mistake. It’s about both happening at the same time, and feeding off of each other. It turns out that the literal meaning of “going viral” was, in fact, more accurate than its initial meaning of having an article or image or video spread far-and- wide. An actual virus mutates as it spreads, much as how over time the initial article or image or video that goes viral becomes nearly unrecognizable; it is now a meme.

This is why, in the end, the best way to describe what happened to Gamestop is that it was a meme: its meaning was anything, and everything, evolving like oral traditions of old, but doing so at the speed of light. The real world impact, though, was very real, at least for

15/86 those that made and/or lost money on Wall Street. That’s the thing with memes: on their own they are fleeting; like a virus, they primarily have an impact if they infiltrate and take over infrastructure that already exists.

The Meme President

In 2016 the Washington Post documented how 4chan reacted to Donald Trump being elected president:

4chan’s /pol/ boards have, for much of the 2016 campaign, felt like an alternate reality, one where a Donald Trump presidency was not only possible but inevitable. At some point Tuesday evening, the board’s Trump-loving, racist memers began to realize that they were actually right. “I’m f—— trembling out of excitement brahs,” one 4channer wrote Tuesday night, adding a very excited Pepe the Frog drawing. “We actually elected a meme as president.”

Trump, with his calls for protectionism and opposition to immigration, was compared throughout the campaign to previous presidential candidates like Ross Perot and Pat Buchanan; the reason why Trump was successful, though, was because he managed to infiltrate and take over infrastructure — the Republican Party — that already existed.

I wrote about this process in 2016 in The Voters Decide; it turned out that Party power was rooted in the power of the media over the spread of information. Once the media lost its gatekeeper status, however, the parties lost their mechanisms of control:

16/86 There is no one dominant force when it comes to the dispersal of political information, and that includes the parties described in the previous section. Remember, in a Facebook world, information suppliers are modularized and commoditized as most people get their news from their feed. This has two implications:

All news sources are competing on an equal footing; those controlled or bought by a party are not inherently privileged The likelihood any particular message will “break out” is based not on who is propagating said message but on how many users are receptive to hearing it. The power has shifted from the supply side to the demand side

This is a big problem for the parties as described in The Party Decides. Remember, in Noel and company’s description party actors care more about their policy preferences than they do voter preferences, but in an aggregated world it is voters aka users who decide which issues get traction and which don’t. And, by extension, the most successful politicians in an aggregated world are not those who serve the party but rather those who tell voters what they most want to hear.

But what did Republican voters want? There were and have been any number of theories put forth, but I suspect the “truth” is similar to GameStop: all of the theories are true. After all, primary voters were electing a meme, and that meme, having infiltrated and taken over infrastructure that already existed, took over the Presidency.

Not that this is exclusively a right wing phenomenon; Portuguese politician and author Bruno Maçães wrote in History Has Begun in a chapter about the emergence of socialism in America:

17/86 Like all quests, the Green New Deal is set in a kind of dreamland, which allows its authors to increase the dramatic elements of struggle and conflict, but at the obvious cost of divorcing themselves from social and historical reality. The detailed consideration of technological and economic forces, for example, is ignored. The causal nexus between problem and solution appears fanciful. Since the authors of the Green New Deal have invented the story, they alone know the logic of events. There are perplexing elements in this logic. Why, for example, would one want to rebuild every building in America in order to increase energy efficiency when we are getting all our energy from zero-emission sources anyway? But a dream world follows different rules from those we know from the real one, which only increases its powers of attraction…

In an interview for the podcast Pod Save America in August 2019, Ocasio-Cortez explained the foundations of her political philosophy: “We have to become master storytellers. Everyone in public service needs to be a master storyteller. My advice is to make arguments with your five senses and not five facts. Use facts as supporting evidence, but we need to show we are having the same human experience. You have to tell the story of me, us, and now. The America we had even under Obama is gone. That is the nature of time. We have to tell the story of the crossroads.”

Millennial socialism sees history as a struggle to control the memes of production.

In Maçães’s telling, this is not a weakness, but a strength; that Joe Biden could simultaneously embrace the Green New Deal on his campaign website while insisting he didn’t support it in a debate is due to the fact that a meme can be whatever you want it to be.

The Meme Master

Last Monday, in an appearance on Clubhouse, Elon Musk was asked about memes:

It is safe to say that you might be the master of the memes, and in fact you had a quote that “Who controls the memes controls the universe.” Can you just explain what you meant by that?

EM: It’s a play on words from Dune, “Who controls the spice controls the universe”, and if memes are spice then it’s memes. I mean there’s a little bit of truth to it in that what is it that influences the zeitgeist? How do things become interesting to people? Memes are actually kind of a complex form of communication. Like a picture says a thousand words, and maybe a meme says ten thousand words. It’s a complex picture with a bunch of meaning in it and it can be aspirationally funny. I don’t know, I love memes, I think they can be very insightful, and you know throughout history, symbolism in general has powerfully affected people.

Musk’s point about the relevant power of memes to pictures makes perfect sense; what is notable is that the unit of measurement — words — are so clearly insufficient for the reasons I just documented. The power of memes is not simply the amount of information they convey, but the malleability with which they convey it. They have shades of

18/86 Heisenberg’s uncertainty principle, in that the very meaning of a meme is altered based on where it is encountered, and from whom. It’s meaning can be anything, and everything.

That, though, is why mastering memes is so powerful. Wired described quantum computing like this:

Instead of bits, quantum computers use qubits. Rather than just being on or off, qubits can also be in what’s called ‘superposition’ — where they’re both on and off at the same time, or somewhere on a spectrum between the two.

Take a coin. If you flip it, it can either be heads or tails. But if you spin it — it’s got a chance of landing on heads, and a chance of landing on tails. Until you measure it, by stopping the coin, it can be either. Superposition is like a spinning coin, and it’s one of the things that makes quantum computers so powerful. A qubit allows for uncertainty.

That sounds a lot like how I have described memes, which means to master memes is to stop the coin on your terms, and there is no better example of what this means than Tesla. I wrote one Weekly Article about Tesla, 2016’s It’s a Tesla, and I think it holds up pretty well. This is the key paragraph:

The real payoff of Musk’s “Master Plan” is the fact that Tesla means something: yes, it stands for sustainability and caring for the environment, but more important is that Tesla also means amazing performance and Silicon Valley cool. To be sure, Tesla’s focus on the high end has helped them move down the cost curve, but it was Musk’s insistence on making “An electric car without compromises” that ultimately led to 276,000 people reserving a Model 3, many without even seeing the car: after all, it’s a Tesla.

Later in that article I compared Tesla to Apple, its only rival as far as brand is concerned:

To that end, the significance of electric to Tesla is that the radical rethinking of a car made possible by a new drivetrain gave Tesla the opportunity to make the best car: there was a clean slate. More than that, Tesla’s lack of car-making experience was actually an advantage: the company’s mission, internal incentives, and bottom line were all dependent on getting electric right.

Again the iPhone is a useful comparison: people contend that Microsoft lost mobile to Apple, but the reality is that smartphones required a radical rethinking of the general purpose computer: there was a clean slate. More than that, Microsoft was fundamentally handicapped by the fact Windows was so successful on PCs: the company could never align their mission, incentives, and bottom line like Apple could.

This comparison works as far as it goes, but it doesn’t tell the entire story: after all, Apple’s brand was derived from decades building products, which had made it the most profitable company in the world. Tesla, meanwhile, always seemed to be weeks from going bankrupt, at least until it issued ever more stock, strengthening the conviction of Tesla skeptics and shorts.

19/86 That, though, was the crazy thing: you would think that issuing stock would lead to Tesla’s stock price slumping; after all, existing shares were being diluted. Time after time, though, Tesla announcements about stock issuances would lead to the stock going up. It didn’t make any sense, at least if you thought about the stock as representing a company.

It turned out, though, that TSLA was itself a meme, one about a car company, but also sustainability, and most of all, about Elon Musk himself. Issuing more stock was not diluting existing shareholders; it was extending the opportunity to propagate the TSLA meme to that many more people, and while Musk’s haters multiplied, so did his fans. The Internet, after all, is about abundance, not scarcity. The end result is that instead of infrastructure leading to a movement, a movement, via the stock market, funded the building out of infrastructure.

Memes and the Future

This is not, to be very clear, analysis about Tesla the business. The reason I only ever wrote one Article about Tesla and a handful of Daily Updates is because I was confused about the divorce between the company’s real world fortunes and its stock price. That confusion — like the weirdness about a company focused on sustainability buying Bitcoin — still exists!

Now, though, I realize that this confusion stems from making the same mistake I did in that old analysis of Facebook: I was looking to the real world as a guide to understanding the Internet, when it was in fact inevitable that the Internet would, over time, come to impact the real world. Some of that impact will be fleeting, like many of the protests Tufekci documented; some will have short term effects, particularly in places, like Wall Street, that easily translate sentiment into prices. The biggest impact, at least for the next few years, will likely come from memes capturing existing infrastructure, like Trump did the Republican party, and Ocasio-Cortez, to a lesser extent, the Democratic party. The most intriguing people, though, both for the potential upside and the potential downside, are those that leverage memes to build something new.

I wrote a follow-up to this article in this Daily Update.

It’s the refunds that blow my mind.

You may be surprised to know that, despite the fact I live in Taiwan, I have an Amazon Prime account. It turns out that Amazon ships to Taiwan, which is particularly useful if you need something rather obscure and you’re not quite sure where to buy it locally:

20/86 Amazon doesn’t simply make buying thing easy from the other side of the world, they make dealing with shipping and customs trivial; they do it all, and refund me if they over- estimated the cost. It’s so easy that it is easy to forget how much work went into making this possible. Moreover, the company isn’t standing still:

The only thing more surprising than this new benefit that arrived completely out of the blue is that there is a part of me that wasn’t surprised; for customers Amazon just keeps getting better, and why not add free shipping to Taiwan? Indeed, I expect the minimum price to decrease over time, which is my way of explaining why so many stories about Amazon — including, I guess, this one — start with the fact that relentless.com redirects to Amazon.com.

21/86 What is clear, though, is that any attempt to understand the relentlessness of the company redirects to their founder, Jeff Bezos, who announced plans to step down as CEO after leading the company for twenty-seven years. He is arguably the greatest CEO in tech history, in large part because he created three massive businesses, all of which generate enormous consumer surplus and enjoy impregnable moats: Amazon.com, AWS, and the Amazon platform (this is a grab-all term for the Amazon Marketplace and Fulfillment offerings; it is lumped in with Amazon.com in the company’s reporting). These three businesses are the result of Bezos’ rare combination of strategic thinking, boldness, and drive, and the real world manifestations of Amazon’s three most important tactics: leverage the Internet, win with scale, and being your first best — but not only — customer.

Amazon.com and Leveraging the Internet

While the mythology of founders centers around a tortured genius solving a problem for themselves and only then discovering product-market fit, Bezos started with the solution and then looked for a problem. That solution, broadly considered was the Internet, and more specifically “the everything store”, a concept that crystallized in discussions Bezos had with David Shaw, the founder of the eponymous hedge fund where he worked. The problem was how to start, and Bezos settled on books; he explained in a speech at Lake Forest College in 1998:

22/86 In the spring of 94 web usage was growing at 2300% a year. You have to keep in mind human beings aren’t good at understanding exponential growth; it’s just not something we see in our everyday life. But things don’t grow this fast outside of Petri dishes. It just doesn’t happen. When I saw this, I said, okay, what’s a business plan that might make sense in the context of that growth. I made a list of 20 different products that you might be able to sell online. I was looking for the first best product, and I chose books for lots of different reasons, but one primary reason. And that is that there are more items in the book space than there are items in any other category by far. There are over 3 million different books worldwide in all languages. The number two product category in that regard is music, and there are about 300,000 active music CDs. And when you have this huge catalog of products, you can build something online that you just can’t build any other way. The largest physical bookstores, the largest superstores, and these are huge stores, often converted from bowling alleys and movie theaters, can only carry about 175,000 titles. There are only a few that large. In our online catalog, we’re able to list over two and a half million different titles and give people access to those titles.

Being able to do something online that you can’t do in any other way is important. It’s all about the fundamental tenet of building any business, which is creating a value proposition for the customer, and online, especially three years ago, but even today and for the next several years, the value proposition that you have to build for customers is incredibly large. That’s because the web is a pain to use today! We’ve all experienced the modem hangups and the browsers crash — there are all sorts of inconveniences: websites are slow, modem speeds are slow. So if you’re going to get people to use a website in today’s environment, you have to offer them overwhelming compensation for this primitive infant technology. And I would claim that that compensation has to be so strong that it’s basically the same as saying, you can only do things online today that simply can’t be done any other way. And that’s why this huge number of products looked like a winning combination online. There’s no other way to have a two-and-a-half-million-title bookstore. You can’t do it in a physical store, but you also can’t do it in a print catalog. If you were to print the M’s on a card catalog, it would be the size of more than 40 New York city phone books.

What is so impressive about this formulation — in which, humorously, Bezos dramatically understated the Internet’s growth rate of 230000%, not 2300% (exponents are hard!) — is the way in which Bezos grasped both the opportunities and the pitfalls the Internet presented to a new business, and took them to their logical conclusions. This sort of strategic thinking, in which Bezos didn’t simply understand a particular point of business but also its implications both now and in the future, was how Bezos transformed Amazon into a true tech company.

AWS and Tech Economics

That Amazon was even considered a tech company, at least for its first decade, was in many respects an accident of timing: there simply weren’t very many online businesses when Bezos got started, so anyone with a website was a tech company. The truth, though, is that Amazon was very much a retailer, with a bunch of managers it recruited from Walmart, and, after the dot-com bubble burst, under tremendous pressure to raise prices in the pursuit of profitability.

23/86 The turning point came in two parts. The first was a meeting Bezos had with Costco founder Jim Sinegal in 2001; from Brad Stone’s The Everything Store:

Sinegal explained the Costco model to Bezos: it was all about customer loyalty…”The membership fee is a onetime pain, but it’s reinforced every time customers walk in and see forty-seven-inch televisions that are two hundred dollars less than anyplace else,” Sinegal said. “It reinforces the value of the concept. Customers know they will find really cheap stuff at Costco.” Costco’s low prices generated heavy sales volume, and the company then used its significant size to demand the best possible deals from suppliers and raise its per- unit gross profit dollars.

