opinion Big Tech's AI Takeover and the Slow Death of Silicon Valley Innovation

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Silicon Valley prides itself on disruption: startups develop new technologies, improve existing markets and outpace newcomers. This cycle of creative destruction brought us the personal computer, the Internet, and the smartphone. But in recent years, a handful of up-and-coming tech companies have maintained their dominance. Why? We believe they have learned to pick out potentially disruptive startups before they become competitive threats.

Just look at what's happening with the leading companies in creative artificial intelligence.

DeepMind, one of the first prominent AI startups, was acquired by Google. OpenAI, a nonprofit founded to challenge Google's dominance, has raised $13 billion from Microsoft. Anthropic, a startup founded by open AI engineers wary of Microsoft's influence, has raised $4 billion from Amazon and $2 billion from Google.

Last week, news broke that the Federal Trade Commission was investigating Microsoft's dealings with Inflection AI, a startup founded by DeepMind engineers who used to work for Google. The government appears to be interested in whether Microsoft's agreement to pay Inflection $650 million in a licensing deal — at the same time it was hiring most of its engineering team to hurt the startup — is antitrust. There was an end to the rules.

Microsoft has defended its partnership with Inflection. But is it right for the government to worry about these deals? We think so. In the short term, partnerships between AI startups and big tech give startups a lot of cash and the hard-to-source chips they want. But in the long run, it is competition—not stability—that drives technological progress.

Today's tech giants were once small startups themselves. They built businesses by finding ways to commercialize new technologies—Apple's personal computer, Microsoft's operating system, Amazon's online marketplace, Google's search engine and Facebook's social network. These new technologies were not so much competing with newcomers as a way around them, offering new ways of doing things that met market expectations.

But the way startups innovate, grow and leapfrog entrants seems to have stalled. Tech giants are old. Each was founded more than 20 years ago — Apple and Microsoft in the 1970s, Amazon and Google in the 1990s, and Facebook in 2004. Why hasn't a new competitor emerged to disrupt the market?

The answer is not that today's tech giants are better at innovating. The best available evidence—patent data—suggests that startups are more likely to innovate than established companies. And this is what economic theory would predict.

An entrant with a large market share has less incentive to innovate because the new sales generated by an innovation can hurt sales of its existing products. Talented engineers are less excited about stock in a large company that isn't tied to the value of the project they're working on than stock in a startup that can grow quickly. And incumbent managers are rewarded for promoting incremental improvements that satisfy their existing customers rather than disruptive innovations that can undermine the skills and relationships that provide them with power.

Tech giants have learned to stop the cycle of disruption. They invest in startups developing disruptive technologies, giving them intelligence about competitive threats and the ability to influence startups' direction. Microsoft's partnership with OpenAI illustrates this problem. In November, Microsoft's chief executive, Satya Nadella, said that even if OpenAI suddenly disappeared, its customers would have no reason to worry, because “we have the people, we have the compute, we have The data is there, we have everything.”

Of course, incumbents have always stood to benefit from eliminating competition. Early tech companies like Intel and Cisco understood the value of acquiring startups with complementary products. What's different today is that tech executives have learned that outside startups, too Their core markets can become serious competitive threats. And the sheer size of today's tech giants gives them the cash to counter these threats. In the late 1990s, when Microsoft was being sued for antitrust violations, it was worth tens of billions. Now it is more than 3 trillion.

In addition to their own money, tech companies can leverage access to their data and networks, rewarding startups that cooperate and punishing those that compete. In fact, it's one of the government's arguments in its new antitrust lawsuit against Apple. (Apple has denied these claims and asked for the case to be dismissed.) They can also use their connections in politics to encourage regulation that acts as a competitive moat.

Remember those Facebook ads advocating for greater Internet regulation? Facebook wasn't buying them for charity. Tech investigation site The Markup concluded that Facebook's proposals “consist mostly of implementing requirements for content moderation systems that Facebook has previously implemented.” This will give it a first mover advantage over the competition.

When these tactics fail to keep a startup out of the competition, tech companies can easily buy it. Before Facebook bought Instagram, Mark Zuckerberg made this clear in an email to a colleague. If startups like Instagram “grow to scale,” he wrote, “they could be very disruptive to us.”

Tech companies also build repeat player relationships with venture capitalists. Startups are risky investments, so for a venture fund to succeed, at least one of its portfolio companies must generate profits quickly. As initial public offerings have declined, venture capitalists have increasingly turned to acquisitions to deliver those returns. And venture capitalists know that very few companies can get a startup at that kind of price, so they stay friendly with Big Tech in hopes of getting their startups to deal with incumbents. This is why some prominent venture capitalists oppose strong antitrust enforcement: it's bad for business.

A co-op may seem harmless in the short term. Some partnerships between incumbents and startups are fruitful. And acquisitions give venture capitalists the returns they need to convince their investors to pump more capital into the next wave of startups.

But cooperation undermines technological progress. When one of the tech giants buys a startup, it can lock up the startup's technology. Or it can divert the startup's people and assets to its innovation needs. And even if it doesn't, structural barriers that prevent innovation at the top can stifle the creativity of the acquired startup's employees. AI sounds like a classic disruptive technology. But as the disruptive startups that pioneered it merge with Big Tech one by one, it may become nothing more than a way to automate search engines.

The Biden administration could take steps to address the issue.

Earlier this year, the FTC announced it was investigating big tech's deals with AI companies. This is a promising start. But we need to change the rules that make cooperation possible.

First, Congress should expand the “interlocking directorships” law — which prohibits a company's directors or officers from serving as directors or officers for its competitors — to allow tech giants to put their employees on startup boards. Can be prevented from being applied. Second, courts should punish dominant companies that discriminate in access to their data or networks based on whether the company is a potential competitor. Third, as Congress moves to regulate AI, it should take care to write rules that don't overwhelm incumbents.

Finally, the government should identify a list of potentially disruptive technologies – we'll start with AI and virtual reality – and announce mergers between tech giants and startups developing these technologies. Will likely challenge. This policy could make life difficult for venture capitalists who like to talk about disruption and then have drinks with their friends in corporate development at Microsoft. But that would be good news for founders who want to sell products to consumers, not startups to monopolies. And that would be good for consumers, who depend on the competition but have spent too much time without it.

Mark Laemmli is a professor at Stanford Law School and co-founder of legal analytics startup Lex Machina. Matt Wansley is an associate professor at the Cardozo School of Law and was the general counsel of the automated driving startup nuTonomy.

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