The Splinternet & our global village

Originally published on March 2022 and written by John White.

Whilst the horrific scenes in Ukraine are disseminated across our screens, there’s another war brewing, viscerally debated amongst technologists, tech investors and geopolitical commentators – a war of our global networks.

The conflict in Ukraine has brought home just how important our networks are. Financial networks, social networks, supply chain, energy, travel, media networks and, of course, the internet have all played a huge role in the conflict for both sides.

Technological infrastructure underpins all these networks.

In just 25 days the average Russian has seen a complete disconnect from the western digital ecosystem they’ve become accustomed to over the last decade.

They can no longer order on Amazon, pay with their AMEX, Visa, Mastercard or via Paypal, update their iPhone apps or their Microsoft Word, Adobe, AWS or IBM products for work.

They can’t watch films on Prime, tweet, listen to music on Spotify, or go to the Cinema. Warner Bros, Universal and Disney have stopped all film distribution. They can’t book an Airbnb, find a date on Bumble and businesses can no longer advertise on Google, Facebook or Instagram or access Slack or Teams to collaborate at work.

This has led to an explosion in VPN usage in the country, with an estimated 400,000 new VPN accounts being created every day. As many Russians can’t pay with Visa or Mastercard, some VPN services are waiving their fees entirely to onboard them now and retain them once they can figure out a way to accept payments.

“Our mission was always to allow people to access information, no matter where they’re located, but the only real option now is cryptocurrency…”

Yegor Sak,
Windscribe CEO

Chinese tech firms and Russian owned brands are filling the gaps left behind by western companies, fuelling the idea that Russia will begin to build its own “great firewall”. Leaning heavily on Chinese banking, telecommunication and digital infrastructure.

Countries around the world are now evaluating their own network independence and assessing just how much control they have over key networks — be they payment systems, social media, supply chains or gas pipelines.

In addition, it’s caused an explosive debate amongst technologists, businesses, politicians and even philosophers about the role of networks in our lives.

China’s Growing International Network

Within days of Visa and Mastercard announcing they’re leaving Russia, China’s UnionPay was touted as the natural replacement. Since its founding in 2002, UnionPay has grown to be the largest payment card scheme in the world, accounting for 45% of all payment cards. With 1 billion users across 180 countries.

“China’s UnionPay is emerging as a payments work-around for Russian citizens as sanctions bite, helping cement Russia’s shift away from Western-led systems and towards Chinese providers looking to expand their global footprint.”

Yvonne Lau,
Asia Markets – fintech & crypto at Fortune

Chinese tech giants – Alibaba and Tencent – and their messaging, fintech, social and cloud service subsidiaries (WeChat, Alibaba Cloud, TikTok, AliPay, WeChatPay, etc.) are all still operating in the country. Telecommunications and IT infrastructure providers such as ZTE, Inspur and Huawei, semiconductor producers, SMIC, and PC manufacturer Lenovo are still actively trading with Russia.

The Chinese Amazon, Aliexpress, and smartphone brands Xiaomi and Huawei were already slowly building a majority market share in the country. Now have an open field. With Uber and Bolt leaving the country, DiDi, the Chinese ride-hailing app, is left with just Yandex as a competitor (who Uber is aggressively trying to sell its joint shareholding in).

We could keep going… Messaging apps, workplace collaboration tools, entertainment, gaming, music… All of these are now up for grabs. Some see this as an acceleration of a wider global shift that was already underway. Within the emerging markets of South America, Africa, Asia and the South Pacific Chinese technology and infrastructure were already being adopted at a rapid pace.

When you take a step back, the speed is quite staggering. In March 2000, the US dominated international trade, with 75% of the global market. But over the last 20 years, China has, bit by bit, become the dominant player. With 73% of the market as of 2020.

This has been accelerated by the announcement of China’s ambitious trillion-dollar international program called the “Belt & Road Initiative”, aimed at better connecting itself to the rest of the world through trade and infrastructure.

In just nine years, China has signed up 145 countries to the program and provided them with long-needed funding for roads, railways, power plants, ports and other infrastructure projects.

Included in this expansion is a sub-initiative they call the “Digital Silk Road” – an equally ambitious vision to catalyse global digitalisation.

“The Digital Silk Road clearly serves a broader objective of narrowing the global digital divide. It also challenges the existing dominance of the U.S. digital value system and dominant market share of its tech companies.”

