Early Indications December 2021: Platform Proliferation

Two quick notes: 

1) November's newsletter was reprinted in edited form in the Boston Sunday Globe: https://www.bostonglobe.com/2021/12/11/opinion/metaverses-good/

2) In these stressful times, I hope the new year brings good news, both momentous and pedestrian, to each of you and your families.

Somewhere around 2005, we moved from the age of the website to the age of the platform. What Marshall Van Alstyne at Boston University (among others) calls demand-side economies of scale began to kick in for Internet businesses. The more people who join Facebook, or shop at Amazon, or watch YouTube videos, the stronger the incentive for a) other people to access the platform and b) advertisers to spend to get access to the growing, engaged population. For Uber and Airbnb, the flywheel effect is even stronger as the more riders/renters, the more drivers/property-owners, which in turn draws more riders/renters, and so on.

After 15 years of being both lightly regulated and extremely profitable, Internet platforms are being reined in through multiple regulatory efforts across the world. Facebook is running print advertising asking for regulation, and the EU has established privacy standards stronger than most anywhere else, at least on paper and for the moment. The evolving notion of “platform” from the days of Windows, through the browser wars of the 1990s, and into “the web as platform” thinking in Tim O’Reilly’s Web 2.0 framework has been heavily studied by business scholars including Annabelle Gawer (now at University of Surry) and her MIT doctoral advisor Michael Cusumano along with Van Alstyne and his co-authors. Another angle comes from communications and cultural studies, where Tarleton Gillespie of Microsoft Research and Jean-Christophe Plantin of the London School of Economics have published strong work. 

My focus today is on the physical world, where platform thinking takes on a slightly different shape. Here, people including Erich Joachimsthaler of the Vivaldi consultancy have differentiated between products and platforms, with the latter providing tangible benefits to both investors and customers through network effects, lock-in, and brand differentiation. At a workshop where we both presented, Joachimsthaler outlined John Deere’s now-controversial strategy of infusing heavy equipment with software and sensors. So-called precision agriculture connects tractor-mounted GPS with soil tests and other diagnostics to plant, spray, water, and otherwise treat crops more specifically than at the field level.

For a time, Deere tried arguing that farmers did not own the $500,000 implement they bought — until they purchased annual software license renewals. The right-to-repair movement arose among farmers who wanted to be able to keep their equipment running during critical windows of planting and harvest. To do so, some downloaded 3rd-party software, illegally, to hack their tractors, combines, and other implements. Interestingly, Apple, AT&T, and other tech companies showed up in Midwestern states to argue against the farmers, fearing a precedent that would spread right-to-repair to electronic devices. Late this year, perhaps to pre-empt regulatory pressure, Apple now allows customers to buy repair parts and try their luck at fixing broken iPhones (https://www.apple.com/newsroom/2021/11/apple-announces-self-service-repair/). For their part, Deere responded to President Biden’s executive order mandating right to repair by stating they supported most instances of the practice.

Platforms occur elsewhere in the physical world. Automakers are aggressively pursuing a practice called “communization,” often using platform nomenclature. The objective is to share parts and assemblies across vehicles that might look different in the showroom but enjoy economies from simpler supply chains, easier new-product development, and faster time to market. Starting in about 2005, GM’s Lambda platform (itself a variant on the previous-generation Epsilon) was shared by 3-row SUVs from Saturn, Buick, GMC, and Chevrolet. Beginning in the 2017 model year, Subaru began migrating _all_ of its models to the Subaru Global Platform (SGP). Straight-line stability, NVH (noise/vibration/harshness), and ride comfort are all said to improve. At Honda, the goal is to reduce model variation across its five global vehicles by 66% between 2020 and 2025. In some ways, this movement anticipates an electric future: a typical Tesla’s part count runs on the order of 10,000, with the drivetrain being substantially simpler than a typical internal combustion vehicle, whose part count approximates 30,000. Traditional manufacturers have begun reinventing themselves, and platformization is part of the plan.

On a smaller scale, a few months ago I saw a Twitter post on the topic of tools, but it’s now lost and no academic sources showed up, so I’ll start from scratch by talking about . . . batteries. All of the major power tool companies — DeWalt, Makita, Hitachi, Bosch, Ryobi, Milwaukee, — and many house brands sell cordless power tool systems. The batteries are interchangeable among tools, but not brands. (Interestingly, DeWalt, Craftsman, and Black & Decker are all owned by the same parent company.) Thus, when shopping for a cordless drill, which is typically the “gateway drug” to a given platform, one might reasonably compare torque, battery life, weight, or other objective statistics. As one finds other needs — flashlights, garden tools, many kinds of saws, grease guns, and so on — the original purchase has created path dependencies. The Hitachi drills I may have bought last year on sale work perfectly well, but Hitachi doesn’t sell a cordless grease gun. If I buy a second 18-volt tool from a different vendor (Makita, let’s say), now I have 2 chargers, 2 or 4 batteries, and lower option value than if everything were fully interchangeable.

Each power tool brand has a range of product decisions to make in the platform context: 

• What price range? Ryobi sells an 18-volt drill-driver kit for $50 at Home Depot; Hilti offers an 18-volt kit for $359.
• Given a price point, do we build in features, durability, or innovations (such as job site RFID tracking)? How does our brand convey our decision to the market?
• How wide is the application coverage? Carpentry, automotive, marine, lighting, gardening/landscaping only begin the list.
• How many SKUs are too many? Especially as supply chains are being strained, and most tools are made offshore, is there value in focusing on known strong sellers rather than chasing endless numbers of niches? Or does completeness of portfolio confer its own competitive advantage?
• What is our channel? With a large SKU count, physical retailers will be challenged to stock the right number and quantity of available products. At the same time, Stihl (makers of outdoor power equipment, much of which is also moving to battery power) has built a formidable network of small dealers, eschewing the big boxes entirely to move a small product line. Amazon, meanwhile, has launched between 50 and 100 private-label brands. Access to that audience comes with real risks, but as far as I could tell, no major brand has stayed off the site, um, platform. Hilti (from Liechtenstein), Festool (Germany), and Metabo (founded in Germany, now owned by Hitachi parent Koki Holdings now that Hitachi brand tools are owned by the US private equity giant KKR) are all available on the Seattle supersite — alongside CP CHANTPOWER, TODOCOPE, and Eastvolt, the Amazon brands of cordless tools. 
• What else can we turn into a platform? Milwaukee launched its Packout modular tool storage line in 2017 and keeps adding both small parts totes and larger static and rolling tool chests to the line. Interestingly, all the pieces I have seen are made in Israel: the engineering tolerances and/or polymer formulations may preclude Chinese sourcing. Black & Decker’s DeWalt brand, meanwhile launched two lines — TStak and ToughSystem — that each demonstrated growing pains. Since 2020, each is on a 2.0 nomenclature, with more robust locking hardware, backward compatibility, and other enhancements, but the two systems cannot interoperate, and the discussion forums are full of disgruntled contractors who gave up on the brand after the poorly-thought-out initial effort. The system approach clearly commands a price premium: the Milwaukee Packout 16-quart modular cooler sells for $109, while a comparable Igloo rotomolded (think Yeti hard side) 20-quart is the same price and 25% larger. 

