There was a time when Internet ideas were extremely valuable. Entrepreneurs guarded them with close secrecy and wrapped NDAs around even whispering about them. Today ideas are shared all the time. If you work in tech it is likely friends and family will say ‘I’ve got this great idea for an app!’ and start to tell you about it. The recent trend for me has been people pitching the idea ‘It is like Uber for x’. These ideas typically embody some kind of marketplace for buyers and sellers and offer an element of disintermediation or service delivery. Many are entering markets that have digital incumbents whether it be in food delivery, music streaming or humans for hire platforms.
Let’s consider food delivery as an Internet business. It has a good revenue model. By matching buyers and sellers and providing an effective marketplace it can charge levies on transactions. If the volume of trades is high enough there is a viable business. Furthermore it is very scalable. You just need to recruit more restaurants and delivery drivers who potentially you don’t even need to employ.
The problem though is that the barriers to entry for this type of business are relatively low. Whilst the technology part of the business is non-trivial it does not need CERN scientists to build it. This results in a number of businesses in the market and in the food delivery sector there are already multiple players. This is great for consumers and the open market but represents a serious challenge to startups looking to establish themselves. With the general pattern of one product rising to the top there is a high chance of failure in the medium term if execution does not result in being the best product in the market.
The Internet Economy has seen the emergence of a Winner Takes All market. Consider Uber as an example. A number of entrepreneurs saw the opportunity that Uber did and in London alone there were five different services operating before Uber landed. Well funded, with a great product and effective marketing Uber quickly established in London and started to dominate. Now the standard phrase on a Friday night is not ‘let’s hail a cab’ but instead is ‘let’s get an Uber’. As Uber continues to refine and innovate on the product it continues to stay ahead.
The same thing is true for a number of other sectors within Tech. Facebook won at social media, Spotify at music streaming, Netflix at video streaming. Once a product is established and has an effective product team behind it it becomes very hard to dislodge without simply acquiring it. Furthermore competition now comes from global businesses that have vast resources and funding. With Internet business models being highly transferable there is a high chance an Internet startup can be disrupted by an overseas competitor moving into the market.
An indication of the maturity of the Internet Economy is the choice that consumers have for different product offerings. When the vacuum cleaner was invented by Henry Cecil Booth in 1901 there was a brief period where there was no competition. Quickly though the idea of a vacumn cleaner became a commodity and the value became the product rather than the invention. I consider a similar pattern has happened with many products in the Internet Economy.
So how do you compete? Typically products compete on cost and quality. Let’s consider streaming music services again. Most offer the same service of a vast catalogue of music that you can listen to on-demand in return for a subscription fee of £10 a month. Some stream at slightly higher bitrates but broadly the service is the same. For music streaming this has resulted in products developing features like offline listening and playlists but in essence the service is still very similar. Without a doubt marketing plays a role in recruiting customers but with just a month of loyalty in the offing customers can quickly switch to another service.
Simply put to win products must create a winning customer experience. This involves investing in user research, excellent product design and striving for the best possible quality of product.
The Internet Economy is maturing and we are seeing intense competition in product businesses. For investors and entrepreneurs the winner takes all economy means that an already risky exercise is made even more risky. As digital businesses mature old rules of economics start to apply again. The customer is king and striving for the best possible product is key. We have shifted from a time where startup ideas were valuable to becoming ubiquitous and cheap.
A symptom of the maturing Internet economy is that the execution of the idea has become the most valuable part.
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