We live in an era that is hard for many to understand because we are observing many companies winning. It may not be obvious how or why they are winning but, I’m certain, we need to redefine the idea of winning. As my friend Benedict Evans (you will hear his name often in this post since we got lunch yesterday and had an intellectually stimulating chat!) likes to say, “Apple and Google both won mobile.” For many who say the first computing era pass and observed only one winner, Microsoft, the idea that multiple companies can win may seem far fetched. Yet, that is exactly what happened. Both Apple and Google won mobile in their own ways.
I read way too many Wall Street buy side investor notes. One very clear realization many of the big firms like Morgan Stanley, UBS, J.P Morgan, and Goldman Sachs, are having is how the market has moved to a winner take all to a winner take most, or multiple winner markets. Another area beside mobile that gets discussed is advertising. This is a market where Google and Facebook have both won. Estimates are that these two companies will command 80-90% of the online ad market in 2020. This is a winners, not winner, take most market.
This idea of winning is not originally how I framed my thesis. My thesis started with the hypothesis that once a company reached a certain size of customers it became nearly impossible to displace or disrupt them. Take for example MySpace. At its peak MySpace had just shy of 80m users. While large, it was not large enough to fend off competition from Facebook and cause its users to leave en-masse to a better solution. Another example could be Yahoo vs. Google. It had appeared Yahoo had won but Google came and displaced them with a better solution. An interesting side note here was Yahoo had entrenched itself enough that the death spiral was slow and long. In some cases losing can take a while to play out even if obvious early in a market’s S-curve.
So the question Benedict and I explored was around what size of a customer base a company needs before they become very hard to displace. My original idea was something around 300 million customers and displacing or disrupting you becomes extremely difficult because you just snowball from there. Benedict had a good point that from a business perspective it depends on whether the companies is a high-margin or low-margin business. The former does not need as much scale to “win” where a low-margin business needs more scale to “win.” We both agreed Apple could have won with a few hundred million customers but in reality, they have over 700 million. Where a company like Google and Facebook need more than 700m or more to “win.” If a business is a high-margin business they can win with less customers than one with low-margin structures. The latter is generally the strategy for consumer focused companies, but also the most difficult and most risky.
There are interesting implications for business opportunities in this light. It is now firmly established, that Facebook, Amazon, Google, Microsoft, and Apple are entrenched winners and are just getting bigger or will essentially keep winning. Each is well positioned to keep spreading its fingers into new markets and use their large customers bases to succeed in new markets as they choose. This makes it increasingly difficult for startups trying to climb a new S-curve when these large companies can enter and use their weight to ward of competition. This is an oversimplification of the strategy needed to succeed in new markets, but these companies got to where they are because of said strategy, culture, people, and process, and those all bode well for their growth ambitions.
As with any new market, the beginning of the S-curve is the most critical time to build the foundations to win, however we define it. Bet on winners early, just realize the definition of winning has changed in the consumer era and the field may include more winners than is obvious at the start.