Ben Thompson on Business and Tech (Ep. 52)

And why Taiwanese breakfast is the best breakfast.

Not only is Ben Thompson’s Stratechery frequently mentioned on MR, but such is Tyler’s fandom that the newsletter even made its way onto the reading list for one of his PhD courses. Ben’s based in Taiwan, so when he recently visited DC, Tyler quickly took advantage of the chance for an in-person dialogue.

In this conversation they talk about the business side of tech and more, including whether tech titans are good at PR, whether conglomerate synergies exist, Amazon’s foray into health care, why anyone needs an Apple Watch or an Alexa, growing up in small-town Wisconsin, his pragmatic book-reading style, whether MBAs are overrated, the prospects for the Milwaukee Bucks, NBA rule changes, the future of the tech industries in China and India, and why Taiwanese breakfast is the best breakfast.

Watch the full conversation

Recorded October 15th, 2018

Read the full transcript

TYLER COWEN: I am here today with Ben Thompson, who is the founder and author of Stratechery, which is about the strategy and business of technology. There’s a free article once a week, but there’s also more extensive material, which you pay to subscribe to. I am myself a loyal subscriber and payer. I recommend that you all do the same.

Ben, welcome to Mercatus.

BEN THOMPSON: Thank you. Happy to be here.

COWEN: We’re mostly going to talk about tech, so let me just plunge right in. Why aren’t the big tech companies very good at public relations? Or are they?

THOMPSON: The add-on is an excellent question. I think there’s an aspect where they haven’t needed to be for a long time. This is both a broader context in that they’ve been like American heroes in many respects. And where is American innovation? Everyone looks to Silicon Valley, and from that perspective, can do no wrong.

The other big thing is, their business model is making people happy. You can define happiness in all kinds of ways, in perhaps nefarious ones as well. But people use Google because they find Google useful. They use Facebook because their friends and family are there. They use these companies regularly.

They’re very different than the dominant companies of old that were like monopolies based on controlling distribution. They had no need to service their customers well because their customers couldn’t go nowhere else. In this case, they succeed by virtue of being better than everyone else, and that gives them a leg up in the public eye, generally.

COWEN: Are founder-led companies worse at public relations, maybe because they’re so substance obsessed?

THOMPSON: Maybe. I think it’s more a matter of founder-led companies, in particular, are very missionary-esque in their mission, [laughs] if you can say missionary-esque in their mission. They’re true believers, and they have a story that they’ve told themselves about why this company exists and why it’s successful.

It usually has very little to do with the stuff that I write about, which is business models and moats and network effects and that sort of thing. No, “We are connecting the world” or “We are organizing all the world’s information” — very lofty sort of goals. I think the more founder is there, the more that sense of mission is felt deep within the organization.

But that creates blind spots where you can’t even . . . It’s not that they’re bad at public relations. It’s that they can’t even imagine the possibility of anyone thinking about them poorly because they know their own intentions, and their intentions, they feel, are good. It’s the old attribution error, where “I know what I was trying to do, that guy down the road — he was just being a jerk.” It’s kind of that but in reverse.

COWEN: Does Amazon do public relations differently? Do they do it better? Have they somehow found the magic that the other major tech companies have lacked? Or is reality simply catching up to them now?

THOMPSON: I think there’s a bigger challenge, in general, for a company like Facebook where, if you think about public relations, it’s very tied up into the media and that sort of area, where there’s a certain tension already in that sort of relationship, particularly when it comes to the health of their underlying businesses. Whereas Amazon is a bit more removed from that.

Amazon is also so customer focused that everyone uses Amazon, everyone likes Amazon. It’s not part of the conversation in that regard. I think to the extent Amazon has gotten poor public relations, it’s sort of being ginned up — ginned up sounds bad — it’s being built up by people that are concerned about its tremendous power in the economy.

Arguably, they are the strongest of all, particularly if you look at them from a supplier perspective. But that’s very different than a groundswell of political movement, which is almost the sentiment around Facebook these days. So it’s more a matter of their position relative to society and the dialogue generally that shields them.

The other thing they do, though, as far as a strategy goes, is they just don’t engage. When there was that big thing in the New York Times about working conditions, certainly they pushed back and pushed back very strongly.

But by and large, they aren’t generally in the thick of it, whereas Facebook and Google, particularly Facebook — they’re very eager to explain themselves. It’s arguably that explaining themselves that gets themselves in trouble more than anything else.

COWEN: Why is it that tech companies might make “obvious” strategic mistakes? What’s your simplest model of that?

THOMPSON: I actually find this to be one of the most productive ways to think about what I do. You know, I went to business school — you would have the mock interviews as part of the tech club. It’s the thing that you did to help first-year students prepare.

One of the go-to questions was always, “What’s a move this company made, or a product they made, that you disagree with or you think was a poor choice?” Everyone always — you know, they prepare for these — they always have an answer. But the real killer is the follow-on question: “Why do you think they did that?”


“What’s a move this company made, or a product they made, that you disagree with or you think was a poor choice?” Everyone always has an answer. But the real killer is the follow-on question: “Why do you think they did that?”

THOMPSON: What you find out is a lot of people — they don’t have anything beyond “Because they’re stupid.” The reality is, if you know these companies, you know the people in them — they are anything but stupid. They are very brilliant people that have brilliant backgrounds and all sorts of great things in their résumé and whatnot.

That’s where it gets interesting, to look at companies, look at their culture, look at their business model, see what’s driving that sort of decision-making. You have a company like, say, Microsoft, for example, that achieved dominance in the consumer space by virtue of their network effect that emanated from the enterprise side.

But they started thinking they were good at consumer products, so they would make these consumer products that had no chance in the marketplace because they didn’t have that network effect to build on. And it failed, but you could think about, like, the company had achieved so much success to that point. How did that influence their decision-making and create blind spots where they would do worse stupid things?

You can do a similar analysis of all these companies. I just mentioned the context of Facebook. They’re so convinced that they are a force for good and changing the world that they can’t even fathom that they’re not, which leaves them unprepared to answer very legitimate questions about their effects on the world because they don’t have the — I don’t know if empathy’s the right word — but they don’t have the empathy for the possibility that they might not be, which doesn’t allow them to even create the right response.

