INSIDE ‘THE KILL ZONE’
Big Tech can make life miserable for some startups, but others see opportunity for profits
Patrick Spence in mid-January sat before the United States House Committee on the Judiciary and described how Big Tech was hurting his company, California-based smart-speaker maker Sonos Inc.
For one thing, he said, the giants use their dominant position to subsidize conquests into other markets, squeezing smaller players, some of which were formerly partners. He had some insight into the matter, given that one-time collaborators Google LLC and Amazon.com Inc. are now both selling aggressively discounted smart speakers years after Sonos pioneered the devices.
Both companies initially gave Sonos their blessing by allowing it to use Google Assistant and Alexa voice controls in its product. But over the years, Spence said, the giants began to engage in more aggressive and bullying behaviour, leaving Sonos no choice but to launch a patent-infringement lawsuit against Google in an attempt to protect itself and its products.
“Long term, this could mean price increases and prevent new entrants. It also dries up the venture capital new companies need to develop the next great inventions and bring them to market,” he told lawmakers. “Venture-capital firms are well aware of the kill zone that surrounds startups that pass within striking distance of the dominant platforms — they stay away from those investments.”
Of course, it’s not just venture capitalists that are wary of the startup kill zone, a snappy way of saying that the world’s biggest tech firms are so dominant they can easily crush the competition with predatory tactics, or simply avoid the hassle by buying up any potential threats before they get big enough to become a full-fledged challenger.
The canonical example of a kill zone is Facebook Inc. buying Instagram and Whats-App Inc., while also copying key features from Snapchat to prevent those apps from becoming serious competitors. Facebook has made at least 81 acquisitions since obtaining its domain name in 2005, according to Wikipedia.
But one of the challenges of the kill zone theory is that it can be difficult to observe in the wild unless something big enough happens to make the news, such as when Cisco Systems Inc. bought Waterloo, Ont.-based PixStream Inc. in 2000 (and shut it down a year later) for US$369 million or when Snapchat bought Toronto-based Bitstrips in 2016 for US$100 million.
What’s harder to track are the $50-million, or even $5-million acquisitions that never make the headlines, but take companies out of the market before they’re big enough to be relevant.
Critics of the tech giants say these kinds of acquisitions and predatory tactics happen all the time, but the companies that get picked off are generally much smaller than Instagram or WhatsApp so the kill zone doesn’t get nearly as much attention as it should.
Such critics also say anticompetitive behaviour in the technology sector goes beyond pricing — many services from Google and Facebook are free — since the resulting lack of meaningful competition stifles innovation and allows big companies more freedom to build business models around monetizing private information.
“(The kill zone) is a real thing,” said Abdullah Snobar, executive director of the DMZ incubator at Ryerson University. “And you see it more and more with the challenge of large corporations shopping around all the time, seeing what’s available, what’s going on.”
Snobar sees a lot of nascent tech companies pass through his doors as well as how Big Tech is shaping and often snapping up those fledgling businesses.
Anti-competitive acquisitions are an issue the Competition Bureau of Canada said it keeps an eye on, and it has recently expanded its market intelligence efforts on this front.
“As an organization, the bureau is always concerned about and seeks to identify acquisitions that have the potential to result in a substantial lessening or prevention of competition (SLPC), including ‘killer acquisitions’ by large firms of nascent competitors,” the bureau said in an emailed statement.
“(The bureau’s) enhanced intelligence-gathering activities aim to identify transactions that are otherwise not brought to the bureau’s attention because they fall below our notification thresholds, but that have the potential to result in an SLPC — including potential ‘killer acquisitions.’”
New Democrat MP Charlie Angus, though, has a dim view of the bureau’s efforts.
“I’d like to actually have a Competition Bureau,” he said. “I think there’s one in name, and it was probably great in the 1980s, but the world has changed dramatically, and they’re outside the conversation.”
But with the benefit of a few weeks’ worth of hindsight, 2019 is beginning to look like a watershed year when governments around the world started to seriously consider whether Big Tech is too big.
The European Union levied multi-billion-dollar fines against Google, and various government agencies in the United States are engaged in antitrust investigations against Google, Facebook, Apple Inc. and Amazon — the so-called Gang of Four.
Angus in April brought up the idea of kill zones at a meeting in Ottawa of the International Grand Committee on Privacy, Big Data and Democracy, which brought together legislators from around the world to study issues associated with the Cambridge Analytica scandal in 2018 — when the British political consultant used the personal data of millions of Facebook users without their consent for political advertising purposes — and, more generally, the role of Big Tech in society.
