
How the Frightful Five Put Startups in a Lose-Lose Situation - pmcpinto
https://www.nytimes.com/2017/10/18/technology/frightful-five-start-ups.html
======
magice
I think this article completely bypasses the root causes of the issue in order
to paint Silicon Valley dominating businesses in the worst light possible.

Look, the real issue is simple: all of these "web startups" are not very
innovative. All of them are roughly the same: ever so slightly more novel way
to deliver roughly the same set of data to users in exchange for app or token
of money. How is _that_ "ground breaking"?

Thing is, when everyone is doing roughly the same thing, which costs perhaps a
few engineering months to build, how can startups ever compete with the big
guys who are hell bent on ensuring their success? It's like trying to open
supermarkets to compete with Walmart, or building gasoline car to compete with
Toyota, except it's cheaper for the Big Five to copy than for Toyota, because
the media (information) is inherently more traceable.

I remember when Windows 98, XP, Google, Gmail, Prime (and Uber, eBay, and
paypal) came out. They blew everyone's mind. They changed how we work and
live. What's so hot about SnapChat? I mean, it's probably ever so slightly
more entertaining than, says, Hangout or WhatsApp, but it's just minor tricks
on top of roughly the same set of features. Of course these competitors will
drive it out of the marketplace. It holds no long term competitive advantages.

There are businesses that don't deserve to die. For example, a local store
provides not just goods, but a community center and an identity for a small
town; it gives more value than mere commerce. The decline of these should
alarm us. On the other hand, some businesses do deserve to die. And lack of
long term advantage, lack of innovation, lack of additional value sounds
exactly "should die".

~~~
eljimmy
You're looking at the features rather than the true value of these apps, the
users. Snapchat has the biggest reach into the most impressionable market,
teenagers. That's why it is valuable.

~~~
riot504
Snapchat is valuable from a monetary perspective, but actual real value is
little to none. No one is going in 10 years will say Snapchat changed our
lives or progressed society's knowledge. People will look back wondering why
it made a handful people beyond wealthy.

~~~
s73ver_
Yeah, but to be honest, that's true of the vast majority of companies, tech or
non.

~~~
alexanderstears
You're not wrong, but the 'frightful 5' were all transformative for society.
The point is that the big companies quash non-transformative small companies.

------
pyrale
People seem to think that Microsoft is a company that at some point sucked at
innovation. In fact, the reason Microsoft let a generation of startups blossom
was mostly because they got hit by antitrust.

Google, FB and Amazon are probably ripe for antitrust, too, but the government
won't move.

~~~
empath75
It's hard to go after the FAANG companies for anti-trust when they all compete
with each other in so many ways -- facebook and google have multiple competing
services, apple, google and amazon all build consumer hardware, and facebook
is dipping it's toes in, they all have music services.. Netflix has tons of
competitors outside of the big five, but amazon and google both have streaming
movie services. Amazon and Google both have cloud services.

Really the only two that have a genuine monopoly are Google in search and
Facebook in social networks, and I think perhaps Amazon in online retail.

~~~
ocdtrekkie
The big thing is that the US government needs to recognize how vertical
integration harms consumers. While Apple and Google and Amazon may all compete
with each other in multiple venues, very little of that is cross-compatible.
People with one product or service from a company often has little option but
to use the rest of that company's products and services. The ecosystem effect
means that even if there is a handful of "competitors", those services on an
individual level often aren't available to consumers. If you have your stuff
purchased in iTunes, you have massive monetary cost preventing you from
switching to Android, for example.

One of the stories I hadn't heard of until recently when discussing the AIM
closure, is that the FTC ordered AOL once to make AIM cross-compatible with
their two largest competitors or face antitrust action. Had someone like
Google been subjected to the same, we'd have had Gmail, YouTube, etc. on
Windows Phone, and it wouldn't have died from the lack of Google apps support.