On tech strategies

COWEN: If we’re talking about tech, where there’s high potential for convex or asymmetric returns, is not the real puzzle that we don’t see a lot more mistaken strategies? Because companies arguably should be taking a lot of chances, which maybe have poor modal outcomes but high expected value.

You might think, “Well three-quarters of the time, we’ll just be seeing mistakes, mistakes, mistakes.” And actually, so-called bad strategy is, in a sense, profit maximizing. Do you agree?

THOMPSON: No, we do see tons of bad strategy. All the thousands and tens of thousands of failed start-ups that didn’t get any traction and then went by the wayside. That’s the model of Silicon Valley.

People sometimes ask, why do I spend more time on large companies? In part, there’s more information; there’s more impact in general. But also, those are the ones that have made it and actually can afford to make strategic decisions.

The venture capital model, in many respects, is not about having a great strategy and in finding the right team to implement it. No, it’s funding a whole bunch of teams, get the ones that get traction, and then build up from there. So, strategy is very much a follow-on to initial execution. initially gaining product market fit.

Then, even with the large companies, you see failures all the time. Google in particular is notorious for this, for launching products all the time that never succeed. But it doesn’t matter because they have that core product with the huge network effects that lets them do that end fail.

Amazon’s made an entire business out of this. Amazon is spinning up new things all the time. Amazon’s almost like an internal VC sort of culture, where their money-making businesses throw off tons of profits that they reinvest in all these sort of initiatives, many of which don’t work out.

COWEN: What are venture capitalists chronically underrating?

THOMPSON: I am very curious about — we’re entering this world where we have these extremely dominant platforms. I personally am a huge believer that there is room for all sorts of new types of businesses that are uniquely enabled by the internet. Obviously I’m quite literally living that with my life and career. I think that venture capitalists are very eager to get into many kinds of businesses that should not have venture capital.

There is a lot of small-scale businesses that can be bootstrapped or a minimal investment to get started, that can build very, very niche products for very, very niche audiences that can be reached via social media, via digital marketing.

Basically, the entire world, which enables all these unprofitable niches that you could never serve geographically but can actually be something viable. But all those businesses are not venture-style businesses. Even, arguably, the companies that support them are not necessarily venture-style businesses.

It’s going to be very tempting, and you see it a lot — venture capitalists and companies raising money to go into these spaces. It’s not that the idea is bad or the business model is even bad. It’s that there’s not venture-level returns there to be had.

But I think the challenge from a venture capitalist perspective is, these big companies are so dominant that where is a similar level of return to be gained? Particularly on the consumer side, and that’s a little harder to see.

COWEN: So, do we simply have too much venture capital today? You can scale social media and apps. Most things you can’t scale. Venture capital got too happy with the returns from the mobile era, social media era. Now, where’s the next place for them to go?

THOMPSON: I don’t know that I’ve done this research or whatever to say that. I would be inclined to say no. I think there’s still tremendous amounts of transformation that is going to happen from here on out, particularly things like the cloud and ever-present computing.

Basically, everything can be rented, particularly for a technology company. There’s all sorts of things that can be addressed and taken on. A lot of them may be less sexy than a Facebook or something along those lines. But there’s tons of opportunities still to be explored.

The era we’re really in is . . . you know, tech spent many years eating itself. You had this sort of Darwinian process where you got these . . . the ones that won out in the end were these really well-executing, super well-funded, tons-of-cash-flow machines.

Now they’re kind of turning their eyes out to the general world, and all these industries that used tech but were not fundamentally transformed by tech — they’re just being mowed down. The carnage, I think, is going to be pretty epic when you get into broader industries. Uber and the taxi industry is an obvious example.

But I think you’re going to see that happen more broadly, which might be another thing that venture capitalists are underrating. Tech, in general, is all about the heavy investment up front, and then basically zero marginal cost products on the back side. The reality is, as you get more into the real world, those marginal costs become more and more difficult to escape.

COWEN: You need to hire a sales force, right?

THOMPSON: Well, that’s always been the accepted okay marginal cost. But you need other ones. You’ll need to do regulatory compliance. You’re going to need ongoing lobbying efforts. You’re going to need all sorts of stuff that is sticky stuff in the real world.

People say, “Why hasn’t tech done much in healthcare?” Well, everyone avoids healthcare because of all the regulatory overhead, despite this massive market. I think there’s going to be a mind shift, where we need to be willing to go into those areas with massive regulatory overhead, with massive red tape, because that’s the real growth opportunity.

People say, “Why hasn’t tech done much in healthcare?” Well, everyone avoids healthcare because of all the regulatory overhead, despite this massive market. I think there’s going to be a mind shift, where we need to be willing to go into those areas with massive regulatory overhead, with massive red tape, because that’s the real growth opportunity.

I think being willing to fund companies that are willing to do that — they’re willing to spend like that — is going to require a mind shift in venture capital generally, and also in founders looking at opportunities.

COWEN: What’s the main commercial area where a truly decentralized blockchain database might actually make sense?

THOMPSON: I don’t know.

COWEN: Do you think there’s any?

THOMPSON: I don’t know. Blockchain is inherently interesting because the thing about the internet is its reduction in — basically driving distribution cost to zero. But tied into that is the end of scarcity because anything can be copied endlessly. That’s great. It’s bad for a lot of businesses; it’s great for other businesses.

But what makes blockchain–derived products interesting is, they can have that zero-distribution-cost aspect — obviously varying on the fees and whatnot, but theoretically — while also being scarce. That’s a really interesting concept of being able to basically go over the whole entire world, yet there be only one of every particular item.

That’s fundamentally interesting, so I would not dismiss it outright. I don’t know how that’s actually going to manifest itself in the real world. But the thing to remember is, every time there’s a new paradigm that comes along, everyone starts out trying to copy what came before, but in the new format.

When the internet came along, everyone slapped ads next to the articles because that’s the way they did it in the newspapers. Obviously that didn’t work, but you see this again and again and again. It’s the second wave that figures out what is native to the format.

In the case of digital advertising, it’s putting it in the feed where it’s an ongoing stream of information that you can inject ads into — only possible on digital, tremendously profitable.

With blockchain-type companies, the initial wave is all trying to recreate stuff that already pretty much works. The key is going to be figuring out stuff that’s not possible, but is uniquely possible with blockchain. If I knew what that was, then maybe I wouldn’t be writing a newsletter every day.

