Breaking Up the Internet

Natural fragmentation and natural oligopoly

Disclosure: I work at and hold equity in a company that benefits from this framing.

The fragmentation of the internet is continuing. Top of mind for most Americans is the possible nationalization of TikTok. The Trump administration is also saber-rattling with a “Clean Network". This behavior is dangerous for the future of American companies. We are losing the moral high ground on open markets, and fewer markets will be open to American companies. Fragmentation will accelerate.

There was already some natural fragmentation

Natural fragmentation. In some internet-enabled businesses, locals have a strong home-field advantage. They tend to not need any protection. There are millions of small complexities not translatable across borders. Or there is a need for a strong ground game. Examples include ridesharing/food delivery, accounting/tax, logistics, non-card payments, e-commerce, SME services.

Natural oligopoly/monopoly. Other businesses are much more global. They don't need much local customization. This means providers can scale, bottoms-up, even without an office or local entity. Returns on scale mean winners take most. Examples include social media, communications, search, most SaaS, card-based payments, and digital infrastructure.

The current global providers of naturally oligopolic (love that I can do this in English) services are generally American. AWS (but not Amazon.com), and MS Azure will continue to dominate. WhatsApp is everywhere outside of the US and East Asia. Instagram is everywhere except China. Google search and Android will be near-impossible to unseat. However, America has burned through the goodwill generated by programs like Internet.org and Next Billion Users.

Regulatory fragmentation is coming for the natural oligopolists

"How Asia Works" suggests a few key differences between successful and unsuccessful modernization. Successful countries protected and nurtured domestic manufacturing, but with mandated export discipline. Locals were protected at home, and got a lot of help, but had to compete globally. Unsuccessful countries opened access to domestic markets, but did not up-skill. Their economies are still dominated by multinationals. Oil, mining, auto, electronics.

China and Russia applied this framework to the internet. They've built protected local internets. India is starting, too. Governments will try to reduce the influence of Silicon Valley/Washington, and political stability / economic sovereignty will take priority.

Facebook has seen the fragmentation accelerating, and is scrambling to find local allies. It recently invested in Reliance Jio (India) and Gojek (Indonesia), both national champions. These also happen to contain 22% of the world's population. Reliance Jio and Gojek will then encourage local lawmakers to remain open to FB.

What’s next?

Real answer is ¯\_(ツ)_/¯, but that’s never stopped thinkbois like me from speculating. Generalizing from the FB example:

  • Politicians, regulators, state media (especially large, nationalistic, or authoritarian ones) intensify targeting American companies for: 

    • Taxation

    • Nationalization / divestments

    • Shakedowns

    • Jobs programs

    • Censorship

    • Scoring points

  • Favoritism toward local champions become more overt

  • “Regulatory consulting”, campaign donations, direct bribery grow

  • Multinational (esp. American) corp dev teams get busier yet face more uncertainty

  • Development dollars used as currency for US/Chinese alignment

Who benefits?

  • Local competitors to natural oligopolies in large markets; in the short term. If markets open up again and they can’t get legal barriers, they’ll get stomped

  • Politically-connected entrepreneurs, “regulatory consultants” and lawyers

  • Consumers in small, still-open, or previously-ignored markets

  • VCs who can’t get into X, but can get into X for Region

  • State censors

Who loses?

  • Local competitors in small, still-open markets, who get stomped in the short term

  • Consumers in restricted markets, who get less choice

  • Companies with X for Everywhere baked into valuation

  • American multinationals on average. $FB? $MTCH? $NFLX? Someone else can tell you how much international growth is baked into valuations.

Some other examples that helped form this thesis:

List is definitely incomplete. I've ignored Africa and most of Central/South America, which I know little about. I would love to learn more.

Natural fragmentation:

  • Ridesharing - Uber burned billions then sold local ops to Didi, Grab, Yandex

  • Ecommerce - Amazon.com losing in Asia (seems ok in Europe)

  • Food delivery wars are not settled, but mostly local players

  • Stripe has given up on India

Regulatory fragmentation:

  • TikTok nationalization in the US

  • Huawei’s troubles

  • GDPR

  • Reliance Jio's fundraising bonanza. It included Facebook, Google, a bunch of American private equity, the UAE and Saudi sovereign wealth funds

  • India bans on Chinese apps, bounty for a local Zoom clone

  • Lark, Bytedance's Slack competitor

  • Whatsapp Pay blocked in India and Brazil

  • Indonesia’s “foreign digital goods” tax

  • Facebook censoring in Singapore

Thanks to Turner Novak for reading a draft of this essay.

If you want to talk about this more hit me up @chiefofstuffs on Twitter