In the 2010s, cheap solar panels from China began flooding the US market, killing off US domestic panel-makers who couldn’t compete on price. The US government slapped a 40 percent tariff on Chinese panels, claiming under World Trade Organization rules that China’s government was unfairly subsidizing panel-makers. Given how quickly solar panel costs were plummeting and the Byzantine ways in which industries are subsidized supported, the claims under WTO rules were difficult to prove.
But America can be trigger-happy when it comes to using WTO law to try to protect its own industries and markets when it believes other governments are competing unfairly. Under international trade law, a country can’t subsidize an industry to give its exports unfair advantage over industries of a trading partner if it wants to compete in that partner’s markets.
But what about domestic subsidies that distort markets? American governments use tax laws to subsidize many industries. Oil and gas drilling, transportation, the steel industry, farmers… the list goes on. Many of these subsidies are in support of public goods. We need energy. We need roads. We need a stable food supply.
In the era of Big Tech, there’s an even more powerful subsidy that has emerged, a “scalability subsidy” that has ignited disruptive technologies that have transformed the world. The prospect of having 2.5 billion users (YouTube), or 3 billion users (Facebook), or 8.8 billion searches per day (Google) makes investors’ eyes water. And Silicon Valley industries have sucked up multi-billions of dollars of investment, creating trillion-dollar companies and minting dozens of billionaires. Capitalism at work.
Prospects for such scale of success means investors are willing to subsidize companies for years. Amazon didn’t have its first profitable year for nine years. Spotify, founded in 2006, has never had a full year of profitability, despite now having more than 400 million users. Netflix took eight years before its first annual profit; TikTok took eleven years (2019) before it turned profitable. In the meantime, investors ploughed billions in subsidy investment into the companies in expectations of big returns later.
And why? To have millions of viewers, as the old broadcast TV networks had, made their business model wildly profitable. We called it mass culture. To have thousands of ticket-buyers, concert and theatre companies could make a workable income. In the digital world, though, a company attracting only a million users is a failure. A company with 50 million users that has stopped its wildfire growth is a company likely in decline. Back in the real world, pretty much every traditional content producer (hate the term, but as a catch-all it works) has seen the structural economics that support their business wither away as scalability subsidy mindset has taken hold. Even the old mass-culture audiences of television.
Companies like Netflix, Amazon, Facebook, Spotify, Apple and Google have subsidized what they offer (super-cheap or free content, faster service and better accessibility) to capture audience and attention in ways that have played havoc with culture producers and artists everywhere, whether or not they create on any of these platforms. These platforms for years have offered “content” at well below the cost it took to make it, putting “terrestrial” content models (including, broadly, the arts) at a disadvantage. Then, having massively subsidized their platforms and scaled up to capture their markets, now that the bills are coming due (investors wanting to see returns) we’re seeing these giants slash how much they’re producing, raise prices, and impose other tolls, resulting in what Cory Doctorow describes as an “enshittification” cycle, when, having captured a market, an industry starts degrading its deal to both its producers and consumers.
But, you protest, I make theatre or dance or play in a symphony orchestra. What does this have to do with me? The old culture gatekeepers may have seen their power dwindle, but the new Big Tech platforms have taken their place with a vengeance, creating their own rules and exacting big taxes not just on producers who use the platforms, but anyone who wants to create something and get it out to an audience.
Where musicians and authors used to sell their work as physical objects, they now have to participate in bundled digital platforms which offer a fraction of the compensation the old markets did. Newspapers and magazines used to be able to monetize their work by selling ads. They still can, but the scalability subsidy has slashed ad rates to pennies on the dollar. And the big adtech monopolies (looking at you Google and Facebook) force you to play by their rules and compensation structures, taking care to take a generous cut of every transaction and earning billions, while journalism starves.
TV and movie industries have likewise been impoverished (relatively speaking) by streamers who bundle content into subscriptions that can’t realistically return fair rewards to producers. They get away with it because in order to get to an audience you can’t afford not to sell on Amazon or have your music or movie on a streaming service.
Every website you visit has to play by Google’s rules or it becomes invisible in Google’s search engine. Every product you sell on Amazon has to play by Amazon’s rules on pricing and distribution or it either doesn’t appear in the store or gets relegated to page 487 of customer search results and gets no sales. Every app for your phone downloaded from the Apple app store has to pay a tax of around 30 percent on every transaction made on that app. So when you download the New York Times or Spotify apps and then subscribe through the app, every month Apple gets around a third of your subscription payment. And these producers are trapped. Every musician has to upload to Spotify and accept its shitty streaming compensation or remain invisible to the vast majority of music lovers.
Big Tech argues that requiring producers to play by its rules makes a better consumer experience. Optimizing websites to Google standards results in more streamlined web browsing experience. Amazon’s rules for sellers protect consumers from bad players. And Apple claims its onerous standards protect the public from bad apps. All of which are probably true to some extent.