COWEN: Will Amazon have any impact on healthcare? As you know, there’s a new initiative.

THOMPSON: I don’t know. Amazon is the sort of company where it’s very difficult to doubt them, and they do have a model where they figure out stuff for themselves first. Then they figure out a way to productize it and make it available to anyone. So, I would always be hesitant to bet against them.

The other thing to note, too . . . I was going to say all the difficulties in healthcare and regulation. The thing Amazon does . . . Amazon does really hard problems. I think I mentioned that: that venture capitalists need to change their mindset, generally, to be willing to go into spaces where upfront capital investment is not sufficient — there needs to be sufficient ongoing expenditure on a marginal basis for a product — and be willing to accept that.

Amazon does stuff like that. They actually go out, and they build a bunch of distribution centers, and they build out a logistics chain. They do all this really hard, expensive stuff that everyone says doesn’t make sense, and how are you going to get a good return of capital from that, without realizing that the payoff is not in the three-to-five-year range. It’s in the impenetrable moat that comes from actually having physical assets in the real world that no one can afford to compete with in the long run.

On synergy in businesses

COWEN: Here’s a business school kind of question. The idea of synergy is made fun of quite often. Conglomerates often have had a pretty poor history. But now there’s Amazon that seems to be evolving into a conglomerate form based on synergies, and it’s working. What’s the difference now? How would you explain this in terms of the strategic model having changed?

THOMPSON: I’m a little skeptical of the claim that synergies don’t exist, or that mergers and acquisitions are inherently value destroying. I think particularly tech companies, in general, throw off so much cash and have such strong core products that it makes sense to acquire other companies instead of trying to build something from scratch all over again. I would say that as a rule, generally.

With Amazon specifically, Bezos has done a remarkable job of building a company that is not integrated. Amazon is the anti-Apple in many respects, where it all fits together absolutely perfectly. Whereas Amazon’s a very modular entity, where all the different teams have well-defined ways to work with other teams that lets it build other things that sit on top of that.

You know, the famous story of AWS is, AWS — the idea was that Amazon should interact with this entity, and it should be able to scale to serve Amazon’s needs in a way that it would any third party. Then, well, might as well sell to third parties.

That’s a little bit of an oversimplified telling of the story because Amazon itself was on its own integrated platform for a long time after AWS started. It has shifted AWS over time, but I think the way AWS works is very emblematic of the way Amazon is structured internally that lends itself far better to expanding in a conglomeration structure in a way that even other tech companies are not well suited to do.

Amazon in particular, given their focus on infrastructure, on spending all that money, not just on AWS but the distribution centers and the logistics, and all those sorts of things. All those are particularly good synergistic pieces because they are very capital intensive. They’re very hard to duplicate in general. You’re going to get much more of the gain from synergy than you would with other tech products.

COWEN: What’s the model-based reason why winner’s curse doesn’t seem to apply to the tech companies? Is it that there are so few bidders, but over time, as more bidders enter the market, the winner’s curse will apply, and mergers and acquisitions will go back to, on average, being mistakes?

THOMPSON: It depends on, actually, the part of the tech industry, I would say. When it comes to the consumer companies, the reason is network effects. There is so much gain to be had from having a larger network, and it creates a virtuous cycle, where you have the larger network. And this is a big thing that I focus on in general, is the importance — it used to be that you gained power on a value chain by controlling supply, and consumers had to come to you on your terms. Whereas, in tech, you gain power by controlling demand, by having all the users and the suppliers come to you on your terms. So if you’re acquiring a company with a significant user base and adding it to your user base, you’re increasing your power exponentially in those value chains that you compete in. So that’s number one.

Number two, a lot of acquisitions in tech are much smaller scale, buying technology that is going to be plugged into existing products, existing networks, existing people.

Again, the value of a particular innovation to Apple if they put it in an iPhone is just so much greater than it would be to anyone else to put in a similar phone. Or Facebook acquiring some sort of product they can incorporate into Facebook is so much more valuable because of Facebook’s network that they just don’t have competitors at that scale to gain those sort of . . . to compete with.

COWEN: We’re sitting here in Arlington, Virginia. Where will the new Amazon headquarters be?

THOMPSON: Maybe down the road.

COWEN: Maybe down the road. I think it’ll be Crystal City with some other facilities in Maryland. So they get six senators instead of two.

THOMPSON: Yeah, that’s a good way of thinking about it. I’ve definitely been focused on the getting-senators angle. Obviously, you mentioned it earlier: Is there going to be a public relations wave? Which in public relations, in many respects, is another way of saying politics.

Amazon having a presence here is something that is going to be important to the company. I think it’s something that Bezos has thought about, and Amazon has been proactive like this in the past.

You see this, for example, with the sales tax thing, where they fought the sales tax, or they refused to pay it in states for ages and ages. I remember being in business school and having to interview with them by phone because they would not send recruiters to the state of Illinois because they were in a sales tax dispute.


Then what’d they do? When they saw the wind shifting, they said, “We’re going to pay sales tax everywhere, and oh, by the way, we’re building distribution centers next to all the major cities.” So they actually turn it into an advantage where they’re already everywhere.

They impose this idea of sales tax. You had the Wayfair decision come down — that’s going to weigh very heavily on e-commerce businesses. You have a small e-commerce business — this is something that I’m dealing with right now — how do you calculate sales tax across 5,000-some tax jurisdictions?

Whereas for Amazon that’s going to be much more easier for them to handle. They did the same thing with this minimum wage thing. California is already on its way to $15 minimum wage. They have lots of distribution centers there. They get out in front of it, get a ton of huge PR. It doesn’t actually cost them much because they took away all the bonuses and whatnot.

So they’re more savvy about this stuff than you think. Certainly setting up bridging Maryland and Virginia would make a lot of sense in that regard.

On Apple’s products

COWEN: I have a few questions about Apple. It feels to me like I have a happy life, and indeed, it’s actually pretty simple. Why do I need an Apple watch?

THOMPSON: I don’t wear one personally.

COWEN: What’s the best thing it might possibly do for me? You’re excited about it, right? Why?

THOMPSON: I am excited about it because . . . Apple has always excelled. Apple has always been, at its heart, a personal computer company. Just what a personal computer is has changed over time. It used to be something on your desk. Then it was something in your bag. Then it was something in your pocket. That’s certainly the dominant form now.