I'd be more than in favor of ordering vertically integrated companies to
support at least two competitors' platforms in every way they support their
own.

~~~
ehnto
That's quite the can of worms, but what an interesting topic.

I see your point and agree that vertical integration is harmful. I would like
to offer the automotive industry as an interesting comparison of an industry
with similar compatability issues.

All of the major components produced by the big manufacturers tend to be
incompatible (without heavy engineering effort). When parts on a car are
compatible between many makes and models it tends to be a third party parts
manufacturer that has made it but a concerted effort from the big manufacturer
that allowed that to happen. Think brake pads, tires, air filters, spark
plugs. In most cases engines, their computers, interiors, transmissions and so
on, are all make specific and also usually model specific.

No one is compelling BMW to make sure their engine fits into a Jeep. When I
buy a BMW I am locked into their infrastructure and without their parts and
support I could find myself without a working vehicle.

While you can often mix and match manufacturers parts so long as you can wield
a few tools and have time and knowhow, it's pretty rare that someone wants to.
Similar to emulators or jailbroken phones, IFTTT, APIs and integrations, it's
easy to see there is a desire for this kind of flexibility but again it's
often only a particular type of individual with a particular desire that makes
it happen.

I feel that this desire for interoperability is niche. My mother on her
Windows phone has been perfectly happy. I have never met anyone who wasn't in
tech that has complained about interop. So while I agree it would probably be
a good step to introduce more flexibility there, I don't think it's critical
to protecting consumers against monopolistic behavior. If you buy an iPhone
you are locked into Apple for that device, but you can still buy an Android.
Just like I am locked into BMW while I own their car, but could still move to
an Audi.

~~~
lukeschlather
It's not just parts though. The car analogy is more like, I can't drive my car
to your house because your house was built by BMW and my car is an Audi. It's
like we all live in corporate-controlled subdivisions with proprietary,
incompatible rail lines instead of roads.

------
baxtr
_> The best start-ups keep being scooped up by the big guys (see Instagram and
WhatsApp, owned by Facebook)_

Well, I don’t know. „Scooped up“ sounds very hostile, in reality these
startups were sold for a fortune. Also, the fact that you’re able to buy an
innovative startup does not necessarily mean that you’ll integrate or run it
successfully. Take for example google’s Nest or Motorola acquisition.
Acquiring and sustaining is quite difficult.

~~~
NicoJuicy
They can measure the performance on social media + google queries.

Then they can "scoop" it up before it's valued higher than themselves.

~~~
icebraining
Why would they need social media or whatever? The startups themselves
advertise their own success. It wasn't a secret that Whatsapp was growing
tremendously.

------
clarkevans
There seems to be a concerted effort to paint the silicon valley elite
companies as "dangerous"? I'm not sure it's unwarranted, but it seems
relatively recent to me, as if to drum up political support for regulation.
What's interesting to me is the big technology/infrastructure/media
corporations that are escaping this broad brush, including AT&T and Comcast.

~~~
jbob2000
It's a political attack against Mark Zuckerberg's upcoming presidential run.
The propaganda machines are starting now by painting a picture of Silicon
Valley elite being out of touch, dangerous, etc. etc.

~~~
notfromhere
I'm perfectly happy if FB's shady doings keep Zuckerberg out of the
presidency. Last thing we need is a president with a propaganda mill

~~~
stevenwoo
One might look at the founding of Fox News and its relationship to the GOP and
be forgiven for thinking the last thing has already happened, even though it
only reaches diehard GOP voters.

~~~
notfromhere
This would be more like...if Trump ran Breitbart for a decade, and Breitbart
had a following consisting of most of the US population and could easily be
used to sway huge portions of the electorate because you spent the last decade
figuring out how to manipulate your viewers.

Probably a better example is if the GOP owned a private intelligence firm that
had data on every citizen and could manipulate what they saw/read/said

------
bognition
> The Five run server clouds, app stores, ad networks and venture firms,
> altars to which the smaller guys must pay a sizable tax just for existing.

Hmm... thats not actually whats going on. Its not like start ups wouldn't have
to pay hosting costs if the big 5 didn't exist. If anything these ability to
host at Google/MSFT/Amazon lowers the barrier to entry for startups.

~~~
ocdtrekkie
Perhaps, but bear in mind, instead of a multitude of potential hosts, that
hosting tax _must_ go to the Big Five. Which means the Big Five will _always_
have a financial advantage entering any market.

~~~
Bartweiss
Is that true, though? You can certainly host on Rackspace, avoid AWS entirely,
and so on. Amazon will have cheaper hosting than you no matter how you get it,
but that's merely a function of scale, not monopoly.

Google traffic/ads and the iOs app store are the only two spots that seem
truly captive.

~~~
peoplewindow
AWS is quite expensive. It's not the case that it's cheap. Rather, you pay
more for convenience.

The idea that startups "must" pay AWS or equivalent is the kind of idiotic
junk that only rags like the NYT could come out with. Nothing stops you buying
your own hardware and racking it. For many companies that's in fact a better
option than paying for cloud services!

~~~
phil21
> Nothing stops you buying your own hardware and racking it.

