Inside the House Report on Big Tech and Competition: Part II

Plus! Yelp’s Crypto-Coinbase Moment; Life at a Hypergrowth Startup; Microsoft’s App Principles; Square and Bitcoin; More...

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Inside the House Report on Big Tech and Competition: Part II

This is part two of a series. Part I  looked at the background of the report, its rhetoric, and its  underlying antitrust theory. In part II, we’re reviewing the details of  how Facebook and Google achieved and extended their market dominance,  through product decisions, strategic relationships with other companies,  and acquisitions. Part III will continue on Monday, reviewing Apple and  Amazon—two companies that seem to have embedded some monopoly-looking  economics in businesses that don’t have dominant market share.

A recurring theme in the report is that many of the traits that make  big tech companies fantastic for shareholders and employees—their  ability to continuously reinvest at scale, their power to shape markets  so they capture a larger share of the upside and lock in users and  advertisers—are much more worrisome from a regulatory perspective. There  is not a strong legal case to be made against companies that are merely  big and profitable, but there are precedents for going after companies that use their size to squash higher-quality offerings.

But a meta theme is that the lifecycle of most companies is that they  grow by delivering much more value than they charge for, they raise  funds based on their growth, and then they make those investments pay  off by capturing more value. In its maturity, a company will capture a  greater share of the value it creates. That’s part of the career cycle,  too; early-career employees don’t get regular raises because their  productivity is rising, but because they’re getting more indispensable  over time. Your relationships with your coworkers and customers, and  your knowledge of your company works, represents a form of vendor  lock-in that lets you capture more of the economic value your employment  creates. This is very much part of the deal; employees accept being  proportionately underpaid early on in exchange for a shot at being  proportionately overpaid later, and the company’s bet is that this works  out over the full cycle.

So it’s important to look at these companies through the full cycle  of their economic lives. Very few tech companies have been able to stay  dynamic for decades, although the current crop of winners has had an  unusually long run. Measuring their behavior now risks ignoring what  they did to get to this point, and also ignores the statistically  inevitable decline that at least some of them will experience.

With that in mind, let’s take a look at two of the report’s cases,  against two companies that dominate their core businesses of social  networking and search.

Facebook

It’s a bit revisionist to say that Facebook has retained “an  unassailable position” for nearly a decade. It’s true that Facebook has  been #1 for a long time, but only because it’s dealt with a constant  stream of assailants. The pivots that kept Facebook ahead of the  competition were all controversial at the time (the News Feed was  essential for making the service real-time, but Facebook only knew it  worked when 10% of their userbase joined a group devoted to hating the  feed; Facebook’s revenue is mostly mobile now, but their mobile  transition took years, and was controversial with investors—Facebook was  actually sued by investors for not disclosing how quickly the service  was transitioning to mobile).

The report quotes an insider saying that the “Only metric is getting  another minute.” This is a quote from an unnamed Instagram employee.  Based on the interview date, it’s probably the one who asked earlier in  the report why Facebook is allowed to collude with Instagram. (Answer:  the same reason Coke can collude with Diet Coke, instead of both  products converging on a 50/50 corn syrup/aspartame-based sweetener  mix.) So, not necessarily a reliable witness, albeit an informed one.

The House Subcommittee is right that Facebook dominates social  networking. But Facebook is right that there are many other activities  that compete for people’s time. The Big Three have retained high share  of the network television business, even as that business has gotten far  less relevant. But even ten years ago, Paul Graham could talk about why TV lost  to Facebook. The year that article was written, Facebook’s annual  revenue was $777m, or about what the broadcast TV industry brought in  every three days.

This seems to be the common pattern in tech antitrust. There’s a  broad human need that no one company satisfies—human connection,  entertainment, shopping—but for any specific form-factor that solves it,  there’s exactly one company that’s dominant. If you want to entertain  people, there are many jobs you can pursue. If you want to entertain  them by streaming long-form video, you have to work for or with Netflix;  if your idea is short-form video entertainment, TikTok; if it’s  aphorisms or witty comebacks, Twitter. (Tweets by Naval and Nassim have been collected in books. And Twitter is a powerful enough medium that before it existed, people who wanted to write tweets had to invent fictional personae.)