The idea of something on your wrist that is with you even more is something that’s very compelling and fits with a broad arc, the broad narrative, I think, of Apple. What could be done with something on your wrist that connects to a pair of AirPods in your ears? Or maybe there’s going to be something with augmented reality in the future. It’s hard to say. If you’re interested in the future and the way technology’s going, it’s inherently interesting.

I think Apple struggled originally because they had the same supposition that this is inherently interesting, so let’s build it. And they didn’t know what it was for. They’ve really, over the last few years, honed in on a health and fitness angle, where this will help you with healthier, it will help you with exercise, be more active. Now they have the heart rate sensor and things like that. That’s a necessary step in why should you buy this product.

I find it useful — I do have one — the notifications can be useful. Almost, actually, less of a distraction because you’re not pulling your phone out of your pocket. You’re just glancing — “That’s not important.” But at the end of the day, honestly, for me, I like the simple life as well, and charging something every day just drives me — one more thing every day — drives me up the wall, and being nervous about that.

Also, I want to look at my wrist and see the time immediately, not have to wait for it to turn on or whatever. So I have very little, very small-scale objections to it, but that’s the thing: the closer something is to you, the more the small stuff really matters.

COWEN: Will Apple be the company that finally builds a workable, fun, comfortable version of Google Glass?

THOMPSON: Probably. If you had to bet on someone, they make the most sense. When it comes to physical products, Apple is still the best by a significant margin. Google is better and better at hardware, especially things that are very computationally intensive, like their camera is pretty incredible.

But when it comes to the entire experience of touching it, and interacting with it, and just the feel of it, which matters — again, I just said, the smaller something is and the closer it is to you, the more that matters, the more that plays to Apple’s strengths. You saw that going from computers to phones. You see it with their watch, which is just leagues ahead of anything else. It’s likely to be the case with something that you would put on your face.

COWEN: That device, what will it do for me? Why do I want it? I have a simple life, I’m happy. I walk into Whole Foods, it helps me see the bargains? Or it tells me the person I’m talking to is lying?

THOMPSON: It’s one of those things where the easiest way to define what it’ll do is to imagine things today as they are, if you went back and say, “What would a phone do for me?”

Back when we were using flip phones, you would’ve said, “Oh, it’s going to do email, it’s going to do things like that.” You wouldn’t have imagined all the . . . You’d use it to find Pokemon. Or you’re going to play these crazy involved games. Or spend tons of money on purchases. Or whatever it might be.

There’s an aspect of you need to build it to figure out what is there. It’s the Silicon Valley model writ large. You figure stuff out, you build it, you throw it out there and see what happens.

And that’s fine. That’s okay; we don’t need to know exactly how stuff goes. We have a lot of history that trying to anticipate and plan everything generally results in a less dynamic outcome than experimenting and seeing what works.

COWEN: Have smart phones made humans smarter or stupider?

THOMPSON: I think humans are humans. People that are tut-tutting the kids on the phone — they forget that when they were kids they literally sat at home with a phone against their ear, talking to their friends for hours at a time, and if they had a smart phone, they’d be doing the exact same thing.

I think it’s a matter of, certainly, it’s important to pay attention to and be aware of potential downsides, but they’re here. It is what it is. We’ve dealt with these upheavals previously, and I think we’ll figure it out.

I tend to adopt the “the kids are going to be okay” mindset. There’s going to be new things that arise about it, new mores. Is there worries about things like bullying and being on phones all the time and isolated? Certainly, but that’s always been a problem and a question of new technology.

I’m not trying to wave my hand and say it’s all going to be okay. I think it’s just a matter of, it’s here. Once you accept that it’s here, the best thing we can do is to figure out how to manage it going forward instead of pining for a world that is long gone.

COWEN: Are you worried about the attention-span effect, precisely because, say, iPhones are so very good and entertaining?

THOMPSON: I think so. I do, certainly, find myself always wanting to pull up Twitter or whatnot, but that’s another thing where we’re going to adapt. I’m not sure it’s great for people to have a very long attention span that entails sitting in front of the television for four hours at a time. At the end of the day, people are going to have to figure it out, and I think they will.

COWEN: Why should I want a tech device in my home at all? Take Alexa — I don’t have one, I’m pretty happy, my life is simple. I don’t want anyone or anything listening to me. What does it do for me? I know I can tell it to play me a song or buy something on Amazon, but that’s one-click shopping anyway, could hardly be simpler. Why do devices in the home have any future at all?

THOMPSON: The reality is — particularly when it comes to consumer products — is that in the long run, convenience always wins. I think people will have them in their homes, and they’ll become more popular because it’s convenient.

The reality is — particularly when it comes to consumer products — is that in the long run, convenience always wins.

You can be doing whatever you want; you can say something like, “Set a timer five minutes,” or “What temperature should I grill my steak to?” And you’ll get an answer with your hands busy, and altogether it’s going to be a more convenient answer than it would’ve been otherwise.

Right now, is it always more convenient? No. To get everything working together, all the different pieces . . . but again, that’s very normal in the development of something new. At the beginning everyone’s figuring it out, and then someone’s going to nail it. Then it will grow from there. If you don’t want to have it, you can not have it. That’s going to be fine. But I think a lot of people will choose to have it because people love convenience.

COWEN: So answering your questions is the main thing it will do for you in the home?

THOMPSON: I think that’s going to be an important thing. There are aspects of home automation that are pretty nice. Even lights. Once you have one set up to turn your lights on and off, it seems barbaric to go and hit a switch on the wall. I may or may not be speaking from personal experience.

But again, is there going to be more than that? We will see. I feel I’ve given you these platitudinal answers, like, “I don’t know, we’ll figure it out.” But that’s the way technology has always worked. To the extent that’s Silicon Valley — you go all the way to what is Silicon Valley about? Why is it successful?

It goes to this willingness to let people do crazy stuff, most of which is going to fail, and some of it will succeed. To have that willingness to say, “I don’t know. I don’t know if it’s going to succeed, but sure, give it a shot.” That drives innovation in a way that a top-down, it’s-going-to-be-used-for-this, create-this sort of process doesn’t. So the platitudes are all I’ve got.

On Facebook

COWEN: Let me try a few Facebook questions. What’s the long-term Facebook-Instagram relationship? Will Instagram just be like Facebook? And it will be as cluttered and as connected to advertisements, and it will feel like Facebook? Or will Instagram always be a separate carve-out?