If you're a bootstrapped startup, sure.

I think you'll find it a rather hard sell to tell your VC-backed board that
you are hosting somewhere other than AWS or GCE these days.

It's an _extremely_ concerning trend for anyone paying attention. Mandated-by-
investor vendor lock-in before you even deploy a line of code.

~~~
Bartweiss
I don't expect anyone will actually be racking their own hardware, but "AWS or
CGE only" still sounds pretty narrow to me. Are VCs really going to object to
Oracle's bare metal setup, or RackSpace with OpenStack?

------
nocoder
Another poor quality article with little research. It started with big tech
companies are bad and followed that with some reasons. Lot of start-up don't
succeed because they are not innovative and lack vision. The ones that did add
value are doing well likes of uber, Netflix, airbnb, slack. In fact, if the
author expands his world view a bit more and looks across the globe than he
will find many more such examples. Even within the big five there is
significant amount of competition and currently it is good for customers. This
article is just crying wolf without offering any substantial reasons. Big
companies buying of smaller competitors isn't some cunning move neither it is
something new. This happened all the time even earlier. In fact the rise of
cloud services has reduced the entry barrier for tech companies significantly
by reducing upfront capital costs. Imagine if before starting a factory you
first had to build a coal powered electric plant, not many would venture i
guess. The argument about snapchat paying google for cloud services is just
absurd. It would be costlier for snap to build this on their own.

------
analog31
_Note that Snap booked only $330 million in ad revenue for the first half of
this year. In other words, it 's paying more than half of its revenue to
Google._

I wonder if it's possible that small companies are better at creating _user_
value, but big companies monopolize the mechanism of delivering _customer_
value, which is advertising.

------
oconnor663
> In January, Snap signed a cloud hosting deal with Google. It agreed to pay
> Google $400 million a year for the next five years. Note that Snap booked
> only about $330 million in ad revenue in the first half of this year. In
> other words, it’s paying more than half of its revenue to Google.

This figure is hard to put in context without knowing how much of Google's own
revenue goes to operating it's data centers. Sure, they're not paying that
money to another single giant company, but they're still paying it.

~~~
klank
It's being called out to highlight a diversification issue not a profitability
issue.

------
wiremine
> Fewer than 1 percent of start-ups end up as $1 billion companies.

Is that the goal for society, to have more $1 companies (vs. having that value
rolled into a larger, pre-existing organization)? Is there an assumption that
more $1 billion companies will somehow mitigate the power of the Big Five? Are
the Big Five stifling innovation?

Feels like it's only a problem if the big boys enter into non-complete
agreements (like the hiring issue a few years ago).

To put it another way: do we need/want to spread the value from the "Frightful
Five" to something like 7, 8, or more companies? Is a "Terrible Ten"
better/worse than five?

~~~
siddharthdeswal
Yes, your "Terrible Ten" is better than five.

Google quickly came up with this:
[https://academic.oup.com/antitrust/article/1/1/162/274807/Is...](https://academic.oup.com/antitrust/article/1/1/162/274807/Is-
competition-always-good)

But there's so much more that says more competition is good for an economy.

~~~
wiremine
There's a fine line there, though, right? We want competition, but we also
want integration. I'm not happy that there isn't deeper integration with Apple
hardware and Google software. having Google search + Google assistant + Apple
Phone + Somebody else chat isn't what I'm looking for as a user.

------
jondubois
>> Fewer than 1 percent of start-ups end up as $1 billion companies

1 percent sounds ridiculously high. I would think more along the lines of "1
in a million".

~~~
jansho
Are there really millions of startups

~~~
adventured
What are we calling a start-up? You're going to have to set at least a
modestly limited definition.

 _Any_ relatively new business? Sure, there are tens of millions of those
started every year globally.

Six million small businesses are formed each year in the US (any new business
with less than 500 employees), most of those are small, usually single person,
self-employment entities. That's clearly too broad however.

Closer to the definition of a corporation being formed with the intent to hire
other employees, it's more like half a million per year in the US. [1] It's
probably safe to say it's at least five or ten times that globally.

