How Big Tech Coopts Disruption – and What to Do About It

Our economy is dominated by five aging tech giants – Alphabet, Amazon, Apple, Meta, and Microsoft. Each of these firms was founded more than 20 years ago: Apple and Microsoft in the 1970s, Google and Amazon in the 1990s, and Facebook in 2004. Each of them grew by successfully commercializing a disruptive technology – personal computers (Apple), operating systems (Microsoft), online shopping (Amazon), search engines (Google), and social networks (Facebook). Each of them displaced the incumbents that came before them. But in the last 20 years, no company has commercialized a new technology in a way that threatens the tech giants. Why?

We start with the premise that the tech giants are smart. Their executive suites are filled with MBAs and engineers who realize the power of disruptive innovation, and they don’t want to become the next IBM. And though they would not say so publicly, they realize that as a large incumbent, they will struggle to overcome the diseconomies of scale and develop disruptive innovations in-house. Imagine yourself as an executive at one of the tech giants tasked with preventing the company from being leapfrogged by disruptive competition. Despite the advantages of network effects created by your platform and the possibility of cloning startups’ products, past experience has shown that your current monopoly status is no guarantee against future disruption. What would you do?

We think you would take four steps. First, you would learn as much as you can about which companies had the capability to develop disruptive innovations and try to steer them away from competing with you – perhaps by partnering with them, or perhaps by investing in them. Second, you would make sure that those companies could not access the critical resources they would need to transform their innovation into a disruptive product. Third, you would tell your government relations team to seek regulation that would build a competitive moat around your position and keep disruption out. Fourth, if one of the companies you were tracking nevertheless did start to develop a disruptive product, you would want to extract that innovation – and choke off the potential competition – in an acquisition.

That is precisely what the tech giants are doing. They have built a powerful reconnaissance network covering emerging competitive threats by investing in startups as corporate VCs and by cultivating relationships with financial VCs. They have accumulated massive quantities of data that are essential for many software and AI innovations, and they dole out access to this data and to their networks selectively. They have asked legislators to regulate the tech industry – in a way that will buttress incumbents. And they have repeatedly bought potentially competitive startups in a way that has flown – until a few years ago – below the antitrust radar.

In our new paper, Coopting Disruption, we show how these seemingly different acts are part of a pattern tech companies and other incumbents use to maintain their dominance in the face of disruptive new innovations. And we document how three important new technologies – artificial intelligence (AI), virtual reality (VR), and automated driving – are being coopted.  This is a critical legal issue right now. Indeed, after we wrote this paper, the Federal Trade Commission (FTC) announced that it would review incumbent investments into startups in one of the areas we identified – AI.

Coopting disruption is a challenging problem for the law. Cooption can look a great deal like competition and innovation. And partnering with an incumbent can sometimes offer real benefits to both startups and their customers. Nonetheless, we think incumbents coopting disruption is bad for both competition and innovation in the long run. At best, consumers receive incremental improvements to the tech giants’ existing products. They miss out on the more fundamental innovations that an independent company would have developed – both innovations that threaten an incumbent’s core business and those that a company locked into an existing mindset (and revenue stream) might simply not appreciate. And cooption cements incumbency, undermining the Schumpeterian competition – competition to become the next dominant firm – that drove innovation in the tech industry throughout the 20th century.

We suggest several ways the law can reduce the harm from coopting disruption. We can revitalize a century-old law that prevents people from serving as officers or directors of their competitors, extending it to prevent incumbents from controlling the direction of startups. We can make it illegal for incumbent monopolies to discriminate in the access they provide to their data or programs based on whether the company is a competitive threat. We can ensure incumbents cannot use regulation as a mechanism to undercut competition from startups. And we should make it presumptively illegal for incumbent monopolies to acquire startups developing innovations that might prove disruptive.

This post comes to us from professors Mark A. Lemley at Stanford Law School and Matthew Wansley at Benjamin N. Cardozo School of Law. It is based on their recent paper, “Coopting Disruption,” available here.