Web3: a route to harness the web’s Natural Monopolies

Private and public interests on the internet

Earlier this month Twitter and Facebook banned Trump from their platforms. At roughly the same time, Google, Apple, and Amazon kicked Parler, a right-wing social media app, off their platforms (followed later by a flood of others). Tech twitter has spent most of the week since debating this move, which I won’t rehash here.

But on a complex issue, I think most commentaries missed a critical point: our current internet environment made this a lose-lose situation. And if we care about the web long-term, that needs to be fixed.

I saw 4 common perspectives on this:

  1. These are private companies that can do what they want. If you don’t like it, go elsewhere
  2. Powerful tech companies are censoring our public square, compromising our free speech and civic discourse
  3. Every community needs moderation, and in a hard situation these teams are doing a pretty good job
  4. Break up big tech — they are monopolies with too much power if they are making such consequential decisions

I empathize with each of these views. That’s why this issue is hard. But none, in my opinion, captures the appropriate macro framing for policy. These platforms cannot be viewed as private companies, public squares, or even normal monopolies.

These massive tech companies are natural monopolies, which requires specific governance to keep private and public interests (somewhat) aligned

Tech networks are Natural Monopolies

A natural monopoly is an economic term for a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over a potential competitor (from Wikipedia). This has usually applied to large-scale physical infrastructure projects with high upfront costs, returns to scale, and network effects: public utilities, railroads, internet service providers.

Natural monopolies aren’t limited to physical infrastructure networks, though. Setting up an online platform may have much lower upfront costs than a railroad, but the network effects can be nearly as strong and at a more global scale. Nfx has mapped out 13 different types of network effects and their relative power. Our largest tech platforms operate with many or even most of the different network effect types behind them at once.

From the Nfx Network Effects Manual
From the Nfx Network Effects Manual

Online networks are natural monopolies driven by strong, compounding, massive network effects. It may not be as strong a natural monopoly as tap water…but it may be. The exponentially climbing value of networks (driven by Reed’s law as well as Metcalfe’s) means there will be a natural tendency towards a winner-take-all monopoly in online networks.

The “if you don’t like it, go elsewhere” mantra of private competition cannot apply in natural monopolies. There won’t be viable competitors — not because they have been beaten, but because the market conditions ensure it. Economists and policymakers going back to John Stuart Mill have known that natural monopolies can’t be left alone in a free market because they have too much power, no competition, and the ability to extract from the public without checks. Some intervention or public-interest governance is necessary to prevent any network owner from abusing their uncompetitive position.

The web is our digital society — how to protect it?

Our largest tech companies aren’t natural monopolies in random vertical markets. The web is our digital society, and these platforms operate as our public square (Twitter and Facebook), our public utilities (Google, Apple), and our public infrastructure (AWS). Anyone excluded from these platforms will be unable to participate on the web. They’ll have no voice and little chance of survival.

Nobody in government or at these companies decided this would be the case. But it is where we are and, with natural monopoly conditions, it’s not about to change. Right now, big tech companies have the power to disenfranchise any participant or perspective from our digital society. That makes them the government of our digital society. And it is a dictatorship.

This is not new. One of the investors in my company, 3Box, analogized tech platforms to governments more than 10 years ago. It’s just clearer and louder and more extreme than ever. This is also not just about the big decisions — the Trumps and Parlers. Tech companies constantly make less-visible decisions that we have no recourse and little visibility into. They are shaping our public square for their private interests every day.

They aren’t wrong for doing it. That’s just how it is online. But imagine if your tap water utility could charge whatever they wanted for clean water. It’s not a sustainable situation. Our options going forward:

Leave private companies private. Hope that morality, the (very) distant threat of competition, and sufficiently aligned interests keep private platforms from being too manipulative of their position. If not, be okay with Mark Zuckerberg as our monarch online — he earned it in the free market after all.

Government regulation and oversight. Anyone who has used Comcast or TWC is probably repulsed right now. I’ll move on.

Anti-trust to force competition: Many have pushed, with sound reasoning, for anti-trust action to break up these monopolies (ex’s: Cory Doctorow, Elizabeth Warren, the DOJ itself). While this idea takes these platforms’ roles seriously, it treats them as one-off monopolies rather than addressing the underlying conditions. These are the first major winners in natural monopoly markets. Do we want constant government interventions after each inevitable re-consolidations?

Forced interoperability: a more effective intervention — outlined well by my colleague here — would require tech platforms to open their databases and allow other products, services, and platforms to make use of them. Upstarts could tap into some of the underlying accounts, social graphs, and user data and give users the ability to start using a new product while still getting the benefit — and the network effects — of the old. The natural monopoly would be somewhat neutralized, alternatives would be viable, all could compete more based on their product rather than their lock-in. A competitive market would ensure private companies wouldn’t stray too far from the public interest.

