Policing the power of tech giants - Axios
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Policing the power of tech giants

Rebecca Zisser / Axios

The world's largest tech companies — Google, Facebook, Amazon, Microsoft and Apple — have become enormous concentrations of wealth and data, drawing the attention of economists and academics who warn they're growing too powerful. "Platform companies have captured the economy," said Jonathan Taplin, who argues in a new book and a recent NYT op-ed that the dominant platforms are so big that they're undermining competition.

Our thought bubble: Despite populist promises, cracking down on Silicon Valley is not one of President Trump's near-term priorities. Makan Delhrahim, Trump's top antitrust enforcer at the Justice Department, has pledged to to enforce antitrust violations with respect to online platforms just as he would with any other industry, but insiders expect him to be cautious. And Maureen Ohlhausen, acting FTC chair, said in a recent speech that the agency has no intention of meddling in the way tech companies use algorithms and data.

Sheer size:

  • Facebook, Amazon, Apple, Microsoft and Google parent company Alphabet are the top five contributors to the S&P's 500 gains this year and their climbs helped drive the stock market's recent rally
  • These mega-cap tech stocks have earned the acronym FAAMG from Goldman for their performance, adding $660 billion in market value this year.
  • The market cap of tech giants is already greater than the GDP of large U.S. cities: On that basis, Google is bigger than Chicago, Amazon is bigger than Washington DC.
  • "It could ultimately lead to populist calls for redistribution of the increasingly concentrated wealth of Silicon Valley as the gap between tech capital & human capital grows ever-wider," according to a recent Bank Of America Merrill Lynch note.

Economists tend to agree that concentration has increased across U.S. industries, including the internet platform industry. What they don't agree on, though, is whether it's time for antitrust authorities to step in and if there's even a legal mechanism to do so.

Who's the regulator? The FCC regulates the networks these companies use to reach consumers, but not the online platforms themselves. That duty falls to the FTC, but the agency doesn't have the same rule-making authority and therefore relies on after-the-fact enforcement actions when companies mislead consumers or violate their own rules, such as privacy policies. Antitrust laws, some lawyers argue, were designed to oversee physical industries like steel and oil— not the new breed of digital commerce companies that have created entirely new markets.

"High-tech has no regulator so there's a huge policy gap" said Gene Kimmelman, CEO of consumer interest group Public Knowledge and former DOJ official under the Obama administration, who expects greater antitrust scrutiny of tech company moves. "The pot is simmering and it's getting hotter. I think it's a question of whether they overreach in an environment where people are distrustful of their power."

The case for more scrutiny: Overreaching is what Microsoft did in the late-90's, when a judge ruled it had attempted to monopolize the web browser market and unlawfully tie its web browser to its operating system, a violation of the Sherman Antitrust Act.

But the government's lack of enforcement over the past decade could lead to much stronger regulation as populist policymakers start to take notice. Gary Reback, an attorney at Carr Ferrell who led the charge against Microsoft and now does antitrust work against Google, said, "If this behavior goes unchecked for another 10 years, you're going to see the [formation of] the Internet Commerce Commission" to reign the companies in.

The antitrust sanctions against Microsoft helped lead to the startups that later displaced it, some argue.

"People don't fully appreciate that the reason we have Google and Facebook today is because there was an antitrust enforcement action against Microsoft that slowed down the ability of Microsoft to monopolize the internet, the browsers, the data, search, and so on," said Luigi Zingales, finance professor at the University of Chicago Booth School of Business. "Today's monopolies are yesterday's startups. In a good system, this keeps changing."

European regulators have taken much stronger positions against the data practices of these tech giants. Barry Lynn, head of New America's Open Markets program, thinks the EU's higher level of scrutiny is has already caught the attention of some U.S. policymakers.

The case against: Not everyone is ready to take the tech companies to task. In the complicated internet platform and data markets, it's sometimes hard to tell what's anticompetitive and what's just efficient business.

In the case of internet platforms, markets overlap and are are tough to clearly define. While Google may have 88% market share of search advertising, Facebook more than 70% of social media on mobile and Amazon 70% of the ebook market, at some level all three are competing against one another for time and attention and are moving into each others' turf.

