Podcast Summary
The continuum of technology and business: Technology and business are part of a continuous process, with two main dynamics: how we interact with technology and the evolution of computing devices. From batch to continuous computing, we've reached the ideal spot with portable, powerful devices. Future challenges and opportunities include wearables and AR glasses.
Key takeaway from this conversation between Patrick O'Shaughnessy and Ben Thompson is that technology and business are not as disruptive or fragmented as they may seem. Instead, they are part of a continuous process, with two main dynamics at play: the shift in how we interact with technology and the evolution of computing devices. From batch, destination-oriented computing to continuous, always-with-you computing, this progression has led us to the ideal spot where we have portable, powerful devices that are always connected. However, the future may bring new challenges and opportunities, as we explore the limitations and potential of wearable technology and augmented reality glasses. Overall, understanding this continuum of technology and business can help us better navigate the ever-changing landscape of innovation.
From mainframes to smartphones: The evolution of technology: The smartphone is the central hub in the era of specialized devices and sensors, with dominant players like iOS, Android, Amazon, Microsoft, and Google poised to capitalize on future opportunities, as seen in the car industry's history.
We have reached a logical endpoint in the technological revolution with smartphones being the most versatile general-purpose devices. The future lies in specialized devices and sensors, but the smartphone remains the central hub. The industry's evolution can be traced from mainframes in one room to desktop computers with on-premises servers, and now to mobile devices and the cloud. The dominant players in this era, such as iOS and Android for handheld devices and Amazon, Microsoft, and Google in the cloud, are best positioned to capitalize on future opportunities. The car industry's history serves as an analogy, where the top players were established by the 1930s, and new companies barely emerged until Tesla decades later. The market agrees with this assessment, as these companies continue to receive rich valuations and remain near their all-time highs. The pandemic has accelerated existing trends rather than causing a sudden shift in direction.
Aggregation Theory and the Smile Curve: The pandemic is driving up valuations for tech companies that provide highly differentiated inputs or capture consumer attention, while companies in the middle may not see significant value growth. To become an aggregator, establish a direct customer relationship, have 0 marginal costs, and lower customer acquisition costs as it scales.
The trend of technology companies becoming more foundational and critical to everyday life is likely to be accelerated by the pandemic, leading to increased valuations. A key concept to understand this shift is aggregation theory, which posits that value flows to either highly differentiated inputs or the end part where consumer attention is captured. Companies that occupy the middle, such as fabricators, may not capture significant value. The smile curve, a visual representation of this theory, shows high value on the ends and low value in the middle. To create an aggregator, one must have a direct relationship with the customer, have 0 marginal costs, and lower customer acquisition costs as it scales. An aggregator is different from a platform, which controls components in the value chain and can squeeze both OEMs and developers.
Understanding the unique aspects of platforms' power: Google and Apple leverage user choice and abundance to provide efficient services, while regulations should consider the user-driven nature of platforms' power for effective regulations.
Platforms like Google and Apple wield power differently, with Google leveraging user choice and abundance to provide better services, while Apple's control over its app store can be problematic. Regulations should understand this user-driven nature of platforms' power, as Google and Facebook's direct relationship with users enables them to serve users efficiently and at virtually no cost. This scalability and decreasing acquisition costs lead to better products and services for users, creating a virtuous cycle. For instance, Google's ability to provide relevant search results and ads based on user preferences is a result of its vast user base and data. Similarly, Netflix's growth from a few thousand shows to tens of thousands is due to the evergreen nature of its content. Regulations that don't account for these unique aspects of platforms' power may not be effective.
Companies that own demand can dominate industries: Companies owning demand can monetize offerings effectively, compete better, and potentially dominate industries by delivering targeted, personalized ads to large, well-understood user bases.
Companies like Netflix that own demand, rather than just supply, have the potential to grow into aggregators and dominate their industries. This concept, which has been discussed by Bill Gurley and others, is more generalizable than it first appears. The distinction between owning demand and supply is crucial, as it impacts how companies monetize their offerings and compete in the market. For example, Spotify's recent move into podcasts is an advertising play, as they aim to monetize this under-monetized content through targeted, personalized ads to their large, well-understood user base. By delivering a Facebook-type advertising experience, Spotify could potentially monetize podcasts more effectively than others, becoming the center of the podcast ecosystem and attracting more content creators to their platform.
Power dynamics between aggregators and suppliers: Aggregators like Google and Facebook hold power due to demand control, but supplier power determines aggregator size and profitability.
The power dynamics between aggregators and suppliers on the internet hinge on the relative power of the suppliers. Google and Facebook, as examples of strong aggregators, have leveraged their control over demand to become dominant players, while suppliers, such as music companies, hold significant power due to their ownership of valuable back catalogs. In the case of Spotify, the music industry's stronghold on the market limits Spotify's control as an aggregator. Conversely, in the podcasting space, where the supply is more disparate, Spotify has the potential to exert more control and power. Netflix is an interesting example of a company that has shifted from buying content to producing it, giving them more control over the entire value chain and increasing their negotiating power with suppliers. Ultimately, controlling demand is crucial for aggregators, but the power of suppliers determines the size and profitability of the aggregator.
