meet the new economy, same as the old economy
moats and their discontents
I was worrying about this on social media during the week, and thought I might get some interesting discussion … first, have a look at this story about Google’s plans to migrate its famous search product to an AI-driven “intelligent search box”.
Lots of people are very much “gahh, enshittification, I just want my weblinks”, but I’m not - I do think this is potentially very useful. Being able to carry out a semantic search - something like “find me three examples of trade associations making outlandish claims about the economic impact of housing regulation” is a real time saver, and although you do have to do a lot of back-and-forth with the AI to get what you want, it’s less of a pain in the arse than filling your screen with browser tabs and reading the press releases yourself.
However, the question I want to ask is - if we put that kind of issue to one side and assume for the sake of argument that a really useful product will come out of this, how would we expect to see that reflected in the economic statistics?
I’m not sure that we would at all. I like using the intelligent search box, but that’s just unmeasured consumer surplus to me. I don’t like it so much that I’d pay for it, and Google know that if they were to charge for search, they would lose market share instantly.
It also doesn’t seem likely to me that Google could monetise that consumer surplus by raising its ad rates. It’s a monopoly already; it’s squeezing as much out of the advertisers as they have to give.
Google might be able to serve me more ads, if I spend more time in the intelligent search box and less time on other sites. But this is close to a zero sum game, in that those other sites will have fewer opportunities to sell me ads.
So, at best, the increment to Google’s revenue (and therefore, the only thing that has any chance at all of going into GDP) is the extent to which time spent on a Google site with ads is substituted for time spent on other sites which didn’t previously have ads. It feels pretty marginal, particularly since there’s a huge amount of capex needed to achieve it.
I think what’s going on here is that we’re experiencing a less than perfectly foreseen consequence of the big trend towards corporations trying to create “moats”. When a monopolist is earning monopoly profits, then they will invest to protect that monopoly, even if the investment is not one that would be justifiable as a stand-alone. If you are earning profits of 100, and you are faced with the need to make a big capital investment in order to ensure that those profits only drop to 90 rather than to 50, then you grit your teeth and make it.
If a lot of the capex going into AI is going into this kind of investment - negative sum games between monopolists trying to protect their rents - then we shouldn’t expect to see the big consequences that everyone’s been predicting. We’ll just get some more unmeasured consumer surplus, a few marginal players will go bust and the moat will keep getting filled.
In your original post on "moats," you wrote:
>But the trouble is that the original companies Buffett was talking about were things like Coca-Cola or Disney, where the “moat” was the fact that nobody else could make such a great product that everyone wanted. It’s certainly true that he also meant it to refer to companies with built-in regulatory protection or natural monopolies, but the main focus was on things that had a kind of intangible asset.
Even though everyone likes to talk about "network effects" and search (implying that google just snagged a "natural" moat waiting to be taken), the original google search was just a really great product. People used it because it was way better and google focused on building the infrastructure to support it and landed on an insanely profitable business model that allowed them to finance web-based, free email, browsers, and productivity software that just got people to do more on the web and less on their PC.
But ever since it became possible to use Claude to fetch webpages, I've started using it for any automated search task where I know that using google would be fussy - I write multiple paragraphs describing exactly what I'm looking for and then get this tool to run a bunch of web searches and pull together some kind of artifact with the best results, links to multiple pdfs, etc. However, I still use google when I want to look up a place to get my shoes fixed.
With "harnesses"/coding agents/Cowork, I think that Anthropic/OpenAI have figured out something novel and value-additive for knowledge workers (still mostly coders, but someone will figure out a less foreboding interface that performs the same function). My employer happily shells out for the Claude Max subscription because having a single tool that can read and write files to my computer and various web apps, pull down webpages, and run arbitrary software.
So while I agree that it seems like google is moving to shore up its search monopoly, I'm not so sure that the other labs are competing for the same pie, really. It's more that there's been a genuine leap forward in natural language processing that makes many of the google search use cases obsolete.
In Stafford Beer terms, it seems like making search chatbot-first is a reasonable system 3 move--it will keep the engine chugging longer--but they really are facing a system 5 dilemma because frontier LLMs turn keyword searches into commodities. It seems like keeping their dominance will require a major identity shift to becoming the dominant hyperscaler or the self-driving car company. Seems possible, but difficult for cultural, rather than technical or business, reasons.
Mmmm, consumer surplus! (everyone is after all a consumer...)