"Each of these companies provides different things. That differentiation of platforms — search engines, social networks, vending websites, etc. — may reduce the tendency of concentration and the ability to dominate an entire market," said Michele Polo, economics professor at Italy's Bocconi University.

Market share does not necessarily equate to market power, said Michael Beckerman, CEO of the Internet Association, which represents Amazon, Facebook, Google and Microsoft in Washington D.C. Speaking on a panel about competition last week, he pointed to low barriers of entry to compete in the internet sector, and the consumers' ability to quickly switch to a new service with a single click.

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Microsoft taps AI, Reddit to make Bing smarter

Microsoft AI and Research chief Harry Shum, speaking in San Francisco Wednesday. Photo: Ina Fried/Axios

Microsoft announced a bunch of new partnerships Wednesday as it aims to show itself as a leader in the field of artificial intelligence. It's also adding a bunch of AI-powered features to its own products, including its Bing search engine along with a deep integration of content from Reddit.

Why it matters: AI is one of the hottest areas in tech and Microsoft is competing with Google, Facebook, IBM and others for talent, mindshare and deals.

Partnerships: Microsoft announced efforts with a range of companies, including Reddit, UPS and China's Cheetah Mobile. In the Reddit deal, Microsoft's Bing search engine will use content from the online discussion community, including its popular "Ask Me Anything" Q&As.

Internal efforts

  • On the Bing front, Microsoft is using AI to deliver answers that combine information from multiple sites. That can allow results that compare different arguments on an issue, explore the differences between two things or just deliver a summary of facts from more than one place, with footnotes showing where the information came from. It is also making Bing more conversational and allowing people to search within images.
  • With Cortana, Microsoft is trying to help its digital assistant stand out from a crowded pack that includes Apple's Siri, Google's Assistant and Amazon's Alexa. Microsoft's case is that it is the only digital assistant that stretches across work and personal life. To that end, Microsoft said Cortana can now understand calendar and other data from Google's Gmail. It's also building Cortana into Android apps, including the CM Launcher app from China's Cheetah Mobile.
  • Microsoft is also expanding its use of AI in Office 365. A new insights feature will automatically make charts showing trends within a complex spreadsheet. Within word, AI will help make sense of acronyms within a document using other documents within the company. Microsoft already prioritizes which e-mails to read first, but a new feature will help find the action items within Outlook.
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The debate over inequality

Last week, we reported that the wage inequality gap in the U.S., a primary source of the polarization among Americans, has been shrinking: For five straight quarters, wages have been growing the most for U.S. workers with only a high school diploma.

Data: Indeed analysis of BLS monthly jobs data; Chart: Axios Visuals

But readers pushed back:

  • "Surely you're kidding?" wrote James Harvey, executive director of the National Superintendents Roundtable. The percentage wage increase is better for high school graduates, he said, but the dollar increase still favors the rich: a 3.3% raise for someone making $20,000 a year is $660—only an eighth of the $5,000 raise going to someone earning $500,000 and getting a 1% increase.
  • In a phone call, Upwork CEO Stephane Kasriel told me, "The 1% is doing a lot better, and for the 30% and 40% at the bottom, it keeps getting worse."

Quick take: The times do indisputably favor the rich:

  • When adjusted for inflation, U.S. wages are up only 10% from almost a half-century ago.
  • Meanwhile, wealth held by the top 1% has surged: it rose to 38.6% of the total in 2016, from 36.3% in 2013, the Fed said in a report in September, while the bottom 90%'s wealth has fallen for almost three decades—last year, it was 22.8% of the total, compared with 33.2% in 1989.
  • FoW reader W.Spackman linked to this July report by Deloitte, which said income inequality today is comparable with the Gilded Age of robber barons, in the 19th century (Figure 3).

And Charlie Allenson, a FoW reader in New York, made another point: "Many of those chronically not working are not getting back to work. Namely, those more 'mature' workers. Ageism rolls on. Personal example: People look at my website and love my work. They meet me, see the gray hair and suddenly they're going in a 'different direction.' This is a constant for me. And it sucks."