Bezos immediately cut prices, but Sinegal’s core insight only truly crystallized later that year at an offsite with (soon-to-be-published) Good to Great author Jim Collins:

Drawing on Collins’s concept of a flywheel, or self-reinforcing loop, Bezos and his lieutenants sketched their own virtuous cycle, which they believed powered their business. It went something like this: Lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party seller to the site. That allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website. This greater efficiency then enabled it to lower prices further. Feed any part of this flywheel, they reasoned, and it should accelerate the loop.

Thus was the famous Bezos napkin diagram born:

This insight is what transformed Amazon from a retailer that leveraged the Internet to a tech company masquerading as a retailer. What is fascinating about this transition, though, is that AWS was still several years down the road; Amazon still looked like a

24/86 retailer! The difference is that just as Bezos had started with a solution (the Internet) looking for a problem (books), in this case Bezos started with tech economics and applied them to retail.

The first tech CEO to truly grasp how tech economics were different from most other businesses was Bob Noyce (the future Intel founder) at Fairchild Semiconductor. From Michael Malone in The Intel Trinity:

In the spring of 1965…Noyce got up before a major industry conference and in one fell swoop destroyed the entire pricing structure of the electronics industry. Noyce may have had trouble deciding between conflicting claims of his own subordinates, but when it came to technology and competitors, he was one of the most ferocious risk takers in high-tech history. And this was one of his first great moves. The audience at the conference audibly gasped when Noyce announced that Fairchild would henceforth price all of its major integrated circuit products at one dollar. This was not only a fraction of the standard industry price for these chips, but it was also less than it cost Fairchild to make them.

The reason this was possible is that the true cost of integrated circuits came from the R&D costs to design them, and capital costs to manufacture them; the actual materials cost was practically zero. This meant that the best route to profitability was to make it up in volume. This equation is even more powerful in software, which has only R&D costs, and zero material costs. This overall concept, that tech is governed by a world of zero marginal costs, is what makes tech economics fundamentally different from most businesses.

Bezos, though, had one big problem: Amazon had to actually pay for the products it sold! To effectively pursue a tech economics strategy, i.e. bet everything on volume in an attempt to gain leverage on huge fixed costs, was exceptionally risky in an arena with inescapable marginal costs. Bezos, though, prioritized boldness; he wrote in his famous 1997 Letter to Shareholders that he would attach to every subsequent letter:

We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.

This was the exact approach Bezos took to the initial launch of AWS; from The Everything Store:

Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term. Willem van Biljon…proposed pricing EC2 instances at fifteen cents an hour, a rate that he believed would allow the company to break even on the service. In an S Team meeting before EC2 launched, Bezos unilaterally revised that to ten cents. “You realize you could lose money on that for a long time,” van Viljon told him. “Great,” Bezos said.

A decade later Amazon would finally break out AWS in its reporting and it was an absolute juggernaut; I called it The AWS IPO:

25/86 This is why Amazon’s latest earnings were such a big deal: for the first time the company broke out AWS into its own line item, revealing not just its revenue (which could be teased out previously) but also its profitability. And, to many people’s surprise, and despite all the price cuts, AWS is very profitable: $265 million in profit on $1.57 billion in sales last quarter alone, for an impressive (for Amazon!) 17% net margin.

Fast forward to Q4 2020, where AWS just reported $3.6 billion in profit on $12.7 billion in revenue; perhaps more tellingly in terms of Amazon’s transformation into a tech company, it is Andy Jassy, the longtime head of AWS, who is succeeding Bezos (yet still, reflecting Amazon’s business-centric roots, Jassy is an MBA, not an engineer).

Amazon’s Platform and the First Best Customer

AWS was not, as urban legend has it, borne out of the desire to utilize holiday capacity; after all, it is not as if Amazon kicked off AWS customers every Christmas! In fact, it took years for Amazon.com to fully run on AWS. AWS, though, was created to solve the internal problems that Amazon.com presented: how to create new customer experiences without constantly waiting for the infrastructure team to set up dedicated capacity.

The solution was primitives: instead of building monolithic applications, Amazon’s infrastructure team should build basic compute offerings — like the EC2 instances above — so that their developers could make anything they wanted to. And then, having solved the problem for itself, Amazon could solve it for everyone. From The Amazon Tax:

26/86 The “primitives” model modularized Amazon’s infrastructure, effectively transforming raw data center components into storage, computing, databases, etc. which could be used on an ad-hoc basis not only by Amazon’s internal teams but also outside developers:

This AWS layer in the middle has several key characteristics:

AWS has massive fixed costs but benefits tremendously from economies of scale. The cost to build AWS was justified because the first and best customer is Amazon’s e-commerce business. AWS’s focus on “primitives” meant it could be sold as-is to developers beyond Amazon, increasing the returns to scale and, by extension, deepening AWS’ moat.

This last point was a win-win: developers would have access to enterprise-level computing resources with zero up-front investment; Amazon, meanwhile, would get that much more scale for a set of products for which they would be the first and best customer.

As I noted in that article, this exact same approach increasingly applied to the e- commerce side of the business:

27/86 Prime is a super experience with superior prices and superior selection, and it too feeds into a scale play. The result is a business that looks like this:

That is, of course, the same structure as AWS — and it shares similar characteristics:

E-commerce distribution has massive fixed costs but benefits tremendously from economies of scale. The cost to build-out Amazon’s fulfillment centers was justified because the first and best customer is Amazon’s e-commerce business. That last bullet point may seem odd, but in fact 40% of Amazon’s sales (on a unit basis) are sold by 3rd-party merchants; most of these merchants leverage Fulfilled-by- Amazon, which means their goods are stored in Amazon’s fulfillment centers and covered by Prime. This increases the return to scale for Amazon’s fulfillment centers, increases the value of Prime, and deepens Amazon’s moat.

Over the last five years Amazon’s investment in fulfillment has ballooned into a multitude of new distribution centers, sortation centers, an Air Hub for Amazon’s growing fleet of airplanes, trucking, and a massive delivery operation that largely bypasses UPS and Fedex (while leveraging USPS for far-flung deliveries). At the same time the number of products sold by third-party merchants is now over 50% on a unit basis, and last quarter third- party seller services — where Amazon charges a merchant to stock and ship their goods — accounted for $27.3 billion in revenue.

Relentlessness and the Real World

28/86 This transformation in one respect brings the Bezos story full circle: the vision was an “Everything Store” — something that could only exist on the Internet — and while books were the best place to begin, they were only that — a beginning. Thanks in large part to Amazon’s platform the company has achieved Bezos’s vision.

What is somewhat ironic, though, is that while the Internet is unquestionably a critical component of what makes Amazon Amazon, what makes the company so valuable and seemingly impregnable is the way it has integrated backwards into the world of atoms. Real moats are built with real dollars, and Bezos has been relentless in pushing the company to continually invest in solving problems with real world costs, from delivery trucks to data centers and everything in-between. This application of tech economics to the real world is what sets Bezos apart.

The world, particularly the United States, has been a massive beneficiary, especially in 2020: when people were stuck at home, what was the company they depended on more than any other to deliver supplies? When companies had to go remote overnight, what was the infrastructure that made that possible? When time needed to be filled with entertainment, games, or video calls, where did those services run? The answer in all cases was Amazon, and the companies that rose up to compete with it. That is one heck of a crowning achievement for a career that changed the industry and the world.

Andreessen Horowitz is going direct. From the a16z website, natch:

People want to learn about the future. If Software really is Eating the World, there needs to be a place that is dedicated to explaining and tracking it. So we are doing just that: we are building a new and separate media property about the future that makes sense of technology, innovation, and where things are going — and now, we’re expanding and opening up our platform to do this on a much bigger scale. We want to be the go-to place for understanding and building the future, for anyone who is building, making, or curious about tech.

Journalists, needless to say, were not amused; this tweet from the Washington Post technology columnist Geoffrey A. Fowler was representative:

29/86 For the record, I doubt that journalists have much to worry about in terms of a16z monopolizing the market; Andreessen Horowitz, under the guidance of former Wired editor Sonal Chokshi, has built out an entire podcast network that has excelled by doing pretty much the same thing promised with this initiative: explaining and tracking technology and how it might impact the future. Given the fact the podcast launched in 2014, a year after Stratechery, I for one can attest that the venture firm’s efforts have not drowned out “more independent views.”

Still, I get the concern. Andreessen Horowitz, at the end of the day, succeeds or fails on the basis of its investment returns. It is unreasonable to expect the company to cast a truly critical eye towards new technologies or companies given how significant its conflicts of interest are. At the same time, this also explains why Fowler’s tweet isn’t quite right: the tech industry, from the smallest startup, to the loudest venture capitalist, to the largest behemoth, has no problem when it comes to the motivation necessary to “grow and improve its products”. Competition will quite quickly kill the startup, the returns, or the long-term competitive position of any entity that ignores market forces.

Just look at journalism.

Traditional Journalism’s Insulation

There was a fascinating exchange between Nilay Patel, the editor-in-chief of The Verge, and Marques Brownlee, the brilliant YouTuber behind the MKBHD tech review channel, on the most recent episode of Patel’s podcast Decoder:

30/86 Nilay Patel: This kind of gets into one thing that I personally was very happy to see on your channel. You made an entire video about your ethics policy and what you will and won’t do with advertisers. Just to draw the stark contrast, I have almost nothing to do with the revenue of The Verge. I’m a very traditional journalist in that mold. Like, I know who our sales team is and sometimes they parade me out in front of executives to seem fancy. But I don’t know what our rates are. I’m very insulated from sales. It’s your inbox, it’s your deals, you’re setting the rates. How do you balance that tension, because it’s a very YouTube- specific tension in one way, but I think we’re seeing it across the entire kind of creator ecosystem?

Marques Brownlee: The way you phrase it is interesting. I think our rates for an ad in a video are pretty fluent. But it’s a balancing act, because you don’t want to overdo it or pick the wrong thing or not consider some part of this that should be considered. You want to make more, so that you can pay for that camera car.

But the other end of that seesaw is a channel that does way too many ads…I never put three mid-rolls in a video. It’s zero or maybe one. That applies to the ads that we build in and make ourselves, too. If it’s a bad product, it’s not worth doing it at all, even if we would’ve made a ton of money. If it’s a bad integration or if it’s a bad company to work with, I have to say no, because it just doesn’t fit. So that fit is often more important than the math of the per-minute or per-project basis.

I agree with Brownlee that the way the question was phrased is “interesting”; from a certain perspective there is an insinuation of small-scale corruption, or at the very least, the markers of something less important than “journalism”. After all, journalists don’t know how their businesses work, and they are proud of it!

31/86 To be fair, I really don’t think that Patel meant anything quite so damning; he was simply stating what any “traditional journalist” thinks; no less an authority than Joseph Pulitzer wrote in The School of Journalism about his vision for Columbia Journalism School:

32/86 Not to teach typesetting, not to explain the methods of business management, not to reproduce with trivial variations the course of a commercial college. This is not university work. It needs no endowment. It is the idea of work for the community, not commerce, not for one’s self, but primarily for the public, that needs to be taught. The School of Journalism is to be, in my conception, not only not commercial, but anti-commercial. It is to exalt principle, knowledge, culture, at the expense of business if need be. It is to set up ideals, to keep the counting-room in its proper place, and to make the soul of the editor the soul of the paper…

Here is the problem, though: traditional journalism, at least in the 20th century, was predicated on geographic monopolies that bundled editorial and advertising. There was no need to know how the business worked, because, as Warren Buffett noted in a 1991 letter to shareholders, newspapers weren’t even businesses, but franchises:

An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company’s ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage.

In contrast, “a business” earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management.

Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely. Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can’t expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that’s available. The result is that competition has intensified, markets have fragmented, and the media industry has lost some — though far from all — of its franchise strength.

Note again the date: 1991. That was when Buffett perceived that media properties were losing their status as franchises and becoming merely businesses, which is to say that the rationale for journalists not caring about how the money was made was disappearing before the World Wide Web even existed.

The Web dramatically accelerated the trends of increased supply — infinite supply, in fact — while sites like Craigslist destroyed the classifieds business that was newspaper’s biggest moneymaker. Even mentioning Craigslist, though, anthropomorphizes what was a secular outcome of the Internet: that fact you could make a site for anything accessible by anyone — and searchable, to boot — meant that of course newspapers were going to lose

33/86 the classifieds business (and the display advertising business after that). They only had it because newspapers had been a franchise, and now they were a business, and a struggling one at that.

Someone like Brownlee, on the other hand, has been focused on building a business from video one. Sure, he is the star of his videos, but he is also the CEO of his company; of course he makes business deals, because it is business deals that make the content production possible. This isn’t a YouTube-specific tension: it’s the marker of any modern media business.

Australia’s Media Bargaining Code

The problem with not understanding that not knowing or caring about how the business worked was a luxury afforded by media’s franchise status, is that it lays the groundwork for other, more pernicious untruths. Look no further than Australia, and its proposed media bargaining code; here is what Fowler’s Washington Post had to say about it:

Google on Friday warned Australian lawmakers it would stop offering its search engine in the country if they went ahead with a proposed law that would force the Internet giant to pay news organizations for showing their stories in its search results. The threat is the latest and most intense in a long-running battle that has pitted Australian lawmakers and news organizations against U.S.-based tech giants Google and Facebook. For years, news organizations in Australia have argued they should be paid when Internet companies aggregate news stories on their websites. Google and Facebook say their sites help people find news, and the resulting traffic to news websites is valuable on its own…

The rise of Google and Facebook has massively disrupted the news business all over the world. The steady advertising revenue newspapers relied on for decades has almost entirely gone online, and news organizations have struggled for years to adjust to the new reality, with many going out of business or severely downsizing. The proposed law is written to apply to all “digital platforms,” but Facebook and Google are specifically mentioned in the text and have been at the center of the debate.

This is what happens when you don’t understand how your own business works: you create a myth wherein Google and Facebook decimated the news business, when in reality they came along years after the business — already not a franchise — had been decimated by the Internet. That Google and Facebook became hugely profitable by virtue of helping users make sense of infinite content — Aggregators focus on discovery, not distribution — meant that their responsibility for the state of news, to the extent it exists, is exactly what they say it is: directing huge amounts of traffic to publisher websites.

