Rediscovering Capitalism

Yesterday, July 11, 2021, President Biden announced  he wants to encourage “the right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies.” This is an important but complicated project. “Robber Barons” in their day brought us the national railroads, systems for extracting and refining oil that led to the ubiquitous use of cars and other efficiencies that lead to our 20th century life.. They also blocked competitors, controlled access to who could participate in auxilliary businesses and ultimately used their power over our elected officials to shape the strategies that protected them.

Their power over shaping our national policies on controlling corporate malfeasance never left. The Citizens United case, decided by the US Supreme Court in January, 2010, made it even easier for corporations to influence our elections and to shape policies of our elected officials to conform to the best interests of large corporations. This law further reinforced the already strong imbalance within the concept of capitalism between the large corporations and the smaller corporations who could not afford to exercise their corporate rights to pay lobbyists to protect their interests. Many small companies lost out to larger corporations, sometimes by fair acquisition processes, sometimes by unfair manipulation of the rules of commerce. The “digital revolution” opened a whole new sector of growth in our capitalist economy, and offered a whole new range of abuse of the expected rules of capitalism.

Google led the way in one of the most egregious examples of corporate abuse. On April 24, 2012 Google launched a “fix” for their Google search tool named “Penguin“. Publicly Google claimed that the reason for this launch which killed about 3% of all commerce websites, was to give the internet user a better experience by eliminating sites that appeared to overuse “key word terms” to attract Google search users. The better understood explanation for Google’s “Penquin” algorithmic correction was far different. By 2012 Google was fearing that analysts were beginning to consider them a “mature company”. In the corporate world, being considered “mature” is the kiss of death. It implies the company has reached its maximum growth potential and there is no more new money to be made. Analysts saw Google’s huge dependency on their “key word” income as the core of the Google business model and as ultimately limited. Companies built on the platform of the “do no harm” Google saw another reason for Penquin. It killed those companies who were not spending enough of their revenue on paying Google for “key word search”. Google only wanted payors on their search platform.

I’ll dive into this as an example of the dangers the public does not see when it allows large corporations to manipulate markets. The focus on internet technology, as opposed to oil extraction is both more timely and, for me, more personal. My own internet company died on April 24, 2012 when Google launched Penquin and killed 3% of users.

First, a brief digression into the theory behind commerce and the world wide web as of the mid-1990’s.

In 1997, when I launched, the public use of the internet, specifically e-commerce, was in its infancy. I had recently graduated with an MBA and, like millions since then, was excited about starting a company in ecommerce. The “long tail” theory of ecommerce particularly interested me. I could go into a dozen shoe stores in my ca. 20 mile market area and none of them carried more than one pair of women’s size 11 fashion shoes. Most carried no more than one pair in size 10. I could understand why a walk in store with a limited market area might not want to be burdened with a large selection of shoes in a size that were rarely requested. But under the “long tail” theory, the internet could reach women needing size 12 shoes all over the world! And since they couldn’t get fashion shoes in their size anywhere else, shipping costs were not an obstacle.

Let’s take a moment to remember the concept of how the new digital ecommerce world would serve people looking for things hard to find in their local market area. Picture a bell curve. In this case it could represent the population in the market area of people looking for a specific item and the likelihood that they’d find that item in their shopping area. Maybe they are looking for a fast take out burger? There are lots of options for that in most places in the US. That option would likely be at or near the highest point of the curve. People looking for something hard to find, an old tool, a special watch, a size 12 fashion shoe, would likely be at the low far end of the bell curve… aka “the long tail”.

Bell Curve – with “long tails” on left and right sides.

When ecommerce businesses started in the mid to late 1990’s, a business model to serve a customer searching for a “long tail” product were, according to ecommerce commentators, a perfect model. Google shattered that model when they introduced Penguin in April, 2019. While Google claimed it was for repetitive terms on the website, it stands to reason that a company carrying one specific kind of long tail product is going to use that term many times. The beauty of those early years was that businesses who specialized only in long tail products and who built their business trusting in Google’s honesty about their platform rules, were able to use that platform without needing to pay the “key word search” fee that companies selling many products had to pay to compete.

Whether we call large tech companies that regulate and shape the stream of private business models that might use them capitalist free enterprise corporations or utilities, it is clear that they have the unregulated, unreviewed power to make decisions, much like the early Robber Barons, that shape the business models that reward their interests and kill business models that do not. Nor are there any clear remedies for enabling public interests or private companies to engage in inquiry about policy decisions by these companies that shape the way our economy, as well as our society, functions.

In the spirit of “asset stewardship”, it is time, as President Biden said, to encourage “the right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies”.


Follow Barbara Thornton @AssetStewards and LinkedIn
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