But there are in fact signs of an improvement in the fortunes of ordinary people, and wages and salaries are among them, says Jed Kolko, chief economist at Indeed.com, the jobs listing website, who wrote the blog post on which we were reporting. In an email exchange, Kolko told me:

  • Harvey and Kasriel are correct to single out the vast concentration of income at the top, comprised largely of non-wage earnings like capital gains, interest and dividends—which combined are how the wealthy make most of their money.
  • But wages earned for work are another lens into the inequality story, and in that realm, the gap indeed has narrowed.
  • The shrinking wage gap is important to watch because wages and salaries are a large component of pre-tax money income, which includes interest, dividends and income from property. The Bureau of Labor Statistics puts the proportion at 76.8%. (see pages 8-9 in this BLS report).

The Fed, too, has noted the trend favoring less-educated workers. According to a Fed report released in September, income rose from 2013 through 2016 for all income groups, after accounting for inflation, which was a change from the prior three years, when income was stagnant. But the highest growth — an average of 25% — was among families without a high school diploma; in the 2010 to 2013 period, income fell for these workers, the Fed said.

Thought bubble: Inequality is not an absolute metric. If it were, ordinary people could legitimately lash out about wealth at the top regardless of how they themselves were faring. The rise of wages at the bottom and in the middle is slow, and the trend could halt—that is a point that Kolko makes. But it remains notable that the numbers are no longer going only in one, inexorable direction—there are metrics pointing to growing wages and salaries, and more jobs, for those whom the economy has been leaving behind.

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Bitcoin: 'This is a casino, not an investment'

Illustration: Lazaro Gamio / Axios

Bitcoin is up about 1,700% since the start of the year. Some attribute the surge to ordinary, if enthusiastic, investment, along with the forces of supply and demand. Others say it's a bubble, and that it will ultimately burst. Joe Borg, president of the North American Securities Administrators Association, a grouping of state securities officials, suggests it's the latter. "This is a casino," he tells Axios, "not an investment."

The bottom line: Borg, who is also director of the Alabama Securities Commission, says he could be wrong and that those who say bitcoin is just "another type of investment" will be proven correct. But he sees worrying signs of a classic investment mania.

Among the signs:

  • People have told him they have taken out home equity lines of credit to buy bitcoin.
  • Those doing so, he said, are mostly millennials and young baby boomers.
  • "They seem to think anything electronic is a game," Borg said. "There are entrepreneurs who run Facebook, and they put this in the same category."

Thought bubble: If bitcoin collapses, which has been the normal course in big, sudden investment manias, the price is highly unlikely to go to zero, meaning a lot of people will still be in the money. But lots of people will lose, too, including perhaps some who have taken out those home equity lines of credit.

That there is a fever is indisputable. It is global, and especially heavy in Asia. Ordinary South Koreans are the most aggressive bitcoin investors, in addition to Hong Kong Chinese, Japanese and Vietnamese, report the WSJ's Steven Russolillo and Eun-Young Jeong. Together, they account for almost 80% of global bitcoin trading. Other reminders of fevers past:

  • Most of these Asians buying bitcoin are the general public, not professional traders.
  • At the point last week when bitcoin went above $17,000, it was almost $25,000 in South Korea, almost 50% higher, the WSJ said. In other words, the trade is chaotic to the point of irrationality.
  • At the FT, Izabella Kaminska writes today that even central banks are "getting drunk on the collective cryptocurrency/blockchain Kool-Aid."

A point that increasing numbers of observers are making is that bitcoin is only an investment, with no other real-life, large-scale utility, at least at present: bitcoin and other cryptocurrencies are too slow and cumbersome to serve as money, their original purpose.

  • In a speech today in Sydney, Phillip Lowe, the governor of the Reserve Bank of Australia, makes the point: "The current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment."
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This robot went to college

Bina48 graduates in the philosophy of love. Photo courtesy William Barry.