THOMPSON: Well, it depends how you look at the business. If you look at it from a consumer perspective, they’re two very different products. You have people that say, “I’m against Facebook. I’m going to delete Facebook.” Then they’re sitting on Instagram all day long.

But if you look at it from an advertiser perspective, they’re very much the same product. You buy the ads in the same way through the same platform. You deal with the same salespeople. You can build the same sort of ads, whether it be the feed ads or the story ads or whatnot.

Frankly, that is the reason why Facebook owning Instagram is such a problem for competition in the digital advertising market. Because if you’re an advertiser — let’s say Snapchat is marginally more effective at reaching the demographic you want to reach. Well, if Instagram is so much cheaper by virtue of you’re already on Facebook and it’s easy to add on Instagram, then it’s not even worth the effort to go elsewhere.

So I would say, from an advertising perspective, they’re already extremely integrated, and it’s the reason why Facebook is as dominant . . . the company is as dominant as it is.

I do think Facebook will be very hesitant in screwing up the user experience too much. It’s their best asset. Even if Facebook does feel the need to drive increased revenue, I’m sure they are more aware of, than anyone, about what a jewel Instagram is in their portfolio. That’s part of the reason why having Facebook is actually a benefit for Instagram, because Facebook does all the junk, like events and birthdays and stuff, so that Instagram doesn’t need to.

COWEN: Is the social media space, right now, just full up? No more major entrants, what we have is what we’re going to get, and it will evolve in modest ways, but the ages of a new Instagram are over?

THOMPSON: I don’t think so. Every new generation comes along, and they want to be somewhere different than the generation that came before. That was very much what drove Snapchat — that kids didn’t want to be on Facebook. The next generation, the post-Snapchat generation, will come along, and they’ll want something else.

I think the real concern is the monetization side. Social networks and advertising go hand in hand because advertisers want to be everywhere, and the value of social network is about how many people are on the service. So it’s a natural business model.

But as I just noted, because Facebook owns so much of the social advertising market, it’s very hard for a third entrant to gain traction in a meaningful way. That’s what I’m more concerned about. I’m not concerned about a service necessarily emerging over time.

COWEN: Per user, is Facebook or Twitter worse at creating these ideological filter bubbles? If indeed you think either’s a problem?

THOMPSON: I’ve thought about this a lot and I’ve written about the filter bubble issue. I do wonder if it’s one of those things that makes so much . . . It’s almost too neat. Obviously this must be a problem, but is it a problem?

You think about the age groups that are the most polarized, and they tend towards — I think these are older generations — and you look at things like cable news, and how much is that actually driving the filter bubble effect?

I do think there is more of an effect than Facebook acknowledges. They released this study a few years ago that said there was no filter effect, and it was a very problematic study in all kinds of ways. It’s bothered me that they never acknowledged those problems and updated that.

At the same time, I think it’s a little easy and cliché to blame Facebook when Facebook may actually just be a reflection of society at large. I think the attributing causation to these companies when, if you think about how they work and how they have power in the market, it is by giving people what they want, which it follows — people want to be polarized, they’re going to get polarized things.

What is the chicken-and-egg connection there? I’m a little more skeptical than the general narrative that Facebook is to blame for everything.

On the Ben Thompson production function

COWEN: Now I have a few questions about what I call the Ben Thompson production function. How does being from Wisconsin shape what you’ve done?

THOMPSON: I would say significantly. The most obvious impact is, I was raised very blue-collar, small-town Wisconsin, just being more in touch with and aware of the world between the coasts. The not elite at all.

One place this manifested very clearly was, I was very bullish on Facebook very early, even when they were in their doldrums or on the IPO and things like that, saying this company — the potential here is just absolutely massive. Part of that came from the fact that, where I’m from in Wisconsin, Facebook is everything. It is the social network. No one’s on Twitter. People know of Twitter; they don’t use it. They’re aware of it, but it’s not a thing.

That really gets to Facebook’s power. Facebook has penetrated so thoroughly everywhere. And why? Because Facebook is the digitization of your friends and family. Where I’m from, friends and family is very central in a way that in Silicon Valley — where a lot of people are running away from their friends and family to pursue this dream or to get away — is less cognizant of.

COWEN: How would you describe your media diet? What do you do to stay current?

THOMPSON: I read a lot of news. I get this question a lot. I think people find it unsatisfying, but I read a lot of news. I read a lot of newspapers. TechMeme has a list of all the stories of the day. Then when I want to write about something, I will do very deep dives on it and read extensively about that topic, in and around it. But as far as a regular habit, it’s a lot of news and, frankly, probably too much Twitter.

COWEN: What do you do to optimize what you might call reader input — emails you receive or WhatsApp messages— as a part of your daily workflow? Should you be doing more of that and less reading of news or vice versa? How do you balance those two things?

THOMPSON: The feedback is very valuable. I get lots of email every day from readers. I have a forum for members to post on. People send tweets to me all the time. I think it goes in a few ways. One, you do get really valuable, concrete feedback like this specific thing, like details about something, or you’re wrong about this and this is why — which is extremely valuable.

Sometimes it’s, oh, I disagree with you and it’s an opinion sort of thing, which is fine. It’s good to gauge that. One thing that was hard for me at the beginning — most writers have to figure out — is to understand you have a core group of readers that are going to send you messages and tweet you all the time, and they’re not representative of your audience as a whole. Having a mental filter around that, to be aware of it.

But it’s — one of the best things about writing on the internet is the immediate feedback, and it can adjust what you write the next day, as opposed to, if you’re writing a book or whatever, and you have to wait for the next book or the next paper or whatever it might be. It’s a tremendous benefit.

COWEN: You have an MBA from Northwestern, correct?


COWEN: Are MBAs overrated or underrated?

THOMPSON: It depends on how you think about it. From an intellectual pursuit, probably a little overrated, and I say this as someone who benefited tremendously from an MBA. I had no sort of formal business background. It turned out I had a good understanding of how this stuff worked, and the MBA gave me the language to put around these sorts of things.

That said, are you going to get an MBA and become some sort of strategic maven? No, I don’t think so. I think a lot of MBAs get a bad rap, deservedly so, for thinking they know everything when they’ve just read a few case studies.

