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Bill Gates accidentally makes the case to regulate the hell out of platform companies

There’s a great video of Bill Gates speaking to a venture capital firm called Village Global going around today, in which Gates says that Microsoft losing mobile to Android is his “greatest mistake ever.”

“So the greatest mistake ever is whatever mismanagement I engaged in that caused Microsoft not to be what Android is,” says Gates, adding “Android is the standard non-Apple phone platform. That was a natural thing for Microsoft to win.”

This is all true, and you can read a bit more about the circumstances of how Microsoft missed the mobile moment here. But I want to focus on what Gates said next, because it is incredibly relevant to the current conversation about platforms, regulation, and antitrust. Here it is, with my emphasis in bold:

It’s very tricky for platforms… these are winner-take-all markets. It really is winner-take-all. If you’re there with half as many apps or 90 percent as many apps, you’re on your way to complete doom. There’s room for exactly one non-Apple operating system and what’s that worth? $400 billion that would be transferred from company G to company M.

What Gates is describing is commonly referred to as the network effect, which says that the value of the platform to users is really created by all the other people on that network. There’s been a lot of great work exploring how this plays out over the past few years — you might be familiar with Ben Thompson, who has laid out a very refined argument about the network effect called “Aggregation Theory.”

The important thing to know is that it’s well-established that the network effect enables the winning platforms to achieve massive scale and preclude competition. It’s a devastating combination that Gates calls “complete doom.” There’s a reason so many tech markets tend toward monopoly or duopoly, like Android and iOS, or Google search, or Facebook, or Uber and Lyft — the network effect makes it basically impossible to build a competitor because you can’t populate the network. And you can’t buy your way out of this problem: Microsoft famously paid app developers to write Windows Phone apps when there weren’t enough users to otherwise draw developer attention, and… it didn’t work.

Gates might be saying this to describe why Windows Phone didn’t succeed — it didn’t have the app ecosystem to compete with Apple and Android — but what he is describing is the exact reason regulating tech platforms is the subject of so much conversation around the world: you can’t count on competition to keep these companies in line, because it’s virtually impossible to build a competitor. Even Microsoft couldn’t do it!

The network effect (or aggregation theory, or whatever you want to call it) is also why the regulatory approaches to, say, the auto industry don’t track to the tech industry very well: consumers buy a single car from Ford, not access to an ever-growing ecosystem of cars that gets more valuable with each new user. You can switch from a Ford to a Honda to a Chevy pretty easily as a consumer, but it’s vastly harder to switch away from a software platform with multiple interlocking dependencies. That’s why Tesla was able to enter the market in such a disruptive way, and why there’s a flood of new car companies starting up right now, but not a flood of new search engines or social networks or smartphone operating systems. Gates straight up says as much (emphasis mine, again):

So this idea that small differences can magnify themselves, that doesn’t exist for a lot of businesses. If you’re a service business, that doesn’t exist. But for software platforms it’s absolutely gigantic.

That’s all pretty wonky, but you can intuitively feel this problem throughout the digital economy, which is increasingly intermediated by a small handful of platforms and companies. Just ask anyone who’s tried to switch away from iMessage, or any YouTuber trying to leave YouTube: at a certain point you’re not just walking away from a product, you’re walking away from millions of other people, and that makes it extremely hard to take your dollars elsewhere. Facebook can have all the scandals it wants, but everyone is still using Facebook because leaving is so hard. What signal is Facebook getting from the market, except that revenue was up 26 percent year over year last quarter?

If you can’t send a signal to the market by voting with your dollars, then you should vote with your vote, and push politicians and regulators to put strong rules in place around privacy and self-dealing, and break companies up to create more competition for user trust and goodwill inside those rules. And that is exactly what’s happening.

Here’s the last Gates quote I want to call out — again, the emphasis is mine:

It’s amazing to me having made one of the greatest mistakes of all time — and there was this antitrust lawsuit and various things — that our other assets, Windows, Office, are still very strong, so we are a leading company. If we had gotten that one right, we would be the leading company, but oh well.

Why was the path cleared for Google to become Google? For Android to become Android? Because increased antitrust scrutiny of Microsoft and Windows, which was the original platform monopoly, helped open the door. Would you rather have several leading companies, or just one? More competition, or less?

That Bill Gates, he’s a smart guy.


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