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https://www.thebignewsletter.com/p/economic-termites-are-everywhere?utm_campaign=post&utm_medium=webEconomic Termites Are Everywhere
Why is this economy so difficult to manage? The macro statistics are hiding the experience of being cheated.
MATT STOLLER
JUN 08, 2024
Today I want to start with a comment by a colleague, Texas antitrust lawyer Basel Musharbash, observing a restaurant trying to do a renovation in Dallas. “Something funky is happening in the building materials supply chain,” he wrote . “A 3,000 sq. ft. commercial space in a strip mall shouldn’t cost $720,000 to renovate into an Italian food joint.” He’s right. It shouldn’t. And yet it does.
This attitude of ‘something is very wrong with our society’ is everywhere now. Corporate procurement officers just assume costs are going up, it’s in budget projections for the Defense Department, and we expect cost overruns on everything. ‘Inflation’ is now a catch-all for a basic view that stuff is just going to suck more and more.
So what’s going on? Today’s piece is about a concept I am going to call ‘economic termites,’ which are instances of monopolization big enough to make investors a huge amount of money, but not noticeable enough for most of us. An individual termite isn’t big enough to matter, but the existence of a termite is extremely bad news, because it means there are others. Add enough of them up, and you get our modern economic experience.
The concept of an economic termite is the cousin to Cory Doctorow’s ‘enshittification’ or Yves Smith’s ‘crapification,’ terms that describe how a platform gradually degrades the quality of its service as it gains market power and gets pushed to extract cash by financiers. Economic termites describes where these same forces get into the mostly unseen business foundations of our society and profiteer.
These termites are in the infrastructure or guts of business, like recruiting services, construction equipment or software, the industrial gasses that go into chemicals and electronics, and so forth. It’s the stuff you don’t see that makes our world turn, there’s fortunes to be made, and bottlenecks to foster.
They also explain a dynamic we all face, a profound wariness in our society, a sense that stuff just costs more and is more difficult, for no discernible reason. Added up, these end up sapping our faith in the American system, because they make what seem like simple problems become not just unsolvable, but not even capable of being diagnosed. In this issue, I’ll cover some of the companies you don’t realize are gnawing at the foundation of our society - Verisign, Autodesk, Linde, Assa Abloy, Gracenote, and LinkedIn. And yes, there are legal tools to address them. But first we have to realize that these bottlenecks are everywhere.
We’ll start with a corporation I pay to host this newsletter.
The secret ingredient is crime : r/MitchellAndWebb
Verisign: The Most Profitable Company in the Stock Market
A few months ago, Verisign - which is the government-designated monopolist that runs the registration of .com addresses - announced a price hike, from $9.59 per year for .com addresses to $10.26. If you’ve ever bought or renewed a website, Verisign has gotten some of your money. I have to pay this fee to register TheBigNewsletter.com domain name, every year. So does everyone else who has a domain name.
An increase of less than a dollar a year is not a big deal. But over the decades, these price hikes have been routine. A few years ago, the price to renew a .com domain was $6 a year. Then $7. Then $8. Verisign has hiked prices every year, up to the maximum set by the government (until Trump removed the price cap altogether in 2018.)
Today, Verisign is the single most profitable company in the stock market, a great example of an economic termite. In 2013, its operating margins were 54.7%, by 2023 they grew to a crazy 67.1%. Verisign doesn’t invest this money; in 2023, it spent $882 million of it on stock buybacks. Its expenses are basically running a simple database, its strategy is to hike prices just below what will be noticed, and its method is to have politically connected people like Clinton Justice Department official Jamie Gorelick - who is one of Merrick Garland’s good friends - on its board.
Where did Verisign’s monopoly come from? Well, it was due to the last four administrations choosing to ‘privatize’ domain registration to a ‘multi-stakeholder group,’ the Internet Corporation for Assigned Names and Numbers (ICANN), which has a deal with Verisign to allow it to maintain the monopoly. ICAAN could at any point put the contract out on domain management for bid, and you’d see corporations come in at $2/year, certainly much less than $10.26. But they haven’t ever done that. Their contract strikes me as unlawful, a straightforward agreement in ‘restraint of trade.’ Yet, Verisign has a weird agreement with U.S. government’s National Telecommunications Information Administration (NTIA), which is widely perceived to provide the firm with legal cover for its clearly monopolistic behavior.
