Mark Lemley and Matt Wansley
The New York Times

How Big Tech Is Killing Innovation

Silicon Valley prides itself on disruption: Start-ups develop new technologies, upend existing markets and overtake incumbents. This cycle of creative destruction brought us the personal computer, the internet and the smartphone. But in recent years, a handful of incumbent tech companies have sustained their dominance. Why? We believe they have learned how to co-opt potentially disruptive start-ups before they can become competitive threats.
Just look at what’s happening to the leading companies in generative artificial intelligence.
DeepMind, one of the first prominent A.I. start-ups, was acquired by Google. OpenAI, founded as a nonprofit and counterweight to Google’s dominance, has raised $13 billion from Microsoft. Anthropic, a start-up founded by OpenAI engineers who grew wary of Microsoft’s influence, has raised $4 billion from Amazon and $2 billion from Google.
Last week, the news broke that the Federal Trade Commission was investigating Microsoft’s dealings with Inflection AI, a start-up founded by DeepMind engineers who used to work for Google. The government seems to be interested in whether Microsoft’s agreement to pay Inflection $650 million in a licensing deal — at the same time it was gutting the start-up by hiring away most of its engineering team — was an end run around antitrust laws.
Microsoft has defended its partnership with Inflection. But is the government right to be worried about these deals? We think so. In the short run, partnerships between A.I. start-ups and Big Tech give the start-ups the enormous sums of cash and hard-to-source chips they want. But in the long run, it is competition — not consolidation — that delivers technological progress.
Today’s tech giants were once small start-ups themselves. They built businesses by figuring out how to commercialize new technologies — Apple’s personal computer, Microsoft’s operating system, Amazon’s online marketplace, Google’s search engine and Facebook’s social network. These new technologies didn’t so much compete with incumbents as route around them, offering new ways of doing things that upended the expectations of the market.
But that pattern of start-ups innovating, growing and leapfrogging incumbents seems to have stopped. The tech giants are old. Each was founded more than 20 years ago — Apple and Microsoft in the 1970s, Amazon and Google in the 1990s, and Facebook in 2004. Why has no new competitor emerged to disrupt the market?
The answer isn’t that today’s tech giants are just better at innovating. The best available evidence — patent data — suggests that innovations are more likely to come from start-ups than established companies. And that’s also what economic theory would predict.
An incumbent with a large market share has less incentive to innovate because the new sales that an innovation would generate might cannibalize sales of its existing products. Talented engineers are less enthusiastic about stock in a large company that isn’t tied to the value of the project they are working on than stock in a start-up that might grow exponentially. And incumbent managers are rewarded for developing incremental improvements that satisfy their existing customers rather than disruptive innovations that might devalue the skills and relationships that give them power.
Of course, incumbents have always stood to gain from choking off competition. Earlier tech companies like Intel and Cisco understood the value of acquiring start-ups with complementary products. What’s different today is that tech executives have learned that even start-ups outside their core markets can become dangerous competitive threats. And the sheer size of today’s tech giants gives them the cash to co-opt those threats. When Microsoft was on trial for antitrust violations in the late 1990s, it was valued in the tens of billions of dollars. Now it’s over $3 trillion.
In addition to their money, the tech giants can leverage access to their data and networks, rewarding start-ups that cooperate and punishing those that compete. Indeed, this is one of the government’s arguments in its new antitrust lawsuit against Apple. (Apple denied those claims and has asked for the case to be dismissed.) They can also use their connections in politics to encourage regulation that serves as a competitive moat.
When these tactics fail to steer a start-up away from competing, the tech giants can simply buy it. Mark Zuckerberg made this clear in an email to a colleague before Facebook bought Instagram. If start-ups like Instagram “grow to a large scale,” he wrote, “they could be very disruptive to us.”
But as the disruptive start-ups that pioneered it get tied up with Big Tech one by one, it may become nothing more than a way of automating search engines.

The New York Times