[1] [http://money.cnn.com/2016/09/08/news/economy/us-startups-
nea...](http://money.cnn.com/2016/09/08/news/economy/us-startups-near-40-year-
low/index.html)

~~~
srtjstjsj
That still includes a huge number of local
plumber/accountant/lawyer/landscaper/restuarant companies that hire a few
employees.

In principle they could grow into a Home Depot / McDonalds, but it is still
strange to call them startups

------
johnpython
> fewer than 1 percent of start-ups end up as $1 billion companies

Not every company needs to achieve a billion dollar evaluation. This eat-the-
world mentality is incredibly toxic. An an entrepreneur one should be
satisfied with making tens of millions in revenue, but of course you can't
stop there when VCs are involved.

------
hmart
Dropbox isn't even mentioned in the article. Dropbox is fighting against at
least four of the five giants : iCloud Drive, One Drive, Google Drive and
Amazon Drive. Guess who should buy Dropbox (or Facebook Drive?)

~~~
srtjstjsj
Dropbox is in a special niche because their core feature is cross-plaform
compatibility. No single platform can compete with them.

~~~
KGIII
I frequently see people saying that they'd love it if Microsoft dropped a One
Drive Linux client. My guess is that those companies could compete with
Dropbox, with little real additional effort.

------
marinman
Question: is a 1% chance at becoming a unicorn higher or lower than before? I
mean, the vast majority of startups fail. 1% actually seems high to me

~~~
lkbm
The article actually says "fewer than 1%", but they don't include the "fewer"
as part of the link text, which seems like a poor choice.

The linked article reports the actual value in their cohort to be 0.91%[0],
which is surprisingly close to 1%.

For what it's worth, this cohort is of companies that received their initial
seed in 2008–2010. Obviously it takes a while for a company to hit $!Bn
valuation, but the landscape has changed a fair bit in 7-9 years, so the
current number may be a lot lower (or a lot higher).

[0] [https://www.cbinsights.com/research/venture-capital-
funnel-2...](https://www.cbinsights.com/research/venture-capital-funnel-2/)

------
arithma
> Snap, the company that makes the disappearing messaging app Snapchat.
> Although it is one of the most innovative consumer-focused internet
> companies

Isn't this part of the problem? Snap, albeit innovative and fast as they are
in creating new paradigms should in no way be the most innovative consumer-
facing company. There's an imbalance here somewhere. Maybe when it makes sense
for everyone to create their own infrastructure, the hold of the five will
loosen up. That might require another wave of infrastructure improvements that
the huge companies will not be able to compete with the collective many.

~~~
fragmede
Err, mind explaining why shouldn't they? I say this as an 'olds' who still
uses Facebook (though I've tried Snapchat, but only after they IPO'd).

~~~
arithma
I meant: there must/should be more innovative companies that are targeting
more fundamental problems. Of course every company should be as innovative as
maximising profit allows.

To reiterate I meant there ought to be lots more companies with bigger dreams
than that of Snap, no matter how innovative Snap is. That Snap _IS_ considered
one of the most innovative companies is indicative of the problem.

~~~
adventured
Snap is only considered one of the more innovative companies in consumer
facing social. That's it. There's no sense in expanding that to include
everything in tech, they are not one of the top few most innovative consumer
companies in all of technology.

That Snap gets pegged as that, is a fake set-up to write articles that stick
to a script that the writer wants to push. It's equivalent to asking someone's
opinion when you've already entirely made up your mind, except in this case it
has a particularly negative effect as it's being pushed out into the world as
a form of media propaganda.

Here's how it works (to use a famous example of this setup): we expected
flying cars and all we got was 140 characters. That's a bullshit setup, it
fails to even question whether flying cars make sense, and then sets up
Twitter as an ideal example of today's level of innovation (which it never
was). While Thiel was pushing that bogus premise, incredible innovation (both
hardware and software) had occurred in mobile all around the world in a mere
ten years from 2007 to 2017. Drastically improved communication, as one
example, is far more important than flying cars.

Innovation is so terrible today! Then hold up mediocre examples of innovation
while ignoring the vast, extraordinary innovation going on (from quantum, to
crispr, to AI).

------
PhasmaFelis
> _The best start-ups keep being scooped up by the big guys (see Instagram and
> WhatsApp, owned by Facebook)._

I was under the impression that that was the point. From the investors'
perspective, you're playing volunteer R&D/HR for Amazon or Google or Facebook
in hopes that they'll take notice and buy your devs and users off you. That's
what an "exit strategy" is, and we all know that every startup needs one. The
bit about changing the world and revolutionizing the way we communicate is a
sop to keep the engineers happy and productive.

------
mack1001
I completely agree with this premise. Nowhere is it more obvious than in OSS
companies. There is no open source business model that cannot be disrupted by
the cloud bigs which also include Microsoft.

~~~
johnpython
This is why I do not publish any open source projects except with GPLv3
license. I refuse to let Amazon profit off my hard work.

