Democratizing Data
Entrepreneur-turned-academic James Bessen suggests industry leads share their piece of the technology pie.
Democratizing Data
Entrepreneur-turned-academic James Bessen suggests industry leads share their piece of the technology pie.
Earlier this month, The Record spoke with BU Law Professor and Executive Director of the Technology & Policy Research Initiative James Bessen about his recently published book, The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation, and Undermine Regulation (Yale University Press 2022), which demonstrates how corporate giants are impeding growth through proprietary technology, and proposes balancing industries through access to their data and technology. Professor Bessen will be keynoting at the Financial Times Future of Work conference on October 19.
Listen to an unabridged version of the interview:
Q&A
James Bessen
The Record: How did the research for your book begin?
Back in the 1980s, I ran a company that sold software to retailers, catalogs, and publishers. We were one of the first desktop publishing companies and had large systems that our customers used to tailor their advertising to better meet the needs of individual consumers. This seemed like a great advantage of software.
As time passed, it became a clear trend that in the majority of industries, the top firms are taking a bigger and bigger share of the market. And that goes against the sort of common idea that industry dynamism, which allows the small guys to rise up and disrupt the big guys, seems to be slowing down in some way.
Through analysis we found that the large firms that lead industries are much less likely to get disrupted today than a firm that was in the top four of its industry twenty years ago. It occurred to me that software may be playing a role, and I connected the dots between what we had seen much earlier and what was going on now.
Evidence confirmed that software was connected to the growing dominance of large firms and the drop in disruption. Then I started exploring the implications of that for overall productivity growth or inequality.
The Record: Could you illustrate some of the everyday ways in which consumers are affected by the proprietary platforms of these dominant companies?
As consumers, we’re affected in lots of ways. For instance, health insurance is complicated and the only way they can do this is with very sophisticated systems. It’s a huge advantage to the large insurance companies that have lots of data and process to be able to tailor insurance packages.
And we’re also affected by banks: four banks dominate the credit card industry, it used to be thousands of banks. They now have tremendous amount of data about what each of us buys, and they’re able to tailor the credit card offers or home equity offers to our particular needs. They’re able to identify somebody’s their risk profile, how much are they going to be willing to pay… which may not always be in our best interest. One positive outcome is they’ve enabled many more people to get access to credit. At the same time, they’ve come to dominate the industry. And there may be people who are taking on too much risk or paying too much for it because their weaknesses have been identified.
Even waste management is an industry that is spending a lot on information technology to benefit their logistics and solve the problem of getting waste from point A to point B most efficiently. With information technology, they can provide better service by responding more rapidly and anticipating needs, and so they become better suppliers.
Despite all the benefits, there is limited access to the technologies that are the means to these benefits. Innovative companies coming up can’t compete with Walmart or Amazon very easily because they just don’t have the platform. A bank trying to introduce a clever new credit card is going to run into mail campaigns from the big banks that make it difficult to gain market share at a pace even close to innovators in the past.
The problem today is while these large platforms are delivering good benefits, we also want innovative firms, smaller firms to have access. A more democratic distribution of the technology is going to enhance competition, creativity, and innovation.
The Record: Your proposed policy solution suggests no change should be made to the size of these companies, but rather that they open up their platforms. What do you foresee the outcome of access to their data and technology may be?
This analysis tells me the general direction we need to go in, but it’s going to take us as a society a long time to figure out the details. In the past, when technology has changed the nature of the economy, new movements and laws follow. For instance, robber barons in the late 19th century inspired a progressive movement, antitrust law, and changed all sorts of aspects of how firms operate. But it took a long time to get it right.
The problem today is while these large platforms are delivering good benefits, we also want innovative firms, smaller firms to have access. A more democratic distribution of the technology is going to enhance competition, creativity, and innovation.
We’re seeing some firms moving in that direction. Amazon is one of the prime examples: first they opened up their information systems that can handle huge websites and large volumes of transactions and keep it all running smoothly. Instead of keeping it proprietary, they decided to standardize it and open it up. They created Amazon Web Services (AWS), popularly known as the cloud.
Any one-person company to a company like Target can use these tremendous information technology capabilities, and in a very scalable way, pay for what they what they use, but get access to the top-notch capabilities. That turned out to be tremendously profitable, and still is for Amazon. Studies show that it’s been very productive for lots of small firms, who were able to gain these greater capabilities.
Historically, the government has played a role in encouraging firms to open up technology. They pushed Bell Labs to open up semiconductor technology, and that created the modern semiconductor industry. In the late 1960s, the government encouraged IBM to sell software separately from hardware, which resulted in growth of the independent software development industry. It was also hugely profitable to IBM, increasing their hardware and software sales. It increased the whole industry—the pie grew so much that even though IBM had a smaller slice of it, IBM was still way ahead of where they would have been without it.
It’s quite clear that if banking data were opened up, as some other countries have enforced, there’s a lot of opportunity for financial innovation, some very good things that may improve the service of banking.
A number of other policy areas touch on the ability of firms to access technology, for the purpose of making it less difficult for technical employees to bring their tacit knowledge from one employer and to another. Noncompete agreements have become more widespread and trade secrecy law has become enhanced, which hinders employee mobility.
The Record: Companies are likely to push back, arguing that propriety software and data should remain strictly within the bounds of its owner and not be supervised by the government. Is there a way to convince the “Goliaths” that this benefits them as well? How may the policy take shape?
We don’t want the government to get in there and micromanage. On the other hand, we want to encourage firms to do more.
It’s a difficult business decision because it involves a future that’s unknown and it may not work out well for some. There needs to be growing momentum. I also tend to think, once one big bank breaks rank, the others may soon follow. So, I see the process taking a long time. But in the end, overall, both businesses and consumers are going to be far better off.