Zooming back out to the bigger platform picture, given that Bosch makes both cordless power tools and batteries for e-bikes, what lessons are being applied to the younger market? Will bike batteries be at all interoperable, or will the power tool model carry over? Is my allegiance to the battery manufacturer (Phylion vs Bosch), the motor company (Yamaha vs Shimano), or the frame-maker (Specialized vs Giant)? Might my Bosch bike battery be able to swap with my cordless jackhammer battery, both of which come from the same company and run at 36 volts? At a larger level, electric cars, electronics, cordless tools, and e-bikes all rely on lithium-ion technology, and supplies of the required minerals — lithium, cobalt, and nickel — are all tight. Which markets have priority today and might tomorrow? Modern military hardware also requires significant quantities of cobalt as well — how will national security be invoked in the pursuit of rare-earth metals?

The decade of the 2020s could well be defined by the extension of platform thinking to residential construction, pharmaceuticals (mRNA models could point in that direction if you squint your eyes), entertainment (what’s the difference between a franchise/“universe” and a platform?), or education (check out Clay Shirky’s Revue newsletter). At the same time, just as the late 19th and mid 20th centuries saw backlash against the excesses of industrialization, so too will we see more scrutiny of platform models’ externalities. In any event, the race between innovation and new constraints, many long overdue (are too many Airbnbs a good thing for a residential neighborhood?), will bear watching.

Early Indications November 2021: Metaverses for good

By now everyone has seen multiple reactions to Mark Zuckerberg’s vision/rebranding announcement that posits that vast numbers of us will prefer life in a mixed-reality headset to face-to-face contact for significant periods of our waking hours. I can see the appeal for an ad-driven company: imagine having your eyes physically locked onto a television/monitor, unable to look away from what Facebook wants you to see. Instead of being able to control our field of view, vision would become more akin to hearing, which is hard to steer or focus: largely passive reception of whatever sensory input is within range. I won’t comment further; Benedict Evans wrote a great piece before Zuck’s announcement and he makes a solid argument.

Evans concludes by arguing that “the nature of our interactions with software, entertainment, experiences, displays and, yes, money, is still very early.” While something is going to happen in mass culture at this intersection (more likely, several distinct somethings), I’m going to go in a different direction. There is increasing attention being directed to various communities of people with conditions that formerly were characterized as disabilities. A reframing is afoot: there is now talk of “neurodiversity” (including autism, ADHD, dyslexia, dyspraxia, dyscalculia, dysgraphia, and tics), and “multiple abilities.” If we look at the core components of Zuckerberg’s vision and leave out cryptocurrency for the moment, there are many opportunities to extend the range of human experience to more people. Just as I believe Google Glass should have been directed at B2B applications like aircraft maintenance or art and architectural tours, so too a mixed-reality plus gamification plus social network plus mass culture mashup can do a lot for particular people in particular circumstances. This isn’t how either Silicon Valley or the assistive technology industry typically work, however, so the following is largely aspirational.

Strabismus is a set of conditions, including “crossed eyes,” in which both eyes do not align in the same direction at the same time. According to a recent Nature article, VR headsets were successfully deployed to diagnose the disorder. There is also a prescription app called Vivid Vision that helps correct strabismus. In contrast to traditional patching therapy that covers the strong eye to force the weak eye to catch up, the headset varies the assist to the weak eye, decreasing it over time at the same time that the decay in strong-eye signal strength also decreases. The same visual lock-in that makes VR scary for advertising is essential for therapeutic benefit. Once the therapy is designed, content can be modified for most age groups, and delivered either in a doctor’s office or at home. From a kid’s perspective, headsets are cool; eye patches are often “a battle,” as one doctor told me. VR would appear to be a clear win here, so how many more conditions can be addressed with this approach to display technology?

Everyone has been lost in a new city. I have a hunch Apple’s experience in both mapping and body-worn computing could position it for a leadership position in next-generation wayfinding. Now extend that ability to a vision-impaired person new to a city: a social layer of “here’s both where to go and why you want to head there” on top of mapping would serve both individual and social objectives. Who of today’s tech companies would make the effort to address that segment? Similar logic could apply to people with intellectual disabilities, using a metaverse-like cluster to deliver supported decision making, transportation training, and multiple safety nets. 

Another example: nobody really knows how many wheelchair users there are in the US. Estimates have historically run in the 1% range, putting the population at 3-4 million, a total that is projected to increase as the baby boomers hit old age. How many of those people would pay for a convincing meadow, a bustling cityscape, or a visit to an important site from their life? How could the VR layer be structured to increase rather than decrease sociability, whether in the same building or across distance? Again, who in either the assistive technology or VR/gaming industries would build and curate such experiences — maybe a Peloton-like experience for wheelchair users? The economic incentives, largely invisible populations, and requisite technical skills make it a tough ask from today’s providers.

How can we build expertise in and commitment to teen mental health via a rethought technology layer? Device/app abstinence is one path, but likely not a very promising one. Instagram does marked harm (especially in the realm of body image) according to the company’s own research, along with some acknowledged good. Teens themselves are fleeing the blue F (partially in favor of Instagram, to be sure), and the firm’s plans for a pre-teen “Joe Camel” service will disqualify them in the eyes of some parents. The consequences of our historical moment — climate change, racial injustice, and economic inequality are all urgent issues to many teens, our mismatch between human scale and planet-spanning platforms, and the speed of both information and disinformation put many lives and psyches at risk. The sportswriter Ivan Maisel just published a memoir of his son’s suicide, and as a parent, I’m overcome with both grief and gratitude. We can do better by our teens, so for every child who feels isolated, frightened, furious, or hopeless, how do we design headsets, gameplay, education, and social interaction to promote health rather than furthering a negative spiral? The goal is achievable but not under the assumptions of monetizing daily average users, locking those users to a given platform, or reposting platitudes. I don’t trust Facebook, or the National Federation of Teachers, or the Autism Society to get it right. Judging from TikTok, give some teens the tools and some air cover (maybe in the form of protected spaces of human scale), and they will outperform the aforementioned incumbents.

The potential use cases rapidly multiply. Foreign language instruction, the preservation of cultural heritage, enhanced enjoyment of essentially every art form from dance to sculpture, job and skills training — a “metaverse” approach could deliver multiple benefits:

1) A local chapter/organization could use an App Store model to scale a contribution to a much larger community. All politics may be local, but platforms could scale dispersed efforts to help the displaced, people with disabilities, the aged, the lonely, the different. In other words, all of us at some points in our lives. One key is to modulate the scaling: just because the Santa Fe chapter of a given inclusion/advocacy group builds something useful doesn’t mean every person in the US, or English-speaking world, or world with hip dysplasia, PTSD, or MS joins in one big tent.

2) The potential for isolation behind a headset (Facebook’s Oculus remains unacceptably goofy for many of us) must be balanced by new forms of participation and inclusion.

3) Immersive environments can break out of gaming applications into education, training, data visualization (CAVEs are old news), and others: maybe a grandmother could revisit the Woolworth’s, Macy’s, or Dayton’s of her childhood, for example, either with or without a commerce layer. 

