Category Risk

Category risk is a fundamental challenge facing both startup and large incumbent technology companies. There is no Category King without a kingdom.

If you want increasing revenues, earnings and market cap over time, you must be positioned in a category that is large and growing. If you want to win, you have to be the Category King. This means that building your category is equally important to building your company. It sounds crazy, but it’s true.

The Segway never took off. Not because it’s bad technology. It’s an amazing product. It failed because the “personal electric balancing transportation” space didn’t develop past a few niche use cases. Creator Dean Kamen couldn’t articulate an argument for why the Segway solved a problem that most people cared about. As a result, Segways suffered the fate many breakthrough technologies do: the category never took off and now it lives as a niche for mall cops and dorky tourists.

Some companies get lulled into thinking that their space is defensible. Only to get crush by innovation. In the late ‘90s, Netflix did what legendary tech startups do. They didn’t compete head on with Blockbuster. They destroyed the video store category by creating a new category. They incited a market “from-to”. By using the Web versus physical stores as its channel to customers and a business model that transformed video rentals into a monthly service, with no late fees Netflix caused a material change in video entertainment.

As a result, Netflix changed the way customers perceived value with a different approach to media consumption. This original strategy created a new category for DVD subscriptions Vs. rentals. This simple and powerful idea crushed Blockbuster Video’s category and they ultimately went bankrupt. Today Netflix has a $27 billion dollar market cap.

The seminal question all developers of new technologies face is “do we have a strategy to define, develop and dominate a giant category that matters?