Before the pandemic helped Bill Gates re-orient his image as a humanitarian, he was a hated man. In the late 1990s, he had earned quite the reputation. Danny Westneat, a columnist for the Seattle Times, summarized it neatly:
“The Gates of old would tell people an idea was “the stupidest I’ve ever heard.” He and his minions acted as if they ruled the world, plotting, in e-mails, how to use the company’s market power to squash rivals — infamously, how to “cut off their air supply” or “knife the baby” or other such mob-like threats.”
Knifing the baby; what's that all about? Read on and find out.
#1 - Companies are driven by immediate profits, not R&D
The profit motive in companies drives companies to innovate less. The topic was explored in Geoffrey West's book "Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life in Organisms, Cities, Economies, and Companies." Thomas A Dorfer, who summarized the book, puts it as follows:
“In order to achieve greater efficiency while striving for greater market share and increased profits, companies typically add more rules, regulations, and protocols, very often at the expense of R&D… Market forces usually limit the initial excitement and enthusiasm for new products, which leads to only a few successful products as the company is trying to gain a foothold and an identity, creating economies of scale. Most become very unidimensional by focusing only on short-term goals. This reduction in diversity, along with the lack of R&D and other predicaments, are classic indicators of reduced resilience and are typically a recipe for eventual disaster.” [Emphasis Added]
#2 - Monopolists don’t need to innovate, so why should they?
A 1988 study found that “the total number of innovations is inversely correlated with concentration” and that monopoly power deters innovation. They concluded, “Innovation falls as industrial concentration increases.” The study clearly shows that monopolies don’t need to spend their money on innovation to remain the competition king. Rather, they can spend their money on other things to remain on top. This refutes the myth that the free market will “automagically” result in innovation. Its primary focus is increasing the wealth of the 1%.
#3 - Monopolies hate competition, so they crush innovation
In the “Master's Switch”, Tim Wu makes the case how yesterday's "idealistic start-up" will become today's tyrannical monopoly. Consider:
Google racks up $9.3 billion in anti-trust fines: I remember the early days of the Internet and saw Google go from scrappy start-up to the search monopoly it is today. Not only did they abandon their "don't be evil" mantra, but they’ve also racked up a whopping $9.3 billion fines by European antitrust regulators for “evil conduct." Coincidence? Probably not.
AM Radio crushes FM technology: David Sarnoff, an early AM radio enthusiast who was instrumental in launching RCA by broadcasting the "heavyweight championship fight between Jack Dempsey and Georges Carpentier" back in 1921. So how did he react to the invention of FM Radio? He squashed it by suing Edwin Armstrong out of existence.
AT&T suppresses the answering machine in the 1930s: AT&T executives forced Clarence Hickman, an engineer at AT&T’s Bell Labs, to put aside the answering machine and magnetic tape he invented because they were “convinced that the release of recording devices would cause Americans to abandon the telephone."
As NYU professor Douglas Rushkoff puts it: “This operating system is called capitalism, and it drives the antihuman agenda in our society...” [emphasis added]
#4 - When you break up or regulate monopolies, innovation will come
Conversely, the innovation will emerge after a monopoly is broken up. William Burton, a chemist at Standard Oil (SO), wanted a $1 million investment from SO to invest in “thermal cracking." His innovation enabled more gasoline to be extracted from a barrel of crude oil. But the company killed it because it was too risky. “Only when Standard of Indiana became independent in 1912 could the project go forward. The Burton process was widely licensed. Between 1913 and 1920, when competing cracking processes began to emerge, 91 million (42 gallon) barrels of gasoline had been refined using the Burton process.”
Monopolists are not gods. They couldn’t see how vital gasoline was going to become. In 1907, they only sold 43,000 cars, but by 1920, factory sales reached 1.9 million.
Similarly, when Microsoft was put through the antitrust ringer in the late 1990s, they could not monopolize Internet technologies. As Tim Wu and Richard Blumenthal put it in a NY Times Op-Ed: “Imagine a world in which Microsoft had been allowed to monopolize the browser business. Holding a triple monopoly (operating system, major applications and the browser), Microsoft would have controlled the future of the web. Google, the tiny start-up, would have faced an unfair fight against Bing.” No PageRank search algorithm, no Gmail, Google Docs and so on.
#5 It's more profitable to ‘knife the baby’ or buy it out
So finally, we get to 'knifing the baby.'
As per CNN, Microsoft executives wanted to kill Apple’s QuickTime. Back in the 1990s, there was no YouTube. You need to download QuickTime, RealPlayer and Windows Media Player (WMP) to watch a video. From what I can remember, most of the videos were either encoded in QuickTime or RealPlayer format (MP4 was yet to become a standard). The infamous antitrust hearings against Microsoft in the late 1990s revealed that Microsoft wanted to crush QuickTime (the competitor to its WMP):
“Meanwhile, there were signs that Microsoft was pressuring Apple to kill QuickTime, either entirely or merely for Windows -- which runs on 90 percent of personal computers. "They seemed to be saying to us they wanted us to knife the baby," a slang expression for canceling QuickTime, Tevanian [an Apple software executive at the time] said. When another Apple executive asked Microsoft to confirm that impression, Tevanian reported that a Microsoft executive said "Yes, we're talking about knifing the baby."
The other way is to buy out the competition. Why invent stuff when you can buy out rivals with a “cash and stock” deal like Facebook did for WhatsApp? This transaction is part of the reason why Facebook has attracted the ire of antitrust regulators. As per WSJ: “The FTC and a group of 46 states in separate antitrust lawsuits on Wednesday alleged that Facebook engaged in a years-long campaign to acquire or stymie nascent technology companies that it feared could become rivals.”
There was no memo from “Trey” (that's Bill Gates's nickname) saying to knife the baby. But as they say, the “tone at the top” set by the Microsoft executives created an environment where this type of behaviour was acceptable. But the more significant issue is Capitalism itself. Capitalism is about expanding the freedom of ownership – not innovation. There's no mandate for corporations to innovate, so why should they? If it's more profitable to 'knife the baby,' they certainly will.