Netflix's Strategic Business Model for Control and Upside: Netflix's negative free cash flow strategy allows them to pay more upfront for productions, control demand, and capture long-term revenue upside. Competitors can counter by monetizing customers in multiple ways and adopting unique business models.
Streaming platforms like Netflix hold onto all the residuals and upside from their content, which allows them to pay more upfront for productions and control the supply. This business model, which has led to negative free cash flow for Netflix for several years, is a strategic move to exert more control over demand and capture long-term revenue upside. The scale economies advantage of these platforms make it challenging for competitors to match their spending and subscriber reach. However, companies like Disney have found success by monetizing customers in multiple ways, making their streaming service not just a revenue generator but also a lead generator for their entire business. In essence, it's essential to adopt unique business models and strategies to compete effectively against streaming giants.
Competing with tech giants in the streaming industry and e-commerce space: Netflix's scale and unique business model give it an edge over competitors, while Shopify's focus on supporting suppliers allows it to differentiate from aggregators like Amazon.
Scale and different business models are crucial factors in the competition between streaming platforms like Netflix and tech giants looking to enter the market, such as Apple. While Apple may have the financial resources to challenge Netflix, it would mean accepting significant losses for an extended period due to less efficient spending with a smaller user base. Netflix's scale and unique business model give it an advantage, making it difficult for competitors to compete directly. Shopify and Amazon are examples of platform and aggregator companies. Shopify's success lies in enabling suppliers to have a direct relationship with customers, allowing them to compete with aggregators like Amazon in an orthogonal way. Amazon, on the other hand, controls demand and offers a convenient one-stop-shop for customers. However, Shopify's focus on supporting suppliers differentiates it from Amazon, making it a valuable alternative for businesses looking to build a presence online. Competing with the likes of Google and Facebook in the digital landscape requires a direct connection with customers. Shopify facilitates this by enabling suppliers to set up their own stores and build a customer base outside of these aggregators. The high competition and lack of differentiation in the digital world can lead to profit loss if businesses don't have a strong customer base or unique value proposition.
Shopify's Business Model Thrives on High Churn: Shopify's scalability and low marginal cost allow for high churn, constant influx of new customers, and revenue growth. Its focus on logistics and merchant connections creates a deep moat, making it a valuable and differentiated player in e-commerce.
Shopify's business model thrives on high churn due to its scalability and low marginal cost. The platform's ability to accommodate a large number of users, many of whom may eventually go out of business, allows for a constant influx of new customers, generating revenue for Shopify. This is a positive sign, as the cost of serving these new customers is essentially zero. Additionally, Shopify's focus on expanding into areas like logistics and creating connections between merchants and third-party logistics providers can create a deep moat, making it difficult for competitors to replicate. The concept of a "moat map" refers to the idea that network effects can be externalized or internalized within a product. In the case of Shopify, the platform's network effect becomes more internalized as it grows, making it a valuable and differentiated player in the e-commerce space. Microsoft and Apple are examples of companies that have successfully leveraged externalized network effects, while Facebook is an extreme example of a company with internalized network effects. Understanding the nature of these network effects and how they are leveraged can provide insight into a company's competitive position and long-term success.
Understanding the difference between internalized and externalized network effects: Facebook and Google, with internalized networks, aim for total commoditization, while Uber-like platforms need differentiated suppliers to attract users and strengthen their platforms. Digital constraints are about data and user behavior, not physical choke points.
Companies with internalized network effects, like Facebook and Google, have a different business model compared to platforms with externalized network effects, like Uber. Internalized networks aim for total commoditization of content and suppliers, diminishing differentiation, while externalized networks need highly differentiated suppliers to attract users and strengthen their platform. The lack of friction in the digital world challenges traditional business strategies, making it essential to understand the difference between modularity and integration. In the past, controlling a choke point in a physical value chain was a common strategy. However, in the digital world, constraints are less physical and more about data and user behavior. Companies like Facebook and Google own the network and content, making them the gatekeepers of information and user data, enhancing their services through a feedback loop. Understanding these differences is crucial for successful business models and effective regulation.
From scarcity to abundance in the digital world: Companies that succeed in the digital age offer unique content or serve as starting points for users, while focusing on efficient operations and sustainable differentiation.
The internet has eliminated many of the physical and financial constraints that defined traditional industries and businesses, leading to an abundance of content, inventory, and reach. This shift from scarcity to abundance has significant implications for various sectors, such as media, where the cost structures have drastically changed, and writers have become profit centers instead of cost centers. Companies that succeed in this new landscape are those that can be the starting place for users or offer highly differentiated content, while also having efficient back-end operations. This requires a mindset shift towards focusing on sustainable differentiation rather than distribution.
Individual creators providing unique services to audiences: Focus on providing value to audiences and building direct relationships for digital media success.