The report talks a lot about app-level “tipping points”—once Facebook  is the dominant social app in a country, it never loses that status.  Messaging apps are in some ways less sensitive to tipping points: while  messaging apps theoretically have all-or-nothing characteristics, the  recent crop of privacy-focused apps is different. Since privacy is the  whole point, they grow more slowly, and in parallel, but they have high  switching costs.[1]

The report also notes that Facebook has acquired major competitors,  especially WhatsApp and Instagram. A counterpoint to acquisition as a  way to cut down on competitors is that potential acquisitions are a subsidy  to competitors. Since Instagram is worth more to Facebook than it is as  an independent company, Facebook’s potential desire to acquire them is a  source of cheaper capital. At the limit, every social media app gets to  free-ride on Facebook’s mature monetization model, because if they  succeed they can convert their business into shares of Facebook.

If it’s not legal to acquire a competitor, the nearest substitute is  to copy. But it’s not helpful to consumers if Facebook gets a little  more Pinteresty and Pinterest gets a lot more Facebooky, and ultimately  as the products converge, the biggest one wins. Allowing big companies  to acquire smaller ones that compete for a subset of their user-time  might actually lead to a more diverse app ecosystem, albeit one without as much underpriced ad inventory.

One factor that adds some drag to Facebook’s growth is burnout. Sam  Lessin is the author of some of the blunter internal Facebook memos  cited in the report. Today, he’s a writer, who is broadly critical ($, The Information)  of how lucrative the tech industry has gotten. This is an entropic  force that slows down dominant companies. When they start, they’re  underdogs, but if they win, everyone who worked there to be an underdog  can quit. (And, after cashing in their options, they’re free to spend  their time however they want, including criticizing their former  industry. The “Mad as hell and not going to take it anymore” scene plays  out in tech every time a big chunk of equity-based compensation vests.)

Google

The report’s coverage of Google actually does a good job of  understanding why search is a winner-take-all market: the biggest search  engine has more data on long-tail queries, so it tends to have fewer  frustrating searches. And since the main reason to visit a new search  engine is if the previous one didn’t deliver good results, the biggest  search engine will tend to have the best results and lowest churn. Long  ago, Google actually identified cases where Bing used Google’s own search results for long-tail queries (Bing argues that this was an unintended consequence of a useful feature of their toolbar.)

In one sense, search is a standard, like weights, measures, or the  various grades of crude oil. But it’s a standard that has to be  implemented at great expense, lends itself to language-level economies  of scale. Google’s last remaining country-leading competitors, Baidu and  Yandex, are both in different languages. And the search engines that  most recently lost their market share dominance to Google, Seznam and  Naver, were also in different languages.

The businesses that get cited most frequently as victims of Google  are vertical search providers. Vertical search generally relies on  Google for traffic, but is that because Google is dominant or because  they’re arbitraging weaknesses in its algorithm? There are some vertical  search products that get the first click—Amazon, Kayak, and Yelp are  all good starting points for particular kinds of searches. But other  kinds of vertical search get the second click, after someone  searches Google for a term, clicks the #1 result, and is presented with a  search page. Google argues that this is a bad user experience; the  searcher looked for an answer, not a follow-up question. Vertical search  companies argue that it’s anti-competitive, and that Google is  deliberately refusing to do business with companies that compete with  it. These are not mutually exclusive.

For repeat-use vertical search, it makes economic sense that a search  provider would win over a search engine. Their economics support  loyalty programs for users, which are a complement to deeper and more  detailed search results. But for single-use searches (hiring a plumber,  writing a will, tracking down a particular article) it makes sense for a  general-use search engine to have dominant share. This is one reason  such verticals are dominated by businesses that monetize after  the search: there are many sites that can suggest a new name for a  business, but Shopify is the one that makes the most money from people  who have a business idea and just need a name before they get started.

In the report, Google admits to some bad behavior with respect to  vertical search. The report quotes an internal memo about Google ranking  its in-house vertical search products above competitors, noting that  Google’s products would never rank well on their own merits. (How much  of this is because of their merits as services or their merits as pages optimized to rank well on Google  is unclear from the context.) What is clear is that Google gave its  in-house products a boost in order to improve their traffic, at the  expense of other products that were ahead of Google at the time. But  Google’s vertical search products have continued to improve over time,  and since they can monetize both by selling ads and by increasing Google  usage in the aggregate, Google-owned vertical search tends to select  against pages that exist solely to sell ads. CelebrityNetWorth, for  example, is cited as a business that lost most of its revenue when  Google started placing answers in the search page instead of directing  searchers to their site.