On the other side, I think MBAs do do wonders for your salary, and I think that’s very well documented. It certainly paid off for me in that regard.

COWEN: If one is trying to learn or understand business strategy, do academic economists have anything to offer?

THOMPSON: I don’t know. I would say that it’s impossible for me to answer this objectively because I would say a driving force for me, starting Stratechery, was I felt there was a tremendous void in actually looking at things that were happening now and thinking about them strategically in a useful sort of way.

I remember being in business school and reading studies and being like, there’s nothing here about internet companies, for example. Professors would say, “Well it’s universal concepts that you can apply them anywhere.” Yeah, but once you put zero marginal costs into the equation, you can think it through if you think really hard, but it’s a totally different business, and it’s hard to draw concepts from.

So one of the voids that I saw that I thought Stratechery could fill was much more practical, immediately useful analysis of decisions today. So I guess I would say yes, it’s probably useful, but that’s more a . . . Do I read a lot of academic papers about business and business models? No, not many, to be honest.

COWEN: What would be a book you would recommend for someone interested in learning about business strategy? Doesn’t even have to be the internet.

THOMPSON: I get this question a lot. I always get, “What books do you read?” It’s challenging because I read books in a very practical . . . What’s the word I’m looking for? I read books in a very . . .

COWEN: Exploitative way.

THOMPSON: I read books very pragmatically.


THOMPSON: I want to know about something or I’m writing about something, and I read very fast, so I will plow through a book in a morning to get context about something and then use it to write.

The books I find particularly useful for what I do is the founding stories of companies and going back to decisions made very early because going back — we talked at the beginning of the podcast about when companies do stupid things — it’s often embedded in their culture about why they do that, and understanding that is useful.

But if you want one thing to read about business strategy, I do go back to Clay Christensen’s the original The Innovator’s Dilemma. The reason I like that book and go back to it, even though I think he’s taken the concept a little too far, and one of the first articles I got traction on was saying why he got Apple so wrong, but what I like about that book specifically is the fundamental premise is managers can do the “right thing” and fail.

That gets into what I talked about before — why do companies do stuff that in retrospect was really dumb? Often it’s done for very good, legitimate reasons. That’s what they’re incentivized to do — they’re serving their best customer. They were adding on features because people wanted them, and that actually made them susceptible to disruption. I think that’s very generalized, broadly it’s a very useful concept.

COWEN: Now you’ve worked at Apple, Microsoft, WordPress. What did you learn at WordPress?

THOMPSON: Well I have to be clear or else the WordPress folks will be mad at me — it’s Automattic, which manages

COWEN: Okay.

THOMPSON: WordPress is an open-source project. One of the greatest things working there was, that’s when I went back to Taiwan because they’re fully distributed. You live and work anywhere in the world. Teams are totally remote and virtual. That was just a really cool and neat experience generally. You would have team get-togethers all over the world where people would fly together for a week. Almost from a social experiment, it’s a very interesting and fascinating company to work for.

I would say the other thing though, when I was working there, is the scale of the internet is astronomical. Automattic and — the number of sign-ups they have every day and the number of new blogs being created. Even people who blog — who writes blogs anymore? There are a massive number of new blogs created every single day. Do a lot of them fail? Sure they do.

But this idea of the internet being huge — it’s something that drives Stratechery. I can write a paid newsletter, and because my market is the entire world, I can have plenty of subscribers all over the place. It makes it viable. Not just me, but you can write a newsletter about China — I just talked to my friend Bill Bishop here in DC. You write a newsletter about basketball. I can write a newsletter about Apple specifically.

That’s just one niche, one area is newsletters because the internet — it’s bigger than anyone thinks. Even people in Silicon Valley, I think, underestimate at times just what it really means to be able to access billions of people.

COWEN: As you mentioned, you live in Taiwan. Your wife also is Taiwanese, I believe. What’s your favorite thing to eat in Taiwan?

THOMPSON: There are many good choices. I would say my favorite is probably spicy hot pot. Lots of food is put on the table, put it in there, mix it all together, it’s good. But beef noodle soup is great. Taiwanese breakfast — remarkably underrated. Most people don’t know about it, but once they come, they can’t get enough. As far as eating goes, it’s hard to top.

COWEN: What’s the most underrated place in Taiwan?

THOMPSON: Probably Taroko Gorge — it’s called Tiwoga in Chinese — in part because in Taiwan it’s very well known, but internationally it’s not known at all. It’s absolutely incredible world-class scenery. It’s pretty awe-inspiring.

COWEN: The east coast is gorgeous also. I did that bus trip once.

THOMPSON: The entire east coast, yeah. The best part is going to Taroko from Taipei. You go down this road that there’s parts where there’re cliffs up one side, cliffs down the other. You’re hanging over the ocean and also winding through the mountains. It’s a two-day trip, and it’s totally worth it.

COWEN: What’s the hardest thing about living in Taiwan?

THOMPSON: The obvious one would be just the language in general. But I can speak certainly well enough for day-to-day life. I think what gets harder is the sense of always being different. Certainly people can experience this here or lots of places, but every time you’re in public, at all moments, you’re always aware that you are different.

If someone is rude to you, or someone doesn’t help you, or a taxi drives by you on the road and doesn’t pick you up, why? Is that because I’m a white guy? That’s something that a lot of people have a hard time dealing with.

When I went to Taiwan, I was an English teacher back in the day. New teachers would come, and you could tell right away which ones would not make it because that sort of stuff would just drive them crazy, and they’d be gone in a month or two. Whereas, if you can chill out and be like, “It is what it is,” then you’ll have a better chance of surviving.

On the NBA

COWEN: The Milwaukee Bucks last year won, I believe, 44 games, and in the NBA, they were in the bottom third for the number of three-pointers attempted. Why should we think they might do better this year?

THOMPSON: Because they had the worst coach in the league, by far, and he is gone, and now they have a new coach. They actually have the best shot profile in the entire league in the preseason, which is shooting threes or shooting shots at the rim. They are 89 percent or something like that.

They are going to have a great year. Giannis is going to win MVP. It’s going to be amazing, and we, being Bucks Twitter, is going to spend the whole time telling everyone that we were right and they were wrong.

COWEN: As a management question, how do teams end up in the equilibrium, where they’re not taking enough three-point shots? That seems like a very easy technology, right? You know where the line is. You shoot from behind it, not in front of it. How does that happen?