The Australian Competition & Consumer Commission’s Digital Platforms Inquiry, which undergirds the proposed media bargaining code, does, to its credit, have a somewhat more realistic view of what happened to publishers:

34/86 For many news media businesses, the expanded reach and the reduced production costs offered by digital platforms have come at a significant price. For traditional print (now print/online) media businesses in particular, the rise of the digital platforms has marked a continuation of the fall in advertising revenue that began with the loss of classified advertising revenue in the early days of the internet. Without this advertising revenue, many print/online news media businesses have struggled to survive and have reduced their provision of news and journalism. New digital-only publications have not replaced what has been lost and many news media businesses are still searching for a viable business model for the provision of journalism online.

This at least gets the timeline right; the problem is that phrase “marked a continuation of the fall” is treated as “caused a continuation of the fall” in the rest of the report, and the bill that followed. The Explanatory Memorandum for the bill states:

The ACCC found in its Digital Platform Inquiry (July 2019) that there is a bargaining power imbalance between digital platforms and news media businesses so that news media businesses are not able to negotiate for a share of the revenue generated by the digital platforms and to which the news content created by the news media businesses contributes. Government intervention is necessary because of the public benefit provided by the production and dissemination of news, and the importance of a strong independent media in a well-functioning democracy.

This idea, that news media businesses contribute to Google and Facebook’s revenues and have a claim to it, is rooted in the same mindset that undergird the separation of editorial and business: faith that money for news is a fact, and thus of no concern to journalism, at least until it disappeared. Then the industry looked around, saw who was making money, and in effect declared that money to be theirs.

The memorandum continues:

This Bill establishes a mandatory code of conduct to help support the sustainability of the Australian news media sector by addressing bargaining power imbalances between digital platforms and Australian news businesses…

The memorandum uses this hypothetical to explain what a bargaining power imbalance is:

35/86 The Daily Chronicle (DC) is a registered news business that receives a benefit from referrals to its website from Digiplat, a designated digital platform service that holds a significant bargaining power imbalance in its commercial relationships with Australian news businesses including DC. When assessing both parties’ final offers, the panel considers how the benefit that DC receives from Digiplat is affected by this bargaining power imbalance derived from Digiplat’s status as an ‘unavoidable trading partner’ for Australian news businesses.

To do this, the arbitrator considers arguments in the final offers about the size of the benefit that would likely be provided by Digiplat to DC when compared to a hypothetical scenario where there is an absence of any bargaining power imbalance.

The hypothetical scenario the panel decides is appropriate in this circumstance is one in which audiences may reach DC through other means (such as users directly visiting DC’s website or accessing it through other news aggregators) and where DC and other Australian news businesses are not reliant on Digiplat to reach those audiences.

This is also what happens when you base a law on a myth; you create hypotheticals that, if taken seriously, would not change anything about the current situation. The fact of the matter is that every person in Australia — indeed, nearly every person in the world — “may reach DC through other means (such as users directly visiting DC’s website or accessing it through other news aggregators)”; Google and Facebook don’t decide what websites users visit, users do. That they choose not to “directly visit[] DC’s website or access[] it through other news aggregators” is the result of publishers losing in the market with more choice and less lock-in than any other in history. Which, again, is the real problem: businesses built on being the only choice don’t do well when choice suddenly appears.

To that end, when the Australian government references “bargaining power imbalances”, what they mean is that publishers need Google and Facebook much more than Google and Facebook need the publishers. Publishers could, if they wanted to, de-list themselves from Google’s index; if their content were as valuable as they claim, there is absolutely nothing stopping readers from seeking them out. It’s the fact they won’t that is the real problem, which is why the bill also prevents Google and Facebook from simply declining to list sites that are demanding payment.

The New York Times’ Brilliance

I am being pretty hard on publishers here, but the truth is that news is a very tough business on the Internet. The reason why readers don’t miss any one news source, should it disappear, is that news, the moment it is reported, immediately loses all economic value as it is reproduced and distributed for free, instantly. This was always true, of course; journalists just didn’t realize that people were paying for paper, newsprint, and delivery trucks, not their reporting, and that advertisers were paying for the people. Not that they cared about how the money was made, per tradition.

36/86 The publication that has figured this out better than anyone is the New York Times; that is why the newspaper, to its immense credit, has been clear about the importance of aligning its editorial approach with its business goals. From 2017’s 2020 Report:

We are, in the simplest terms, a subscription-first business. Our focus on subscribers sets us apart in crucial ways from many other media organizations. We are not trying to maximize clicks and sell low-margin advertising against them. We are not trying to win a pageviews arms race. We believe that the more sound business strategy for The Times is to provide journalism so strong that several million people around the world are willing to pay for it. Of course, this strategy is also deeply in tune with our longtime values. Our incentives point us toward journalistic excellence…

Our journalism must change to match, and anticipate, the habits, needs and desires of our readers, present and future. We need a report that even more people consider an indispensable destination, worthy of their time every day and of their subscription dollars.

The way in which the New York Times has covered the Australian media bargaining code is a great example of how this approach has paid off; this article, published around the same time as the afore-linked Washington Post one, is far better reported: unlike most of American media, which has framed this dispute as being about paying for news, the New York Times acknowledges that Google and Facebook pay for news elsewhere, and are instead objecting to the specific ways the Australian code is implemented.

It is the description of those objections, though, that reveal the downside; note this section about algorithms, which, I would note, were not even mentioned by the Washington Post:

37/86 One potentially groundbreaking element of the proposed legislation involves the secret sauce of Facebook, Google and subsidiaries like YouTube: the algorithms that determine what people see when they search or scroll through the platforms. Early drafts of the bill would have required that tech companies give their news media partners 28 days’ notice before making any changes that would affect how users interact with their content.

Google and Facebook said that would be impossible because their algorithms are always changing in ways that can be difficult to measure for a subset like news, so in the latest draft, lawmakers limited the scope.

If the bill passes in one form or another, which seems likely, the digital platforms will have to give the media 14 days’ notice of deliberate algorithm changes that significantly affect their businesses. Even that, some critics argue, is not enough for Big Tech.

“I think Google and Facebook are seriously worried that other countries will join in Australia’s effort,” said Johan Lidberg, a professor of media at Monash University in Melbourne. “This could eventually cause substantial revenue losses globally and serious loss of control, exemplified by the algorithm issue.”

But, he added, using threats to bully lawmakers will not do them any good.

“Google’s overreaction perfectly illustrates why the code is needed,” he said, “and beyond that, the dire need for all governments, across the globe, to join in efforts in reining in and limiting the power of these companies that is completely out of hand.”

That is how the article ends, and the point of view — delivered through a quote, of course — could not be clearer. Google and Facebook are a menace, and need to be reined in, and their objections are proof of their guilt. Never mind the fact that there are millions of sites spending untold amounts of money trying to game the companies’ algorithms, and that revealing changes in advance would be unworkable, unfair, and fraught with unintended consequences. The article is “match[ing] and anticipat[ing] the habits, needs, and desires” of the New York Times readers, who, as I noted in Never-ending Niches, assume that everything tech does is bad.

NYT & a16z

At the same time, as I wrote in that Article, I don’t begrudge the New York Times their approach; in fact, I quite admire it:

38/86 I wrote in a piece called In Defense of the New York Times, after the company wrote an exposé about Amazon’s working conditions:

The fact of the matter is that the New York Times almost certainly got various details of the Amazon story wrong. The mistake most critics made, though, was in assuming that any publication ever got everything completely correct. Baquet’s insistence that good journalism starts a debate may seem like a cop-out, but it’s actually a far healthier approach than the old assumption that any one publication or writer or editor was ever in a position to know “All the News That’s Fit to Print.”

I’d go further: I think we as a society are in a far stronger place when it comes to knowing the truth than we have ever been previously, and that is thanks to the Internet…the New York Times doesn’t have the truth, but then again, neither do I, and neither does Amazon. Amazon, though, along with the other platforms that, as described by Aggregation Theory, are increasingly coming to dominate the consumer experience, are increasingly powerful, even more powerful than governments. It is a great relief that the same Internet that makes said companies so powerful is architected such that challenges to that power can never be fully repressed, and I for one hope that the New York Times realizes its goal of actually making sustainable revenue in the process of doing said challenging.

Indeed they have, and I see the ongoing criticism of tech as a feature, not a bug.

To put it another way, what the New York Times has become is not so different from what Andreessen Horowitz is proposing to build. Margit Wennmachers said in that introductory post that “Our lens is rational optimism about technology and the future”; as a long time subscriber of the New York Times, I think it is fair to call their lens rational skepticism about technology and its effects. What is notable about both is that their lenses are perfectly aligned with their business models (and, I would note, both claim to be motivated to change the world).

Again, this is a good thing. While I am open to the argument that governments ought to tax Aggregators and fund news — this is what Australia’s code is in practice, and I would be much less harsh about it if it admitted as such — I think that a news organization like the New York Times thriving on its own is much better (and I have faith that readers will adapt).

After all, it is not as if the alternative to business incentives is unimpeachable objectivity. Go back to Pulitzer: the man was an unabashed political activist; the entire reason he sold the St. Louis Post-Dispatch was because his managing editor shot the law partner of the candidate Pulitzer was opposing dead (the law partner had entered the newsroom armed after the managing editor had called him a coward). Pulitzer took over the New York World and his energetic campaigning was credited with Grover Cleveland being elected president. This is the way newspapers operated when readers paid the bills, and while an advertising business model encouraged a veneer of objectivity, those days are long gone. Publishing is back to the future, even if awareness of that reality is not evenly distributed.

39/86 One of the first Articles on Stratechery, written on the occasion of Intel appointing a new CEO, was, in retrospect, overly optimistic. Just look at the title:

The misplaced optimism is twofold: first there is the fact that eight years later Intel has again appointed a new CEO (Pat Gelsinger), not to replace the one I was writing about (Brian Krzanich), but rather his successor (Bob Swan). Clearly the opportunity was not seized. What is more concerning is that the question is no longer about seizing an opportunity but about survival, and it is the United States that has the most to lose.

Problem One: Mobile

The second reason why that 2013 headline was overly optimistic is that by that point Intel was already in major trouble. The company — contrary to its claims — was too focused on speed and too dismissive of power management to even be in the running for the iPhone CPU, and despite years of trying, couldn’t break into Android either.

The damage this did to the company went deeper than foregone profits; over the last two decades the cost of building ever smaller and more efficient processors has sky-rocketed into the billions of dollars. That means that companies investing in new node sizes must generate commensurately more revenue to pay off their investment. One excellent source of increased revenue for the industry has been billions of smartphones sold over the last decade; Intel, though, hasn’t seen any of that revenue, even as PC sales have flatlined for years.

What has kept the company prospering — when it comes to the level of capital investment necessary to build next-generation fabs, you are either prospering or going bankrupt — has been the explosion in mobile’s counterpart: cloud computing.

Problem Two: Server Success

It wasn’t that long ago that Intel was a disruptor; whereas the server space was originally dominated by integrated companies like Sun, with prices to match, the explosion in PC sales meant that Intel was rapidly improving performance even as it reduced price, particularly relative to performance. Sure, PCs didn’t match the reliability of integrated servers, but around the turn of the century Google realized that the scale and complexity entailed in offering its service meant that building a truly reliable stack was impossible; the solution was to build with the assumption of failure, which in turn made it possible to build its data centers on (relatively) cheap x86 processors.

40/86 Over the following two decades Google’s approach was adopted by every major datacenter operator, and x86 became the default instruction set for servers; Intel was one of the biggest beneficiaries for the straightforward reason that it made the best x86 processors, particularly for server applications. This was both due to Intel’s proprietary designs as well as its superior manufacturing; AMD, Intel’s IBM-mandated competitor, occasionally threatened the incumbent on the desktop, but only on the low end for laptops, and not at all in data centers.

In this way Intel escaped Microsoft’s post-PC fate: Microsoft wasn’t simply shut out of mobile, they were shut out of servers as well, which ran Linux, not Windows. Sure, the company tried to prop up Windows as long as they could, both on the device side (via Office) and on the server side (via Azure); conversely, what has fueled the company’s recent growth has been The End of Windows, as Office has moved to the cloud with endpoints on all devices, and Azure has embraced Linux. In both cases Microsoft had to accept that their differentiation had flipped from owning the API to having the capability to serve their already-existing customers at scale.

The Intel Opportunity that I referenced above would have entailed a similar flip for Intel: whereas the company’s differentiation had long been based on its integration of chip design and manufacturing, mobile meant that x86 was, like Windows, permanently relegated to a minority of the overall computing market. That, though, was the opportunity.

41/86 Most chip designers are fabless; they create the design, then hand it off to a foundry. AMD, Nvidia, Qualcomm, MediaTek, Apple — none of them own their own factories. This certainly makes sense: manufacturing semiconductors is perhaps the most capital-intensive industry in the world, and AMD, Qualcomm, et al have been happy to focus on higher margin design work.

Much of that design work, however, has an increasingly commoditized feel to it. After all, nearly all mobile chips are centered on the ARM architecture. For the cost of a license fee, companies, such as Apple, can create their own modifications, and hire a foundry to manufacture the resultant chip. The designs are unique in small ways, but design in mobile will never be dominated by one player the way Intel dominated PCs.

It is manufacturing capability, on the other hand, that is increasingly rare, and thus, increasingly valuable. In fact, today there are only four major foundries: Samsung, GlobalFoundries, Taiwan Semiconductor Manufacturing Company (TSMC), and Intel. Only four companies have the capacity to build the chips that are in every mobile device today, and in everything tomorrow.

Massive demand, limited suppliers, huge barriers to entry. It’s a good time to be a manufacturing company. It is, potentially, a good time to be Intel. After all, of those four companies, the most advanced, by a significant margin, is Intel. The only problem is that Intel sees themselves as a design company, come hell or high water.

My recommendation did not, by the way, entail giving up Intel’s x86 business; I added in a footnote:

Of course they keep the x86 design business, but it’s not their only business, and over time not even their primary business.

In fact, the x86 business proved far too profitable to take such a radical step, which is the exact sort of “problem” that leads to disruption: yes, Intel avoided Microsoft’s fate, but that also means that the company never felt the financial pain necessary to make such a dramatic transformation of its business at a time when it might have made a difference (and, to be fair, Andy Grove needed the memory crash of 1984 to get the company to fully focus on processors in the first place).