What’s paradoxical about Google is that most of its aggressive  competition is in other companies in the search business—either  companies like CelebrityNetWorth that answer a single question, or  companies like Yelp and vertical search sites that answer a category of  questions. But the alternative to this competition is for Google to subsidize  direct competitors, by giving them free traffic. Google can accurately  say it’s in the business of changing text queries into answers, and that  the companies it harms are in the business of changing search queries  into ad clicks. Google’s harm to these businesses comes from making the  Internet less commercial for some queries.

It’s notable that in at least one case, Google tried to promote its  own vertical search, and failed. Google Video was ranked inline in  search results, but YouTube still grew faster, forcing Google to acquire  them. (The NYT article on the deal compared it to the dot-com bubble; one analyst estimates  that YouTube is now worth 188x its acquisition price.) So Google’s  actions are somewhat constrained. It can try to favor its own services,  but if there’s a clearly better option, Google has to either buy it or  live with the lost market share.

Google’s long-term incentive is not to have kill zones; it’s to have  buffer zones. Google wants a world where search-dependent services can  turn a profit, but not reap monopoly profits. Google also wants it to be  relatively easier to start a service than to grow one; the more  scalable something is, a) the more likely it is to be gaming Google in  some way, and b) the more likely it is to eventually represent a threat  to Google. If every content business eventually gets killed by algorithm  changes, nobody will start a content business (or they’ll start one in a  different medium that Google doesn’t control). If every e-commerce  company’s margins get squeezed by Google, that means Amazon’s market  share rises relentlessly; every time e-commerce consolidates, Amazon  Prime looks like a better deal, and Prime users are more likely to start  their product searches on Amazon.com than Google.

Consumer surveys reliably show that many Google users are unaware  that the ads (which, in the search interface, are labeled “Ads”) are  ads, and that they’d be less likely to click if they knew. This is  evidence that Google’s design is not especially transparent, but also  evidence that searchers' concerns are misguided: if the ads are so  unobtrusive and well-targeted that many customers can’t distinguish  between them and the best organic results, that’s evidence that ranking  ads well doesn’t impede the quality of the product—it just means that  more of the value of a good search engine accrues to the search engine,  rather than the sites it indexes.

Many tech companies see a pattern where user growth plateaus long  before revenue growth. The main way for this to happen is for them to  create a vast consumer surplus upfront, and then capture a share of it  later. While this pattern degrades third parties' economics over time  (it’s great to depend on Google when they’re charging less than the  value of the traffic they send), it also creates a strong incentive to  produce all that consumer surplus in the first place. Google was founded to organize the world’s information, but it was funded  based on its ability to charge for this, and many other companies raise  funds on the basis that if they captured just 1% of what Google  has—DuckDuckGo’s slice of the privacy-sensitive market, LinkedIn’s lock  on searches for names, StackOverflow’s dominance in software  Q&A—they’d be worth a lot. The pattern of value creation first and  value capture later leads to ongoing disappointment, but it’s a fact of  life beyond tech: plenty of other important relationships reach their  peak fun level in the first few months but are worth maintaining long  after the honeymoon is over.

Google’s use of Android is more dubious. Granted, it’s a fantastic  business decision: lock handset companies into a Google-controlled  operating system, gradually force them to install more Google-owned apps  (to the point that a new phone with 16GB of storage came with 7-8GB  taken up by Google’s products), and then track user data to assess  competitive threats. This is hard to defend on its own merits. In the  US, it’s less problematic, because Apple has high market share and  pitches its phones as a more privacy-friendly alternative to Android  (among other benefits). But in countries where Android is the dominant  OS, Google’s lock on the market continues to grow. Here, the competitor  harm is much more visible than the consumer harm: when Google tracks  TikTok usage to refine its plans for a TikTok clone, that’s mostly a  problem for ByteDance, not for users.

Chrome, like Android, is an example of Google extending its search  dominance into an adjacent area and then reaping the benefits. Google  promoted Chrome through its search page, probably the single most  valuable display ad inventory in history. But Chrome also won by being a  better browser. Leveraging distribution advantages is useful, but it’s  not enough; when Windows 10 can’t resolve Start Menu queries by pulling  up programs or documents, it defaults to Bing, and despite Microsoft’s  dominant markeshare in desktop operating systems, this hasn’t made Bing a  major search engine. Google’s aggressive marketing campaign for Chrome  was also a bet that Chrome was a better product, and so far that bet has  paid off nicely, both for Google’s business and for Chrome’s users.