4) I began by noting that a reframing of ability is underway. Metaverses could be an important part of this discussion. There is already a movement toward rethinking “assistive technologies” from being largely artisanal (hand-made custom prosthetics) to benefitting from network effects (shared, adaptable 3D printer files for those same prosthetics). These technologies are traditionally defined by their steel and rubber, but when will they become more routinely microprocessor-enabled: why not smart crutches? Finally, as assistive technologies move from being prescription items to sometimes becoming community assets, it will change not only the technologies but also the communities of people — of whatever abilities — that coalesce around their co-creation, their procurement, and their use. The phrase “Nothing about us without us” ("Nihil de nobis, sine nobis”) dates back 600 years to central Europe’s early constitutional democracies. Today, it is coming into wider usage within disability-based groups. What better use of emerging metaverse technologies and worldviews than moving toward more inclusive policy discussions, product design, and environmental modification — both virtual and physical? With some will and creativity, we can improve both the range of options for people of varying abilities, while also improving the processes whereby communities do so. The trick will be far less a matter of technology and far more a matter of redesigning our organizations to mobilize those emerging capabilities.

Early Indications September 2021: What’s ahead for the big Internet platforms?

In 2005, the World Wide Web turned 15, and both Facebook and YouTube launched us into the age of the platform. In 2020, Facebook and YouTube turned 15, and it does seem that we have hit another inflection point. TikTok, built from the ground up as a mobile-first, vertically oriented, behavior-modification exercise highlights YouTube’s legacy as a search-driven, horizontally oriented, desktop video repository. For its part, Facebook is trying to regain traction in the post-millennial demographic. The latest news — that a kid-focused Instagram would do for Facebook what Joe Camel did for cigarettes — shows how important audience acquisition has become at multi-billion-user scale. At a time when congressional hearings multiply, content businesses struggle with the realities of post-fact, polarized civic discourse, and “privacy” appears to be working as an Apple positioning anchor, what might we see from the platforms going forward?

1) How will entertainment and interpersonal connection separate?

TikTok is not built as a social graph. Growth for ByteDance does not rely on users getting their friends to sign up, which was Facebook’s growth hack back in the 2000s. Snapchat does not spread memes as its primary focus. Going forward, we might see a division of labor similar to the pre-Internet era: AT&T kept people connected while Disney and Viacom kept them entertained.

2) What’s the next hardware frontier?

Amazon has considerable traction with Alexa but no social media component. Facebook has invested heavily in virtual reality, with only nice markets adopting the technology. Apple is poised to offer glasses; Google could do so again. Google appears to be focusing its automotive efforts on self-driving, whereas Apple’s Project Titan remains super-secret. Self-driving is reported to be in the works, but it would be no surprise if instead we saw a dramatically upscaled CarPlay, essentially turning the car into a peripheral. A partnership between Tesla and, say, Facebook would be a surprise but not illogical. Amazon just launched household drones along with robots that integrate Alexa. In short, watches, glasses/goggles, bots, and automobiles could each help launch the internet platforms into new directions.

3) How do Chinese apps fare?

As we saw last month, Chinese Internet app companies are being focused by their country’s government, and the trend continues on a weekly basis. At the same time, enormous adjacent markets await. Well over a year ago the venture investor Turner Novak listed several product extensions TikTok could plausibly undertake given ByteDance’s existing competencies in steering consumer behavior. These included:

Longer-form videos

Music streaming

Gaming

Consumer finance

Education (note the attention to tutoring services in he Chinese governments recalibration of consumer-facing tech companies)

Messaging

News feeds

Enterprise software (a homegrown Slack competitor for China?)

Cloud hosting

Handsets

In-app purchasing of both virtual (such as badges) and physical assets (foods used in a cooking demo)

4) What can the US apps expand into?

Facebook tried and failed to launch a cryptocurrency. YouTube is trying to be Comcast on some days and NBC/Universal on others. Amazon owns NFL broadcast rights. Google is reportedly trying to sell search tools to ByteDance. Apple has a credit card that, combined with the brand’s emphasis on trust, could open doors into other financial services. (Such a move would support the company’s efforts to expand beyond hardware revenue.) It’s a broad brush, I realize, but I believe firms with more diverse revenue streams (Amazon) will fare better than pure-play advertising companies that traffic only in attention.

5) How will regulation play out?

Will Facebook be forced to divest WhatsApp and/or Instagram? What about Google and YouTube? Amazon and Twitch? 10+ years is a long time after the acquisition to unwind a deal, but there could be other dramatic departures from current practice. Short of divestiture, cross-app integration might be curtailed, for example: log into Facebook, but nothing you do there is transferred into Instagram, including the identity management process.

 

6) What’s ahead for content moderation?

It’s abundantly clear that social media personalities with big followings play by different rules than the rest of us. It’s also clear that mis- and disinformation campaigns grow more sophisticated and consequential every year. YouTube just took down a bunch of anti-vaccine videos, for example, but where does the platforms’ responsibility start and stop? In an age of highly politicized efforts to discredit science-based public policy as elitist attacks on personal freedom, what counts as free speech? In what venues? Apart from the enormous hairball of fact-checking, misogyny and racism continue to plague every major social media platform. Twitch is rolling out new tools, for example, while YouTube can’t define what hate speech is at the same time that the platform prohibits it.

Early Indications August 2021: What comes after maturity?

Back in the early 2000s when I attended a lot of tech conferences, there was a common and usually regretful discussion: is tech now a mature industry? Even though Facebook, YouTube, the iPhone, Uber, and Bitcoin were all in the future, there was already concern that the “old” insurgent Silicon Valley was somehow lost, and that the startup ethos — often romanticized — was giving way to regularized processes, HR departments, and boring stuff like earnings calls and firm shipping deadlines. If people were sad in 2002, what must they make of today’s environment? We see big funding for food delivery and other gig work companies, the many consequences of ad-funded software, and no U.S. tech companies of wide impact started in more than a decade (Uber launched in 2009).

Many major tech companies, I’m arguing, are now past mature, but finding a name for the state of play is less clear-cut. The biggest change is that tech is now a major aspect of geopolitics, with a raft of consequences starting to flow from that status. There are other signals as well. Let’s skim over a few of these before getting to the main theme.

1) No tech company with work to do wants to buy back stocks with its spare cash: engineering the share price rather than investing in growth worries me and a lot of other people a great deal. I can’t remember which business professor said it (probably several), but the paraphrase was that “buying back your stock tells me you’ve run out of fresh ideas.” At the same time, when you have the cash pile Apple does, there’s money for lots of things, including acquisitions, buybacks, and new product launches.

2) Any firm that tries to protect its business model primarily by lobbying sends a bad signal. We like the status quo, it seems to say, and we want to protect it with favorable legislation rather than having to compete and win in the market.

3) Buying big corporate headquarters sends more negative signals. Salesforce and Apple both make statements here. Amazon’s bake-off approach to “HQ2” created negative optics. To their credit, Microsoft is downsizing its physical office space and eschewing the “edifice complex.” Netflix spent big on movie production facilities, but that’s essentially a factory in their industry.