Bina48 appears to be the world's first robot college student. Along with 31 classmates, she took a 16-week course this fall in the philosophy of love, taught at Notre Dame de Namur University, in Belmont, CA, graduating with a grade of "superior quality." ​

Quick take: William Barry, who taught the class and worked with Bina48's artificial intelligence developers to make her ready for college rigor, says the aim was to improve the robot's ability to "communicate and build rapport with human classmates." Some students might start with apprehensions about AI, but Barry wanted Bina48 to dispel them. "We wanted to start the conversation with students not from a place of experiential fear, but as a place of opportunity," he said. "We're teaching an artificial intelligence about how we want it to help us in the flourishing of humanity."

How it works: Bina48 was designed to "learn" by capturing a mosaic of general knowledge that any college student would have — what Barry calls "mind files" — in addition to specific information about the course. Along the way last semester, Bina48 was able to modify her store of knowledge in line with what she was learning, Barry said.

The course went something like this:

  • Bina48 could listen in classes held by Skype, and reply with a voice.
  • When a subject arose, she would peruse her mind file and figure out where the class conversation was going. "It's not like she's reading from a script and then repeats it back," Barry said.
  • Among her classwork, Bina48 participated in a debate with students at the U.S. Military Academy at West Point. The subject: the use of nonlethal weapons in warfare.

What's next: Bina48 is signed up for an "ethics of emerging technologies" course next semester.

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Working dogs: People buy when canines are selling

Illustration: Rebecca Zisser / Axios

For several years, dogs have been among the biggest stars on Instagram, with hundreds of thousands of followers and enormous advertising deals. The reason? Many Instagram users trust dogs more than human models.

Why it matters: In an age where brands and platforms are radically rethinking how ads are produced and delivered to consumers, "animal influencers," as the ad industry calls them, produce sponsored content that people actually choose to follow and engage with. “People are going to get ads — whether it's banner ads, whether it's influencer ads," Loni Edwards, founder of The Dog Agency, tells Axios. "But they want to see them in a way that's going to make them smile."

The business: In 2015, Edwards, a Harvard Law graduate, left the corporate law world behind when she founded The Dog Agency, which manages pet influencers.

  • The Dog Agency has about 100 clients — dogs, cats, pigs, hedgehogs. The majority have hundreds of thousands of followers.
  • You might have heard of Harlow and Sage (1.6 million Instagram followers), The Dogist (2.9 million), and Tuna (1.9 million).
  • Edwards cites an "incredibly powerful" campaign that she did for Urban Decay, a makeup brand, involving numerous pet influencers. “It was about how Urban Decay doesn't test on animals, and it's about putting that message next to these pets that people already have a strong connection to," she said. Urban Decay did not respond to an email.
  • And there are ways to expand: The Dog Agency has its own pet content site called Pet Insider, and last month sponsored "PetCon," a weekend pet-focused convention in New York based around some of the agency's most famous animal influencers.

Why it connects: While animal influencers first came to prominence promoting pet-friendly products like Barkbox, a monthly dog-focused subscription service, the most prominent influencers today tend to work closely with human models. One approach is to embed an ad from a known human personality within a photo of an animal who consumers have already chosen to follow, and thereby get people not only to view the ad, but like and comment on it as well.

  • Animal influencers get more attention than human bloggers, Edwards said. Clients see the results. "By partnering with [animal influencers]," she said, "they're really resonating with their consumers on a deeper level"

One of the stars: Elle Drouin is owner of Mochi, a 3-year-old maltipoo who just cracked 100,000 Instagram followers. She said it's not uncommon for a single Instagram post to earn $1,000 (around $100 for every 10,000 followers). “Mochi definitely earns more then her keep," she told Axios. "She pays for herself and then some."

  • Mochi's recent deals include campaigns for Ralph Lauren, Ritz Carlton, Amex, Google, and Disney. The Ritz Carleton deal scored Mochi and Drouin a swanky vacation to Aruba.
  • Drouin works, too: Drouin estimates that she works three to five hours a week on Mochi's brand. “I was sitting in my office," she said, "and I realized that I had spent two hours responding to emails for my dog."
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TaskRabbit CEO: "sharing economy is here to stay"

TaskRabbit is "going to be a part of the retail transformation from products to services," company CEO Stacy Brown-Philpot said at an Axios event Wednesday at the University of Michigan.

