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September 30, 2009 / Danny Robinson

Assessing Competition Risk for Digital Media Startups

I often hear the statement: “I’m not going to invest because if [fill in the blank large company] wanted to do this, they would just wipe you out.” I usually respond: If that was true…

  • …Yahoo would have taken out Google
  • …Amazon would have taken out eBay
  • …MySpace would have taken out Facebook
  • …Facebook would have taken out Twitter
  • …Blockbuster would have taken out NetFlix
  • …and the list goes on and on and on.

I had the pleasure of getting to know some of the management team at Amazon who was around long enough to remember when they had the option to buy eBay.  They tell the story as if it was the largest missed opportunity that Amazon ever made, and they never want to make that mistake again. Still, they waited until Zappos had an $800M price tag before they bought them, but how come Amazon didn’t just do it themselves?  I use Amazon as an example, specifically because they have to be the most innovative large-companies that I can think of, and they still can’t defend themselves against anyone coming along and making a superior product.

Exceptions to the rule will always have to do with some sort of manipulated market channel.  Anyone who owns/rents a Motorola DVR knows what I’m talking about here.  No reasonable consumer would ever buy this product if they had a choice.  It’s the worst piece of garbage I’ve ever used.  Especially if you’ve used a Tivo before.  Motorola has the muscle to be able to negotiate big long term contracts with the cable companies and force them to restrict consumer choice.   There are similar exceptions with AT&T and the iPhone, and Microsoft with Windows.

But, The Internet is unique. It’s the ultimate in disintermediation.  It’s very difficult to lock up any particular channel.  For example, If I don’t like Google, I’m headed over to Bing with one click.

crunchbase

On the Internet, the best product wins.  It’s truly a case where the best defense is a strong offense.  And winning has NOTHING to do with the size of the company you’re competing against.  Large companies “get this.”  77% of acquisitions made by the top 10 acquirers in the entire technology industry are web companies.  Large companies have really no choice but to succumb to using the start-up ecosystem as their outsourced R&D departments.

So, what can you conclude about competition risk for digital media startups?

  1. There is no such thing as a big company who is going to come and eat your lunch.  All companies, regardless of their size, are run by a collection of individuals.  By definition a decision maker is just one person, whether you’re in BigCo or NewCo.  And, although large companies have more data and more money, their decision makers have to listen to lots of opinions (causing a watered down unfocused product), too many people to please (causing the product to launch and change very slowly), and have a reduced tolerance for risk because they’re afraid of losing their job if they screw up.  These are all impedance’s that startup decision makers don’t have.
  2. The product development and engineering teams the most important positions in the company.  Companies may soon fight for the elite PD guys the same way that TV networks fought for Dave Letterman. See Boris Wertz’ post (any my comment) to get a glimpse of our future.
  3. The best of the best will usually not want to work to make someone else rich, when they can simply start their own company.  So, the most innovative product teams will not fear risk, and leave to start their own companies.

All this boils down to another great reason to invest in digital media companies.  I’d love to hear your thoughts on this.

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6 Comments

  1. @adammcnamara / Oct 1 2009 8:08 am

    Fantastic blog post (for the third time this week).

    Thoughts on why large companies aren't cherry picking promising smaller startups earlier in the pipeline? Zappos didn't reach $800M overnight. Do they appear on the big guy's radar too late, or are the big guys looking for irrefutable market validation before an acquisition and by that time its too late?

    Adam
    http://selectstartstudios.com
    http://appnotify.com

    • DannyRobinson / Oct 1 2009 5:58 pm

      You've defined the art of M&A — Buy them early enough where they still have enough uncertainty that the price is low, but they've proven their business. Not surprisingly, The BOD's appetite for being acquired is inversely proportional to how well the company is doing (revenue or user growth), which is proportional to the amount of interested acquirers. This forces prices up a very fast rate. I call that the "updraft." As entrepreneurs, we like to get caught in the updraft.

      • Ian Andrew Bell / Nov 6 2009 1:25 am

        The reality is that as these companies grow larger they become more, not less, risk averse. It is oftentimes less risky to watch a market develop, let the customer base pick the winner, and then buy out that winner. This is a strategy which Cisco, which according to Brent Holliday has lots of cash in the bank, has openly embraced.

        Cisco has realized it's hard to innovate from within and calls itself a Fast Follower. Elephants can't dance.

  2. gs-tech-law / Oct 2 2009 1:44 am

    I fully agree with your analysis Danny. I have acted (as a lawyer) on behalf of NewCos who have been bought by BigCos and it is fascinating to see that even on the negotiation level the business decision process of a NewCo is sometimes more efficient in adapting to changing circumstances as the deal evolves (as almost all deals have ups and downs). I think that there are some other entrepreneur myths which need to be addressed.

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