By far the biggest marker of post-mature status is geopolitical activity. The Trump administration took action in this domain (aimed at TikTok and Huawei) while the Biden administration is making noises about Amazon and Facebook. Beyond US presidential initiatives, several tech companies have had major geopolitical episodes in the past five years:

-Facebook proved to be a decisive “threat vector” for foreign influence in the 2016 elections
-Twitter became a key tool of the Trump presidency
-Google left China
-YouTube is used by extremist groups that post misinformation and violent content for recruiting purposes.

The most recent and farthest reaching actor in the geopolitical entanglement with the tech sector is the Chinese government. Alibaba’s Jack Ma (worth a reported $50 billion) actually disappeared for three months last November on the eve of his Ant Group's IPO; a company executive said he is now focusing on hobbies. Didi (a Chinese ride-hailing app company) went public in the US only to have its home-market operating status reined in soon thereafter, dropping its equity value substantially. TikTok parent ByteDance did not go public as many expected; instead, the Chinese government took a board seat on a ByteDance operating company, complicating the US app’s promises that stateside user data is not shared with the core team in China.

But blocking big gains in personal wealth, while ideologically coherent, is not the only thrust of current efforts. Last week the CAC (Cyberspace Administration of China) posted a draft of regulations designed to apply to “Internet Information Service Algorithms” and there is a _lot_ in the document. My first thought upon reading it: how will western governments respond to a regime widely characterized as authoritarian ostensibly taking the lead on protecting citizens from algorithmic abuses?

Here’s the document: http://www.cac.gov.cn/2021-08/27/c_1631652502874117.htm#. I’m relying on Google Translate and will gladly correct any readings that I get wrong given my reliance on an imperfect tool. All bold-face emphasis is mine.

The document gets very granular very quickly: article 2 states that “The application algorithm recommendation technology mentioned in the preceding paragraph refers to the application of algorithmic technologies such as generating synthesis class, personalized push class, sorting selection class, retrieval filter class, scheduling decision class and so on to provide users with information content.” This looks like it could be extended to include not only adtech but social media, ride hailing, meal delivery, discussion threads, and tutoring (another recent point of emphasis).

Article 6 paints with a very broad brush: I’m sure phrases like “mainstream value orientation,” “positive energy,” and “economic and social order” are carefully chosen and carry great weight. The paragraphs also appear to imply censorship of a wide range of content.  

“Algorithm recommendation service providers shall adhere to the mainstream value orientation, optimize the algorithm recommendation service mechanism, actively disseminate positive energy, and promote the upward improvement of algorithm application.
Algorithm recommendation service providers shall not use algorithm recommendation service to engage in activities prohibited by laws and administrative regulations, such as endangering national security, disrupting economic and social order, and infringing on the legitimate rights and interests of others, and shall not use algorithm recommendation services to disseminate information prohibited by laws and administrative regulations.”

Article 8 seemingly prohibits the dopamine-pump model that currently powers Facebook and TikTok: “Algorithm recommendation service providers shall regularly review, evaluate and verify the algorithm mechanism mechanism, model, data and application results, etc., and shall not set up algorithm models that induce users to indulge or consume in high amounts that violate public order and good customs.”

Article 14 appears to call for algorithmic transparency. “The provider of algorithm recommendation service shall inform the user of the situation of providing algorithm recommendation service in a significant way, and publicize the basic principle, purpose intention and operation mechanism of algorithm recommendation service in an appropriate way.”

Article 15 seems to endorse an opt-in rather than the dominant and delimited opt-out model.
“Algorithm recommendation service providers shall provide users with options that are not specific to their personal characteristics, or provide users with convenient options to close algorithm recommendation services. If the user chooses to close the algorithm recommendation service, the algorithm recommendation service provider shall immediately stop providing the relevant service.

The algorithm recommendation service provider shall provide users with the function of selecting, modifying or deleting user tags used for algorithm recommendation services.

Users who believe that the application of the algorithm of the algorithm recommendation service provider has a significant impact on their rights and interests have the right to require the algorithm recommendation service provider to explain and take corresponding improvements or remedial measures.”
Might that include an EU-like right to be forgotten?

Article 17 sounds like it is directed at rideshare and meal delivery.
“Where algorithm recommendation service providers provide work scheduling services to workers, they shall establish and improve platform order allocation, remuneration composition and payment, working hours, rewards and punishments and other related algorithms, and fulfill the obligations of protecting workers' rights and interests.”

Article 18 would seem to limit differential pricing of consumer goods, especially when it is based on user behavior (US airlines, take note):
“If an algorithm recommends that a service provider sells commodities or provides services to consumers, it shall protect the legitimate rights and interests of consumers, and shall not use algorithms to carry out unreasonable differential treatment in trading conditions such as transaction prices and other illegal acts according to the preferences, trading habits and other characteristics of consumers.”

Does article 20 mandate state oversight of the actual code base?
“Algorithm recommendation service providers with public opinion attributes or social mobilization ability shall fill in the name, service form, application field, algorithm type, algorithm self-evaluation report, content to be announced, etc. through the Internet information service algorithm record system within 10 working days from the date of service delivery.”

For all the breadth of these proposed measures, the financial consequences are light: fines range from 5000 yuan to 30,000 yuan ($773 to $4639). At the same time, even the EU has not proposed, much less implemented, any sort of public algorithmic oversight, an opt-in model for collection of user data, or prohibitions on hooking kids on apps while they are young: providers “shall not use algorithmic recommendation services to induce minors to indulge in the Internet.” Just this week, according to Reuters, "China has forbidden under-18s from playing [online] video games for more than three hours a week, a stringent social intervention that it said was needed to pull the plug on a growing addiction to what it once described as 'spiritual opium'."

I’m not a professional China-watcher by any stretch but I do know that the government strictly surveils the citizenry, in part via social media trace data. How do consumer protections relate to the ability of government to collect user data from Internet companies? How do these regulations relate to the Chinese government’s efforts to build its non-consumer tech sector: chip-making, autonomous vehicles, advanced manufacturing, and others?

In answer to the question posed by the newsletter’s title — “what comes after maturity?” — the answer most certainly is “regulation.” The next few years will be most interesting as the tech sector on most every continent will face state scrutiny, litigation, legislation, and taxation. That idealized garage startup is a distant memory.

Early Indications July 2021: Amazon Effects

As so often happens, three disconnected observations turned out to have a common theme. In order, I’ll connect the Twitch game-streaming platform, local real estate, and the reported decline of corporate R&D to the firm that has remade multiple landscapes. It turns out this is a timely discussion. As Congress and the executive branch debate whether and how to regulate the tech sector, they need to think deeply. What we are seeing is fundamentally new, and thus requires careful attention to the details of governmental oversight. Merely saying “Jeff Bezos is too rich,” or “Amazon is too big and therefore bad” may be politically popular, but it’s intellectually and economically sloppy. We need to develop new tools of analyzing social good and social costs, and new language to weigh the ratio of one to the other. In this age of hot takes and polarized discourse, that’s probably an impossible ask. Call me an idealist and I won’t disagree.