But here’s the thing – these companies have all had years of investor subsidies that allowed them to capture audience/users, lock them in, forcing creators to play on the platforms because that’s where the audience is.
There are lots of reasons markets for culture have changed and business models have been disrupted. But years of zero-percent interest rates have allowed tech companies to borrow vast sums of free money and capture users in unprecedented numbers, stealing attention and users from traditional markets. Having done so, along the way destroying infrastructure that supported creative production, they now control these new market platforms, and, as the middlemen, both setting the rules and taking lucrative pieces of every transaction.
Is it a surprise that when interest rates went up over the past year, money was no longer free, and investors needed Big Tech to start earning, that we’ve seen investment in content go down, big layoffs, and steep increases in subscription costs? All the while, Big Tech in the middle collects more.
Social media platforms have become overrun by bots, and “sponsored content” ads choke Instagram, TikTok and Facebook feeds. Google’s search results are now vast scrolls of “sponsored results” that get between you and what you’re looking for, or worse, capturing your attention with compromised results.
Journalists and artists can point to mistakes made, difficulty in adapting, and structural factors that make what they do difficult to compete in a digital world. But the truth is, journalism and the arts haven’t been playing on a level playing field for a long time. The audience is online. That audience has been captured by a small number of platforms who dictate who gets access to what and on which terms. The scalability subsidy has decimated culture and is leaving vast fields of wreckage.
Thank you for your great clarity on this subject. It’s very sad, and I wonder what the way out is (if any).
Great post, Doug. I have come to exactly the same conclusion some years ago and have expressed this wherever I can, so it’s great to see this stated. As the previous commenter says, the question is now what the way out is… By the way, Big Tech’s stranglehold on advertising isn’t the only problem: you may be interested in an opinion piece I wrote about Google being the effective worldwide controllers of media content: https://bachtrack.com/opinion-who-rules-media-google-february-2023
The economics of this essay are incoherent. The CCP was creating yuan ex nihilo and flooding it into domestically produced solar panels to be traded for dollars worth more than the yuan. Investors of dollars who were willing to wait a decade for a return of dollars and absorb high risk in the meantime were not in any sense subsidizing the tech companies. The incentives are entirely different between the two cases, and the latter are unambiguously better. There is likewise no sense in calling Apple’s margin a “tax.” I haven’t used an Apple product in 20 years.
I guess you’re trying to establish that something is unfair about the markets, but in the process, you’re obscuring some pertinent questions about why, relative to the tech giants, journalism and the arts are such unattractive investments.
I tend to think that the arts and journalism wrecked themselves by pursuing political agendas and failing to connect with audiences universally. The exceptions are instructive: Bari Weiss’s Free Press now has more subscribers than the Dallas Morning News; Oliver Anthony became the first artist to chart at #1 without ever having been signed. New York Magazine, even in the process of accusing Weiss of “reinventing neoconservatism” last month, admitted that in journalism, “progressive activists managed to override truth-seeking norms for the sake of what they believed to be social justice.” Last fall Newsweek published an op-ed claiming that “Rich Men North of Richmond” demonstrated how “weight bias and racism are fundamentally intertwined.” I wouldn’t say that all the damage is self-inflicted, but enough of it is that one wonders how much the remainder matters.
Franklin: Thanks for the response, But a few points:
My Chinese solar panel example was to make the point that when international trade partners believe that uncompetitive practices of other governments create uncompetitive situations for domestic producers, they act. Those uncompetitive practices can take many forms and can be pretty subjective.
Companies that underprice the real cost of producing what they sell and willing to take years of losses (underwritten by investors) while they drive traditional producers out of business and build market share gaining monopolies is indeed a subsidy. I’m not arguing that markets are unfair (at least on this point, anyway), I’m saying that the anticompetitive behavior that has been enabled by the “scalability subsidy” of Big Tech has become Silicon Valley’s go-to model.
As for the Apple “tax”: Apple’s app store is the equivalent a credit card processor (as is Google’s Play store). Apple and Google authenticate transactions and process them (including authenticating the apps themselves). But while Visa charges 1.4%-2.5%, Apple charges 30 percent. For any transaction completed through an app. So use another store, you say. If you have an iPhone, you have no choice but to use Apple’s app store. More than 60 percent of traffic online is through mobile devices, which means Apple or Android, both of which have monopolies on their app stores and impose the rules. A tax.
Finally – I fear your diagnosis of what ails journalism and the arts is naive. Blame the content? That is the traditional argument, and both journalists and artists have been struggling to divine a formula, tweaking content and trying new models. Aside from clickbait, nothing has worked in a sustainable way over time, despite many many attempts. I’m glad Bari Weiss has found something that works so far. I could point to many examples that currently work — including the New York Times, which has never been in a stronger position. But to diagnose this as a content problem (again the usual argument) distracts from the primary role and enormous power that larger systems wield.
