The Competitive Re-Alignment of Every Industry is Coming
Note from John: I’ve been on a break from writing on Medium for a bit, but here’s some thing short that I put together this afternoon. Enjoy!
It used to be that if you produce oil, you competed against other oil companies. If you make movies, you compete against other movie producers. If you make phones, you compete against other phone users.
This alignment bent quite a bit after World War II as companies began to diversify, especially into related fields. It snapped back to attention with the Internet era as smaller players could reach larger consumer segments and thus get around traditional players in some industries (e.g. entertainment) but not others (e.g. “heavy” manufacturing).
In some ways, this is true. For instance, if I run a company that depends on a certain type of employee — a video editor, for instance — I am competing for that talent with other companies who could employ her.
But competitive alignment in the tech industry is not just about competition for talent — it is also rather obviously about competition for consumers. And in that, companies are less (and more alike) than you might expect. This alignment is largely related to the attention paid by consumer segments, not by what the company actually does.
Facebook is a good example. Billions of people are signed up to Facebook. But those billions use Facebook in drastically different ways, largely depending on consumer segment. Some people use it to communicate. Others use it to waste time. Still others use it for self- or business-promotion. And each of these user groups has different competing companies.
For communication, WhatsApp was a competitor (until Facebook bought it) and iMessage still is. For time wasting, it’s YouTube or Netflix or news. For promotion, it’s LinkedIn, Twitter, and Instagram (also owned by Facebook). Even within these groups there are demographic and interest segmentation in which Facebook competes differently.
What will competitive alignment look like in 5 years?
Data vs. Content
The hardware/software/social divide that previously drove so many of the differences will continue to melt away. Apple, Amazon, and Netflix will drive this change. The shift will largely come from how companies monetize data and how they produce content.
Apple’s hardware advantage in computers came to an end years ago and its advantage in mobile phones has likely done the same (without updated iPhone sales data, pinpointing the exact date will de facto be the date at which they stopped reporting iPhone sales data).
What Apple is increasingly selling is an entire ecosystem that is a) “safer” and b) “more private” than the alternatives. It used to be that Apple also sold a better product — that is a bit more in doubt.
The privacy and safety focus are huge because what consumers are really trusting companies with today (and going into the next decade) is their data. Apple is really a company that sells data-collecting devices (e.g. phones, wallets, tablets, computers) to make your life more convenient. This is why Apple going into autonomous vehicles has a certain logic to it.
Right now, Apple largely uses the data they collect to make better products. They also generate revenue by charging a fee for any other company that wants to access its user network’s data through the AppStore.
The other major data collectors — Facebook and Google — don’t make money this way. Instead, they make it from selling advertisements based on data provided by users through their services.
Facebook’s platform is essentially optional — users have to opt-in to it which makes it much more susceptible to user-abandonment.
Google on their other hand supplies so much of the infrastructure of the Internet that user abandonment is probably not as troublesome as national government’s simply taking over its infrastructure and nationalizing it.
On the content side, Netflix is king, generating not only its own content, but owning the rights to lots of third-party content providers. It’s major weakness with respect to content is having little to no presence in user-generated content. YouTube (Google-owned) and Instagram (Facebook-owned) are the clear winners there. But the user rates and revenue per user on each are not even close — Netflix wins in just about every category.
Amazon is somewhere in the middle. On the one hand, it is a major data controller not only for consumers but for businesses through its AWS platform. On the other hand it has made major content pushes through Amazon Studios (video) and the Washington Post (news).
Monopoly is not just a board game
All major tech companies operate in monopolistic ways. They have secured deep and wide competitive advantages as a result.
In theory, it is the job of governments to regulate competition, ensuring that the market remains “free” from things like monopoly control. In practice, governments are often substantially less powerful than the companies they are attempting to regulate.
The last major tech company to face a monopoly prosecution (usually called an “anti-trust” suit) with wide-scale impact on their business was Microsoft back in 1998. Though the US court ordered Microsoft to effectively split into two companies, the nature of the Internet and Microsoft’s business had changed so much by the time the order was supposed to be acted upon, that it was essentially pointless — so the two sides settled in 2002 only officially ending the action in 2011.
That case has created two types of ideas:
1 — the tech industry moves so quickly with so much competitiveness that monopolies don’t last long enough to be meaningful from a regulatory perspective.
2 — the expense of battling it out with a big tech company is likely too much for any one government to handle.
The first idea is wrong mostly because technological change is being driven by companies with monopoly power either buying up startups (see: Facebook buying and no probably merging WhatsApp and Instagram) or by developing the new tech in-house (see: Apple and Google with driverless cars).
The second idea is contingent on what “too much” means. Any monopoly prosecution against any of the big tech companies would likely cost the government hundreds of millions of dollars. The lack of competition though will likely cost consumers even more in the long run.
Over the next five years, the monopolies that tech companies have in their areas will only get stronger. At the same time, more and more governments will try to rein them in, likely led by the EU and the US. Smart regulations like those proposed by Benjamin Tseng will (to the peril of many governments) be ignored.
And then there’s China
Unsaid in all this is that China will continue to push forward in key areas and make all of this look like a bit of a sideshow. With massive investments and state control over the process, China will continue to challenge the idea that a society needs vast personal freedoms in order to achieve innovation and its key economic ingredient: creative destruction.