Twitch

Alongside Facebook’s acquisition of Instagram, Amazon’s purchase of the Twitch gaming platform was one of the smartest pieces of M&A I’ve ever seen. (Pop quiz: what is the _worst_ acquisition ever? My nominees will appear below.) The MIT professor T. L. Taylor makes an extremely important point about game streaming: TV used to be something people watched. Game streaming -- and I’m arguing, online video more broadly considered -- has transformed that relationship. Twitch is something people can watch, in a variety of ways, but more important, it’s something they _do_. Game commentary is arguably the most profitable category on YouTube, and Twitch has become a powerful niche site where gamers can watch, play, comment, interact with both gamers and watchers, or opine on non-game issues. Game designers are building to the platform, integrating the gamer community in both development and competitive aspects of their products. Communicating with others as they watch gameplay dates back to the hangers-on around arcade games, and the scale of the audiences in this virtual arcade are staggering: according to Twitchstats.net, at peak load about 140,000 channels (streams) are reaching 3.8 million viewers.

As a student of mine pointed out, meanwhile, Amazon won broadcast rights to Thursday NFL games in the league’s most recent media auction. He speculated that Twitch will be a facet of the Amazon streaming of the games. This could involve fantasy sports, snarky in-group commentary, and/or actual wagering at some point. It’s getting tough to track all of Amazon’s forays: pharmacy, grocery, drones and logistics, the MGM acquisition, the fast-growing ad business, cloud computing. Michael Porter's 1980s business school concept of an industry really doesn’t apply any more.

Urban archeology

I was strolling through downtown Syracuse earlier this week. A massive space used to house the flagship Dey Brothers department store from 1894 until 1992. Like many other downtown buildings, it hasn’t found its 21st century purpose yet: an art center seems to be at least one tenant, but the bricked-over windows and giant rusting awning over the main entrance highlight the contrast between the structure’s past vibrancy and today’s urban uncertainty.

In the 1950s -- sources disagree on the exact year -- Dey Brothers joined its main competitor Addis as early tenants in the Shoppingtown mall in the adjoining suburban town of DeWitt. Shoppingtown was originally an open-air mall but not surprisingly (given the Syracuse climate) converted to an enclosed space that celebrated a grand opening in 1975. In 1974, meanwhile, a 75-store mall opened about 3 miles further east of Syracuse in Fayetteville. It featured a carousel built in Europe, and Addis and Dey (they’d merged) opened a $7 million store in the 1990 expansion. That didn’t last long. Yet another mall, then named Carousel, opened to the west, closer to Syracuse proper.

By 1993 all Dey Brothers-related stores had closed. Fayetteville Town Centre was partially demolished and converted into an open-air mall. Shoppingtown currently sits empty, though a multi-use redevelopment plan was just announced this week. Carousel, by now the largest mall in the state of New York, was renamed Destiny USA by its developer Pyramid Companies, a huge mall operator in the Northeast US. Its $285 million in bonds were downgraded to junk status last month.

What does Syracuse real estate tell us about the future of retail? Amazon just opened two facilities here: one is a 3.8 million square foot distribution center in Clay (a northern suburb). If that number sounds big, it is: the only larger industrial structures, apart from similar Amazon buildings, are Tesla’s Nevada battery plant at 13.6 million, and the Boeing facility in Everett, WA where they used to build 747s. The other local Amazon facility is a 112,000 sq ft “delivery station” in DeWitt, the same town that boasts a currently empty Shoppingtown mall. That building will host a fleet of local delivery vehicles, standing as one of more than 500 such Amazon sites, according to one consulting firm’s estimate. It’s a neat inversion: Shoppingtown was built for cars to converge on the mall, whereas a delivery station is designed for [mostly electric] delivery vehicles to disperse into the community.

The decline of corporate R&D?

A colleague forwarded me a paper out of Duke’s Fuqua school of business. Entitled “The changing structure of American innovation: Some cautionary remarks for economic growth," the paper analyzes the decline of corporate R&D as measured by PhDs hired, patents, publications, and other measures. There's a decided lack of appetite among corporate shareholders and managers for maintaining modern-day successors of GE Research, Bell Labs, Xerox PARC, or IBM Research. (A high-profile example: under pressure from an activist investor, DuPont shut its R&D lab in 2016, despite a distinguished history of publication and even a Nobel Prize.) Universities were theorized as taking up the slack, but the paper casts doubt on the efficacy of this approach.

Although Google gets considerable attention in the article and Microsoft's commitment to publication is highlighted, Amazon is barely mentioned. Given global competition, neither publications nor patents are obvious activities for a company making serious gains in data center management, algorithmic efficiency, machine vision, codebase maintenance, and many other areas. That is, I think private-sector R&D is delivering concrete innovations but they aren't being announced or shared in traditional channels. Google's Tensor Processing Unit chips, optimized for machine-learning tasks, come to mind. Amazon has developed its Graviton, designed for data-center efficiency, in the same custom silicon space. Both chips are proprietary.

Cloud computing hardware has evolved to the point where racks of specialized devices, not general-purpose servers, are the unit of analysis. While much of this material is open-sourced, it is not included in the article's critique of corporate R&D. (See ocp.org) Finally, huge advances in algorithmic science have been achieved, often by academics hired by Facebook, Google, Amazon, and elsewhere, but they aren't always made public.

This migration of academic talent into industry is fascinating for many reasons. Money is obviously a factor: Uber hired away essentially an entire Carnegie Mellon autonomous vehicle lab -- 40 people -- in 2015. But resources are also a draw: instead of spending weeks or months writing grants to get data sets, computing time, or post-docs, researchers inside the big platform companies have access to effectively infinite computing power, no teaching expectations, no committee work, and no career-dependent need to publish in journals with acceptance rates in the low single digits. The Duke paper quotes an astonishing yet representative statistic: inside Google, researchers use the JFT-300M dataset (300 million images, 375 million labels). Academic researchers aspire to use data sets similar to Stanford's Imagenet, which had at last report about a million images. Which setting will generate big-data insights more readily?

While I think the Duke authors are onto an important question, the differences between software and hardware or chemicals are not sufficiently addressed, I don't think. Facebook can roll out an algorithmic refinement tonight; Bell Labs or IBM faced a 3-5-year lag, at least, between lab insight and commercialization. Similarly, when China's "Big 3" of Baidu, Alibaba, and Tencent (soon to be joined by ByteDance) operate under a different set of financial, subsidy, regulatory, and ideological assumptions, global competition plays out differently than GM vs Volkswagen or Dow vs BASF did back in the day. National patents don't make the competitive sense thy once did.

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Given the many facets of just one company, talking about "Big Tech" as some kind of homogeneous oligopoly doesn't make sense. Just addressing advertising (and therefore privacy) alone, Amazon, Apple (yes Apple), Facebook, and Google are all intense competitors, operating in a "Wild West" environment due for some rules of the road. Comcast, Verizon, and another dozen companies deserve scrutiny in that same discussion. Moving to logistics, Amazon competes head to head with FedEx, UPS, USPS, and others. Have that discussion too, on its own particular merits, possibly asking pointed questions about universal service, subsidies, etc. Then do cloud computing, maybe addressing data portability, with Amazon, Google, IBM, and Microsoft in the room. If private-label retailing is a concern, of course Amazon is involved, but so is every major grocery chain, many apparel companies, and Target and Wal-Mart. The point is simple: address corporate competitive issues in specific terms rather than with cheap and empty posturing.