Problem Three: Manufacturing

Meanwhile, over the last decade the modular-focused TSMC, fueled by the massive volumes that came from mobile and a willingness to work with — and thus share profits with — best of breed suppliers like ASML, surpassed Intel’s manufacturing capabilities.

This threatens Intel on multiple fronts:

Intel has already lost Apple’s Mac business thanks in part to the outstanding performance of the latter’s M1 chip. It is important to note, though, that while some measure of that performance is due to Apple’s design chops, the fact that it is manufactured on TSMC’s 5nm process is an important factor as well.

42/86 In a similar vein, AMD chips are now faster than Intel on the desktop, and extremely competitive in the data center. Again, part of AMD’s improvement is due to better designs, but just as important is the fact that AMD is manufacturing chips on TSMC’s 7nm process. Large cloud providers are increasingly investing in their own chip designs; Amazon, for example, is on the second iteration of their Graviton ARM-based processor, which Twitter’s timeline will run on. Part of Graviton’s advantage is its design, but part of it is — you know what’s coming! — the fact that it is manufactured by TSMC, also on its 7nm process (which is competitive with Intel’s finally-launched 10nm process).

In short, Intel is losing share in PCs, even as it is threatened by AMD for x86 servers in the datacenter, and even as cloud companies like Amazon integrated backwards into the processor; I haven’t even touched on the increase in other specialized datacenter operations like GPU-based applications for machine learning, which are designed by companies like Nvidia and manufactured by Samsung.

What makes this situation so dangerous for Intel is the volume issue I noted above: the company already missed mobile, and while server chips provided the growth the company needed to invest in manufacturing over the last decade, the company can’t afford to lose volume at the very moment it needs to invest more than ever.

Problem Four: TSMC

Unfortunately, this isn’t even the worst of it. The day after Intel named its new CEO TSMC announced its earnings and, more importantly, its Capex guidance for 2021; from Bloomberg:

Taiwan Semiconductor Manufacturing Co. triggered a global chip stock rally after outlining plans to pour as much as $28 billion into capital spending this year, a staggering sum aimed at expanding its technological lead and constructing a plant in Arizona to serve key American customers.

This is a staggering amount of money that is only going to increase TSMC’s lead.

The envisioned spending spree sent chipmaking gear manufacturers surging from New York to Tokyo. Capital spending for 2021 is targeted at $25 billion to $28 billion, compared with $17.2 billion the previous year. About 80% of the outlay will be devoted to advanced processor technologies, suggesting TSMC anticipates a surge in business for cutting-edge chipmaking. Analysts expect Intel Corp., the world’s best-known chipmaker, to outsource manufacture to the likes of TSMC after a series of inhouse technology slip-ups.

That’s right: Intel likely has, at least for now, given up on process leadership. The company will keep its design-based margins and foreclose the AMD threat by outsourcing cutting edge chip production to TSMC, but that will only increase TSMC’s lead, and does nothing to address Intel’s other vulnerabilities.

Problem Five: Geopolitics

43/86 Intel’s vulnerabilities aren’t the only ones to be concerned about; I wrote last year about Chips and Geopolitics:

The international status of Taiwan is, as they say, complicated. So, for that matter, are U.S.- China relations. These two things can and do overlap to make entirely new, even more complicated complications.

Geography is much more straightforward:

Taiwan, you will note, is just off the coast of China. South Korea, home to Samsung, which also makes the highest end chips, although mostly for its own use, is just as close. The United States, meanwhile, is on the other side of the Pacific Ocean. There are advanced foundries in Oregon, New Mexico, and Arizona, but they are operated by Intel, and Intel makes chips for its own integrated use cases only.

The reason this matters is because chips matter for many use cases outside of PCs and servers — Intel’s focus — which is to say that TSMC matters. Nearly every piece of equipment these days, military or otherwise, has a processor inside. Some of these don’t require particularly high performance, and can be manufactured by fabs built years ago all over the U.S. and across the world; others, though, require the most advanced processes, which means they must be manufactured in Taiwan by TSMC.

This is a big problem if you are a U.S. military planner. Your job is not to figure out if there will ever be a war between the U.S. and China, but to plan for an eventuality you hope never occurs. And in that planning the fact that TSMC’s foundries — and Samsung’s — are within easy reach of Chinese missiles is a major issue.

The context of that article was TSMC’s announcement that it would (eventually) open a 5nm fab in Arizona; yes, that is cutting edge today, but it won’t be in 2024, when the fab opens. Still, it will almost certainly be the most advanced fab in the U.S. focused on contract manufacturing; Intel will, hopefully, have surpassed that fab’s capabilities by the time it opens.

Note, though, that what matters to the United States is different than what matters to Intel: while the latter cares about x86, the U.S. needs cutting-edge general purpose fabs on U.S. soil. To put it another way, Intel will always prioritize design, while the U.S. needs

44/86 to prioritize manufacturing.

This, by the way, is why I am more skeptical today than I was in 2013 about Intel manufacturing for others. The company may be financially compelled to do so to get the volume it needs to pay back its investments, but the company will always put its own designs at the front of the line.

Solution One: Breakup

This is why Intel needs to be split in two. Yes, integrating design and manufacturing was the foundation of Intel’s moat for decades, but that integration has become a strait-jacket for both sides of the business. Intel’s designs are held back by the company’s struggles in manufacturing, while its manufacturing has an incentive problem.

The key thing to understand about chips is that design has much higher margins; Nvidia, for example, has gross margins between 60~65%, while TSMC, which makes Nvidia’s chips, has gross margins closer to 50%. Intel has, as I noted above, traditionally had margins closer to Nvidia, thanks to its integration, which is why Intel’s own chips will always be a priority for its manufacturing arm. That will mean worse service for prospective customers, and less willingness to change its manufacturing approach to both accommodate customers and incorporate best-of-breed suppliers (lowering margins even further). There is also the matter of trust: would companies that compete with Intel be willing to share their designs with their competitor, particularly if that competitor is incentivized to prioritize its own business?

The only way to fix this incentive problem is to spin off Intel’s manufacturing business. Yes, it will take time to build out the customer service components necessary to work with third parties, not to mention the huge library of IP building blocks that make working with a company like TSMC (relatively) easy. But a standalone manufacturing business will have the most powerful incentive possible to make this transformation happen: the need to survive.

Solution Two: Subsidies

This also opens the door for the U.S. to start pumping money into the sector. Right now it makes no sense for the U.S. to subsidize Intel; the company doesn’t actually build what the U.S. needs, and the company clearly has culture and management issues that won’t be fixed with money for nothing.

That is why a federal subsidy program should operate as a purchase guarantee: the U.S. will buy A amount of U.S.-produced 5nm processors for B price; C amount of U.S. produced 3nm processors for D price; E amount of U.S. produced 2nm processors for F price; etc. This will not only give the new Intel manufacturing spin-off something to strive for, but also incentivize other companies to invest; perhaps Global Foundries will get back in the game, or TSMC will build more fabs in the U.S. And, in a world of nearly free capital, perhaps there will finally be a startup willing to take the leap.

45/86 This prescription over-simplifies the problem, to be sure; there is a lot that goes into chip manufacturing beyond silicon. Packaging, for example, which long ago moved overseas in the pursuit of lower labor costs, is now fully automated; incentives to move that back may be more straightforward. What is critical to understand, though, is that regaining U.S. competitiveness, much less leadership, will take many years; the federal government has a role, but so does Intel, not by seizing its opportunity, but by accepting the reality that its integrated model is finished.

I wrote a follow-up to this article in this Daily Update.

Francis Fukuyama’s The End of History and the Last Man is, particularly relative to its prescience, one of the most misunderstood books of all time. Aris Roussinos explained at UnHerd:

Now that history has returned with the vengeance of the long-dismissed, few analyses of our present moment are complete without a ritual mockery of Fukuyama’s seemingly naive assumptions. The also-rans of the 1990s, Samuel P. Huntington’s The Clash of Civilisations thesis and Robert D. Kaplan’s The Coming Anarchy, which predicted a paradigm of growing disorder, tribalism and the breakdown of state authority, now seem more immediately prescient than Fukuyama’s offering.

Yet nearly thirty years later, reading what Fukuyama actually wrote as opposed to the dismissive précis of his ideas, we see that he was right all along. Where Huntington and Kaplan predicted the threat to the Western liberal order coming from outside its cultural borders, Fukuyama discerned the weak points from within, predicting, with startling accuracy, our current moment.

Consider this paragraph from the book:

Experience suggests that if men cannot struggle on behalf of a just cause because that just cause was victorious in an earlier generation, then they will struggle against the just cause. They will struggle for the sake of struggle. They will struggle, in other words, out of a certain boredom: for they cannot imagine living in a world without struggle. And if the greater part of the world in which they live is characterized by peaceful and prosperous liberal democracy, then they will struggle against that peace and prosperity, and against democracy.

It was hard to not think of that paragraph as scenes emerged from last week’s invasion of the U.S. Capitol in an attempt to overturn a democratic election, particular those members of the mob LARPing a special forces military operation, and in the following days when it became clear just how many members of the mob were otherwise well-off members of society. Was belief that President Trump won the election a sufficient motivation to attack the Capitol, or, underneath it all, was there something more?

46/86 Win McNamee via Getty Images

I won’t pretend to know the answers to that question — this is a blog about technology and strategy, not philosophy and history. The events that followed Wednesday, though, bring to mind Fukuyama’s warning that history may be restarted by those unsatisfied with its end.

The End of the Beginning

One year ago I wrote The End of the Beginning, which posited that the history of information technology was not, as popularly believed, one of alternating epochs disrupted by new paradigms, but rather a continuous shift along two parallel axis:

47/86 The evolution of computing from the mainframe to cloud and mobile

The place we compute shifted from a central location to anywhere; the time in which we compute shifted from batch processes to continuous computing. The implication of viewing the shift from mainframe computing, to personal computing on a network, to mobile connections to the cloud, as manifestations of a single trend was just as counterintuitive:

What is notable is that the current environment appears to be the logical endpoint of all of these changes: from batch-processing to continuous computing, from a terminal in a different room to a phone in your pocket, from a tape drive to data centers all over the globe. In this view the personal computer/on-premises server era was simply a stepping stone between two ends of a clearly defined range.

Another way to think about the current state of affairs is that it is the inevitable economic endpoint of the technological underpinnings of the Internet.

Internet 1.0: Technology

The vast majority of the technologies undergirding the Internet were in fact developed decades ago. TCP/IP, for example, which undergirds the World Wide Web, email, and a whole host of familiar technologies, was first laid out in a paper in 1974; DNS, which translates domain names to numerical IP addresses, was introduced in 1985; HTTP, the

48/86 application layer for the Web, was introduced in 1991. The year these technologies came together from an end user perspective, though, was 1993 with the introduction of Mosaic, a graphical web browser developed by Marc Andreessen at the University of Illinois.

Over the next few years websites proliferated rapidly, as did dreams about what this new technology might make possible. This mania led to the dot-com bubble, which, critically, fueled massive investments in telecoms infrastructure. Yes, the companies like Worldcom, NorthPoint, and Global Crossing making these investments went bankrupt, but the foundation had been laid for widespread high speed connectivity.

Internet 2.0: Economics

Google was founded in 1998, in the middle of the dot-com bubble, but it was the company’s IPO in 2004 that, to my mind, marked the beginning of Internet 2.0. This period of the Internet was about the economics of zero friction; specifically, unlike the assumptions that undergird Internet 1.0, it turned out that the Internet does not disperse economic power but in fact centralizes it. This is what undergirds Aggregation Theory: when services compete without the constraints of geography or marginal costs, dominance is achieved by controlling demand, not supply, and winners take most.

Aggregators like Google and Facebook weren’t the only winners though; the smartphone market was so large that it could sustain a duopoly of two platforms with multi-sided networks of developers, users, and OEMs (in the case of Android; Apple was both OEM and platform provider for iOS). Meanwhile, public cloud providers could provide back- end servers for companies of all types, with scale economics that not only lowered costs and increased flexibility, but which also justified far more investments in R&D that were immediately deployable by said companies.

The network effects of iOS and Android are so strong, and the scale economics of Amazon, Microsoft, and Google so overwhelming, that I concluded in The End of the Beginning:

The implication of this view should at this point be obvious, even if it feels a tad bit heretical: there may not be a significant paradigm shift on the horizon, nor the associated generational change that goes with it. And, to the extent there are evolutions, it really does seem like the incumbents have insurmountable advantages: the hyperscalers in the cloud are best placed to handle the torrent of data from the Internet of Things, while new I/O devices like augmented reality, wearables, or voice are natural extensions of the phone.

This, though, is where I am reminded of The End of History and the Last Man; Fukuyama writes in the final chapter:

49/86 If it is true that the historical process rests on the twin pillars of rational desire and rational recognition, and that modern liberal democracy is the political system that best satisfies the two in some kind of balance, then it would seem that the chief threat to democracy would be our own confusion about what is really at stake. For while modern societies have evolved toward democracy, modern thought has arrived at an impasse, unable to come to a consensus on what constitutes man and his specific dignity, and consequently unable to define the rights of man. This opens the way to a hyperintensified demand for the recognition of equal rights, on the one hand, and for the re-liberation of megalothymia on the other. This confusion in thought can occur despite the fact that history is being driven in a coherent direction by rational desire and rational recognition, and despite the fact that liberal democracy in reality constitutes the best possible solution to the human problem.

Megalothymia is “the desire to be recognized as superior to other people”, and “can be manifest both in the tyrant who invades and enslaves a neighboring people so that they will recognize his authority, as well as in the concert pianist who wants to be recognized as the foremost interpreter of Beethoven”; successful liberal democracies channel this desire into fields like entrepreneurship or competition, including electoral politics.

In the case of the Internet, we are at the logical endpoint of technological development; here, though, the impasse is not the nature of man, but the question of sovereignty, and the potential re-liberation of megalothymia is the likely refusal by people, companies, and countries around the world to be lorded over by a handful of American giants.

Big Tech’s Power

Last week, in response to the violence at the Capitol and the fact it was incited by Trump, first Facebook and then Twitter de-platformed the President; a day later Apple, Google, and Amazon kicked Parler, another social network where Trump supporters congregated and in-part planned Wednesday’s action, out of their App Stores and hosting service, respectively, effectively killing the service.