The overall case against Google is weakest in search, where Google’s  behaviors tend to be wealth-creating, but increasingly tilted towards  creating more wealth for Google. They’re strongest for Android, which  has allowed Google to run a Microsoft-in-the-90s strategy in reverse:  use a dominant Internet application to create a popular operating  system, then use that operating system to reinforce the original  application’s dominance and extend it to other products. On the other  hand, Android preserves a balance of power in mobile: precisely because  Google monetizes it mostly indirectly through apps rather than directly  by selling it, Android creates a lower-priced tier of smartphones that  compete with Apple.

Conclusion

Tech antitrust is always backwards-looking, because technology moves  fast and Washington is slow. For example, the majority of US TikTok  users started using the app between when this report was started and  when it was published. (The report concludes a 16-month investigation.  TikTok’s US active users rose from 40m in October 2019 to over 100m by August 2020.) And as Benedict Evans points out, some of the data the report cites is nearly a decade old.

There is a good case that these companies have behaved aggressively,  but it’s important to balance that against what consumers get. “Network  effects” usually describe a business that gets more profitable as its  user count grows, but that’s the second-order effect of the product being better  as it grows. Scale effects are similar: every search engine needs to  spider sites, construct and store an index, and rank results, which  means that every new search engine starts by duplicating what already  exists, at great cost, and providing a slightly worse product by default  because it’s informed by less data. (DuckDuckGo, the most interesting  direct challenger to Google, gets around this in two ways: it focuses on  user privacy, and it offers some very useful shortcuts  for certain use cases. Since DuckDuckGo doesn’t customize results based  on individual users' data, the search results are less relevant to  them—but also less likely to confirm their own biases.)

The economics of software reward scale, but generally because  software products are better at scale. Google resolves long-tail queries  well; two half-Googles would each be less than half as good at this.  Facebook connects people, and two half-Facebooks would have fewer than  half the connections (and would be able to support far smaller  moderation staffs, and might feel more pressure to break  end-to-end encryption, allow more dubious advertisers, etc.). Those  wonderful scale-and-network-effect economics depend on fragmentation one  level up and down the supply chain, so they’re always a tempting target  for competitors, and the profitability of a mature tech company creates  a public-market comp for funding incumbents.

This means that every successful tech company simultaneously exists in two states:

  1. Enjoying cozy monopoly profits, and periodically tweaking its core  product to shift slightly more surplus wealth to itself instead of the  advertisers and users of the service; and
  2. Desperately trying to stop getting disrupted, disintermediated, or  rendered irrelevant by competitors, often competitors that don’t even  look like they’re competing.

The biggest threat to tech companies is other tech companies, which  means the best way to keep the market competitive is to ensure that  there are rewards for building a company big enough to scare Google,  Facebook, Amazon, and Apple as much as they scare one another.

Text-based search is mature as a product, but won’t matter forever.  Voice search, for example, is intrinsically more vertical-specific: a  voice-search product for finding local businesses will be very different  from one that provides health advice or controls smart appliances.  Training an algorithm is less feasible when results are presented in  sequence rather than in parallel, and it’s more important to invest in  advance in getting the answer exactly right.

Social is also a mature category. A generic friend graph is  inconvenient to rebuild, so it’s hard to imagine a Facebook competitor  that works by going head-to-head with Facebook. But some friend graphs  are ad hoc and non-overlapping; office friends, poker buddies, a book  club, and a church congregation all have very different social networking use cases, and a  single large social graph won’t serve them all, and may actually  degrade their experience. Facebook offers granular access-control tools,  so anyone who wants to invest the time can choose exactly who sees  which interactions, but spinning up group chat on Signal or Telegram is  an easier way to create a single-purpose social network that’s unlinked  to other identities by default.

Every company that benefits from repeat Google and Facebook traffic  is scheming to keep users for itself; TikTok spent vast sums on user  acquisition before it figured out how to get user retention up to  sustainable levels, at which point paid traffic from social media  started to be less important, and PR and organic sharing began to matter  more. Now, if Twitter tried to suppress the popularity of TikTok videos  on its platform, it would degrade the Twitter experience (they were on  to something with Vine!), and Twitter’s best bet for providing  bite-sized entertainment is to accept that some of that entertainment  ends up advertising a faster-growing competitor.