(My personal, completely unscientific hall of shame of bad acquisitions: GE/Alstom, Microsoft/Nokia, eBay/Skype.)  

Early Indications June 2021: Making sense of short-form online video

As I edit what started as a book about YouTube into a book about online video more broadly, I join many others in trying to figure out TikTok. Given that the videos max out at one minute, you can watch a lot of them in a few hours. It’s worth noting that I cannot watch them natively: given that TikTok is heavily app-centric (there is a web version, but it’s a secondary channel compared to smartphone/tablet installs), I don’t trust the company with my personal and behavioral data. Just this week CNBC quoted former employees that ByteDance (the Chinese parent company) and the US TikTok operation worked very closely, sharing user data back and forth. I don’t have a “burner” smartphone to load the app onto, so can’t experience the addictiveness of the For You Page, the machine-learning-powered customization algorithm.

That said, what does one find in clips that run 15-60 seconds apiece? Fast cuts are the norm, as are clever visual effects: creating videos in the app gives the author access to a substantial palette of dissolves, filters, and other tools. Some other video apps even advise creators to edit in TikTok before uploading elsewhere. Catchy music (or music that is thought to be catchy for the target audience, which is rarely people like me) is often a potent part of the experience, which I noticed quickly. Even among “best of” complications, stereotypes abounded: pets and babies are cute, old people are clueless, boldly fluids and sounds are thought to be funny. For some reason, shots of people singing or dancing on escalators draw huge viewership. Men often perform in drag (consisting of wearing a towel or cloth napkin as a shawl): racial and gender stereotypes are a common theme from many angles. There’s still a lot of lip-synching and dancing, which were the original focus of the service.

Genuinely original content does percolate up. Rube Goldberg machines can be impressive and fit the medium perfectly. How-to videos can teach something interesting and useful in 60 seconds, including home-made bath bombs and drinking glasses made from empty wine bottles.Gender reveals (some that thankfully involve no pyrotechnics) show up, as do letter-openings: one Black person was captured as she got the DNA results that gave her an ancestral homeland as opposed to the centuries-old name of a slaveowner. One woman crocheted plastic shopping bags and shipping materials into blankets for the homeless.

These appear to be the exception. Millions of people apparently like to puppeteer their pets into dance-along videos. Teenage topics predominate: the dumb things teachers say and do, makeup tips or complaints, drunken antics that look less hilarious in the morning. Pranks and pratfalls show up a lot, as do dad jokes and moms who are good sports and/or wanting into their children’s world. Much of it was frighteningly stupid and often cringe-worthy.

Where did this wave of content come from? TikTok’s timing was perfect, launching as it did in 2017 just as Twitter’s Vine service was shutting down after four years. What then was Vine? Like TikTok, Vine insisted on short videos: six seconds apiece. The fit with Twitter (which bought rather than built the service) makes logical sense, with one exception: six seconds makes it impossible to affix ads to the short-form efforts. Absent a revenue stream for the service and monetization for the creators, Vine never overcame poor economics.

What Vine did do, however, was teach both creators and viewers a new visual and experiential vocabulary. It was called a generation’s inside joke, and many prominent Vine personalities went on to replicate their success on YouTube, Instagram, and elsewhere. This vocabulary was seized upon, and built upon, by TikTok creators who studied what had worked in a six-second world. For all the questions about TikTok’s data practices, the fact that Snapchat, Vine, nor TikTok was owned by the Zuckerberg empire made them popular among those who entered their teen years after Facebook had reached the over-45 demographic: sharing your latest stunts or jokes with your aunt or grandmother lacked any semblance of a “cool” factor. 

What could people do with those six seconds? Again, much of the environment has to be viewed through the lens of a 13-20-year-old. Very few of the people seemed to live in a 40-hour work world; schools, malls, parks, cars, and apartments are familiar settings. Pop songs are familiar soundtracks, although the action could be anything from a cartoon to a puppeteered animal to someone lip-synching in an incongruous location or context. One key was facial expression: something visually stunning followed by a shot of raised eyebrows, sidelong glances, or millennial ennui fit the medium well. As on YouTube, pranks gone wrong and deliberate pratfalls show up often. Road signs and display advertising with letters covered over can easily fill six seconds. 

Why does this matter? At 6 or 60 seconds, short-form videos are perfect time-fillers while waiting on hold, in line, or at a bus stop. Memes, a key currency for this demographic, can travel extremely quickly in such an environment. For the creators, the time limitations and editing suites heighten certain forms of talent: just as black-and-white still photography or iambic pentameter force artists to master a delimited medium, short-form video exposes those who can set up and deliver a joke, or create a visual impression, or set a mood with no time for throat-clearing. At the same time, the big money for creators still lies on YouTube, from what I’m told and have read: I’ve seen TikTok used as a lead stream to drive traffic to the youTube page of the same creator.

Look at the last 20 years: AOL Instant Messenger, MySpace, Facebook (Farmville), Tumblr, Instagram, Snapchat, TikTok. Every new crop of adolescents needs to find its method of rebellion and differentiation, so as the TikTok demographic ages, and kids outgrow Roblox, expect to see some new form of app-powered expression within the next 2 or 3 years. Both Facebook and Google are launching TikTok copycats. Some candidate components: environmental sustainability, post-Covid shared nostalgia and PTSD, maybe a Disney effort that takes hold. I can’t see a subscription model succeeding with people who lack credit cards, so ads will have to pay for it in the short term. Maybe there will be a geospatial layer (remember Pokemon Go?), and I guarantee it will be snarky. That’s one constant among people this age and I can’t imagine it changing any time soon.

Early Indications May 2021: A New Kind of Television

After spending much of the past two and a half years researching and writing a book about online video (YouTube, TikTok, Twitch, et al), my attention recently turned to streaming TV in a recreational capacity. After burning through iTunes’ offerings, I resubscribed to Netflix after a long hiatus, and there I encountered “Formula 1: Drive to Survive.” As a chapter in media history, it’s a brilliant success story, albeit a complicated one. The more I watched, the more I researched, and the more surprises I discovered.

The show is currently running in season 3, focused on the Covid-shortened 2020 racing season. So even though Netflix began filming in 2018, the story begins two years prior. That’s when Liberty Media, John Malone’s US-based holding company, began the process of buying the Formula 1 series for $4 billion. Like Major League Baseball, F1 racing fans were aging out and not being replaced at younger demographics. Like the NFL, Malone’s team saw media exposure as a winning strategy: recall that there was a Nickelodeon play-by-play simulcast of an NFL game last year, and note that the new NFL media deal gives Amazon exclusive rights to game inventory that will likely involve cross-promotion on its Twitch game-streaming network. The power of long-form sports documentaries is well proven: last year’s Michael Jordan 10-hour marathon on ESPN was a cultural touchstone during the early months of lockdown.

