The only barrier to entry you should care about

http://versiononeventures.com/the-only-barrier-to-entry-you-should-care-about/

by bwertz • 14 years ago

17 14 14 years ago

davidcrow2• 14 years ago

"Demand-side benefits of scale are the only important barrier to entry a web business can build up"

This is a great post. There was lots of thought previously that network effects could be built using vendor lock in (switching costs), first mover advantage (technological advantage), and preemption of scarce assets. Demand-side benefits of scale really are a preemption of scare assets, whether it is consumer attention or positioning in the app store. @bwertz has provided a great summary of why the rush for traction and the prevention of others that matter. #mustread

bwertz5• 14 years ago

Thanks @davidcrow - nice summary of the post :-)

marshallp2• 14 years ago

How about instead creating barriers by innovating faster. More Elon Musk and less Mark Zuckerburg. The world needs more inventors and less monopolists.

bwertz5• 14 years ago

I think continuous fast-paced innovation in an industry usually creates relatively low barriers to entry as perpetual innovation cycles “self-correct” potential monopolies.

marshallp2• 14 years ago

That may true, but I was just trying to point out the attitude of essentially "stealing" money by monopolizing is not good for society. Just add by relentlessly innovating and you might end up better off than sitting on a pile of money. The example of microsoft comes to mind, did the executives actually gain by slowing internet adoption through various shenanigans like IE or did indirectly slow down the advancement society so that it was a net loss for them (less cancer cures/self-driving cars/space rockets).

dredmorbius3• 14 years ago

It depends.

If the market creates an innovation engine, then participants in the market will compete over scraps. Unix, the Windows application environment, Apple and Android marketplaces, consumer fashion.

If a company creates an innovation engine, then it can ride a stream of development that gives it a persistent advantage: 3M, Edison, Apple, Google, Intel. Possibly IBM (though I'd count its success on other factors, despite a few periods of significant innovation).

Contrast this with companies which created one big idea and camped on it for a long time: AT&T, Xerox, Boeing, Microsoft, Comcast. These have essentially leveraged economies of scale, regulatory environments, and monopolies to capture and retain a market for an extended period of time during which little if any real innovation happened. Oftentimes these companies actively discouraged significant new innovation (AT&T and IP telephony, Boeing and high-speed rail, Microsoft and OS alternatives from DR-DOS to OS2 to Novell to Linux, Comcast with municipal broadband).

It depends on whether or not your goal is market dominance or advancing overall conditions. I'd like to see an innovation-based strategy encouraged, and demand-side benefits of scale doesn't deliver on this.

dredmorbius3• 14 years ago

<grammarnazi> s/less/fewer/ </grammarnazi>

graue• 14 years ago

Agreed. I'm a little surprised (though not much) to see lock-in so openly touted as a goal. In the long run such lock-in is inherently anti-consumer and a problem many are trying to solve. Look at Facebook these days, which everyone complains about but still uses. What can you do? Everyone's on it. You have no choice. And here we have an article about how to create millions more locked-in, disempowered users.

Now to be honest, the Mailchimp example in the article sounds fairly innocuous compared to Facebook. They're just able to give you extra data and better stats (from what it sounds like; only skimmed) compared to an upstart service. It's a less extreme example because the value-add from network effects is a smaller proportion of the overall product.

But the principle is the same, and this is yet another reminder that Silicon Valley capitalism is as amoral as any other kind. I look forward to someone disrupting the paradigm of non-interoperable web services that let businesses lock people in like this. I don't know if that kind of disruption will have a business plan behind it; I suspect it may not be VC-funded.

bwertz5• 14 years ago

The internet is the largest interoperable web service and wasn't VC-funded.

dredmorbius3• 14 years ago

Naive article.

Demand-side scaling is one approach to lock-in. Others include APIs, open/closed data policies, utility, interaction with other services, ease-of-use, and more.

Hal Varian and Carl Shapiro's Information Rules is a far more complete look at various elements of lock in from both a provider and consumer perspective. http://www.powells.com/biblio?isbn=978-0875848631

bwertz5• 14 years ago

Great book - thanks for mentioning. Agree with you that there are multiple ways of locking in customers but the point of the post was rather that the web has changed the relative importance of the different barriers to entry. Most have decreased in their importance (among others lock-in effects) but the clear winner are demand-side economies of scale.

davidcrow2• 14 years ago

I'd forgotten how great this book is, and that it was published in 1998 is incredible. Time to re-read.

The only barrier to entry you should care about

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