This article first appeared on my column in Forbes.
The Internet Is Far From What It Was Meant To Be
The Internet was meant to be a force for democratization, its power drawn from the bottom-up, peers working with each other without mediators. Recall that its origins were in ARPANET, originally funded by DARPA, as a decentralized and distributed collection of networks, without omnipotent hubs that might be vulnerable to attack by foreign powers. Much of the entrepreneurship that has fueled the Internet was bootstrapped out of scrappy locations -- dorm rooms, friendly couches, garages -- far from the corridors of power.
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Yet, the Internet, circa 2016, is far from a digital Woodstock; it is ruled by a handful of omnipotent hubs. While this outcome may seem ironic, in an industry prone to network effects and scale economies, a concentration of market power among a handful of players is entirely natural and should not come as a surprise. What is surprising is how much we trust them and the tradeoffs we make every time we use their products.
To get a sense of how powerful the "nabobs of the Net" are, consider some statistics:
Alphabet (Google's parent) and Apple are the two largest companies in the world, as measured by market cap;
Facebook accounted for 43.9 percent of all social media site visits by U.S. consumers in February 2016, 60 percent market share in app downloads, over 90 percent audience penetration in the age 35+ category in the U.S. and has 1.65 billion active monthly users worldwide;
Amazon is the "everything store" and is the world's largest retailer;
Despite the competition, Uber dominates the ride-sharing market, having grown share from 9 percent to 29 percent market share from 1st quarter 2014 to 1st quarter 2015.
The Internet Is Prone To Disruption - But Not In The Way That You Think
Today, if any of the nabobs, Apple, Facebook, Google, Amazon, Uber, were to stop functioning, there would be serious disruption -- and not of the "disruptive innovation" kind so widely associated with the industry. Despite their outsize influence, given the perennial threat of competitive innovation in this industry, these players are not regulated in the way the old telephone monopolies used to be. Not only do we rely on a handful of nabob nodes not going down, we also trust that they are acting in our interest. Indeed, every time we tap on an app, do a search or make purchases on the Internet, we are making a tradeoff between the costs of incomplete "digital trust" in the industry and the benefits of partaking of its products.
We Love The Internet Despite Incomplete Digital Trust
In case, you were wondering whether trust in these all-too-familiar companies was incomplete, let's re-visit some recent news.
Apple: Despite its much-beloved products, the company has been famous for its opacity. "More than any company I can recall, Apple has shut the door on speaking with CEO Tim Cook or Chief Financial Officer Luca Maestri. That's unprecedented, certainly for a company of its size," according to Tiernan Ray of Barron's. In parallel, Apple has only recently emerged from daily headlines covering a high profile face-off with government officials over the FBI's demands that it unlock an iPhone in the interests of national security.
Facebook: Recently, there has been a blizzard of questions about how Facebook curates its news feed and chooses the "trending" topics. In particular, conservatives are questioning whether there is a political bias in the process. CEO, Mark Zuckerberg, is even meeting with conservative media figures to help re-build trust.
Google: European regulators are on a warpath alleging that Google manipulates search results to its own advantage. It faces a record $3.4 billion fine from the European Commission.
Amazon: In six major Amazon same-day delivery cities, the service allegedly excludes predominantly black ZIP codes, according to Bloomberg
Uber: The city of Austin, Texas has insisted that ride-sharing companies, such as Uber, ought to be conducting fingerprinting-based background checks on their drivers. It has even led to Uber (and its competitor, Lyft) to quit Austin, for now. Concerns about how much due diligence Uber does on its drivers has been an ongoing concern in cities around the world.
Even these few instances suggest digital trust encompasses many disparate issues. In fact, because the products of the digital industry are intangible and the process for assembling them are complex, often done by arcane algorithms running on networks behind the scenes, much of our interaction with these players involves an act of trust.