After years of defending Facebook and Twitter’s decisions to keep Trump on their services, I called for him to be kicked off last Thursday, and I explained yesterday why tech’s collective action in response to last Wednesday’s events was a uniquely American solution to a genuine crisis:

50/86 So Facebook and Twitter and Apple and Google and Amazon and all of the rest were wrong, right? Well, again, context matters, and again, the context here was an elected official encouraging his supporters to storm the Capitol to overturn an election result and his supporters doing so. What I believe happened this weekend was a uniquely American solution to the problem of Trump’s refusal to concede and attempts to incite violence: all of corporate America collectively decided that enough was enough, and did what Congress has been unable to do, effectively ending the Trump presidency. Parler, to be honest, was just as much a bystander casualty as it was a direct target. That the tech sector is the only one with the capabilities to actually make a difference is what makes the industry stand out.

I am not, to be clear, saying that this is some sort of ideal solution. As I noted last week impeachment is the way this is supposed to go, and hopefully that still occurs. And, as I also noted last week, if this triggers a debate about the power of tech companies, all the better. This solution was, though, a pragmatic and ultimately effective one, even if the full costs will take years to materialize (again, more on the long-term repercussions soon).

Soon is today; this Article is not about the rightness and wrongness of these decisions — again, please see the two articles I just linked — but rather about the implications of tech companies taking the actions they did last weekend.

Start with Europe; from Bloomberg:

Germany and France attacked Twitter Inc. and Facebook Inc. after U.S. President Donald Trump was shut off from the social media platforms, in an extension of Europe’s battle with big tech. German Chancellor Angela Merkel objected to the decisions, saying on Monday that lawmakers should set the rules governing free speech and not private technology companies.

“The chancellor sees the complete closing down of the account of an elected president as problematic,” Steffen Seibert, her chief spokesman, said at a regular news conference in Berlin. Rights like the freedom of speech “can be interfered with, but by law and within the framework defined by the legislature — not according to a corporate decision.”

The German leader’s stance is echoed by the French government. Junior Minister for European Union Affairs Clement Beaune said he was “shocked” to see a private company make such an important decision. “This should be decided by citizens, not by a CEO,” he told Bloomberg TV on Monday. “There needs to be public regulation of big online platforms.” Finance Minister Bruno Le Maire earlier said that the state should be responsible for regulations, rather than “the digital oligarchy,” and called big tech “one of the threats” to democracy.

Make no mistake, Europe is far more restrictive on speech than the U.S. is, including strict anti-Nazi laws in Germany, the right to be forgotten, and other prohibitions on broadly defined “harms”; the difference from the German and French perspective, though, is that those restrictions come from the government, not private companies.

51/86 This sentiment, as I noted yesterday, is completely foreign to Americans, who whatever their differences on the degree to which online speech should be policed, are united in their belief that the legislature is the wrong place to start; the First Amendment isn’t just a law, but a culture. The implication of American tech companies serving the entire world, though, is that that American culture, so familiar to Americans yet anathema to most Europeans, is the only choice for the latter.

Politicians from India’s ruling party expressed similar reservations; from The Times of India:

BJP leaders expressed concern on Saturday over the permanent suspension of US President Donald Trump’s Twitter account by the social media giant, saying it sets a dangerous precedent and is a wake-up call for democracies about the threat from unregulated big tech companies…”If they can do this to the President of the US, they can do this to anyone. Sooner India reviews intermediaries’ regulations, better for our democracy,” BJP’s youth wing president Tejaswi Surya said in a tweet.

Tech companies would surely argue that the context of Trump’s removal was exceptional, but when it comes to sovereignty it is not clear why U.S. domestic political considerations are India’s concern, or any other country’s. The fact that the capability exists for their own leaders to be silenced by an unreachable and unaccountable executive in San Francisco is all that matters, and it is completely understandable to think that countries will find this status quo unacceptable.

Companies, meanwhile, will note the fate of Parler. Sure, few have any intention of dealing with user-generated content, but the truth is that here the shift has already started: most retailers, for example, have been moving away from AWS for years; this will be another reminder that when push comes to shove, the cloud providers will act in their own interests first.

Meanwhile, there remain the tens of millions of Americans who voted for Trump, and the (significantly) smaller number that were on Parler; sure, they may be (back) on Twitter or Facebook, but this episode will not soon be forgotten: Congress may have not made a law abridging the freedom of speech, but Mark Zuckerberg and Jack Dorsey did, and Apple, Google, and Facebook soon fell in line. That all of those companies will be viewed with a dramatically heightened sense of suspicion should hardly be a surprise.

Internet 3.0: Politics

This is why I suspect that Internet 2.0, despite its economic logic predicated on the technology undergirding the Internet, is not the end-state. When I called the current status quo The End of the Beginning, it turns out “The Beginning” I was referring to was History. The capitalization is intentional; Fukuyama wrote in the Introduction of The End of History and the Last Man:

52/86 What I suggested had come to an end was not the occurrence of events, even large and grave events, but History: that is, history understood as a single, coherent, evolutionary process, when taking into account the experience of all peoples in all times…Both Hegel and Marx believed that the evolution of human societies was not open-ended, but would end when mankind had achieved a form of society that satisfied its deepest and most fundamental longings. Both thinkers thus posited an “end of history”: for Hegel this was the liberal state, while for Marx it was a communist society. This did not mean that the natural cycle of birth, life, and death would end, that important events would no longer happen, or that newspapers reporting them would cease to be published. It meant, rather, that there would be no further progress in the development of underlying principles and institutions, because all of the really big questions had been settled.

It turns out that when it comes to Information Technology, very little is settled; after decades of developing the Internet and realizing its economic potential, the entire world is waking up to the reality that the Internet is not simply a new medium, but a new maker of reality. I wrote in The Internet and the Third Estate:

What makes the Internet different from the printing press? Usually when I have written about this topic I have focused on marginal costs: books and newspapers may have been a lot cheaper to produce than handwritten manuscripts, but they are still not-zero. What is published on the Internet, meanwhile, can reach anyone anywhere, drastically increasing supply and placing a premium on discovery; this shifted economic power from publications to Aggregators.

Just as important, though, particularly in terms of the impact on society, is the drastic reduction in fixed costs. Not only can existing publishers reach anyone, anyone can become a publisher. Moreover, they don’t even need a publication: social media gives everyone the means to broadcast to the entire world. Read again Zuckerberg’s description of the Fifth Estate:

People having the power to express themselves at scale is a new kind of force in the world — a Fifth Estate alongside the other power structures of society. People no longer have to rely on traditional gatekeepers in politics or media to make their voices heard, and that has important consequences.

It is difficult to overstate how much of an understatement that is. I just recounted how the printing press effectively overthrew the First Estate, leading to the establishment of nation- states and the creation and empowerment of a new nobility. The implication of overthrowing the Second Estate, via the empowerment of commoners, is almost too radical to imagine.

It is difficult to believe that the discussion of these implications will be reserved for posts on niche sites like Stratechery; the printing press transformed Europe from a continent of city-states loosely tied together by the Catholic Church, to a continent of nation-states with their own state churches. To the extent the Internet is as meaningful a shift — and I think it is! — is inversely correlated to how far along we are in the transformation that will

53/86 follow — which is to say we have only gotten started. And, after last week, the world is awake to the stakes; politics — not economics — will decide, and be decided by, the Internet.

The Return of Technology

Here technology itself will return to the forefront: if the priority for an increasing number of citizens, companies, and countries is to escape centralization, then the answer will not be competing centralized entities, but rather a return to open protocols.

This is the only way to match and perhaps surpass the R&D advantages enjoyed by centralized tech companies; open technologies can be worked on collectively, and forked individually, gaining both the benefits of scale and inevitability of sovereignty and self- determination.

This process will take years; I would expect governments in Europe in particular to initially try and build their own centralized alternatives. Those efforts, though, will founder for a lack of R&D capabilities, and be outstripped by open alternatives that are perhaps not as full-featured and easy-to-use as big tech offerings, at least in the short to medium-term, but possess the killer feature of not having a San Francisco kill-switch.

I wrote a follow-up to this article in this Daily Update.

54/86 In December 2016, when then-President-elect Donald Trump summoned tech leaders to Trump Tower for a roundtable discussion, there was considerable debate about whether or not executives like Amazon’s Jeff Bezos, Google’s Larry Page, Apple’s Tim Cook, and Microsoft’s Satya Nadella should accept the invitation.

I argued that they absolutely should in this Daily Update (which is now free-to-read):

Beyond that, though, elections have consequences. Consider immigration, the first reason on Swisher’s list for refusing the meeting: during the campaign Trump was not exactly shy about stating his position on immigration, and while I and just about everybody else in tech vehemently disagree with that position, the fact remains that Trump won. For tech executives to refuse to even meet with the president-elect absent his retracting the foundational issue of his campaign is to seek to defy democracy through belligerence. Make no mistake: those same executives absolutely should seek to influence and/or defeat whatever legislation Trump proposes on the matter, but disagreeing on legitimate political issues like immigration, trade, etc. is not a reason to spite democracy.

More importantly, though, is that calling the United States a democracy is incomplete; we are a (small ‘l’) liberal democracy: that is not only do we elect our representatives, but we also are governed by the rule of law and the guarantee of individual rights and personal liberty. That our liberalism may be under threat is a far graver concern than bad policy decisions; I’m by no means denigrating the terrible outcomes that can result from bad policy, but said policy can be reversed by winning the next election. The loss of liberalism, on the other hand, reduces democracy to a sham.

In short, Trump opponents need to pick their battles: conflating policy with which you disagree with fundamental attacks on civil liberties is, per my second point, itself an attack on those civil liberties, and ineffective to boot. To that end, my advice for these executives would be draw clear lines: with regards to the infringement of civil liberties, there should be no compromise; with regards to legitimate political disagreements, there should be the registration of clear opposition with the admission that the law will be followed.

My ultimate advice was as follows:

The priorities of everyone, including these executives, must be clear:

1. Liberalism is inviolable 2. Democracy must be respected 3. Bad policies should be opposed

Responding to an invitation from the president-elect is in this case governed by the second priority, not the third; one hopes we will never reach a point where it is the first priority that is in play, but if we do that will be the time to put everything — including a company’s stock price — on the line.

Four years on, we have a new Congressionally-certified President-elect, combined with the greatest Trump-related crisis facing tech yet.

55/86 Trump’s Tweets

Yesterday’s Trump-incited mob that invaded the U.S. Capitol hasn’t been the only Trump- related crisis; the principles in that Daily Update have guided my thinking in how to navigate other controversies, particularly last summer when Twitter and Facebook faced renewed demands to remove Trump tweets. I argued that the services were right to leave them up, in no small part because Donald Trump was the democratically-elected President; from Dust in the Light:

In fact, that is what is so striking about the demands that Facebook act on this particular post (beyond the extremely problematic prospect of an unaccountable figure like Zuckerberg unilaterally deciding what is and is not acceptable political speech): the preponderance of evidence suggests that these demands have nothing to do with misinformation, but rather reality. The United States really does have a president named Donald Trump who uses extremely problematic terms — in all caps! — for African Americans and quotes segregationist police chiefs, and social media, for better or worse, is ultimately a reflection of humanity. Facebook deleting Trump’s post won’t change that fact, but it will, at least for a moment, turn out the lights, hiding the dust.

The question that has been raised in the weeks since the election, though, particularly yesterday, is whether Trump’s tweets are themselves a threat to Principle 2. Casey Newton, who has by-and-large agreed with me about how the platforms should handle Trump, has seen enough; from The Verge:

For years, I opposed Twitter and others deplatforming the president. My reasons were largely practical ones. Surely, the president would decamp to a smaller site if banned; surely, a Twitter bot would scrape and instantly tweet anything he posted elsewhere, largely defeating the point of a ban. As irritating as the move surely would have been to Trump, I thought, the gesture would largely have been symbolic. And at the end of the day, the man was the duly elected president.

No longer. Americans voted Trump out of office, but instead of accepting that result, he has sought to overturn it. By inciting the violent occupation of the US Capitol, Trump has given up any legitimate claim to power. In 14 days, barring catastrophe, he will be out of office. The only question is how much damage he will do in the meantime — and we know, based on long experience, that his Twitter and Facebook accounts will be among his primary weapons…

Were today January 21, 2021, and Trump were no longer President, I would agree with Newton; I am exceptionally close to agreeing with him today, as well. One final question remains, though: is this the right level of the stack?

A Framework for Moderation

The other Stratechery article I have returned to during these Trump controversies is A Framework for Moderation, from August 2019. The occasion was Cloudflare’s decision to cease providing distributed-denial-of-service protection for 8chan, the forum where

56/86 multiple terrorists had planned and celebrated their acts over the previous year. The framework focused on where a company was in the stack:

It makes sense to think about these positions of the stack very differently: the top of the stack is about broadcasting — reaching as many people as possible — and while you may have the right to say anything you want, there is no right to be heard. Internet service providers, though, are about access — having the opportunity to speak or hear in the first place. In other words, the further down the stack, the more legality should be the sole criteria for moderation; the further up the more discretion and even responsibility there should be for content:

I refined this framework while decrying Twitter’s handling of that New York Post story:

The addition I would make to this framework is that responsibility accrues to the layer of agency, both as a matter of principle and of practicality. In other words, the New York Post is responsible for what they publish, and not only should Twitter not decide whether or not that is acceptable as a matter of principle, it needs to recognize that doing so will not kill the story but rather make Twitter’s abuse of power the story. To go in the other direction — to make every part of the stack responsible for everything in the stack — is to inevitably end up in a world of ISP-level control on what we can or cannot see.

This is how we arrive back at Trump’s tweets inciting and celebrating violence at the nation’s capitol, which built on weeks of delegitimizing the most recent election. Newton is right that they are a danger, even as he notes that Twitter can only do so much:

No one should be under the illusion that deplatforming Trump will end the erosion of our democracy. But we saw today that Trump’s continued presence will accelerate it. And should he leave office with his platform intact, he can immediately declare his candidacy for president in 2024 and use it to further escalate his attacks on the republic.

57/86 In fact, we have a mechanism for dealing with a President encouraging sedition and refusing to accept a democratic outcome, which not only removes said President from office, but also prevents him from running again: impeachment. It has the added benefit of not setting a precedent of top-down tech control of political speech. It also seems exceedingly unlikely to happen.

