Technology and barriers to entry
Every now and then I come across something that makes me rethink the concept of barriers to entry in relation to technology. Barriers to entry are a fundamental part of strategic business analysis: the obstacles that block a company’s efforts to enter a new market, such as investment requirements, regulation, patents, etc., and that tend to define that market’s competitiveness.
When Google came along in 1998, the company was essentially still an idea that two students with 100,000 dollars capital had come up with, and that was entering a space occupied by a multitude of projects of all kinds, and not just other search engines like Excite, Infoseek, Inktomi, Northern Light, or AltaVista, but also a Yahoo! that worked as a catalogue and that had several years head start in terms of experience and capitalization (it was set up in 1994 and had gone public in 1996).
The famous Google algorithm that defines relevance on the basis of the relationship between pages has been copied by just about all its competitors, but none has been able to slow down the growth of a company that today is the absolute leader in all markets except China, Russia, and South Korea.
But for me the question is this: let’s imagine that someone came up with an algorithm to assess relevance based on completely different concept, producing better results than Google. Would its creators have the same chance of success today as Larry Page and Sergey Brin in 1998, and what would be the main barrier to entry they would face?
In essence, the job of running a search engine means maintaining a database that includes indexed pages, as well as the construction of that database, along with the data centers needed to store information and the creation of the technology required to access it efficiently, a task that is now virtually unviable.
The meteoric growth of the internet means that the database of 1998, which could be handled by a few machines, today requires the work of the biggest network of data centers ever created, as well as the development of a technological system that few would be able to manage: an barrier to entry that is all-but insurmountable and that protects a business in which the users’ costs of change are negligible, most of the technology is open access, marketing plays almost no relevant role, and where there is virtually no regulation.
If we add to that formidable barrier to entry the requirement of what we might call a combination of capital, know-how, a learning curve, as well as taking into account Google’s own behavior, which borders on predatory—let’s not forget that anti-monopoly legislation does not sanction the fact of having attained a major share of the market, but instead preventing others from competing in that market through restrictive practices—,we can pretty much take it for granted that Google is going to be the leader for quite some time.
Let’s take another market segment: smartphones. I have just read in GigaOM that a small Finnish startup intends to repackage the old MeeGo developed largely by Nokia and to create an operating system to challenge Android and iOS. Will they be able to? It is not completely beyond the bounds of possibility, because we are talking about a technological development in which obtaining appreciable advantages in variables such as efficiency or usability are largely a question of what Thomas Alva Edison described as a matter of inspiration and perspiration.
Furthermore, the company seems to have teamed up with a number of manufacturers and telcos, which will doubtless support efforts to break the suffocating oligopoly that they currently face.
So what would be the main barrier to entry the company would face?
The main barrier for a new operating system would be to bring on board a sufficiently large number of developers. And to do that would involve showing, on the one hand, that there was a sufficiently large enough number of users, and on the other, that there were appropriate business models in place that would ensure that they were able to sell apps to these users and that pay systems and proper commission structures were in place, for example.
That is the fundamental advantage enjoyed by iOS and Android: the possibility of extending the functionality of a smartphone as far as the imagination allows thanks to the possibilities provided by developers who explore all the opportunities that human activity present.
Aware of this, other manufacturers are trying out new strategies. Manufacturers who work with Firefox OS would like apps to just go away, and for everything to be web-based and HTML5. For its part, Canonical has recently been the main star of the biggest crowdfunding campaign of all time, mainly in a bid to attract attention to its Ubuntu Edge project, which aims to create a dual startup device that includes Android.
Even Blackberry, in its final phase, tried to include Android apps wrapped in QNX. Managing to leverage the goodwill of millions of developers around the world to use your platform for their products and that themselves are financially restricted from choosing several platforms at a time, is without doubt a very important barrier to entry based principally on a network effect that is not easy to overcome.
The changing nature of barriers to entry in the dynamic technology sector can offer many lessons in the teaching and practice of management. Today, almost every industry is, to one degree or another, a technology industry. Will we see similar barrier to entry strategies being applied in one way or another in more traditional sectors?