In less than three months, the NTIA, which is run by former Google lobbyist Alan Davidson, has a choice of whether to renew its agreement with Verisign. I don’t know what Davidson will decide. He might not perceive it as worth his time to fight with this economic termite. But he should, because termites are a bad sign.
Also, I want my money back!
AutoDesk: Taking “Hostages” in Architecture
Talk to anyone in architecture or engineering design for big construction projects, and it’s not hard to find complaints about software provider Autodesk, which sits in the computer aided design (CAD) space. “I have personally been bullied by Autodesk while CTO at a design firm using predatory practices that dictated pricing unlike any software contract I've negotiated in my 30 year career,” one BIG reader wrote me. “I continue to hear stories from all leaders in the industry with aspirations to create a sustainable, human centered built environment, but limited by pricing and poor quality of a single tool (Autodesk).”
Autodesk is the classic economic termite. As one Wall Street analyst put it in praising the stock, “Like other software suites providing extensive support for customer workflows, ADSK's offerings can demand premium prices due to their prevailing market dominance. When juxtaposed with the overall expenses of a construction project, which might reach millions of dollars, the cost of these products remains relatively minor.”
There are rivals in the market, but as another source noted, “The switching costs associated with CAD software are gargantuan, a reality incumbents leverage more or less mercilessly.” The result, he added, is that “there’s not all that much organic innovation in the past 25 years, but lots of steady growth.” Just going to Glassdoor, there are a large number of employee complaints consistent with a firm that has market power, mostly about poor leadership and constant reorganizations due to acquisitions, but extending to unethical sales practices and a few claims of fraud.
In 2020, UK based architecture firms penned an open letter to Autodesk complaining about high prices and poor innovation, “censuring the Silicon Valley-based design software and services giant for the mounting ownership costs—an increase as much as 70 percent over a five-year span through the end of 2019—of its central BIM product, Revit.” The software, they argued, has “remained mostly stagnant and that firms dependent on the aging software (it’s now 20 years old) have been faced with, among other things, ever-changing licensing models, aggressive sales tactics in enterprise licensing, and a lack of understanding of the business dynamics within the industry that the company serves.”
The likely reason for this market power is that Autodesk makes it hard to switch, both through technical means and aggressive sales tactics. As one customer said in the Autodesk forums from a few years ago, “The only feature request I’ll make is antitrust action against Autodesk.”
Generative AI might change the dynamic in the industry, but if there isn’t antitrust action, it will be deployed poorly.
Linde: Industrial Gasses
In 2018, the second and third largest industrial gas companies, Linde and Praxair, combined to become the biggest firm in a very concentrated industry. Industrial gasses are chemicals, like oxygen, nitrogen and argon, carbon dioxide, hydrogen, helium, acetylene and specialty gases, that go into a ‘countless’ number of products, from MRI machines to frozen fish to semiconductors to steel to carbon capture and renewable energy. The Biden Inflation Reduction Act has supercharged the industry.
The merger was a controversial deal within the government, with the Trump Federal Trade Commission blessing the deal, though requiring the new firm to sell off some assets to a private equity joint venture. (FTC Commission Chopra dissented and opposed the merger.)
Immediately after the combination with Praxair, Linde announced substantial price hikes, and it has continued to increase prices ever since. In the last quarter of 2023, for instance, according to Linde’s investment documents, its sales in the U.S. grew by 6%, “driven by 5% higher pricing and 1% volumes.” And the root of its pricing power isn’t hidden; in 2022, its 10% boost in profit was, according to the corporation’s annual report, “primarily due to higher pricing… driven by merger related assets.” Operating margins went from about 10% in 2019 to 16% in 2022 to 27.6% in 2023. In 2023, the company paid out 50% more to investors than it invested into the business.