"Most of our clients are millennials who don’t have time, have extra money, want their services on demand and really just want to set it and forget it."
— Stacy Brown-Philpot

Why it matters: TaskRabbit was bought by Ikea earlier this year to help customers assemble the company's furniture.

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Alibaba is crushing Amazon in transforming offline shopping

Alibaba founder Jack Ma. Photo: Natacha Pisarenko / AP

Amazon has introduced high-profile experiments in offline retail in recent quarters, like the cashier-less Amazon Go, or its new brick-and-mortar book stores, but Fortune reports that Alibaba is "further along the online-to-off-line curve than its U.S. doppelgänger."
China's retail sector was in its infancy by the time e-commerce was introduced to the country during the 2000s, and consumers and retailers latched on to tools like Alibaba's online marketplace rather than waiting for or investing in an efficient network of stores.
What's next: Alibaba is now pouring profits into its New Retail initative, whereby it sells services to offline retailers that will make them more efficient and attractive to China's growing middle class.
  • According to Fortune's Adam Lashinsky, "The purest manifestation of Alibaba's online/off-line ambitions is Hema," a bricks-and-mortar grocery store that accepts orders via app, and promises delivery within 30 minutes and a 5-kilometer radius.
  • The firm's experiments in cashierless checkout systems and augmented reality are arguably further along than those at American firms like Amazon and eBay.
  • Dali Yang, a Chinese-born political scientist at the University of Chicago tells Fortune that offline retail helps support domestic jobs, which " pleases employment-conscious Chinese government officials."
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Target buys same-day delivery startup Shipt

Photo: Vivien Killilea/Getty Images

Target on Wednesday announced that it will acquire Shipt, an Alabama-based same-day delivery startup, for $550 million in cash.

Bottom line: This is about playing defense against Amazon.

Target says that it expects to offer same-day delivery services at around half of its stores by early 2018 and at a majority of its stores by the 2018 holiday season. Full deployment across all major product categories would come by the end of 2019.

Shipt had raised around $65 million in venture capital funding from firms like Greycroft Partners, e.ventures, and Harbert Venture Partners. The Birmingham, Ala.-based company currently has a network of more than 20,000 personal shoppers in 72 markets, and will continue to run independently.

Some additional color from Ian Sigalow, a Greycroft partner and Shipt director:

  • Target CEO Brian Cornell flew down to Birmingham and did a test drive with a Shipt delivery person.
  • Expect Target to particularly leverage Shipt when it comes to fresh food offerings, as Shipt currently focuses on grocery.
  • The original conversations between Target and Shipt were about a business partnership.
[Note: Greycroft Partners is an investor in Axios]
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Google is opening an AI center in China

A Google booth at a 2016 internet conference in China. Photo: Andy Wong / AP

Google is setting up an artificial intelligence research facility in China, the company said on Wednesday.

​Why it matters:​ China is looking to become a bigger player in artificial intelligence. And Google — along with other Silicon Valley companies — is looking to gain a foothold in China, where it has had limited operations since 2010. "I believe AI and its benefits have no borders," said Fei-Fei Li, an AI expert who will be one of the leaders of the new center, in a company blog post.

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Charming Charlie becomes 20th major retailer to file for bankruptcy this year

Charming Charlie, the Houston-based jewelry and accessories retailer, announced Tuesday that it reached an agreement with lenders and equity sponsors to clear the way for its filing of Chapter 11 bankruptcy.

What went wrong: Charming Charlie's bread-and-butter, affordable jewlery, is an ideal product for online sellers, given that it can be warehoused and shipped cheaply. What's more, even as business migrated online, Charming Charlie overextended itself, opening 79 stores between 2013 and 2015.

Why it matters: It's the twentieth major retailer to have filed for bankruptcy protection in 2017.

Charming Charlie burst onto the retail scene in 2004, with stores uniquely organized by color, and offering products at prices between high-end jewlery stores and discount shops like Claire's, which is aimed at the teenage market.