Small is Beautiful (Sometimes)

on August 17, 2017
Reading Time: 4 minutes

A couple of weeks ago, I wrote in this space about the increasingly self-reinforcing dominance of a group of very large companies in the tech industry. Those companies, I argued, have made it all but impossible for smaller companies to break into the industry, to grow, and to build sustainable businesses without being either wiped out or acquired in the process by the industry’s giants. However, though as a general rule all of that is true, there are some exceptions out there, in the form of a handful of small but successful companies that have somehow managed to survive surrounded by much larger competitors. It’s worth looking at some of them and how they’ve achieved what they have, to see if there are lessons for others.

Anker – Compete Where Others Don’t Want To

Anker was, in fact, the company that made me want to write this piece. It was in the news last week when it launched an Amazon Echo competitor based on Alexa, just the latest in a fascinating series of consumer electronics products which started with batteries and went on from there. The Verge did a great profile on the company and its history, which is well worth a read if you’re interested. The key to Anker’s success seems to have been a narrow focus on competing in areas where the big players really didn’t want to. That began with accessories like batteries, first replacement batteries and then external batteries for smartphones, a place where the big companies either didn’t want to play at all or wanted to offer products at margins that provided a nice price umbrella under which companies like Anker could compete.

But the company has taken that starting point and grown from there, expanding into home automation devices and arguably taking the same quality-plus-affordability approach it took to accessories, with the Echo Dot competitor the latest example of that push. Because it undercuts others on price but has built a reputation for reliability, it occupies a somewhat unique niche between the low-cost no-name brands out of China and the more expensive stuff from the big established brands. There are a few lessons here for others: compete where the big players don’t want to; build from an innocuous base to compete more directly with the larger companies; and, lastly, don’t forget that brands don’t all have to be built at the high end.

Roku – Be Switzerland in a World at War

Roku is another company that stands out as a rare exception – a smaller player which competes head on with some of the biggest names in the business and yet has not only survived but thrived in terms of market share. Roku started out as an arm of Netflix, making hardware for its fledgling streaming service, but was soon spun out on its own and has since made a business out of providing the neutral TV box in a world where essentially all the major competitors are owned by big ecosystems. Though Apple, Google, Amazon, Microsoft, and Sony all have offerings in the space, Roku has the largest market share in the US, through a combination of a range of price points and a certain neutrality in the ecosystem wars.

But Roku’s next big step was pivoting from its focus on first-party hardware to providing a platform for others under threat from the big ecosystems, offering its operating system as a way for other smaller players to break into the smart TV space and bring a compelling and rich set of apps to that market. Again, it offered neutrality where others offered only walled gardens and ecosystem favoritism, and has now gained substantial market share in the smart TV operating system space too. That pivot is still in its early stages, and Roku still likely makes a good majority of its revenue from hardware rather than licensing, but that balance will continue to shift as Roku prepares for an IPO. The key lesson here appears to be that there can be an opportunity in being the neutral player that offers an alternative to warring ecosystems, especially when none of those ecosystems has established a dominant position.

Airbnb – Create Brand New Markets in the Digital Layer

Airbnb is another fascinating company that has come from nowhere over the last few years to build a large and seemingly profitable business in the midst of otherwise dominant ecosystems. And it’s done it largely by creating a new market rather than competing in an existing one. Airbnb exists in what I call the Digital Layer – a business model in which infrastructure-light companies leverage existing physical infrastructure and proprietary software to connect buyers and sellers in such a way that new markets or liquidity are created. Arguably the biggest and most successful companies that have emerged over the last few years in the consumer tech industry all fall into this model – Uber and Lyft are the other big examples, but there’s a plethora of smaller ones too.

The key here is recognizing that a consumer tech company doesn’t have to compete in the consumer tech market and in fact the best opportunities exist outside the tech industry in traditional markets like accommodation, transportation, and retail. By digitizing those markets, these companies create new value that wasn’t there before, often enabled by ordinary people with no history in those markets who choose to supplement earnings or make their main income in this way. Creating just the right user experience, removing barriers and simplifying transactions through smartphone apps and other digital tools, then provides the differentiation needed against legacy business models. The big ecosystems so far haven’t participated in these markets at all, though ride sharing seems to be the market segment they’re most likely to enter, with both Alphabet and Apple dabbling already. But the lesson here is competing outside the constraints of the traditional tech industry and creating an opportunity where others didn’t see one.

No Simple Answers

For the purposes of this column, I’ve necessarily kept things pretty simple here, and arguably oversimplified somewhat what’s made these companies successful. In addition, these companies I’ve discussed are by no means the only small successful tech companies to have emerged over the last few years, and there are other strategies to be achieve what they have. They do demonstrate that, however high the odds against success in a market dominated by giants, there are opportunities to be both found and created, and that it is still possible for the right combination of skill, timing, and smarts to carve out a niche where the big players won’t squash you. At least not right away.