A mature product does not imply a mature business. Modern planes and  cars would be mostly recognizable to someone who had been in a coma for  fifty years, but the businesses behind them have learned new tricks for  increasing margins. The growth story for big tech companies isn’t over,  and as that growth continues at a faster pace than the consumer surplus  these companies generate, they’ll eventually have to either give up on  growing or start seriously degrading the user experience in search of  more revenue.

The current regulatory backlash against tech might be comparable to  the Goldwater campaign in 1964: it got a few people very excited, but  ended up attacking a system that was actually working pretty well.  Railing against big government around the peak of US state capacity was  an admirable act of bullet-biting, but ultimately led to a massive  electoral blowout. And then, sixteen years later, a popular pro-Goldwater speaker  ended up getting elected, and helped tear down some of the regulatory  cruft that had accumulated since then. (Since politics is partly a game  of taking credit for outside events, Reagan gets points for legitimizing  some Carter-era technocrat-driven deregulation.)

Tactically, the right move for Facebook and Google is to draw out the  antitrust process for as long as possible. Each company can hope that  the other will face some kind of resounding economic loss from an  out-of-left-field competitor, which will demonstrate that the consumer  Internet field remains dynamic. Ironically, the biggest regulatory risk  for every major tech company is that all of the other ones remain  uniformly excellent at staving off competition and irrelevance, but over  time that gets less and less likely. After all, if they’re all  invincible monopolies, then soon enough nobody else will be left; all of  Facebook and Google’s ad dollars will come from Amazon, all the  products Amazon sells will be ordered on Apple phones, and there won’t  be anyone in the middle left to squeeze. And at that point, the  anti-tech case will be rendered paradoxical: they’re all unstoppable  until one of them stops another.

[1] On my phone, I have WhatsApp, Signal, Telegram, Keybase,  ChatSecure, and Wickr, because everyone paranoid enough to prefer an  encrypted app is also paranoid enough to distrust some other encrypted  apps. In fact, one way the shape of the market is changing is that more  interesting conversations migrate to private chat apps. Since their  churn and virality occur at the level of the conversation itself, not  the platform, they lead to more fragmentation. Any messaging platform  tied to a social platform loses its winner-take-all characteristics as  users get worried that their private comments will be tied to their  public identity and get them in trouble.

Classifieds

Are you always trying to understand how trends become trends? One of  my favorite startups, which surfaces hidden trends and explains why they  are taking off, is hiring a curious thinker who also enjoys writing.  The ideal candidate should be comfortable researching a range of topics  and generating insights through a range of lenses: behavioral economics,  consumer behavior and business strategy. Professional writing  experience isn’t required, though the ability to write well and quickly  is key.

If you’re interested, or know someone who is, please get in touch.

Elsewhere

Yelp’s Crypto-Coinbase Moment

Yelp has made a very interesting and widely-misinterpreted announcement: they will be flagging businesses whose employees have been accused of racist behavior.  This sounds like taking a side in a culture war issue, but it ignores  some of the copy. The notice appears when users check reviews of a  business, and the notice ends with “We have temporarily disabled the  ability to post here as we work to investigate the content. If you’re  here to leave a review based on a first-hand experience with the  business, please check back at a later date.” Leaving one-star Yelp  reviews is a classic way to punish a company for its behavior, and  reviews stick around whether or not a viral story turned out to be true,  and regardless of how the company responds. Yelp’s decision to block  reviews is in part a way to protect the businesses themselves; once a  local business gets tied to a national issue, Yelp doesn’t want to be the default  venue for discussing it.

Life at a Hypergrowth Startup

Patrick McKenzie has a retrospective on spending four years at Stripe. It’s a knowledge-dense and especially wisdom-dense  document, worth reading both for the Stripe-specific insights and for  broader lessons. On Stripe itself, I liked this point:

I don’t think Stripe is uniformly fast. I think  teams at Stripe are just faster than most companies, blocked a bit less  by peer teams, constrained a tiny bit less by internal tools, etc etc.  There are particular projects which have been agonizingly long to ship;  literally years after I would have hoped them done. But across the portfolio, with now hundreds of teams working, we just get more done than we “should” be able to.

A stupendous portion of that advantage is just consistently  choosing to get more done. That sounds vacuous but hasn’t been in my  experience. I have seen truly silly improvements occasioned by someone  just consistently asking in meetings “Could we do that faster? What is  the minimum increment required to ship? Could that be done  faster?” It’s the Charge More of management strategy; the upside is so  dramatic, the cost so low, and the hit rate so high that you should just  invoke it ritualistically.