Exceptions and Rules

One sentiment I keep returning to when it comes to Trump and social media is sympathy, for Mark Zuckerberg and Jack Dorsey in particular. Before Trump it was entirely reasonable for a social network to presume that they did not need special rules for Presidential tweeting, because the norms of the Presidency would sufficiently restrain the President on their own. Trump, though, is clearly exceptional.

The problem with Twitter and Facebook’s response, then, is not treating Trump like the exception he is; instead both companies continue to twist their rules, or make new ones after the fact, to justify what are clearly tortured subjective decisions about Trump’s tweets. Yesterday is a perfect example: Facebook, in explaining why it had taken down two Trump posts (including a video where he celebrated the Capitol intruders, even as he asked them to return home), gave a vague reference to policy violations:

Both companies would have been better served by stating the plain truth from the beginning: Trump is the democratically-elected President, which means he can tweet what he wants. It would also establish the framework for what I now believe needs to be done: an exception to the rule.

As I noted above, my preferred outcome to yesterday’s events is impeachment. Encouraging violence to undo an election result one disagrees with is sedition, surely a high crime or misdemeanor, and I hold out hope that Congress will act over the next few days, as unlikely as that seems. That is, as I noted, the right level of the stack wherein to act.

Sometimes, though, the right level doesn’t work, yet the right thing needs to be done. That, ultimately, is why I defended Cloudflare in 2019; CEO Matthew Prince told me in an interview:

58/86 If this were a normal circumstance we would say “Yes, it’s really horrendous content, but we’re not in a position to decide what content is bad or not.” But in this case, we saw repeated consistent harm where you had three mass shootings that were directly inspired by and gave credit to this platform. You saw the platform not act on any of that and in fact promote it internally. So then what is the obligation that we have? While we think it’s really important that we are not the ones being the arbiter of what is good or bad, if at the end of the day content platforms aren’t taking any responsibility, or in some cases actively thwarting it, and we see that there is real harm that those platforms are doing, then maybe that is the time that we cut people off.

Remember my highest priority, even beyond respect for democracy, is the inviolability of liberalism, because it is the foundation of said democracy. That includes the right for private individuals and companies to think and act for themselves, particularly when they believe they have a moral responsibility to do so, and the belief that no one else will. Yes, respecting democracy is a reason to not act over policy disagreements, no matter how horrible those policies may be, but preserving democracy is, by definition, even higher on the priority stack.

Turn off Trump’s account.

One of the most well-known papers in behavioral economics is The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior by Brigitte C. Madrian and Dennis F. Shea. From the introduction:

In this paper we analyze the 401(k) savings behavior of employees in a large U. S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees who enrolled in the 401(k) plan were required to affirmatively elect participation. After the plan change, employees were automatically enrolled in the 401(k) plan immediately upon hire unless they made a negative election to opt out of the plan. Although none of the economic features of the plan changed, this switch to automatic and immediate enrollment dramatically changed the savings behavior of employees.

I would certainly call a shift from 37 percent participation to 86 percent participation a dramatic shift! However, as Madrian and Shea note, there was a downside:

For the NEW cohort, 80 percent of 401(k) contributions are allocated to the money market fund, while only 16 percent of contributions go into stock funds. In contrast, the other cohorts allocate roughly 70 percent of their 401(k) contributions to stock funds, with less than 10 percent earmarked for the money market fund

The issue is that the money market fund was the default choice, which meant that while the new program helped people save more, it also led folks who would have chosen better- performing funds to earn far less than they would have. Defaults are powerful!

Just ask Facebook, which is conducting a (probably futile) public relations campaign against Apple over iOS 14’s impending “App Tracking Transparency” requirement. Apple told Bloomberg:

59/86 Apple defended its iOS updates, saying it was “standing up” for people who use its devices. “Users should know when their data is being collected and shared across other apps and websites — and they should have the choice to allow that or not,” an Apple spokeswoman said in a statement. “App Tracking Transparency in iOS 14 does not require Facebook to change its approach to tracking users and creating targeted advertising, it simply requires they give users a choice.”

In fact, users have had a choice for several years; Apple has given customers the ability to switch off their device’s “Identifier for Advertisers” (IDFA) since 2012. What makes iOS 14 different is the change in defaults: instead of users needing to turn IDFA off, every app has to explicitly ask for it to be turned on, and given the arguably misleading way that this tracking is presented by the media generally and Apple specifically, both Facebook and Apple expect customers to say no (Facebook launched its campaign at the same time it added the prompt).

Changing the defaults can change the course of a multi-billion dollar company.

China, Control, and Quarantine

One year ago, on January 5, 2020, Wuhan, Hubei province’s largest city, was set to host the 3rd Session of the 13th Hubei Provincial People’s Congress and the 3rd Session of the 12th Hubei Provincial Committee of the Chinese People’s Political Consultative Conference, the two most important political gatherings of the year. Perhaps that is why the city reported no new cases of a mysterious respiratory illness that had started appearing the previous November for the following 11 days. Three weeks later, the entire city was locked down in a drastic attempt to contain the virus we now know as SARS-CoV- 2.

Last week, meanwhile, came a lockdown of another sort; from the New York Times:

A Chinese court on Monday sentenced a citizen journalist who documented the early days of the coronavirus outbreak to four years in prison, sending a stark warning to those challenging the government’s official narrative of the pandemic. Zhang Zhan, the 37-year- old citizen journalist, was the first known person to face trial for chronicling China’s outbreak. Ms. Zhang, a former lawyer, had traveled to Wuhan from her home in Shanghai in February, at the height of China’s outbreak, to see the toll from the virus in the city where it first emerged. For several months she shared videos that showed crowded hospitals and residents worrying about their incomes…

Ms. Zhang’s trial, at the Shanghai Pudong New District People’s Court on Monday, lasted less than three hours. The official charge on which she was convicted was “picking quarrels and provoking trouble,” a vague charge commonly used against critics of the government. Prosecutors had initially recommended a sentence between four and five years.

For all of the consternation in China about the the initial cover-up, Zhang’s case is a reminder that controlling information for political purposes is China’s default approach. It is worth noting, though, that the willingness to exert control can be useful, particularly

60/86 during a pandemic. While Wuhan’s lockdown drew the most attention, and some degree of emulation, that wasn’t what actually stopped the virus’ spread. The Wall Street Journal explained in March:

The cordon sanitaire that began around Wuhan and two nearby cities on Jan. 23 helped slow the virus’s transmission to other parts of China, but didn’t really stop it in Wuhan itself, these experts say. Instead, the virus kept spreading among family members in homes, in large part because hospitals were too overwhelmed to handle all the patients, according to doctors and patients there.

What really turned the tide in Wuhan was a shift after Feb. 2 to a more aggressive and systematic quarantine regime whereby suspected or mild cases — and even healthy close contacts of confirmed cases — were sent to makeshift hospitals and temporary quarantine centers. The tactics required turning hundreds of hotels, schools and other places into quarantine centers, as well as building two new hospitals and creating 14 temporary ones in public buildings.

These centralized quarantines were not optional, and they were effective: China had the coronavirus largely under control by late spring, and the economy has unsurprisingly bounced back; China is expected to be the only Group of 20 country to record positive growth for the year.

The West’s Haphazard Approach

The United States (along with Europe, it should be noted), has not done so well. Actually, that’s being generous: by pursuing selective lockdowns and completely eschewing centralized quarantine, the West has managed to hurt its economies and kill its small businesses, without actually stopping the spread of the coronavirus. At the same time, as Tyler Cowen argued in Bloomberg last May, centralized quarantines were never really a serious option:

There has been surprisingly little debate in America about one strategy often cited as crucial for preventing and controlling the spread of Covid-19: coercive isolation and quarantine, even for mild cases. China, Singapore and South Korea separate people from their families if they test positive, typically sending them to dorms, makeshift hospitals or hotels. Vietnam and Hong Kong have gone further, sometimes isolating the close contacts of patients.

I am here to tell you that those practices are wrong, at least for the U.S. They are a form of detainment without due process, contrary to the spirit of the Constitution and, more important, to American notions of individual rights. Yes, those who test positive should have greater options for self-isolation than they currently do. But if a family wishes to stick together and care for each other, it is not the province of the government to tell them otherwise.

Cowen’s first paragraph makes clear that the views in the second are widely held: no politician that I know of, in the U.S. or Europe, seriously argued for centralized quarantine, even though it was likely the only way to contain SARS-CoV-2. The very idea

61/86 of governments locking up innocent civilians is counter to our default assumption that individual freedom is inviolate.

That, though, is why it is strange that so many have acquiesced to ever-tightening restrictions on information. It seems that over the last year to have a pro-free speech position has become the exception; the default is to push for censorship, if not by the government — thanks to that pesky First Amendment — then instead by private corporations. And meanwhile, said private corporations, eager to protect their money- making monopolies (in the political sense if not the legal one), are happy to comply; YouTube led the way, declaring in April that it would ban any coronavirus content that contradicted the same World Health Organization that tweeted on January 14th that there was no human-to-human transmission, but most tech companies have since fallen in line.

To be perfectly clear, I am in no way denying the presence of huge amounts of misinformation, which, by the way, continue to circulate widely despite tech companies’ best efforts. What concerns me is that this sort of dime store authoritarianism is resulting in the worst possible outcome:

China’s control of information is not ideal — the Wuhan coverup is about as compelling an example as you will ever see of the downsides of information control — but at the same time, it would be dishonest to not recognize that authoritarianism can be effective in actually controlling a pandemic. The West, though, will neither do what it takes to contain the coronavirus, even as we flirt with information suppression at scale. What makes this nefarious is that the cost of the latter is often unseen — it is the ideas never broached, and the risks never taken. But how do you measure opportunity cost?

Vaccines and Defaults

62/86 Here the coronavirus again provides a compelling example, this time in the form of Moderna’s RNA vaccines. David Wallace-Wells wrote in New York Magazine in December:

You may be surprised to learn that of the trio of long-awaited coronavirus vaccines, the most promising, Moderna’s mRNA-1273, which reported a 94.5 percent efficacy rate on November 16, had been designed by January 13. This was just two days after the genetic sequence had been made public in an act of scientific and humanitarian generosity that resulted in China’s Yong-Zhen Zhang’s being temporarily forced out of his lab. In Massachusetts, the Moderna vaccine design took all of one weekend. It was completed before China had even acknowledged that the disease could be transmitted from human to human, more than a week before the first confirmed coronavirus case in the United States. By the time the first American death was announced a month later, the vaccine had already been manufactured and shipped to the National Institutes of Health for the beginning of its Phase I clinical trial. This is — as the country and the world are rightly celebrating — the fastest timeline of development in the history of vaccines. It also means that for the entire span of the pandemic in this country, which has already killed more than 250,000 Americans, we had the tools we needed to prevent it.

As Wallace-Wells notes, this does not mean that the Moderna vaccine should have — or could have — been rolled out in January. It does, though, provide a powerful thought experiment about opportunity cost.

Opportunity cost is distinct from the costs normally calculated in a cost-benefit analysis: those costs are real costs, in that they are actually incurred. For example, if I want to buy a new sweater, it will cost me money. Opportunity cost, on the other hand, is the choice not made. To return to the sweater example, whatever funds I use to buy a sweater cannot be used to buy slacks — the slacks are the opportunity cost.

In the case of the vaccine, the opportunity costs of not deploying it the moment it was developed are enormous: hundreds of thousands of lives saved in the U.S. alone, millions around the world, and untold economic destruction avoided. Again, to be clear, I’m not saying this choice was available to us, and you can easily concoct another thought experiment where the vaccine goes horribly wrong. What makes this thought experiment worthwhile, though, is that it is such a powerful example of opportunity costs, and it is opportunity costs — the thing not learned — that are the biggest casualty of defaulting towards information control instead of free speech.

This isn’t the only mistaken default. Another topic that received minimal discussion was the concept of human challenge trials, where individuals could volunteer — and be richly compensated — to be exposed to the virus to more quickly test the vaccination’s efficacy. When I broached the idea on Twitter, plenty of folks were quick to cite the very real ethical concerns with the concept, but few seemed willing to acknowledge the opportunity costs incurred by waiting a single day longer than necessary, which ought to present ethical concerns of their own. There was also no discussion of making the vaccine broadly available in conjunction with Phase III trials, despite the fact that RNA-based vaccines are inherently safer than traditional vaccines based on weakened or inactivated viruses.

63/86 Similarly, when I expressed bafflement that people weren’t outraged by the FDA’s delay in approving the vaccines, the response of many was to insist the agency was rightly prioritizing safety. What, though, about the safety of those suffering from a pandemic that was accelerating? At every step the default was a bias towards the status quo of no vaccine, no matter how great the opportunity cost may have been.

What is most dispiriting, though, is this chart from Bloomberg:

As of this morning only 30% of distributed vaccines have been administered; that’s not quite as bad as it seems given the U.S. policy to hold back the second shot in reserve (itself a conservative decision that seems driven by the status quo default), but that still means millions of shots are unused and risk expiration. A major hold-up has been strict prioritization protocols, which prioritize equitable distribution over speed. It’s another misplaced default.

Technology and Opportunity

At this point many of you are surly muttering that this was the fastest vaccine development program in history, and that the U.S., for all of its struggles, has already vaccinated 1.42% of its population, the 3rd most in the world. Both are true, and worth celebrating.

64/86 At the same time, the timeline in that New York Magazine article is worth keeping in mind: the single most important reason these vaccines were developed so quickly was because of technological progress. This brilliant article explains how mRNA vaccinations work in computer programming terms, but the entire concept is built on years of work. The Harvard Health Blog noted:

Like every breakthrough, the science behind the mRNA vaccine builds on many previous breakthroughs, including:

Understanding the structure of DNA and mRNA, and how they work to produce a protein. Inventing technology to determine the genetic sequence of a virus. Inventing technology to build an mRNA that would make a particular protein. Overcoming all of the obstacles that could keep mRNA injected into the muscle of a person’s arm from finding its way to immune system cells deep within the body, and coaxing those cells to make the critical protein. Information technology to transmit knowledge around the world at light-speed.

Every one of these past discoveries depended on the willingness of scientists to persist in pursuing their longshot dreams — often despite enormous skepticism and even ridicule — and the willingness of society to invest in their research.