Today, the industry is a lot like Verisign, on a larger scale. Industrial gases are essential to customers, but also an afterthought, because they are usually a small percentage of the customer’s cost. No one really cares if there are price hikes, as long as the gases are delivered. It’s also hard to switch, distribution is a bottleneck, and long-term supply contracts are common. The result, for Linde, is high operating margins, low investment, and lots of dividends and buybacks. There are a few other big companies in the market, like Air Liquide, but the merger cut price competition substantially.
Last year, Linde fortified its position in distribution, buying one of the biggest packaged gas distributors in America, nexAir. And its executives have announced they are looking for ‘tuck-in’ acquisitions, meaning they want to keep buying mid-market firms as a consolidation play.
Unless you are buried in a supply chain somewhere, most people will never hear about the industrial gas price increase. But as with Verisign, a few pennies are coming out of your pocket every day because of this economic termite.
Swedish Predators: Assa Abloy
Swedish conglomerate Assa Abloy makes locks and smart locks that go into a large percentage of residential and commercial buildings. As with gases, locks are a small percentage of the cost of a building or house, so this industry is about power in distribution.
Like many corporations with market power, Assa Abloy is a roll-up, having bought over 300 firms in the last 27 years. In 2023, it engineered a significant merger, to buy out Spectrum Brands’ industry-leading Kwikset line of business, and sell its own third place Yale and August business line to a new weaker firm called Fortune Brands. The Antitrust Division challenged the merger of the Kwikset brand, but Judge Ana Reyes forced a settlement to allow the merger to go through.
Smart locks had been a competitive industry; from 2019, smart lock output nearly doubled, and prices dropped by 9%. That era seems to have ended with the merger. Assa Abloy raised prices in December, January, and February, and its main competitor, Fortune Brands, did as well. There are also complaints in the industry about increasingly coercive behavior. Here’s a story of a new innovative producer whose business was simply… turned off by the incumbents.
As most of my connections, friends, and family know. I have been building a business called DailyAdventureBox since 2019. The business is a self-automated rental locker for outdoor sporting equipment, beach equipment, and camping equipment. We are or should I say, we were, on the verge of extreme success with multi-state operations with major hotels like Hilton Hotels & Resorts, IHG Hotels & Resorts, and Fairfield by Marriott.
Sadly, my business is being forced into bankruptcy because of two multi-billion-dollar corporations not honoring their agreements..... ASSA ABLOY Group and Fortune Brands Innovations have destroyed my business and are not taking ownership of their wrongdoing. Long story short they agreed to partner with my company, they had us design our IOS/Android app to their code, and I developed my lockers around one of their smart lock products. After spending over $500,000 into the partnership, they decided to pull support. Causing my app to crash and all of my locations to be uninstalled. Now we are not operational and are at risk of forced failure for NO REASON. They believe that because I am a startup company, I cannot fight back.
A bit of coercion leads to no innovation, and then a few pennies drawn from the pocket of every homebuyer, landlord, and renter out there…
Entertainment Data: Gracenote
In 2016, Nielson’s acquired a corporation called Gracenote for $560 million, which provides metadata for movie, music and TV listings for use in user interfaces on cable, satellite, streaming services, automobiles, hotels, and hardware. As of 2021, Gracenote was widely deployed throughout the industry, not just in most TV interfaces but in 250 million in-car entertainment systems. The rumors are Gracenote has 60% of the market.
Gracenote seems to have provisions that prevent the use of multiple databases or combining its data with outside vendors to improve the service. “Gracenote will only license if we drop all the other databases, they will not allow to be combined with others,” wrote one person complaining on a forum. “The results from four databases are much better than one.”
Here’s a contract from 2019, and the word ‘outside’ seems to be the mechanism by which Gracenote exerts power.
Many of the customers for the data also make content that needs to be ‘datafied,’ there are a lot of conflicts of interest embedded in the market. And because data is woven into an organization’s fabric, switching costs are quite high. The restrictions on the use of data make moving gradually to another provider of data almost impossible, and prevent the use of different forms of data to make discovery of content better and cheaper.
