Comment by chiefalchemist
4 years ago
Companies do this, but I'm not so sure smart is the right adjective. Better positioned, or risk adverse might be better description.
Effectively, this argues for seeding a new market (e.g., IBM and enterprise OSS). Makes sense. But what's to stop _anyone_ else from getting into that same business? And doing it better? Maybe you create an initial advantage, but for how long? Game consoles come to mind.
It's an effective strategy. But you have to be spot on in the execution, and always be looking over your shoulder. Wouldn't a Zero to One / Blue Ocean mindset be smarter? Yes, more difficult. But none the less the far bigger win.
Well, in a way all businesses want to become monopolies. And hence they try to build moats around their core businesses to prevent competitors from entering that market, or in the worst case, causing the entire market to become commodified. The form of that moat varies depending on what said core business is. One version is even mentioned in the article:
> Another way that I like to express that is “create a desert of profitability around you”. I once had a strategy professor define the Google business model somewhat like that, where “Google tries to make every other business around it free or irrelevant”…A desert of profitability shifts consumers to you, and keeps competitors away.
> Wouldn't a Zero to One / Blue Ocean mindset be smarter?
So if you're about to start a business, should you create a new market (becoming a monopolist in that market), or should you enter some existing highly competitive and commodified market? The answer sounds obvious. Once you do that, then the next question is how do you maintain your monopoly position within that market? See above.
> But what's to stop _anyone_ else from getting into that same business? And doing it better?
You mean your main business or your complement?
If it's the complement, you commemorate, and try to push more people at entering there and doing it better.
It's about pulling the ladder out from under you, so you grow with the commodity and control risk of upstarts. It's interesting to compare something like how aws/azure/gcp (IaaS and up) commoditize snowflake/databricks (data PaaS and up):
* free complement: drive to zero so you go up, and competitors relatively weak individually. A $T corp like aws doesn't really care if any individual sw vendor (OSS, ...) gets big b/c they're still small wrt aws's offerings. The few emerging big winners like snowflake/databricks makes aws more useful to customers and helps the on-prem -> cloud shift: aws and friends are focused on 30%+ quarterly growth, which is nuts at their scale. They can likewise slowly decrease the ISV margin at their leisure for the non-oss parts, and for now use them to keep juicing the growth.
* pricey moat: the hyperscalers keep reinvesting monopoly-margin-driven profits to be even more untouchable. $T corp building their own chips, HA, etc., layers. It's tough for a YC startup to decide to compete w/ AWS head-on - hw/sw codesign takes a lot of time & $, and getting even just sw would be hard. it took huge amounts of VC $ for snowflake/databricks to get where they are, and yet, it still probably doesn't make sense for them to compete w/ AWS/gcp/az via custom hw etc. (TPUs ..), vs. riding commodity hpc (e.g., databricks achieving its AI vision by reselling GPU hw/sw controlled by Nvidia+Google, unlike their past control of Spark). IBM buying redhat gives a sense of how hard it is to buy in at this point.
It seems more like a side effect than a market strategy. Are there mixed strategies? Ie even car companies tend to look askance or even void warranties for using after market parts.
> Makes sense. But what's to stop _anyone_ else from getting into that same business? And doing it better? Maybe you create an initial advantage, but for how long? Game consoles come to mind.
You have to keep in mind that the natural outcome of capitalism is to create a forsaken hellscape of competition where individual companies struggle to make margins good enough to survive.
In this case, the truism is to commoditize your complement. Companies have an incentive to push as much capitalism as they can into things they don't make money on, and keep the capitalism away from their main products as long as they can.
So eg Google don't want to commoditize maps, because they're happy having a monopoly on mapping services. Google's competitors want to commoditize maps, because by doing so they undercut Google and make their own cloud service / phone OS / office suite / other all-encompassing orwellian service more competitive.