THOMPSON: Well, there’s been a real culture shift in the NBA over the last decade, where even though the three-point line has been around for a long time, and the math is very obvious — I mean, three is more than two. You make a third of threes. It’s the same as making half of your twos.

It took a long time to take root, in part because in the NBA, generally speaking, coaches and front-office executives — probably the majority or a fair number — are former players. They came up through the game, and so they have 10, 20, 30, 40 years of conditioning about, “This is how you play basketball.”

Whereas a lot of these teams that were the first to start doing this differently, had — like the Houston Rockets had Daryl Morey, who was a former MBA — I should say, in bringing in a completely different mindset that is more math based. But that’s coming from the outside. And that generates a reaction to it, and it takes a while for that to break through.

And the Bucks — that was very much the case. They had a general manager that had been there in the league for ages, had a coach that was a former player and was insistent that “There’s a certain way to play, and we’re going to play that way,” even if it was objectively wrong.

COWEN: How should NBA rules be changed? Are there too many clocks running? Isn’t it confusing, too arbitrary?

THOMPSON: The main thing I would change is making the end . . . they’ve done a little about this. They’ve reduced the number of time-outs in the last two minutes of a game to make it flow more. I would make it so that . . . FIBA has very interesting rules, where you could only call time out on a stoppage of play. They have lots at the end of the game to make it go more quickly.

Oh, I would also give teams the option, when fouled, that they can either take penalty free throws, or they can take the ball out of bounds. And, at the end of game, there’s fouling — that would fix two problems. One, the hacking bad players who don’t shoot free throws well, which just grinds the game to a halt, and isn’t in the spirit of basketball at all. The point of a foul is to punish the defense, not to punish the offense.

But then, two, at the end of game, you have this fouling constantly and the parade to the free throw line, but that would give people a harder time to come back at the end. Well, then, they should do better the rest of the game. I think that’d make the end of the games remarkably faster, make the whole game faster and more exciting.

COWEN: The problem of steroids and, in general, players taking substances in professional athletics — should it be regulated by the government? Does the league choose the optimal rules? Is there a negative spillover effect on, say, college and high school players? How should public policy deal with this?

THOMPSON: I would tend to think there’s bigger problems for the federal government to deal with. I do think the spillover effect is the biggest reason to be concerned about it. When it comes to professional athletes, they are being paid tremendously for what they do. The risks they are bearing are on them.

But when you have a high school player or a college player that is just in it, and they’re going to have to go live a normal life afterwards, then it’s much more problematic from a moral perspective. At the same time, the leagues are also incentivized to do the minimum necessary to avoid bad press.

Something that might be better would be to relax things like marijuana testing. In the NBA, I think it’s very common for players to smoke weed. But because that’s wrapped into the drug-testing program, that drug-testing program, in some respects, is a little easier to dodge, in part because they don’t want to bust a star player for smoking weed.

Maybe, if they took weed out of the program and got a lot more strict on the other stuff, that would be more equitable to everyone involved.

COWEN: Many Americans have never heard of the company ByteDance, which is from China. By many estimates, it’s the world’s most valuable start-up. How can it possibly be worth, say, $75 billion?

THOMPSON: Because there’s 1.2 or 1.3 billion people in China, and the market is such that — not all of them are online, but a huge . . . WeChat is how many, 750 million users or something like that? All of whom speak the same language, shop at the same places, go to . . . It’s such a common market, in a way, that it’s more similar to the US than the EU, but it’s three times the size.

All things with China start and end with the size of the market and the potential there. And you add on to that . . . This is beyond ByteDance specifically, but Chinese cities are so large and so dense that the level of services and possibilities there are a lot higher than they are in the US, where things are more spread out.

Also, there’s so much labor in China, generally, available that you can do more labor-intensive offerings. So the potential upside is just so massive that that drives, frankly, a lot of pretty crazy investing evaluations in China, but it’s just because the upside is so tremendous.

COWEN: But ByteDance, to me, seems to be apps and machine learning. Why should I care? What can it do for me, saying I’m Chinese? Why is my life better because of ByteDance?

THOMPSON: I don’t know. I’m not that familiar with it, to be honest. People ask me why I don’t cover Chinese companies more. I say there’s two reasons. One, I’m actually not in China.

COWEN: Well, be careful how you state that.


THOMPSON: I know, that’s politically sensitive. And then also, there tends to be a lot of opacity in understanding what’s actually going on with these companies and in these companies.

Generally speaking, to command the level and size of audience that ByteDance does, and to have demonstrably done it with an algorithmic approach that has really gained a lot of traction, the potential there for advertising, for driving to various services, is pretty significant.

In the internet, generally, power comes from owning attention, from owning the consumer, and they have the attention of a lot of consumers in a way that, pretty much, no one in China, outside of Tencent, does.

COWEN: Should Google develop a censorship-laden search engine for China? As a business decision, not morally separate, but should they do it?

THOMPSON: I don’t know. It’s hard to say. The thing people don’t remember about Google leaving China the first time is that, yes, they took a moral stand about it, but also they were getting their rear ends kicked in the process. Their share had decreased from around 33 percent to something like 17 percent when they pulled out, in part because they weren’t very strong on local results in particular, which Baidu had really focused on.

As far as a business decision of being there, broadly, the issue with being in China that needs to be weighed is the risk, which is, the more that your business is exposed to China, the more you’re going to have to deal with the government, and the government’s decision-making is, generally speaking, going to favor domestic companies.

And second, is going to be, first and foremost, concerned with preserving their own power and whatnot. This is something that Apple is going to have to deal with. Apple’s always been the most successful company in China because of their business model, selling devices, differentiated software, don’t have to worry about piracy, don’t have to worry about being copied on a hardware level because they’re unique in that regard.

But what that means is, Apple is uniquely exposed right now to the trade war that’s going on. Yes, they’ve gotten exceptions so far, but if China really wants to put the squeeze on, they can squeeze Apple on both sides, on the supply side and on the demand side. That’s a risk factor that most of the tech companies don’t have because China is not really a meaningful market for them.

COWEN: How bullish are you on India’s tech sector and software development?

THOMPSON: I’m bullish. You know, India — people want to put it in the same bucket as, “Oh, it’s the next China.” The countries are similar in that they’re both very large, but they’re so different.

