Are Tech Giants Building Walled Gardens (Again)?

In the last few years, I've been dissecting business models of any type, and companies of any size. At the same time, I've been talking, interviewing, and discussing business models and business model innovation with dozens of entrepreneurs, and practitioners.

While doing that I found myself diving into the business models of tech giants, which taught me a few interesting things that tell us how the business tech world might look like in the coming years.

As old gatekeepers are made irrelevant, new kids on the block took over, but now they are becoming like the old gatekeepers

The Internet had enabled the decentralization, disintermediation, and disentangling of products and services that before were in the hands of a few or many gatekeepers.

This explains the process of disintermediation of many industries. For instance, Google and Facebook have pretty much disintermediated the advertising industry, which budget before went through expensive and non-transparent advertising agencies managing billions of dollars at lofty fees.

It is important to notice that while decentralization initially was a strong force on the web. As of 2019, we see companies that took hold of the web becoming tech monopolies. Those monopolies are applying the strategy of closing their platforms to create a complete user experience.

Thus, the web, rather than completing a process of decentralization, simply disintermediated several industries by creating new centers of power. And where before there were many gatekeepers. We pretty much ended up with a few platforms which work as gatekeepers on a global scale.

For instance, portals like AOL, in the first web age, had used the so-called walled garden strategy. Where users were locked-in and offered a plethora of services to keep them engaged as much as possible.

Eventually, companies like Google opened up that walled garden by simply pushing people on as many websites on the Internet.

However, as Alphabet squeezes its core asset, the Google search engine; algorithms keep users within Google's pages with new advanced features (from answer boxes to weather reports and travel platforms).

In short, the same companies that built their strategy on an open platform now go back to become a walled garden.

And that is understandable for several reasons.

The reasons for arising walled gardens

Google's business model is now mature. And as such, it only needs to keep monetizing its users for as long as it can. Second, as a new way to interfacing and consuming content arise, Google is trying to have a firm control on the distribution of that content.

One interesting thing though, as those new tech monopolies have formed and as they are propelling new industries (think of all the billions of dollars Amazon and Google are pouring into the voice search war), those new industries are starting as closed ecosystems right off that bat.

In short, Google, which once worked by providing dozens of blue links to sites across the web. With voice search, it narrows the selection to a very few. We might argue the reason is that Google itself is now a mature company.

Just like AOL, founded in 1985, when it dominated the first web era was an already mature company. Google, now Alphabet, is an over twenty years old company, which in tech years, make of it a senior company.

From many gatekeepers to a few global platforms

The primary change that has driven this age is that while before power was concentrated in the hands of a few people. That same power seems to be concentrated in the hands of a few platforms, driven by algorithms tweaked by a few people.

In the end, we might conclude it was all a change of power.

And as new technologies emerge, those able to understand the logic and implications of them can build a new business playground, thus make the rules of this new game and dominate.

Digital platforms are just like governments

As a result of their success, those platforms collect fees (a tax), thus making fat profit margins.

Take how Google collects a fee for the simple fact of showing a company first when a user is searching for it. For instance, if you type "the new york times" on Google, you'll notice NY Times showing as first paid result.

That means the company is paying a small fee to make sure Google shows on top of the search results. This mechanism in paid marketing and distribution is called brand protection, and it makes sense.

It is so inexpensive to protect your brand from the risk of now showing on top of Google if users were searching for it, that not paying for that tax would not make much sense.

We don't know for sure how much money a company like Google makes on branded searches, but we can assume it makes for sure a few billions each year. And that looks exactly like a tax.

Just like governments collect taxes for passing through their borders, Google asks for a small fee to make your brand show up on top of its search results.

Do consumers really have options?

One of the common beliefs that have formed throughout this digital era is that consumers gained power. As they got more options and they got empowered by more free tools, free information, and free entertainment, consumers at the end picked what they liked the most.

With Amazon obsessing on customer experience, it's easy to assume those tech giants follow the interest of those same consumers that empowered them.

And in part that is true. On the other hand, there are three aspects to take into account:

1. On the one hand, they create value for consumers while automating most of the jobs consumers need to buy things in the first place.

And that makes sense from a business standpoint. If the reasoning is to add as much value as possible to consumers, machines help do the job many times over more efficiently.

2. New consumer behaviors are induced thanks to distribution sheer force. Think of how Amazon and Google are pushing out billions of dollars in spending to promote new behaviors within the voice assistants.

And one can argue that only behaviors that are more congenial to human nature will survive. But what does that mean? Aren't there different ways we can do one thing and who control distribution than isn't in charge of deciding what's right or wrong?

As someone that learned to appreciate the power of distribution, I've also learned that in many cases that same distribution can also influence the habits of billions of people.

Which leads to the third point.

3. As monopolies form they reduce competition, increase fragility in the system and make the overall system more fragile.

So what's happening next?

Will tech save the world? 

As new technologies emerge (think of the Blockchain), fewer people look at them with a utopist view, although libertarian dreams of decentralization arise again. Yet, as business history has taught us, the same technology can evolve in many different ways.

And while some technologies do have some intrinsic aspects, which make them move in certain directions. There are multiple ways that direction might look like. And it rarely depends on the technology itself. 

It depends on who controls distribution. 

In short, for those advocating the Blockchain will drive a new wave of decentralization. Beware that also Blockchain has a strong cultural component that depends upon the consensus of who's building it.

Therefore, while it might be open and decentralized initially to enable that change of power needed to break modern monopolies, it might close again over time, once new centers of powers have formed again. 

In this context, to understand where these centers of powers will lie, you need to follow the money, distribution power, and consumer behaviors. 

And after over two decades of commercial viability of the web, power got more and more distributed in a few hands.

Can we hope for tech to help this to change? Or do we need to be in charge of this process instead?