I can’t find pricing information, but since Nielson’s is now owned by private equity/hedge fund Elliot Management, I suspect they aren’t shy about taking advantage of market power. Another dime out of every viewer’s pocket.
LinkedIn: Beyond Super Positive Corporate Blog Posts
Over the years, professional recruiters have been telling me about increasingly worse terms offered by LinkedIn. What’s the problem? Is LinkedIn really a monopoly? Well maybe not from a consumer’s perspective. But from the perspective of recruiting firms? That case is more compelling. “LinkedIn is the only dominant social professional network, with ~1 billion public resumés,” I was told. “They have no true competitors in ‘sourcing software’ for recruiters searching to attract passive job candidates for most all veins of corporate work.” There’s also direct evidence of market power. Earlier this year, LinkedIn imposed a 174% price increase on its customers, who are professional recruiters that scour the database for potential hiring.
And I looked into it, and yes, this one looks like a market power story. In fact, Reid Hoffman, the founder of LinkedIn and a big political donor, wrote a book called “Blitzscaling” in which he discussed the importance of getting big before anyone else. He used that recipe to build LinkedIn, the largest professional social media network, before selling it to Microsoft in 2017 for $26 billion. (Microsoft also owns GitHub, which is the other key place to source mid-career technical talent.)
There are a number of mechanisms LinkedIn uses to maintain its monopoly. The key is, as Google and Amazon do in their areas of network dominance, to deny scale to potential rivals. While most people think a LinkedIn profile is a public facing resume, in fact, Microsoft fiercely controls who can access that data in bulk, litigating to deny the use of LinkedIn profiles to potential rivals, except for certain companies, “such as Google,” which are whitelisted. Why would Google be allowed to search LinkedIn profiles? I’m guessing there’s a market allocation agreement. After all, it would seem pretty trivial for Google to launch a rival product, but it hasn’t.
Thousands of small agencies rely on LinkedIn, and have been gradually driven out of business as Microsoft, its owner, generates more revenue. These make it slightly more expensive to hire, an indirect tiny cost borne by everyone in the economy.
I could on, and I eventually will. (For instance, Waste Management is an obvious termite.) But you get the point. Small hidden tollbooths everywhere eventually foster economic tyranny.
Now of course it’s not all hidden. There are big monopolies in our economy. Live Nation/Ticketmaster, for instance, is likely responsible for big price increases in live entertainment, and UnitedHealth Group is driving up prices in health insurance. Oil price-fixing, rent price-fixing, and meat price-fixing are each individually a big deal. But the aggregate cost increases we’re seeing in random areas often can’t be traced to one big villain. But they can be traced to many small ones.
Where did these economic termites come from? We decided four and a half decades ago that monopolies were good. After 1998, the Antitrust Division stopped bringing monopolization cases, and in 2005, the Supreme Court unanimously endorsed monopolization as foundational to the health of American economy. After twenty years of not bringing cases, business executives realized the best way to run a business was to create a tollbooth in some mostly unnoticed part of society. So now, each supply chain is made up of a bunch of different bottlenecks, too small to notice.
That said, there are commonalities among these industries that make these problems easier to solve. Most of these firms use the tactic of building a network or standardizing a business on their platform, and then denying necessary scale to their rivals through technical, contractual, or business tactics. They often use exclusive contracts. They also often rely on expansive patent, copyright, or trademark claims, sometimes government sanctions for their market power. They are ‘capital light,’ usually in opposition to the new industrial policy goals of ‘bending metal.’
As the big antitrust claims work through the courts, and as government policy design moves away from supporting consolidation, trends in business will change. Executives will get worried about being sued. Rivals will start calling lawyers, class action attorneys will see more opportunity, journalists will write more stories, and judges will learn. It’s becoming easier to see analogies and bring private cases. And over time, we’ll start to once again see these kinds of monopolization techniques as we do other moral wrongs based on unfairly exploiting power.
Thanks for reading! Your tips make this newsletter what it is, so please send me tips on weird monopolies, stories I’ve missed, or other thoughts. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation, and democracy. Consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
cheers,
Matt Stoller
Saludos