It may not be a coincidence that patrickcollison.com/fast exists.

On general business wisdom:

(In a way, every scaling startup is an experiment in  empirical microeconomics research on “What parts of the typical  corporate form are necessary and which are pageantry which we only keep  around due to anchoring, the sunk cost fallacy, and tradition?” Every  time a startup bites the bullet and hires a VP of Sales, a lifecycle  email copywriter, a retirements benefits administrator, or a cook, count  that as a published result saying “Yep, we found this to be  necessary.”)

Microsoft’s App Principles

In light of how Google and Apple use their app store and OS dominance, Microsoft has articulated a set of principles for how it wouldn’t abuse that market power, if they had it.  Microsoft has certainly gotten gentler over the years, and is in the  fortunate position that its market share is highest in products that  remain lucrative but aren’t as attention-getting as they once were,  while its growth is coming from more competitive fields where Microsoft  has just enough scale to see increasingly compelling economics.  Microsoft’s perceptual transition from brutal competitor to trusted  neutral party is one of the most impressive parts of their turnaround  under Satya Nadella, and this declaration—timed to coincide with  discussions of other companies violating these principles—is a good way  for the company to reinforce it.

Meanwhile, in an example of big tech companies disrupting one another for long-term strategic benefit, Microsoft is adding price comparison features to its Edge browser.  This mostly harms Google, by a) creating a way to search for products  without Googling, and perhaps more importantly b) creating an ad unit  that appears on the page users click through to when they Google a  product and click one of the ads. So Microsoft is depriving Google of  some click volume and some click value.

Square and Bitcoin

Square has spent $50m, or about 1% of its assets, on Bitcoin.

My comment from last time this happened still stands:

The event path for Bitcoin has always been gradual  adoption by people who are less and less crazy. MicroStrategy is an  interesting signal, because the CEO owns most of the voting stock. So  while Bitcoin is technically an asset that a public company can use as a  financial reserve, in practice it’s something a CEO can speculate on if  he has largely unfettered control over other people’s money. Still,  this means the next public company CEO who decides to take a flyer on Bitcoin has a precedent to point to.

Driverless

Waymo, after many years of approximations, has launched a driverless taxi service in suburban Phoenix.  This product was delayed, but turned out to have great timing: a  driver-free taxi service is just the product for a pandemic. Right now,  the unit economics are still not great. As the article points out:

Eliminating the safety driver is an important step toward  making Waymo’s service profitable. But it may not be enough on its own  because Waymo says the cars still have remote overseers. These Waymo  staffers never steer the vehicles directly, but they do send high-level  instructions to help vehicles get out of tricky situations.

But optimal redundancy is easier to provide at scale, where the law  of large numbers is favorable. Pushing back against this is the issue  that self-driving is a problem where the first 99.9% gets solved by  building the right general equipment and algorithms, and the last 99.9%  by adapting to a given city. Waymo’s incentive is to grow fast once  their economics are remotely viable, and expect those economics to  improve, but the drawback is that every new city presents the PR risk of  an accident, which would hurt their growth everywhere else.

Local Champions and Good Globalization

Nikkei has a lengthy writeup of KKR’s Asia Ex-China investment strategy  ($), casting PE investment in the region as a way to recapitalize  family-owned businesses and local champions facing a cash shortage. It’s  interesting for how surprisingly normal it is: in theory, countries  with low growth and deep financial markets should be net investors in  countries that are growing faster but don’t have complex financial  systems. In practice, that flow is often reversed, as export-driven  economies accumulate dollar-denominated assets to keep their currencies  cheap. KKR’s investments represent a bet that globalization will look  more like it did in the 19th century, driven by local companies that  raise funding overseas.

China’s Domestic Consumption Push

In the long run, China’s policymakers want the country’s economy to  tilt more to consumption rather than exports and investment. In the  short term, investment is generally an easier way to drive growth. Two  recent stories show some evidence that this rebalancing is working: a  combination of worse relations and higher transaction taxes have discouraged Chinese investors from buying properties in Australia, and duty-free shopping on the Chinese island of Hainan is taking share from South Korea and Hong Kong. (As Jordan Schneider of Chinatalk  pointed out to me last time Hainan came up, some observers think it’s  easier for the Chinese government to consider large-scale reforms on  islands, where the spillover effects to other provinces are more  contained. So Hainan may be a leading indicator for policies that China  may consider elsewhere.)