The future of media on the internet lies in individual creators providing unique, valuable services to their audiences, rather than relying on traditional models of content production and advertising. The internet enables creators to reach a global audience and build direct relationships with their subscribers, allowing them to monetize their work through ongoing subscriptions. This shift from selling content to delivering a service is key to succeeding in the digital media landscape. Moreover, there is a growing demand for niche, localized content, as people seek out information that is relevant to their specific interests and communities. The traditional media model of publishing broad-based content to attract ads is no longer effective, as consumers are overwhelmed with content and no longer want to wade through irrelevant material. Instead, creators who can deliver valuable, timely, and informative content directly to their audience's inbox will be successful. However, the high cost of individual subscriptions can be a barrier for some consumers. Bundling multiple subscriptions into one affordable package could be a potential solution, allowing consumers to access a wider range of content while reducing their overall cost. Ultimately, the key to success in digital media is to focus on providing value to your audience and building a direct relationship with them, rather than relying on traditional advertising models.
Finding innovative ways to cater to niche audiences: Despite challenges, independent writers and content creators can grow audiences by catering to specific niches. Infrastructure providers like Stripe and Plaid enable growth by offering essential tools and services.
Despite the challenges of subscription fatigue and the fragmentation of the market, there's a vast potential for independent writers and content creators to build and grow their audiences by catering to specific niches. The internet is vast, and there are billions of potential subscribers with diverse interests. However, creating bundles or partnerships could make the model more consumer-friendly and economically viable for creators. The formation of such bundles or partnerships, however, is a complex issue, as it requires a critical mass of subscribers and significant investment. Infrastructure providers like Stripe and Plaid play a crucial role in enabling the growth of independent content creators by providing essential tools and services. From a strategic standpoint, these infrastructure providers represent an important layer of the technology ecosystem, and their role in the industry is worth exploring further. Overall, the future of independent content creation lies in finding innovative ways to cater to niche audiences while addressing the challenges of fragmentation and subscription fatigue.
Leveraging Scale for Superior Cost Structures and Services: Platform companies like AWS, Stripe, and Epic Games have a competitive advantage due to their large user bases and economies of scale, enabling them to offer better tools, documentation, and pricing to their customers.
Companies like AWS, Stripe, and Epic Games operate as infrastructure or platforms that provide superior cost structures and services due to their scale. This allows them to offer better tools, documentation, and other benefits to their customers, creating a moat that is difficult for competitors to cross. Stripe, for instance, has a significant cost advantage due to its large customer base, making it challenging for new competitors to match its pricing. Similarly, Epic Games, which operates in the gaming industry, aims to collect revenue only from the games that become huge successes. By charging less upfront and making their engine more attractive to developers, they increase their chances of having more games that go viral and generate significant returns. The gaming industry, with its free-to-play and free-to-win models, can be seen as a leading indicator of how we monetize virtual worlds, which are increasingly becoming a significant part of our lives. The benefits of being a platform company extend to the availability of a broad user base, which can lead to exponential returns. In summary, companies that focus on infrastructure and platforms, and leverage their scale to offer superior cost structures and services, have a significant competitive advantage.
Investing in Real-World Infrastructure with Tech Industry Innovation: The tech industry's zero marginal cost model can drive advancements, but a new investment model with guaranteed returns is needed for real-world projects. Tech industry involvement in politics and promoting competition can lead to better infrastructure and economic benefits.
The tech industry, with its model of zero marginal cost, can bring about significant advancements, but there's a need for innovation in real-world infrastructure spending. The traditional venture capital model, which requires large upfront investments and promises infinite returns, may not be the best fit for real-world projects with ongoing costs. Instead, a new investment model with guaranteed returns, even if the absolute return is slightly less, could be more effective. Additionally, the tech industry can drive positive change by promoting competition between cities and politicians, and by being more involved in politics to address the regulatory challenges faced in the real world. These efforts can lead to better infrastructure and capabilities for companies, ultimately benefiting workers and the economy as a whole.
China's reach into US: Regulating speech on Twitter: Companies must adapt to the Internet's assumptions for success, as shown by Netflix's shift from DVDs to streaming and producing original content, and governments and tech companies can collaborate to address global power shifts.
The interconnected world brought about by the Internet and other globalization factors has led to increased efficiency but also shifted the balance of power. This is evident in China's reach into the US to regulate speech on Twitter. The response requires a collective, likely governmental, effort, and tech companies can also play a role. The most instructive example of adapting to the Internet's assumptions is Netflix, which shifted from DVDs to streaming, acquired content, and produced original shows, all based on the power of scale and 0 marginal cost. A kind act that stands out for the speaker was when John Gruber, an influential tech writer, corrected a mistake and wrote a glowing article about their new blog.
The power of a single endorsement: A respected figure's endorsement can significantly impact your career or project, leading to increased opportunities and growth.
A single endorsement or act of kindness from a respected figure in your industry can have a significant impact on your career or project. In this case, an endorsement from Thompson led to a substantial increase in the speaker's Twitter followers and kickstarted the growth of his site. Additionally, the speaker expressed gratitude for the opportunity to collaborate with Thompson years later on a new podcast venture. This story highlights the importance of building meaningful relationships and the ripple effect that positive interactions can have on one's professional journey.
