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Don’t cry for Mark Z
Credit him for being right
There’s a big story on the business front that hasn't gone exactly unnoticed but has been underappreciated. In the last twelve months the value of the company that used to be called Facebook and now is called Meta has cratered, declining by nearly two thirds. The importance of this story has less to do with the diminishing wealth of Mark Zuckerberg, its founder and chief executive, although many critics of Big Tech will take pleasure in that, than with what this turnaround reveals about the nature of the modern economy.
The moguls of America's first Gilded Age built their fortunes on solid stuff. Or liquid stuff in the case of John D. Rockefeller, the oil magnate. Andrew Carnegie manufactured steel. Leland Stanford laid railroad track. Henry Ford's factories churned out automobiles. Even J. P. Morgan, the money man, based his financial power on shuffling and reorganizing material things, like steel mills and railroads.
America's appetite for stuff has not exactly disappeared, but as economies develop, goods matter less compared with services. No matter how rich you get, there’s only so much you can eat. But as incomes rise, people eat out more, take more vacations, send their kids to expensive colleges, throw lavish parties and so on.
The great fortunes of today mostly spring from services. Zuckerberg’s Facebook fortune is a prime example; also those of Larry Page and Sergey Brin of Google. Even Tim Cook’s Apple, which makes things (or has things made for it), leans heavily on the service side of the ledger. Apple is as much a software company as a hardware one; its proprietary OS and iOS and all the third-party apps on its phones and computers are what make them useful. Bill Gates’s Microsoft started out as a software—that is, services—company but has added some hardware. Jeff Bezos’s Amazon sells stuff, but what it really provides is delivery service.
Stuff-making industries require factories that are often expensive. This expense serves as a barrier to entry for competitors. Any upstart wanting to compete with Carnegie Steel had to reproduce the plant Carnegie already had; few even tried. Detroit’s Big Three automakers had the American market to themselves for decades for a similar reason. Their triopoly was broken only by foreign competitors who had bulked up in their own national markets.
The barriers to entry in service industries are typically much lower. Zuckerberg started Facebook in his dorm room; Page and Brin wrote their search algorithm on borrowed computers; Apple was hatched in a garage. To be sure, Ford Motor started in a garage too, but Apple needed only the one, while Ford required the equivalent of lots of garages before it became a player in automobiles.
Andrew Grove, Intel founder and longtime CEO, often said that in his business only the paranoid survive. Grove made stuff—microprocessors—which require elaborate and expensive fabrication plants. His adage applies much more to software guy Gates, whose Microsoft formed a de facto partnership with Intel to create the personal computer industry. As Intel’s chips got faster, Microsoft’s code became more intricate, giving rise to the observation: “Grove giveth and Gates taketh away.”
In defending Facebook and Meta against potential antitrust regulation, Zuckerberg has often said that however much of the market his company controls at a given moment, it’s always on the verge of losing it—to some new Zuckerberg with a better idea. Turns out he was right. A steel mill or auto factory might be productive for decades, but tastes in social media can change overnight.
Facebook beat out Myspace, but then had to purchase Instagram and Whatsapp, and even with these additions couldn’t keep TikTok from stealing its lunch. Facebook’s critics made much of network effects: the advantage that accrues to an existing system from the fact that everyone wants to get aboard. This isn’t immaterial, but neither is it insurmountable, as Facebook showed Myspace and TikTok showed Facebook.
The critics of Zuckerberg have fallen silent, but not because they don’t want to hit a centibillionaire when he’s down (to being a mere multidecabillionaire). It’s because they realize he was right. It can all go away in an instant.
Markets aren’t magic; they aren’t the solution to everything. Government regulation is sometimes called for. But when markets do the regulating, they can act more swiftly and rigorously than any government regulator would dare. And no one can legitimately complain.
Now that’s a pretty good trick.