“With Amazon, it’s the kill zone of competition — the power that you have through all of your platforms to drive down prices and actually put people out of business,” Angus told Amazon’s representative at the meeting.
But Mark Ryland, a director in the chief information security office at Amazon Web Services, disagrees that competition is being stilted.
“There are a lot of new startups, and we even have a great number of competitors who use our Amazon Web Services platform,” he said. “Some of the largest online commerce platforms in, say, Germany and Latin America use AWS and trust us with their businesses, so we think competition is working.”
Entrepreneurs paint a more complicated picture, but essentially say that both Angus and Ryland are right.
On one hand, there is plenty of competition and opportunity for startups. On the other, the kill zone is all too real.
Snobar said he occasionally sees the market-distorting power of big tech at the DMZ, as well as opportunistic entrepreneurs looking to profit because of it.
“Not everybody wants to build a business that’s going to stick with them for the rest of their lives,” he said. “They actually want to sell it to a large corporation. That’s part of the plan all along.”
Snobar said startup founders sometimes look like they’re trying to engineer an acquisition by building capabilities that a larger company will probably need at some future point.
The kill zone is definitely something startup founders need to be aware of, said Carl Schmidt, co-founder and chief technology officer for Unbounce, a Vancouver-based software company that builds web pages for digital marketing campaigns, but it isn’t necessarily a problem for everyone.
For one thing, Schmidt said, the tech giants create niches for smaller companies. No one would be crazy enough to take on Google by coming up with a better search engine, but its advertising machine creates all kinds of opportunities for companies to build digital marketing tools and complementary services.
This idea is echoed by Stephen Ufford, chief executive of Trulioo, a Vancouver-based company building a system for verifying identities online. He said his company provides a solution to a big-tech need, adding that entrepreneurs can be complementary to Big Tech in the short term while growing into a disruptive company in the long run.
“The kill zone theory is 100-percent correct,” he said. “But the other side of that coin is that if you’re thoughtful about it, you can be strategic in building your business to be an enabler in big tech.”
Despite confirming that they feel the effect of kill zones, none of the entrepreneurs who spoke to the Financial Post wanted to break up the Big Tech companies.
After all, there have always been big companies that dominate certain markets.
“Every space is crowded, so if you’re the kind of person that can’t sleep because you have competition in the world, wow, you probably shouldn’t be building these things, or you’re not building anything that’s relevant,” Ufford said.
At the Creative Destruction Lab inside the Rotman School of Management in Toronto, chief economist Joshua Gans said the most significant thing they do at the startup incubator is teach entrepreneurs how to navigate the business landscape and build their company in a way that doesn’t bring them into a head-on collision with the giants.
“There’s a thing called a kill zone which is, don’t do things that are going to cause you to be crushed immediately. There’s nothing new with that,” he said. “Don’t walk into the lion’s den. Maybe take another path.”
Gans said the conditions today are really no different than 50 years ago, when an entrepreneur would’ve been crazy to start a car company to take on Ford, Chrysler and General Motors.
What’s arguably different is that companies such as Google and Amazon are sprawling into so many different aspects of the economy, whereas the car companies generally stayed in their lanes.
For example, Google is dominant in search and advertising, but also in video hosting through YouTube and mobile phones through Android, not to mention maps, documents and email.
Amazon has repeatedly been accused of predatory tactics in everything from shoes to smarthome gadgets.
But Gans said governments can already police those abuses through antitrust law and regulations to foster a better competitive environment, so it’s not necessary to break up Big Tech.
Another reason some entrepreneurs aren’t worried is that, unlike the dominant players in other industries, the current titans of tech are relatively young, and nobody assumes they’ll last forever. Facebook could turn into the next Myspace someday.
There is so much change happening because of cloud computing, mobile phones, artificial intelligence and other emerging technologies that there are lots of opportunities for entrepreneurs who want to start a new company.
Schmidt said the startup kill zones around Google might mean that nobody is trying to compete to build a better search algorithm, but that’s not really hurting startups. Mostly, he said, the lack of competition is a problem for the businesses who need to pay the socalled “Google tax” to buy an ad to make sure their company is at the top of search results.
“It seems like those areas are more problematic currently than the impact on the startup space, because there is so much new technology and opportunity that we, as entrepreneurs, can easily choose to pursue those areas that are well outside of these kill zones.”