Longshot dreams, enormous skepticism, and even ridicule certainly sound familiar to anyone associated with Silicon Valley, and there is an analogy to be made between how technology accelerated vaccine development, even in the face of conservative defaults, and how the technology industry broadly has driven U.S. economic growth for decades now, even in the face of stagnation elsewhere.

What makes software so compelling to anyone ambitious is that (1) the potential applications are limitless and (2) the limitations on creation are your own imagination, not external regulations. This certainly has its downsides, as anyone trying to get a software release out the door understands; you can add new features and fix bugs forever, because after all, it’s just software. At the same time, you can build anything you want, without asking for permission, and what could be more exciting than that?

I’m reminded of this old Steve Jobs interview:

Jobs was talking about life in general, but the potential he articulates is much more easily grasped in software; what is notable is that it was the software-driven companies that performed the best throughout the pandemic. Perhaps the assumption that any problem is solvable is a muscle that can be developed in software and applied to the real world? Amazon is a striking example in this regard: the so-called “tech” company hired over 400,000 new people in 2020, as it brought its massive logistics network to bear in the face of overwhelming demand; no wonder many have been joking on Twitter that the company should be in charge of the vaccination rollout.

Or, better yet, we ought to figure out how to export the Amazon mindset beyond the world of technology, but to do that we need new defaults.

65/86 New Defaults

Start with these three:

First, it should be the default that free speech is a good thing, that more information is better than less information, and that the solution to misinformation is improving our ability to tell the difference, not futilely trying to be China-lite without any of the upside. Second, it should be the default that the status quo is a bad thing; instead of justifying why something should be done, the burden of proof should rest on those who believe things should remain the same. This sounds radical, but given the fact that the world is undergoing profound changes driven by the Internet, it is the attempt to preserve the unsustainable that is radical. Third, it should be the default to move fast, and value experimentation over perfection. The other opportunity cost of decisions not made is lessons not learned; given the speed with which information is disseminated, this cost is higher than ever.

The urgency of this reset should come from where all of this started: China. Dan Wang wrote in his 2020 letter:

This year made me believe that China is the country with the most can-do spirit in the world. Every segment of society mobilized to contain the pandemic. One manufacturer expressed astonishment to me at how slowly western counterparts moved. US companies had to ask whether making masks aligned with the company’s core competence. Chinese companies simply decided that making money is their core competence, and therefore they should be making masks. The State Council reported that between March and May, China exported 70 billion masks and nearly 100,000 ventilators. Some of these masks had problems early on, but the manufacturers learned and fixed them or were culled by regulatory action, and China’s exports were able to grow when no one else could restart production. Soon enough, exports of masks were big enough to be seen in the export data.

This, to be clear, was not the result of authoritarianism, but despite it; Taiwan exhibited the exact same sort can-do attitude alongside a free press, elections, and pig intestines in the legislature. China, meanwhile, is increasing control of the private sector; the latest example is Alibaba and Jack Ma, who was last seen in October criticizing the country’s regulators; China proceeded to kill Ant Group’s IPO, in a signal to any other billionaires with big ideas about who was boss, and Ma’s whereabouts are unknown. The U.S. can absolutely compete with this approach, not by imitating it, but by doing the exact opposite.

Intentions Versus Outcomes

A few years after Madrian and Shea’s landmark study, Richard Thaler, the Nobel-prize winning economist at the University of Chicago, devised a new approach for 401(k) enrollments that sought to overcome the downside of default choices (while preserving their upside). What I wanted to highlight, though, was this bit from the introduction of Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving:

66/86 Economic theory generally assumes that people solve important problems as economists would. The life cycle theory of saving is a good example. Households are assumed to want to smooth consumption over the life cycle and are expected to solve the relevant optimization problem in each period before deciding how much to consume and how much to save. Actual household behavior might differ from this optimal plan for at least two reasons. First, the problem is a hard one, even for an economist, so households might fail to compute the correct savings rate. Second, even if the correct savings rate were known, households might lack the self-control to reduce current consumption in favor of future consumption…

For whatever reason, some employees at firms that offer only defined-contribution plans contribute little or nothing to the plan. In this paper, we take seriously the possibility that some of these low-saving workers are making a mistake. By calling their low-saving behavior a mistake, we mean that they might characterize the action the same way, just as someone who is 100 pounds overweight might agree that he or she weighs too much. We then use principles from psychology and behavioral economics to devise a program to help people save more.

I suspect a similar story can be told about our slide to defaulting that free speech is bad, that the status quo should be the priority, and that perfect is preferable to good. These are mistakes, even as they are understandable. After all, misinformation is a bad thing, change is uncertain, and no one wants to be the one that screwed up. Everyone has good intentions; the mistake is in valuing intentions over outcomes.

To that end, the point of this article was not really to discuss the coronavirus or vaccinations: with regards to the latter, there is more to praise than to criticize, and I freely admit I am not an expert about either. And yet, that isn’t a reason to settle, or to not examine our defaults: why can’t we accomplish other big projects in a year? What else can we build with so much broad benefit so quickly? And critically, what can we change about our psychology and behavior to make that happen? New defaults are the best place to start.

From the beginning of Stratechery I have posited that writing about tech is a way to write about everything, given the way in which the Internet is affecting every part of society. The pandemic of 2020 has put this thesis on steroids: the lasting impact of COVID will be not entirely new ways of living, but rather the dramatic acceleration of trends that were already in place, particularly those enabled by technology. This includes real world issues like working-from-home, and new digital questions raised by the sheer quantity of information, much of it wrong, but some very right.

67/86 Stratechery explored all of these issues this year, in both 44 Weekly Articles and 141 Daily Updates (including 18 Daily Update Interviews).

This was also an exciting year for new product launches: in February Stratechery launched The Stratechery Podcast which lets you consume Stratechery in your favorite podcast player. Then, in May, I launched Dithering, a thrice-weekly 15 minute podcast, with Daring Fireball‘s John Gruber.

68/86 Today, as per tradition, I summarize the most popular and most important posts of the year on Stratechery.

You can find previous years here: 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013

Here is the 2020 list.

The Five Most-Viewed Articles

The five most-viewed articles on Stratechery according to page views:

1. The TikTok War — How TikTok exposed Facebook’s blindspot, thanks to its Chinese roots, and why those Chinese roots make TikTok a genuine concern. See also this Daily Update comparing TikTok to Quibi, and this Daily Update about how the TikTok ban went wrong. 2. The End of OS X — OS X is retired, but fortunately, its legacy appears to live on in macOS 11.0. 3. The Anti-Amazon Alliance — Google Shopping is changing its model, suggesting Google is joining the Anti-Amazon Alliance; 3rd-party merchants should do the same. 4. India, Jio, and the Four Internets — There are four Internets: China versus the U.S., and the E.U. and India. India’s potential new model rests on Jio. See also this Daily Update about how Jio’s success shows why Facebook Free Basics was the wrong approach.

69/86 5. The Slack Social Network — Slack lost to Microsoft head-to-head, but has shifted to a horizontal strategy that the vertically-oriented Microsoft can’t match. See also this Daily Update about Salesforce’s acquisition of Slack.

Coronavirus and Information

The dominant story of 2020 was obviously COVID, but what was particularly interesting from a tech perspective were the debates about surfacing new information while battling misinformation. Notably, the first four articles were a sort of miniseries published in March; the final article discussed the same issues in the context of the election.

70/86 The Big Picture

These are the articles where writing about tech means writing about the world broadly; this has never been more true than in 2020, particularly given that we are at The End of the Beginning.

The End of the Beginning — The beginning of technology was about the shift from batched computing in one place to continuous computing everywhere. That era of paradigm changes may be over, which means the real changes are only beginning. See also this Daily Update which discussed The End of the Beginning in the context of Carlota Perez’s Technological Revolutions and Financial Capital. Coronavirus Clarity — The coronavirus crisis is making clear just how powerful tech companies are; hopefully this leads to a much more productive conversation about how that power should be utilized or regulated. See also How Tech Can Build, about Marc Andreessen’s seminal essay. Chips and Geopolitics — TSMC showed the power of modularization, and now they are core to the U.S. national security strategy. See also this Daily Update about TSMC, Intel, and U.S. national security. Dust in the Light — The Internet ends gatekeepers and increases transparency, which has world-altering effects — both good and bad. Social Networking 2.0 — Facebook and Twitter represent the v1 of Social Networking; it’s a bad copy of the analog world, whereas v2 is something unique to digital, and a lot more promising. See also this Daily Update about how Facebook failed to build a social media platform.

71/86 Niches and Direct-to-Consumer

While Stratechery frequently discusses Aggregation Theory, a major focus in 2020 were companies and platforms that go direct-to-consumer by focusing on niches.

Email Addresses and Razor Blades — The fate of Harry’s and other DTC companies, particularly relative to companies like Credit Karma, highlight how the Internet elevates the importance of demand over supply. Platforms in an Aggregator World — Facebook Shops are good for Shopify merchants, but bad for Shopify; the answer is to push more into the real world. See also the afore-linked The Anti-Amazon Alliance. Never-Ending Niches — The Internet changed how media competes to focus and quality, but quality is defined by your niche. Disney and Integrators Versus Aggregators — Disney’s reorganization reinforces their integrated strategy; there is a lot to learn for anyone competing with Aggregators. The Idea Adoption Curve — Mapping the technology adoption curve to ideas gives insights as to which business models work on which parts of the addressable market.

72/86 Antitrust, Regulation, and the App Store

One month after writing Aggregation Theory I noted that regulation was inevitable; that inevitable moment arrived in a big way in 2020, with Congressional hearings, reports, and multiple antitrust lawsuits. Apple also received unprecedented attention for its control of the App Store; both were big topics on Stratechery:

First, Do No Harm — As regulators look closer at acquisitions they should be extremely wary of unintended consequences. The current system works well for everyone, most of the time. Antitrust Politics and Anti-Monopoly vs. Antitrust focus on the antitrust subcommittee hearing with big tech executives, and the report that followed. See also this Daily Update for the questions Congress should have asked. United States v. Google — The Justice Department’s lawsuit against Google is appropriately narrow, and if it fails it gives a template for Congressional action. See also Is the Internet Different?, which draws direct connections between Aggregation Theory and my views on antitrust. Apple and Facebook and Privacy Labels and Lookalike Audiences focus on the sharpening dispute between Apple and Facebook, which, despite their differences, are more dependent on each other than Apple in particular realizes. See also this Daily Update about the FTC’s lawsuit against Facebook. Apple, Epic, and the App Store explained how Apple leveraged its integration to control the App Store, while Rethinking the App Store tried to figure out a better approach that Apple might actually implement.

73/86 Five Companies

Stratechery had its usual focus on specific companies and the evolution of their strategies in 2020. In addition to the afore-linked India, Jio, and the Four Internets:

Visa, Plaid, Networks, and Jobs — The history of credit cards helps explain why Plaid is valuable to Visa, and how Visa can make it significantly better. See also this Daily Update about the Justice Department’s lawsuit to block the Visa-Plaid acquisition. Apple, ARM, and Intel explained how Apple ended up replacing Intel chips with their own ARM chips, which is a core part of Apple’s Shifting Differentiation to superior hardware integrated with exclusive software. See also this Daily Update about Intel’s ongoing struggles. Nvidia’s Integration Dreams — Nvidia’s acquisition of ARM only makes sense from a financial perspective, unless you buy Jensen Huang’s datacenter dreams. 2020 Bundles — The state of bundles in 2020: Netflix, Disney, Amazon, Microsoft, and Apple. Plus, Microsoft’s purchase of ZeniMax. See also this Daily Update with more about Microsoft’s ZeniMax purchase, and this Daily Update that explains how Microsoft’s Xbox strategy is dramatically different from Sony’s PS5 strategy.

74/86 Stripe: Platform of Platforms — Stripe’s announcement of Treasury — banking-as-a- service — manifests the breadth of the company’s ambition.

Stratechery Interviews

Thanks to the launch of the Stratechery Daily Update Podcast I devoted more Daily Updates this year to interviews, including:

Dan Wang on technology and manufacturing in China. Bill Bishop on U.S.-China relations. Matthew Ball on Disney and Bob Iger. Automattic CEO Matt Mullenweg on working from home. Eugene Wei on the half-life of information. Tim Culpan on Taiwan, COVID, and Apple’s supply chain. Zeynep Tufekci on masks, media, and information ecology. Okta CEO Todd McKinnon on Okta’s identity opportunity and operating during COVID. Ethan Sherwood Strauss on the media and the NBA. NBA Commissioner Adam Silver and Microsoft CEO Satya Nadella on the new partnership between Microsoft and the NBA. John Gruber about being a niche publisher and the launch of Dithering. Slack CEO Stewart Butterfield on Slack’s acquisition of Rimeto and Slack as a social network. Paul Mozur on technology in China.

75/86 Twilio CEO Jeff Lawson on Twilio’s acquisition of Segment. Microsoft EVP Phil Spencer on Xbox’s service-based approach to gaming. MongoDB CEO Dev Ittycheria on how MongoDB fought off Amazon’s encroachment on open-source business models. See also this Daily Update about how well MongoDB’s approach has worked. BuzzFeed CEO Jonah Peretti on BuzzFeed’s evolution and acquisition of HuffPost. Stripe President John Collison on Stripe’s ambition.

The Year in Daily Updates

Fifteen of my favorite Daily Updates:

Clayton Christensen Passes Away, Professor Christensen and I, Kobe Bryant and Measuring Your Life — There is no greater influence on Stratechery than Professor Clayton Christensen, but it is another death — Kobe Bryant’s — that reminds me of what truly matters. Epic Systems and Electronic Health Records, Aggregators and Data Portability, Epic’s Privacy Objections — Epic Systems, an electronic health records company, is protesting a mandate that they make consumer health care available via API. Their arguments highlight the tension between interoperability and privacy. Spotify Earnings, Podcasts and Lifetime Value, The Ringer Acquisition — Spotify’s mixed earnings, why podcasts are uniquely valuable to the company, and where The Ringer fits in. See also this Daily Update about Spotify’s acquisition of Megaphone and what it says about their strategy.