There is precedent for this: telcos in the US must allow others to use their infrastructure, ensuring some competition in an essential service’s natural monopoly. Adversarial interoperability with Office documents let Apple break Microsoft’s monopoly in operating systems (Web1’s major platform). This would help. But making it happen effectively would be difficult and require a major change from major tech companies.

Interoperability is a much higher bar than data portability. Portability is exporting your Evernote data so you can use it in Notion. Interoperability is using Notion while I use Evernote, and we can still collaborate on the same document. Portability has been embraced by big tech and actually helps them — their network effects create gravity, and data flows in more than out (detailed here). Interoperability would be Snap users being able to post stories to Instagram, making it unnecessary for users to switch or choose which platform to build their usage, history, and reputation.

With interoperability, switching costs plummet since we don’t all need to migrate at once. We can be on different apps but sharing much of the same experience — just as with email and SMS apps. Seamless interoperability of data networks across apps and services can break the natural monopolies held by Facebook, Twitter, and others. That would restore a healthy market.

Web3: harnessing natural monopolies for the whole web’s benefit

The most direct way to ensure data interoperability is for apps to share access to the same underlying data. This would require a shared data network. And this is the heart of Web3: separating the data network from the application. Applications are proprietary and fragmented, but the social graphs, user accounts, and data that populate them can be shared and natively interoperable across them.

This is how the internet should work. A physical-world analogy makes it pretty obvious.

We’ve tolerated the platform-owned model until now because it’s been the only viable option. The data, social connections, and user accounts have to be stored somewhere. Most users can’t do it themselves. So companies ran servers and built databases to do this. Then big companies started offering their infrastructure, software tools, and some starter data to smaller ones (e..g, FB Connect). In return, they asked for access to the small company’s data. Suddenly a few big companies had all the data about everything happening across the web. And all the network effects that come with that.

Today’s “Web2” is held back by a few companies’ control over these critically valuable assets. I’ve lost the source who said, ‘if building houses were like building software, you’d tell your contractor you want the wall blue, then they’d tell you they’ll check whether there’s enough demand to paint every homes’ walls blue.’ We should be able to have many versions of software, modified at the app layer with our own needs and preferences. But because all data is gatekept in a rigid, siloed, company-controlled way, we have very little flexibility in our online experiences.

New technologies have made an alternative viable: we can store the data on shared, open, distributed networks. We’ve had some of the core peer-to-peer storage building blocks for a while. But with many authors and participants writing and reading data to the same data network, challenging problems emerge. Among them: how can you trust data on the network and know that it hasn’t been tampered with? A few new technologies are addressing this:

  • Distributed, content-addressed storage offers reliable storage and retrieval based not on the content rather than its physical location (URL)
  • Cryptographic keys (and IDs) let anyone sign, transact, and participate in these networks, enabling direct management of information (I control my data directly) and the ability for network participants to trust (because they can audit) the network
  • Tokens, or crypto assets, let network designers build incentives directly into the network, helping ensure it stays secure and aligned to the interests of the participants while rewarding contributors to the network (and its value) economically

These technologies enable a “Web3” that is far more interactive and fluid than today’s web because many apps can operate on the same core data. You could use Notion, I could use Evernote, and we can still collaborate. The common layer is the protocol, not the platform. The gatekeepers on innovation disappear when the data isn’t behind a corporate gatekeeper. You could use Twitter, I could use Chirper — because I prefer their feed algorithm and moderation policies — but we could still like, RT, and comment on the same message threads.

This model’s magic is that it gives us more diversity and more network effects at the same time. The app layer can diverge — many different filters, views, interfaces, and services — while the underlying data and network for all are shared. Network effects grow faster than ever. Apps and services work together seamlessly because they don’t require complex integrations — they are operating on the same data layer directly.

In the presence of dominant shared network effects, incentives change too. There will be more economic value in creating useful products and services than trying to build a huge user base for its network effects. “Composing” on existing products is far easier than ever because of the shared data, and switching costs between products are far lower than ever. In Web3, the quality of the products and services we use will take off. We won’t have “10x improvements” — we’ll have constant marginal improvements that compound way beyond 10x.

Apps will be collectively far more powerful than today, but individually far less powerful. In short: the web will be competitive again.

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Danny Zuckerman

Danny Zuckerman

"The best way to get the right answer on the Internet is not to ask a question, it's to post the wrong answer." (Cunningham's Law) | 3BoxLabs.com