Doug: You can, if you like, buy a jailbroken Android, install GrapheneOS, and sideload apps from the open-source ecosystem at F-Droid. You’re paying Apple not to have to do things like that. Apple, for its part, will scan millions of lines of C# to verify that an app you download isn’t harvesting your private photos or surreptitiously mining Bitcoin. It’s a service and you don’t have to use it. You probably should, but the associated costs are not taxes.
It’s likewise difficult to think of the growth funding as subsidies. Investment imposes discipline. Subsidy encourages waste. If a company can survive years of loss-leading and the shareholders are willing, there’s no reason not to try to hit it big that way.
My point is that if investments are subsidies and margins are taxes then the larger systems might as well be run by goblins. We’re not characterizing them in a meaningful manner. Consequently, no ways appear by which we would change them or bypass them. If they’re all just people more or less like us responding to their local incentives, then we might. The latter would be the economic way to think about them. From that standpoint some, not all, of the content is blameworthy.
You ask, “Is it a surprise that when interest rates went up over the past year, money was no longer free, and investors needed Big Tech to start earning, that we’ve seen investment in content go down, big layoffs, and steep increases in subscription costs?” In my case, no, because this is classic Austrian Business Cycle Theory.
So what you’re arguing is language? – that investments aren’t subsidies and margins aren’t taxes? Sure, when markets are working. But it’s not okay to undercut prices (because you’re flush with cash from “investment”) until you put traditional markets out of business, then when you’re the monopoly you degrade the offering and jack up prices. Which is what is happening now. The problem is these tech companies have taken over markets – they own the buyers, they own the sellers, and they compete with producers at the same time. That’s what the EU ruling on Apple’s app stores was about this week. Spotify (and other streamers) pay the 30 percent Apple take in the app store, but Apple Music (the competition) doesn’t have to pay that 30 percent, so everyone is at disadvantage to Apple. This manifests across the digital world.
As for jailbreaking your phone – first, what percent of users really have the tech confidence to do that? Well below 1 percent, I’d say. And when you do, you void the warrantee. So really not a viable option for the vast majority. Second, yes, having Apple (or Google) vet app code to make sure it’s not malicious is valuable. That’s the heart of Apple’s defense. I’d argue it’s only good business. If apps weren’t safe in the app store, fewer customers would use them. Indeed, the app store might collapse as a business as consumers lost trust in what was offered. But taxing (oops – earning a profit) by charging 30 percent of every transaction within the app and not allowing app-makers to direct their customers elsewhere to buy their subscriptions or purchases to avoid the fee is wrong (as the EU just ruled).
Big Tech has been underregulated, and the US hasn’t enforced antitrust laws for decades. You say Austrian Business Cycle Theory. I say predatory uncompetitive behavior that now gives tech opportunity to reduce expenses and raise prices with impunity now they’ve cleared out competitors.
Language, yes; really characterization. Investments and margins don’t become subsidies and taxes whether or not markets “are working” – I’m not sure what you mean by this. If the media products degrade while their prices increase, these companies you’re calling monopolies (they’re not really) will go the way of what you’re calling traditional markets, which in certain respects were even fewer, more locked up, and more abusive than the current ones. Apple remarked, with some justification, that the EU fine was a hit job on behalf of Sweden-based Spotify. The company has competitors. Saying that Apple is a monopoly within its app store is like saying that you have a monopoly on who lives in your house. The number of users who would run Graphene is probably lower than 1% by a few orders of magnitude, no question. But the convenience of the Apple ecosystem is not a human right. It was built at enormous expense and has to be maintained. Android is a fine alternative.
You said it yourself, there was cheap money sloshing around to fund loss leaders because interest rates were low. Low rates goose the economy into a semblance of health, thereby making it easier to reelect incumbent presidents. When those low rates finally triggered price inflation and had to be raised, the goosed-up companies suddenly had to demonstrate that their business models were not hallucinations. If we had a free market in interest rates, they would have been higher all along. There would have been ensuing pressure on these companies to become profitable by some other mechanism than sheer growth alone, for which capital wouldn’t have been as readily available. Your implied expectation that the state should regulate away the misbehavior caused by malinvestment for which it’s ultimately responsible lends weight to the argument that we should ditch the entire thing.
I just think it’s sad when your other commenters remark that there are no prospects for a different future, which is more or less the conclusion to which you led them. I think that it’s annoying that we have to invent new models because the establishment is so inefficient and politically captured. But the price of counterculture is survival at the margins, and thus it ever was. Art will endure. Let what will be wrecked be wrecked.
Terrific essay, with no prospect to a different future