76/86 Zoom was covered in the Daily Update multiple times, both because of its explosive growth, and also its ties to China. See here, here, and here Apple and Amazon Make a Deal, Three Angles, Apple vs. Amazon — Apple and Amazon make a deal; I suspect it has been in the works for a long time, including Apple Music being on Alexa. See also Apple, Amazon, and Common Enemies. Facebook Earnings, Auction Dynamics, Full Steam Ahead — Facebook earnings demonstrated the power of its auction-based direct-response model; what makes it different from Google is Zuckerberg’s drive. Media, Regulators, and Big Tech; Indulgences and Injunctions; Better Approaches — Blaming Facebook and Google for the media industry’s trouble inevitably leads to bad regulations with unintended consequences and the end of accountability for big tech. Trump’s Executive Order, Section 230 In Court, Public Forums — President Trump is poised to sign an executive order that applies to social networks; its reasoning about Section 230 and public forums is not in line with judicial precedent. Zuckerberg’s Choice, Zuckerberg’s Power, Zuckerberg’s Conviction — Why Mark Zuckerberg has made the right choice about Trump’s posts, why his power is a problem, and why his conviction is impressive. Australia’s News Media Bargaining Code, Breaking Down the Code, Australia’s Fake News — Australia’s new media code forcing Google and Facebook to pay incumbent media companies is wrapped in dishonesty about the reality of the Internet. Coinbase’s Clarification, Spotify and Joe Rogan, A Framework for Politicization — Coinbase and Spotify are both grappling with political questions, which is something all companies should prepare for. Amazon One, How Amazon One Works, Good or Bad Idea? — Amazon announces Amazon One: how does it work, and is the underlying technology a good idea? IBM Splits, IBM Skepticism, IBM and Antitrust — IBM is splitting itself up, and while it makes sense, it is an admission of failure. It’s also a lesson for regulators. Tech in Congress, Again; Twitter vs. the New York Post; Who Are the Refs? — Congressional tech hearings are becoming more compelling with time, as tech companies run the risk of making not just economic enemies but political ones. WarnerMedia to Stream Movies First Day, AT&T Versus HBO, Self-Disruption — WarnerMedia’s move to stream all of its movies on HBO Max appears to be value disruptive, but if the company is actually meaningfully responding to disruption, that was inevitable.

77/86 I am so grateful to the Stratechery (and Dithering!) subscribers that make it possible for me to do this as a job. I wish all of you a Merry Christmas and Happy New Year, and I’m looking forward to a great 2021!

It’s a rather motley crew. One is a nurse, another a lawyer, a third an investment adviser. There are three programmers, a soldier, and a data scientist. An entrepreneur, a consultant, and, I just found out today, a nuclear engineer. The ring leaders are a hotel clerk and a person we have known for years, yet no one knows his name, and then there is me.

We talk about all kinds of things: video games and COVID, family frustrations and bad bosses, and whether Aaron Rodgers is better than Patrick Mahomes (if only Rodgers had had Andy Reid). And, of course, the Milwaukee Bucks. That’s the reason we are in the same group, after all, which is another way of noting that all of us — except the Kansas City Chiefs fan — are originally from Wisconsin. And yet many of us had never met each other until a couple of years ago, when we attended a Bucks game together; the physical world was a trailing indicator.

Home on the Internet

While my Twitter bio has changed over the years, the last sentence has, as far as I can remember, stayed the same:

78/86 The proximate cause for that sentence was the fact I lived in Asia, even as my Twitter- personae was firmly rooted in the United States, whether that be because of my longstanding interest in technology, or enthusiastic support of Wisconsin sports teams. And yet, when I moved back to the United States, my interest and relationship to Taiwan remained, and Twitter specifically and the Internet broadly were a way to stay connected; the bio still fit.

For a time that bio described Twitter as well: for a particular type of person, someone who thrived on information — the more the better! — Twitter was a place to not simply learn but to find people like yourself. That is how the “Fiefdom”, the name the aforementioned motley crew gave ourselves, found each other. We all loved the Bucks — or, perhaps more accurately, loved to complain about the Bucks — but while Twitter helped us find each other, over the past few years the medium has grown too noisy, performative, and combative to be a place to simply hang out; we have a group DM, which, frankly, sucks, but at least it is our own place.

That’s not my only online community: while the writing of Stratechery is a solo affair, building new features like the Daily Update Podcast or simply dealing with ongoing administrative affairs requires a team that is scattered around the world; we hang out in Slack. Another group of tech enthusiast friends is in another Slack, and a third, primarily folks from Silicon Valley, is in WhatsApp. Meanwhile, I have friends and family centered in Wisconsin (we use iMessage), and, of course Taiwan (LINE for family, WhatsApp for friends). The end result is something I am proud of:

79/86 The pride arises from a piece of advice I received when I announced I was moving back to Taiwan seven years ago: a mentor was worried about how I would find the support and friendship everyone needs if I were living halfway around the world; he told me that while it wouldn’t be ideal, perhaps I could piece together friendships in different spaces as a way to make do. In fact, not only have I managed to do exactly that, I firmly believe the outcome is a superior one, and reason for optimism in a tech landscape sorely in need of it.

Social Networking 1.0

Earlier this year in The TikTok War I explained why the first version of products on the Internet were usually a bit of a dud:

It is always tricky to look at the analog world if you are trying to understand the digital one. When it comes to designing products, a pattern you see repeatedly is copying what came before, poorly, and only later creating something native to the medium.

Consider text: given that newspapers monetized by placing advertisements next to news stories, the first websites tried to monetize by — you guessed it — placing advertisements next to news stories. This worked, but not particularly well; publishers talked about print dollars and digital dimes, and later mobile pennies. Sure, the Internet drew attention, but it just didn’t monetize well.

What changed was the feed, something uniquely enabled by digital. Whereas a newspaper had to be defined up-front, such that it could be printed and distributed at scale, a feed is tailored to the individual in real-time — and so are the advertisements. Suddenly it was print that was worth pennies, while the Internet generally and mobile especially were worth more than newspapers ever were.

80/86 The most famous feed in technology is the Facebook feed, which through its algorithmic magic made the lives of your friends and family seem far more tantalizing than they probably were in reality. The result was a social network that the FTC, in a lawsuit filed last week, claimed was a monopoly:

Facebook holds monopoly power in the market for personal social networking services (“personal social networking” or “personal social networking services”) in the United States, which it enjoys primarily through its control of the largest and most profitable social network in the world, known internally at Facebook as “Facebook Blue,” and to much of the world simply as “Facebook.”

The FTC focused on “friends and family”:

As Facebook has long recognized, its personal social networking monopoly is protected by high barriers to entry, including strong network effects. In particular, because a personal social network is generally more valuable to a user when more of that user’s friends and family are already members, a new entrant faces significant difficulties in attracting a sufficient user base to compete with Facebook.

Facebook always had an inherent advantage over Twitter in that its network, at least in the beginning, was based on networks that already existed in the offline world, namely, people you already knew. That made the service immediately approachable and useful for basically everyone. Twitter, on the other hand, was more about following people you didn’t know based on your interests. This theoretically applied to everyone as well, but uncovering those interests and building an appropriate list of people to follow had to be done from scratch.

I increasingly wonder, though, how much of my previous Facebook analysis was wrong not because I misunderstood Facebook, but because I overestimated Twitter. I noted last week while writing about the FTC’s lawsuit in the Daily Update:

I would prefer a world where the [Instagram] deal didn’t happen. As I have noted I believe that absent a deal there would be more competition in the advertising space, and more consumer-focused startups.

At the same time, I do have serious rule-of-law reservations about undoing a deal eight years on, particularly given the fact that it appears that the advertising-supported space is doing better than I thought a few years ago: Snapchat in particular is building a great business, LinkedIn is doing much better, and TikTok is obviously on its way. Honestly, I wonder to what extent Twitter’s endemic poor management made the advertising space seem worse than it actually was?

I would go further: Twitter’s incompetence didn’t simply make Facebook’s advertising business look more dominant than it should have; it led all of us — including the FTC — to miss the point that friends and family was Social Networking 1.0: something imported from the analog world that, as time goes on, will be viewed as inferior to the far richer universe that is Social Networking 2.0.

Twitter Incompetence and Identities

81/86 Go back to the Fiefdom that I started with, and the terrible experience that are Twitter group direct messages. It’s impossible to keep your place, so if you follow a link or answer another message, you are dropped to the bottom of the thread. Of course there is no searching, and no third-party API so that someone else could do a better job. The thread also frequently fails to update in real-time, meaning you sometimes reply to questions that have already been answered, which is unfortunate because there is no way to respond to individual messages. It’s honestly awful.

And yet, we use it anyway, because that is where our friendship group formed around our shared interest in the Bucks, and it is the interest graph where Twitter has always had the potential to differentiate itself; in 2015, when it was already clear that the company had missed its opportunity to be great, I wrote in Twitter and What Might Have Been:

What makes Twitter the company valuable is not Twitter the app or 140 characters or @names or anything else having to do with the product: rather, it’s the interest graph that is nearly priceless. More specifically, it is Twitter identities and the understanding that can be gleaned from how those identities are used and how they interact that matters.

Identities — plural — referred to the many users of Twitter, but a second thing that is interesting about my Twitter group is that @benthompson is not a member; my alter-ego, @notechben is. I created that account — which, I will tell you right now, is pretty annoying to follow — so that I could tweet freely during basketball games without losing followers from my primary Twitter account. After all, just because you like my takes on tech, it does not necessarily follow that you like my takes on sports.

What I increasingly realize, though, is that separating my identities on Twitter does not mean a lesser experience, but a far superior one; social interaction in any medium is always a balance between self-expression and the accommodation of others, which means that in the analog world it is a constant struggle to strike a balance between being myself and annoying everyone around me at some point or another. The magic of the Internet, though, is that you can be whatever you want to be:

There are clear downsides to this property of the Internet, particularly on public forums like Twitter, where trolls can attack anyone, bots can astroturf any subject, and even nation-states can seek to incite civil unrest. That’s the thing, though: public broadcast mediums are Social Networking 1.0 as well.

82/86 Image from The New Yorker cartoon by Peter Steiner, 1993

From v1 to v2

Remember that the key characteristic of v1 digital products is that they simply copy what already exists offline. For Facebook that meant digitizing connections between friends and family, and for Twitter it meant broadcasting conversations as if you were sitting at a bar. Such literal translations, though, have limits: Facebook soon found it necessary to augment content from friends and family with professionally produced content from publishers, while public Twitter conversation has disappeared in the face of performative putdowns and political proclamations. The problem is that digital makes analog goods worse: a lot of what your friends and family believe is boring or objectionable, and conversations constrained by the geography of a bar simply don’t translate to a worldwide audience.

What truly makes a category is v2: products that are only possible because of the unique properties of digital. That, for example, is why TikTok is such a threat to Facebook’s hold on attention; again from The TikTok War:

83/86 While it is easy for users to create text updates, and, with the rise of smartphones, even easier to create pictures, producing video is difficult. Until recently, phone cameras were even worse at video than they were photos, but more importantly, compelling video takes some degree of planning and skill. The chances of your typical Facebook user having a network full of accomplished videographers is slim, and remember, when it comes to showing user-generated content, Facebook is constrained by who your friends are…

ByteDance’s 2016 launch of Douyin — the Chinese version of TikTok — revealed another, even more important benefit to relying purely on the algorithm: by expanding the library of available video from those made by your network to any video made by anyone on the service, Douyin/TikTok leverages the sheer scale of user-generated content to generate far more compelling content than professionals could ever generate, and relies on its algorithms to ensure that users are only seeing the cream of the crop.

TikTok’s “network”, such that it is, is the entire world, which means its content is better than Facebook’s could ever be, which means it is a far better attention sink than Facebook could ever be.

Meanwhile, on the other extreme, public broadcasting by default — whether that broadcasting be to the entire world, as on Twitter, or to all of your friends and family, as on Facebook — actually constrains your ability to communicate, because you run into the conflict I described earlier: your “whole self”, versus others’ only somewhat overlapping interests.

This is where messaging is a much more natural fit, and, as far as the depth of your network is concerned, messaging services are just as much a threat to v1 social networks connectivity as TikTok is to Facebook’s hold on attention: I can simultaneously be a Bucks fan with the Fiefdom, be a tech enthusiast with my Slack group, explore ideas with my WhatsApp group, and talk politics with my trusted friends. The fact that I am not my whole self in any of these groups is a feature, not a bug, and one that is uniquely made possible by digital.

Social Media Optimism

Facebook, despite its immense success, has been far more attuned to the inadequacies of its social networking model than Twitter has, and has been pushing aggressively to adapt its products to a v2 world. That includes its shift to emphasizing Groups in 2017, and its focus on messaging, including the spin-out of Messenger, the acquisition of WhatsApp, and its attempts to unify the messaging experience across its platforms.

Even that, though, suggests that the company can’t entirely escape its roots: having one identity is a core principle for Facebook, which is great for advertising if nothing else, but at odds with the desire of many to be different parts of themselves to different people in different contexts. Twitter, meanwhile, is unlikely to ever recover from its missed opportunity to dominate the interest graph.

Instead, the role for both products will be as a bridge between attention-focused products on one side, and private interest-defined trusted groups on the other.

84/86 Their networks still have value, but primarily as a tool for distribution and reach of content that will increasingly be created in one place, and discussed in another.

This, needless to say, doesn’t seem like much of a monopoly, certainly not one worth reaching back in time to retroactively change the rules of the game. What is encouraging, though, is that this view also gives hope for the seemingly hopeless climate that has been fostered by v1 social networks. The problem with forcing everyone to be their “whole selves” for the world, whether they want to or not, is that it becomes strikingly difficult to find common ground. After all, there is always something about everyone that is annoying or off-putting.

On the flipside, to the extent that v2 social networking allows people to be themselves in all the different ways they wish to be, the more likely it is they become close to people who see other parts of the world in ways that differ from their own. Critically, though, unlike Facebook or Twitter, that exposure happens in an environment of trust that encourages understanding, not posturing.

This has been the case for me: I am in private groups with plenty of folks that I disagree with about a whole host of things, but because we share a common interest, and are ok being trusted friends on that vector, I have learned a lot about why they believe what they believe about a bunch of issues. I think it helps my analysis, and I think it makes me a better citizen. That certainly isn’t our expectation of social media today, but that is because we are stuck on v1.

85/86 .

86/86