So media exposure helps F1 reach new audiences. What’s in it for Netflix? Despite a content creation budget in the $15 billion range, satisfying global audiences is not simple. It’s hard to know how many US shows have historically found footholds overseas (and both “Masterpiece Theater” and “The Great British Baking Show” crossed the Atlantic from the other direction), but the politics of culture now dictate that Netflix can’t endlessly run “Orange is the New Black” in Indonesia (and elsewhere), and stand-up comedy is far from universal. Merely rebroadcasting US shows to the globe was going to be problematic, and the appetite for nature documentaries is finite. No national broadcaster could take Netflix’s global perspective on F1, and few events can attract such diverse viewership. It’s truly a perfect fit, one impossible to conceive even ten years ago.

Formula 1 racing is truly a global phenomenon, with races everywhere from Australia to Azerbaijan and Brazil to Bahrain. Although the car manufacturers (“constructors”) are overwhelmingly European, most headquartered in England, the drivers come from farther afield: England, the Netherlands, France, Mexico, and Spain are represented. As a result, Netflix gets content that plays well in much of the globe and F1 gets exposure for its member teams. Although it’s no surprise that some drivers have emerged as media stars (Daniel Ricciardo, an Aussie of Italian descent, likes the camera and vice versa), several of the team principals have emerged from general anonymity and contribute personality, intense competitiveness, and cut-throat politicking to the mix. Mercedes’ Toto Wolff is an investor who owns a 1/3 stake in the team, stands 6’ 4,” and is worth about $800 million. At Red Bull, Christian Horner has won 4 F1 constructor championships, is married to former Spice Girl Geri Halliwell, and lives on a massive English estate. Aston Martin’s Otmar Szafnauer was born in Romania, educated in Detroit, and worked for both Ford and Honda. All of them, and their peers, contribute to the episodes’ realism with relatively frank on-camera talk. 

The series has achieved its objective of explaining the sport to new fans, pulling them into the various rivalries and dramas, and creating story lines from pre-shot footage. I can’t imagine how many hours of video mush have been culled down to the ~10 hours per season. Backstory upon backstory was documented (Finn Valtteri Bottas was shot naked in his sauna months before winning a race), and races invariably deliver ample surprises that must be accommodated. Two British motorsports journalists provide exposition when necessary: why is team X filing a technical challenge against team Y, why does driver A hold a grudge against team-owner B, why does driver C have a particularly good record racing in the rain, etc, Although purists grumble that the season isn’t really documented (a standard year includes ~20 races) because each event doesn’t get a recap, crashes like last year’s terrifying fire that Haas driver Romain Grosjean survived through incredible luck and strength of will cannot be ignored. Thus the scripting of the Netflix shoots can only go so far: reality will dictate some percentage of the final product.

What makes for such gripping yet universal television? It’s a long list:

1) Tech

F1 is essentially the overlay of aerospace onto automotive. Exotic materials, massive data telemetry feeds, incomprehensible horsepower:weight ratios, and minuscule competitive differences are underplayed in this viewer’s opinion. The design of a brake duct, of all things, was found (and not found: F1 is nothing if not political) to have created unfair advantage likely measured in tenths of a second per lap. One thing I’d love to see explained better: the steering wheel is a digital control surface, each custom made and costing up to $150,000. Drivers get radio traffic from the spotting/analysis team, but all manipulations of wing surfaces, front-to-rear braking ratios, battery regeneration (the cars have hybrid engines), and engine management are under driver control via dozens of knobs and switches operated mostly by thumbs on the wheel’s front; paddle shifters are on the rear.

2) Tires

For all the cars’ titanium and carbon fiber, tires are incredibly important, though the series doesn’t really teach the point very well. Part of the reason is that all teams use rubber supplied by Pirelli, and only certain compounds and structures (dry slicks vs grooved rain surfaces) are made available on a given race weekend. One thing you’ll never see is a refueling: cars must run an entire race on the initial tank. This adds considerable weight to the freakishly light vehicles, increasing tire wear early in the race, so determining when to run hard, durable-but-slippery tires versus soft, faster ones (you can tell by the color of the print which is which) is a huge aspect of race strategy.

3) Demographics

The current crop of up-and-coming drivers is incredibly young, and most of them grew up together starting in karting. Current points leader Max Verstappen is 23 years old with 124 F1 starts and 47 top-3 finishes to his credit, and five of the top 10 points leaders are under 25.

4) Money

F1 team budgets will be constrained next year amidst a massive set of rules changes governing everything from gearboxes to aerodynamics (a team’s wind tunnel costs can be a material item, for example), but for now, the Mercedes and Ferrari factory teams have budgets estimated at north of $300 million. Just moving the cars, garages, and other structures around the globe is a massive enterprise. The luxury lifestyle associated with such venues as Monte Carlo and Singapore shows up in the Netflix series as well: watches and fashion eyewear are prominent, and the sometimes-too-young-to-drink drivers have insane vehicles for off-track use. (Hilariously, one McLaren driver is shown going to the grocery in an orange hypercar only to find out there is no place to stow 2 bags of food.) In another episode, a young driver is told by his personal manager that endorsing after-shave gel is a more promising avenue than razors, given the weak facial-hair game that he and many other drivers bring. For now, oil-company logos are prominent, having replaced alcohol and tobacco at the forefront. How that changes with vehicle electrification will be fascinating. The IT world has plenty of representation: HP, Dell, SAP, several antivirus firms, Cognizant, Microsoft, and Cisco all show up. 

5) Team dynamics

Each of 10 constructor teams has two drivers. Many have noted that the most intense rivalries on the track can come as two drivers in theoretically identical cars fight to keep their place (about 20% of seats turn over annually) in a brutal results-driven business. Teams wrangle with other teams, poaching drivers, protesting tactics or tech, and strategically outspending in some domain or another. On non-factory teams, drivers that come with funding have an edge, so Red Bull gets some help from Sergio Perez’s long business association with Carlos Slim, and Aston Martin driver Lance Stroll happens to be the son of the team owner. Cash-strapped Haas, the only US-based team, has a similar deal with driver Nikita Mazepin, whose father is a Russian oligarch.

6) Adrenalin

The executive producer of Drive to Survive, James Gay-Rees, produced the notable documentary of racing legend Ayrton Senna in 2010 (the same year he also put out “Exit through the Gift Shop”) so he knows how to handle racing sequences. At this level of skill, wheel-to-wheel footage can be gripping, and Drive to Survive offers glimpses of straightaway acceleration, spinouts, and just plain racing that make for great viewing. 

It would be nice to have more. At the same time, Gay-Rees is balancing multiple forces: 

1) The Netflix series is a partnership with F1, now newly media-savvy, so it’s not going to expose anything too incriminating.

2) The series has to hold viewers in multiple markets across the world, so somebody’s cultural/aesthetic norms are likely to be irritated at every turn.

3) The outcome is not known before the race, so even though it would make for great narrative if Ferrari driver Charles Leclerc were to win in his hometown race at Monte Carlo, that’s not how things worked out. I have no doubt hours of off-season interviews and other footage were shot to set up that story line, so I’ll be watching next spring to see if that’s how the producers frame that episode.

4) The objective was to broaden the sport’s appeal. While that mission has been achieved, longtime fans and some of the subjects grumble about the portrayal of heroes and villains, fixtures and interlopers, winners and stragglers. 

