More articles by Byrne Hobart
Anti-Cannibals! Building a Business on Nonexistent Norms
DIGITAL DUE DILIGENCE – Yesterday we covered “Cannibals“—companies whose business model is pure status quo, and whose growth model destroys the status quo. They’re fun to track, but they’re intrinsically speculative: their entire business model is based on the existence of something that they’re arbitraging away.
The opposite is a special case of network effects: companies that have a viable business model largely to the extent that they change the world, rather than to the extent that they fail to. These companies have a few traits in common:
- They’re run be revolutionaries, who are often not very nice people.
- They’re funded by missionary VCs, not just people looking for a return.
- They’re more likely to fail.
When they succeed, though, the results are spectacular. The previous last generation of massive tech companies fit into this category: Microsoft built a cost structure around ubiquitous desktop PCs, and turned that into reality; Intel scaled up knowing that as the cost of processors dropped, the potential new uses created enough total growth to justify massive scale.
Now companies like Facebook are doing the same thing: Facebook is creating a cultural norm that activities and relationships will happen (or at least be reflected) online. The model of using this for ad targeting only works if it’s the best source for information about individual preferences.
But a more interesting case is Foursquare. Foursquare is succeeding in reverse: they’re building a business model that didn’t exist, based on a cultural norm that they’ve created, and all that flows from a product that was built to be so compelling that it would make itself indispensable.
Foursquare’s business is selling ads (and remnant inventory) based on where people are, where they’re going, and who they’re with. That relies on a cultural norm of telling people where you are at all times. And that is only possible because Foursquare’s product decisions have all focused on gearing up people’s interest in checking in often and consistently.
The interesting question here is: is it worth the risk? Cultural norms are public property, so Foursquare is in a sense investing a lot of money in something that would be equally helpful to its competitors. At sufficiently high marketshare, that can change, and a company can stay dominant by setting arbitrary industry standards.
But there’s another reason this can be a competitive advantage: a company out to truly revolutionize its market—a company that will only turn a profit if things are the way they should be, rather than the way they are—is a company that will have a serious advantage recruiting the talented risk-takers they need to make it happen.
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