10 Questions To Test Your Digital Trust
There are at least 10 ways in which we cross the trust barrier in the digital world. Here the corresponding questions we implicitly ask:
- Which platform of the many options available, e.g. Google, Facebook, Amazon, or others, such as Yelp, Quora, can I trust for the information I need?
- Since these platforms get me information based on an anonymous "crowd" of other users, can I trust the wisdom of the crowd?
- Can I trust the platform to keep my private information secure, use it responsibly and for my benefit?
- Can I trust an aggregator that stores my private information, including passwords, user-id and digital history, in exchange for reduced complexity, increased convenience, a personalized experience and speed of service?
- Can I trust tracking and analysis systems designed for my security (e.g. public cameras, wiretaps, corporate monitoring, fraud-prevention, etc.)?
- Can I trust digital systems that learn from my data and digital behavior, e.g. machine learning systems, chatbots, artificial intelligence, features, such as autocorrect, auto fill-ins, etc., in order to increase convenience, offer a personalized experience and speed of service?
- Can I trust the ecosystem around the core digital platform I use, e.g. battery life, network access, logistics and delivery systems, to work reliably?
- Can I trust the present state of the digital infrastructure to keep my personal or business data secure against cyber-attacks?
- Can I trust that the evolving developments in the digital infrastructure (e.g. Internet of Things, self-driving cars, automated services, 3D printed products) will also keep my personal or business data secure against cyber-attacks?
- Can I trust the larger-than-life personalities whose reputations are so tightly associated with their products and brands -- e.g. Cook, Zuckerberg, Page-Brin, Bezos, Kalanick, etc. - and believe that they will make decisions that are in my interest?
Incomplete Digital Trust Creates Transactions Costs
The incompleteness of digital trust is what economists would call a "transactions cost", which adds friction to every interaction between consumers and the industry. In the extensive literature on the "theory of the firm", the presence of transactions costs -- without third-party institutions regulating or reducing the costs -- leads to several cost-minimizing outcomes. For example, both sides of a transaction might be better off housed within the same organization or one or more of the parties invests in ways to mitigate the cost.
I think a similar theory applies here. Most significantly, the digital industry's outsize investments in "doing good" serve a trust-building purpose. In fact, the industry's mantra of changing-the-world is so firmly embedded that it is parodied so effectively in the HBO show, Silicon Valley. Apple's products have become intensely personalized extensions of ourselves; if we think we are good, their products are good too. Mark Zuckerberg, Facebook's founder, has made an unusually early start in philanthropy. Google is famous for its "do no evil" policy. Guiding others based on customer reviews and click trails started at Amazon. Listening to Uber CEO, Travis Kalanick's TED Talk might give you the impression that the company is largely a social enterprise that, incidentally, makes money. All have invested in the developing world with aims to include the next billion.
Hamilton Won. Again
Indeed, we have come a long way from the Woodstock version of the Internet. To quote Mitch Kapor, founder of Lotus and an industry pioneer:
"In the first decade of the republic--when the United States was a start-up--it was Alexander Hamilton versus Thomas Jefferson for the dominant vision of what kind of government we were to have. Hamilton won, and we wound up with a highly centralized society. But now there's an opportunity to have sort of a rematch, under very different conditions, between the principles of Jefferson and those of Hamilton. We have the ability, given the construction of a high-capacity information infrastructure, to do things in a decentralized fashion that does not require large institutions, either public or private."
Kapor's vision was off. Hamilton won again. The reigning nabobs know that it is essential that we trust them and maintain some equilibrium between the Hamiltonian reality and Jeffersonian ideal. In this industry, more than in any other, it is crucial to go beyond "do no evil". Doing good is essential to doing well; it builds trust.
Bhaskar Chakravorti is the Senior Associate Dean of International Business & Finance at The Fletcher School at Tufts University. He is also the founding Executive Director of Fletcher's Institute for Business in the Global Context and author of the book, "The Slow Pace of Fast Change."