In the end, the fact that viewers are sufficiently invested to protest everything from perceived oversights to inaccurate engine sounds shows how effectively the series achieved its multiple objectives. I can’t wait to see what next March brings when season four drops, and I'm now sufficiently engaged to be able to tell you the top 5 points leaders among the F1 drivers. Mission accomplished, indeed.

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Early Indications May 2021: Lessons from Germany?

The premise for this newsletter isn’t original: there are numerous books, podcasts, and movies that point to various places in the world that organize things in different ways than we do in the US. Here, I’m not going for cheap laughs (comparing French school lunches to US fare) or easy moralizing (parental leave in the Nordic countries). Instead, I’ll point to four areas where we in the US might learn from the Germans, but in each case, there’s an asterisk: the German model is vulnerable in some way, so none of these is presented as a silver bullet. There is precedent: the German state retirement system, with its retirement age of 65, was a key influence on Franklin Roosevelt at the dawn of Social Security. What else is there to learn from?

1) German cars

Germany’s auto industry, dating back to Karl Benz’s 1886 patent, predates everyone else’s, and its leading brands still set the standard for a particular combination of precision, luxury, performance, and social prestige. Whether in profit margins, motorsports results, or resale value, German automakers have set the standard for well over a century. Some of this leadership appears to be uniquely German: when Daimler Benz owned Chrysler and the latter built vehicles designed by the former, the aforementioned qualities did not translate. Get into a Mercedes blindfolded then into a Lexus or Cadillac, and there are numerous cues that cannot be copied: the seat cushioning, the sound of the door closing, the interior noise level all give the imitators away. The same used to be true of the often-imitated BMW 3-Series: it was the driver-focused benchmark that everyone from GM to Nissan to Audi tried to copy. And it always defied imitation; it appears that only internal marketing-driven design changes could knock the 3-Series off its engineering-earned podium.

Given that every automaker in the world has been studying German automakers under various microscopes, it seems unlikely that anyone could challenge their leadership, but the age of internal combustion is coming to an end. Electric vehicles are under development by everyone in the industry, and the success criteria for those are still unclear. It does appear that every automaker outside of Tesla has underestimated the role of software (whether for user experience, battery management, or driver automation), the Germans included. Perhaps more of a threat comes from the bicycle, and specifically the e-bike, as a more sensible solution to urban mobility. At the 150th birthday of Benz’s invention, there is no guarantee German automobiles will still be the world standard - especially if dashboard menus still look as though they were designed by SAP.

2) Sports team ownership

I just learned this in the last week: German football teams are partially owned by clubs — essentially by local fans — in a unique structure. 50% of shares plus 1 share are held by the club, preventing wealthy owners from running the clubs in ways that conflict with fans’ interests. Profit is not the main priority, and the result is that German football is characterized by high-quality play, reasonable ticket prices, and organizational stability. (Germany also has four World Cup wins, second only to Brazil’s five, three of which included Pele.) US-based sport franchise owners and Russian billionaires have bought clubs in England, which has no such rule, and fans are revolting. In the US, only one professional sports club is owned by the fans (answer below), and league rules expressly forbid this structure from ever being replicated.

As the short-lived attempt to form a European Super League illustrated however, the German model may not be sustainable (it was only implemented in 1998). For one thing, German player salaries are lower than what clubs in other countries can pay. Secondly, investment in the health of the club often requires outside investment, so if a partial owner sustains involvement in the club for 20 years, they can be allowed to acquire a controlling interest. This clause is beginning to take effect at several clubs.  Either way, the 50% + 1 model may not survive the next decade. (Trivia answer: the Green Bay Packers)

3) Beer

In 1516, Duke Wilhelm IV decreed that all beer brewed in the state of Bavaria must contain only three ingredients: water, barley, and hops (yeast hadn’t been discovered yet). It remained codified in German law until 1987, when it had to be modified as part of membership in the European Union. A new German law took effect in 1993, but many brewers still adhere to the Reinheitsgebot. The decree doesn’t have the effect one might think it does: such staples as wheat beer and most darks can’t be brewed in strict accordance with the law.

The 1980s were a time of major change in beer brewing worldwide: Jimmy Carter deregulated home brewing in 1979, then the three west-coast US states all allowed brewpubs in 1982 and 1983. Lots of brewpubs were launched by some of those home brewers, and 2/3 of the 1500 US breweries as of 2010 launched as brewpubs. Craft beers have established a substantial foothold in Germany, bringing the westward migration of German, Czech, and Belgian beer-loving immigrants full circle as a US trend is now reshaping alcohol consumption in Europe.

Part of the German appeal of craft brewing is the same rebellion against mass-produced characterless beer that has taken hold in the US, where craft is approaching 20% of the market. In Germany, the #2 brewer is Anheuser-Busch InBev: Beck’s, Franziskaner, Hasseröder, Löwenbräu, and Spaten are owned by the Belgian-based multinational. The #1 German beer maker, Radeberger Gruppe, exports very little to the US. As we will see in bullet 4), global consolidation is challenging many tenets of German economics and culture.

4) Mittelstand

Germany’s heavy reliance on mid-sized firms is well known even though the term and its definition are unclear. According to an Economics Minister who helped nurture the sector, the concept is “much more of an ethos and a fundamental disposition of how one acts and behaves in society" than a statistical or legal designation. These mid-sized firms can rightfully be called the backbone of the German economy, employing 60% of the workforce and contributing heavily to the nation’s favorable trade balance by exporting everything from orthopedic devices (Otto Bock) to electronic transducers (Sennheiser). Given such a powerful auto industry, it’s not surprising that Germany’s machine-tool sector is the best in the world.

But the Mittelstand is under siege from several directions. Bureaucracies, regulations, and passivity (especially in later generations of a family-run company) can contribute to a lack of innovation. The quest for global scale means that increasing productive output, entering more and more geographic markets, and reinventing the market offering take on more urgency. AKG, a mid-sized Austrian headphone/microphone company, is now owned by Samsung, for example: the “tweeners” markets, never easy, get more pressure applied by global giants every year. Finally, according to at least one investment bank, German mid-sized companies have been slow to embrace digital transformation. One reason for this may be a shortage of skilled labor, a common complaint in most economies. All of these factors should temper any excessive optimism about some magical properties of mid-sized companies.

The US used to have a similar sector: Magnavox made TVs, Schwinn made bicycles, and Bass made shoes, all on native soil. The advent of container shipping, a strong dollar, incredible inflation in health-care costs, and a handful of other factors drove much of the US manufacturing base offshore. Remnants remain: upholstered furniture, metal fabrication (think trailers and RVs), bookbinding. Otherwise, most US manufacturing relates to cars, high technology, aerospace/defense, and chemicals and refining. All of these tend to be capital-intensive, increasingly high-skilled, and rich in intellectual property. Each of these factors makes it difficult for a mid-sized firm to thrive while staying mid-sized. Germany is different, for certain, but the Mittelstand cannot be immune from global competitive forces in perpetuity.

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Where does all this leave us? As President Biden attempts to drive foundational change in the social and economic fabric, there is much to learn from countries where inheritance taxes, universal pre-kindergarten, and wide environmental responsibility are already in place. With any policy at any level, there will always be unexpected consequences and the more we learn from countries like Germany — about what to emulate and what to avoid — the better those new policy outcomes can be.