------
mindcrime
I don't think there's any "there" there, w/r/t this article. All it's really
saying is "some companies build infrastructure and they profit when other
companies use their services". Well duh. In this regard Google or Amazon are
no different from the local electric utility. Well, with the exception of that
fact that there are many cloud hosting providers to choose from and there is
actually some competitive pressure there, where electric providers almost
always have a true monopoly.

So Snap is paying Google $400MM USD / year or whatever... OK, now ask "how
much would it cost Snap to build their own datacenter(s), host and manage
their own services, provide electricity, cooling, etc..." It might or might
not add up to the same as they're paying Google, but it would definitely be a
significant chunk of money. It's not like Google is taking their money and not
providing some value in return!

The flipside of this is that services like AWS, Google Cloud etc. make it FAR,
FAR easier and cheaper to spin up a new (software) business. For some of the
stuff we're doing at Fogbeam, we would never even be able to start if we had
to build a datacenter, buy servers, etc., etc. But we can deploy on AWS for a
minimal spend during development, and then scale our use of AWS as we start to
generate revenue. If/when the day comes that the economics make sense, we
could look at moving to a colo center or even build a dedicated data center.

Personally, I don't begrudge Google, Amazon, etc. the money they're making.
_shrug_

~~~
peoplewindow
I agree that the article is kind of useless, but I think you're maybe over-
estimating the difficulty of racking your own machines. You don't have to
build your own physical building to run your own hardware, and unless you're
using tens of thousands of machines they don't die _that_ often. The savings
from bringing it in house can be substantial.

On the other hand, if you need some of the more exotic cloud services that
don't exist or exist very badly in the self hosted space i.e. you are really
paying for access to their software stacks, then sure.

~~~
mindcrime
_The savings from bringing it in house can be substantial._

Oh yeah, absolutely. I don't dispute that. But I don't see any reason to think
that anybody put a gun to the head of any Snap executives and made them sign
the deal with Google. Apparently they thought they were getting their money's
worth, or else why sign up?

Anyway, all I'm trying to get at is that it isn't like Google are somehow
victimizing some poor, defenseless, startup. These guys made a deal that they
thought made sense, and they know their business better than any of us.

------
fictionfuture
The reality of monopoly and collusion is here and it’s real!

When I started my first company it was easy to access customers(30k+) via all
types of cheap online marketing. But around 2012, a massive shift started
happening towards “content aggregators” and a closed web. Which made marketing
a lot more expensive and less effective.

The big guys have closed the web and are now taxing business for access to
people's attention.

------
Boothroid
This is very US-centric - there are some behemoths outside the US e.g.
Tencent.

~~~
gkanai
China has the same problem the US has. BAT (Baidu, Alibaba, Tencent) control
most of the Internet in China. So China only enforces the claims that NYT
makes, at least for the China market.

~~~
gaius
_BAT (Baidu, Alibaba, Tencent) control_

"Are responsible for its day to day running" perhaps but there is only one
entity "in control".

~~~
srtjstjsj
The line between the Communist Party and the owners of BAT is... blurry.

------
Animats
If this is correct, the return on venture capital should be dropping. Is it?

~~~
theparanoid
Fred Wilson's post is informative [http://avc.com/2013/02/venture-capital-
returns/](http://avc.com/2013/02/venture-capital-returns/)

------
jondubois
The government should force public corporations to hold internal democratic
elections every few years to select a new board and executives and limit how
many terms a CEO can stay in office.

The government is so busy fighting dictatorships overseas that it's forgetting
about the dictatorships that are growing on its own soil.

~~~
kakarot
If you founded a successful company, how would you feel if you were legally
forced one day to resign from running it, even though you've done nothing
wrong? Under either capitalism or communism, this seems unfair.

~~~
jondubois
The fact that someone is allowed to be the leader of a massive too-big-to-fail
company for the rest of their lives just because they happened to be employee
#1 seems extremely unfair.

We should stop pretending that the CEO is the one doing the work and
delivering the value.

Absolutely anyone can be a great CEO if they have lots of smart people under
them.

~~~
kakarot
This is kind of a narrow way too look at things, isn't it? I think a founder
of a company is more than "Employee #1". They are literally the person who
envisioned and created the company. That deserves respect and if the founder
is not harming the company or breaking laws, I don't see any reason why my
government should have the legal ability to make them step down.

------
fourthark
submarine for IAC

------
drharby
Every NYT article i see here lately has been spinning a negative narrative
around tech. Funny

