Walmart Doesn’t Get Tech.
Some marriages are doomed from the start.
If you believe history and the data science is right, Walmart will never catch Amazon -. As a matter of fact, Walmart buying Jet is stupid. Yup. That’s right. Because of the reality of modern category king economics…. stay with me.
Amazon is the category king in ecommerce. As my co-authors and I detailed in our book, Play Bigger: How Pirates, Dreamers and Innovators Create and Dominate Markets, the great tech companies define and develop a new category of business that never existed before, and those companies tend to devour the vast majority of the money and attention in that market, often for years or even decades.
While working on our book, we analyzed data on U.S. venture capital–backed tech startups founded from 2000 to 2015 and found that category kings earned 76 percent of the market capitalization of their entire market categories.
Tech analyst Michael Walkley of Canaccord Genuity looked at the earnings of smartphone companies in late 2014 and found that Apple took in 93 percent of the industry’s total profits that quarter. Eddie Yoon, a principal at the Cambridge Group, analyzed the top 20 of Fortune’s 2010 list of fastest-growing companies.
Those companies received an average of $3.40 in incremental market capitalization for every dollar of revenue growth. But half of those 20 were category creators, Yoon determined, and those 10 companies got $5.60 in incremental market cap for every dollar of revenue growth. “Wall Street exponentially rewards the category creation companies,” Yoon wrote.
As of today (08.12.16), Walmart has a value of $230B and amazon is at $366B, so it’s clear who Wall St thinks will win.
The reason for this is the compounding power of category kings in today’s world. The economic advantages gained by a category king are staggering, and the trajectory is steeper and faster than ever.
Once a company wins a position as category king, a flywheel of benefits opens a gap between the leader and the rest. The leader, for example, increasingly has the best data. In today’s world, data is power. All those transactions on Amazon give the company valuable insights about its customers, inventory, prices — everything. Same with every ride through Uber, every movie chosen on Netflix, every entry on Salesforce.
As the leader amasses data, the data becomes an unfair advantage — a gap that the followers can’t hope to close. And, too, the best employees want to work for the category king. The best partners want to sign deals with the category king. Outside developers want to develop for the category king. The best investors want to put in their money and the best investment bankers want to work on the IPO. As a category king pulls far ahead economically, it has the wherewithal to make acquisitions that vault it even further into the lead.
The economic power of a category king just builds and builds. And the category king achieves the position as the industry standard that all others get compared to.
That why Microsoft couldn’t catch google in the search category, despite spending $10B trying. So if Microsoft can not un-seat Google with $10B Walmart will likely not dethrone Amazon with a $3B purchase of Jet.
Best wishes & play bigger,
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