Probably the most underrated event — I don’t want to say in human history, but in the last hundred years — is the Cultural Revolution in China. And not just that 60, 70 million people were killed, or starved to death, or what it might be, but it really was like a scorched earth for China as a whole. Everything started from scratch. And from an economic perspective, that’s why you can grow for so long — because you’re starting from nothing basically. But the way it impacts culture, generally, and the way business is done.

Taiwan, I think, struggles from having thousands of years of Chinese bureaucracy behind it. Plus they were occupied by Japan for 50 years, so you’ve got that culture on top. Then you have this sclerotic corporate culture that the boss is always right, stay in the office until he goes home, and that sort of thing. It’s unhealthy.

Whereas China — it’s much more bare-knuckled competition and “Figure out the right answer, figure it out quickly.” The competition there is absolutely brutal. It’s brutal in a way I think is hard for people to really comprehend, from the West. And that makes China, makes these companies really something to deal with.

Whereas India did not have something like that. Yes, it had colonialism, but all that is still there, and the effects of that, and the long-term effects of India’s thousands of years of culture. So it makes it much more difficult to wrap things up, to get things done. And that’s always, I think, going to be the case. The way India develops, generally, because they didn’t have a clear-the-decks event like the Cultural Revolution, is always going to be fundamentally different.

And that is by no means a bad thing. I’m not wishing the Cultural Revolution on anyone. I’m just saying it makes the countries really fundamentally different. But India — it’s going to be interesting because India is also . . . English is one of the national languages. To what extent do they develop their own industry versus adopting US tech companies is going to be very different than China as well.

COWEN: Would you agree that Taiwan has produced more internationally successful business executives than, say, South Korea, although the latter’s a larger country? And if so, why is that? Is it coincidence or is there some cultural reason?

THOMPSON: Taiwan has always been very open to the outside world in a very island-nation sort of way, very cognizant of their place in the world and their dependence on other countries. There’s a cartoon that is very humorous that says, “Where Taiwan is in the world,” and shows Taiwan next to China. And it says, “Where Taiwanese think they are in the world,” and it shows Taiwan off the coast of California.

I think that captures something about the Taiwanese psyche: looking to America, very favorable towards America. I’ve always been very favorable towards Japan and generally aware of and pulling culture, whether it be popular culture or whatnot, from other countries.

Whereas my impression of South Korea — I haven’t lived there, so I don’t want to delve in too deeply — is it’s much more internally focused, which is to the benefit of Korean companies because they have a very strong base on which to build and then go abroad. If you’re a Korean, you buy a Samsung phone because it’s Korean, whereas no Taiwanese buys an HTC phone because it’s Taiwanese. They buy whatever phone they think is the best one to buy.

COWEN: China, of course, has the Great Firewall, but is the internet going to fragment internationally, more generally? Will there be a European Union internet, a USA internet, more?

THOMPSON: I think that China will always be a very distinct internet with distinct companies. The US–European Union thing is going to be interesting to watch. The European Union is rich, and there’s a lot of people there. So the big US telecom companies are going to do what it takes to do business there, no matter how annoying it is.

And they will keep doing so because, I think, they’re going to be even stronger in the European Union, in part because dealing with all the regulations like that, it’s going to be a traditional favorite; the incumbents are going to do better at it.

So I don’t think it’s going to be a different internet in the way that China is different. Is there going to be more things, like you can’t reach this site because of GDPR, and things on those lines? Probably. But I don’t think that means it’s going to be different. It’s going to be the same city, maybe with a fence between it, as opposed to being a different country entirely.

COWEN: Two final questions about television. First, in terms of management strategy, why has Netflix been so successful in expanding to so many foreign markets so quickly? Is it now, what, 150 markets?

THOMPSON: Oh, more than that.

COWEN: Very large number in a pretty small number of years. How’d they do that?

THOMPSON: Well, that’s in part because the internet makes that uniquely possible.

COWEN: But there’s regulations in every country. You need to tailor to the home market, it’s not so easy. Television markets are often quite local. American programs don’t export easily.

THOMPSON: That’s what they did when they started. When they started in a lot of countries, they didn’t even have an app in the language of the country they launched in. You downloaded the English app. They localized the vast majority of them by now, but when they did that very dramatic “We’ve gone from 10 countries to 160,” or whatever it was, a lot of it was literally just flipping a switch, and “You can now download our app and sign up.”

There was no real localization effort, and it was almost a flexing of “This is what we can do, and this is why we are competing asymmetrically with the traditional networks, which are focused on a single market. And they’re focused on monetizing up front, whereas we’re thinking about the entire world and monetizing over many years.”

It’s also more a demonstration of how their business model was different and why they could invest at the rates they do, as opposed to necessarily being a viable product that would get a lot of subscribers in all those countries. I think that’s actually been more the last couple years, they’ve actually fleshed it out to being more accessible.

COWEN: Several years ago, you wrote about TV advertising’s surprising strength. What’s your update on this topic?

THOMPSON: The idea of that article is that the companies that dominate TV advertising, the big CBG companies, the car companies, the beer companies — it’s a set group — the phone companies — they are the mass-market products that are seeking to serve . . . the least-common-denominator products that will reach the most amount of people.

And where do those products go? They go into big box retailers or they buy up shelf space, and they make deals through brand extensions and have it next to it. And people drive there in their cars, and they pick it up and go home. And what’s interesting is, all parts of that value chain are under threat by the internet, and it’s all together.

So my argument there was, the reason why TV advertising has remained stronger than people anticipated is because the TV advertisers are unique, are tied in. It’s all integrated. They’re integrated with the big box retailers, they’re integrated with the car companies, they’re integrated with sports and the big beer companies.

It’s all one big thing where the economy, as a whole, is all tied together around a certain way of thinking about the consumer and how you go to market. And all parts of that are under threat by the internet simultaneously. So it will stay stronger than you would think because if the weak all stand together, they can stand longer than they would by themselves.

But when it collapses, it’s going to be a total collapse, and you’re going to have this rise of all the attention markets on the internet and all the niche products in the individualized marketing that you can do on platforms like Facebook. It’s an almost completely separate economy that’s developing off to the side while they’re in it to the end.

COWEN: Ben Thompson, thank you very much, and I recommend that you all read and indeed subscribe to Stratechery.

THOMPSON: Thanks for having me.