Richard Ghiasy,
Senior Fellow at the Leiden Asia Centre, Netherlands

This is where things start getting murky. Many tech investors in London, New York and California are heavily invested in the Chinese technology infrastructure market. Not only is Tencent traded on western exchanges, but it also has a who’s who of western banks and pension funds listed as its main shareholders.

Japan’s Softbank, famous for its investments in Klarna, Revolut, WeWork and Slack, is the largest shareholder in Alibaba. Yet, the Japanese government has been one of the biggest backers of economic sanctions on Russia.

UnionPay announced a global partnership with Stripe back in the summer of 2021 that was seen by many as its formal entrance into the west’s payment infrastructure and yet Stripe’s investor list is a who’s who of Silicon Valley VCs invested in the brands that have all just exited Russia.

International tech investors have always faced a moral question about investing in China’s authoritarian marketplace. The invasion in Ukraine has now shaken the foundations of the global economic order and begs the question: Should western investors continue profiting even as a 2nd Cold War is emerging?

Is Our Obsession With Networks Unhealthy?

The cliché that we live in an increasingly networked age is slowly becoming an archetype of our times. No longer a utopian future but a dystopian present.

The networked future of the 90s came with visions of a triumphant global order, an end of wars, borderless trade and a smoothing of differences across the world. Many envisioned this newfound connectedness would be unitary. Instead, it seems to be fractal, multiplying in layers and layers of complexity.

If you walk the corridors of any of Silicon Valley’s tech or VC firms, you will find an obsession with startups that can generate “network effects”.

Often confused with virality, network effects are uniquely defined as “the mechanisms in a product and business where every new user makes the product/service/experience more valuable to every other user.”

Marketplaces like Uber, Airbnb and Opentable are some of the best examples of platforms leveraging network effects. The more drivers, hosts and restaurants on the platform, the better choice and price users can receive. Equally, the more users join the platform, the more drivers, hosts and restaurants need to join, as that’s where their market exists.

In turn, software businesses that leverage network effects become almost impossible to compete against. Investors like to refer to these businesses as building “highly defensible moats”, and they’ve got a point. Imagine trying to start a new Uber, Airbnb or Opentable today. You’d need hundreds of millions in startup capital.

“Airbnb is worth more than Hilton in the private market. Uber is worth more than GM. Companies that leverage network effects have asymmetric upside. They punch above their weight. They are the Davids that beat the Goliaths, and then become the Goliaths.”

James Currier
General Partner, NfX

Facebook’s dominance has been down to its ability to build multiple network effects into its product and effectively embed itself into our lives. It then acquires other social networks to build network effects on top of network effects.

Some VC firms claim that up to 70% of all the value in the entire tech industry is driven by network effects. With such an obsession for building network effect based businesses, we don’t really ever have a chance to pause and contemplate the impact of our newfound connectivity.

Canadian philosopher and communication theorist, Malcolm McLuhan, famed for coining the phrase “the medium is the message”, proposed that the new technologies we create become extensions of ourselves.

“The computer is the most extraordinary of man’s technological clothing; it’s an extension of our central nervous system. Beside it, the wheel is a mere hula-hoop.”

Marshall McLuhan,
Canadian philosopher

He argued that, over time, these extensions would cause subtle but substantial changes in our perception and radically transform the way we see ourselves, communicate with each other, and organise our societies.

According to McLuhan, once “electronic media” (or what we would call social networking today) went truly global and connected us all, it would radically reduce our proximity to each other and turn our world into a “global village”. With us then global villagers.

As villagers, we would be focused on everyone else’s business. We would want to monitor what they do and what they say – essentially turning us into gossipers. We would feel entitled to this knowledge. Anonymity would disappear and be disregarded. We would pore over updates to monitor what other people think and obsess over their behaviour.

We would enforce strict norms of behaviour, speech, and belief. We would become busybodies, prudes, and angry neighbours. When behaviours emerge that violate those norms, we would vilify the perpetrator until they are shamed and shunned.

We would become angry and reactive, and as our proximity would shrink, we would become more prone to extreme hatred, violence and revenge, both as individuals and as groups. The extreme proximity would make it impossible to ignore the things that offend us, and even though it would be easy to ignore, we wouldn’t. Ultimately, that mindset would bleed over into the real world.

Maybe he was onto something? See you next month…