Real Value & Competition – Not among Products but Environments

Today Facebook filed for a 5 Billion $ IPO. To put this number in perspective we must convert it into INR.

Rs. 24,500 Crores (49 Rs = 1 $).

Note:  In 2009-2010, Maharashtra emerged as the state with the Highest fiscal deficit among all states at Rs. 26,562 crore (Yes The Entire of Maharashtra) 

 

Understandably this has led to hoorahs, congratulations, amazement and…. disbelief.

Disbelief because many people, including some of the shrewdest investors, do not understand how the intrinsic value of a young Social Networking site can be valued at a 100 Billion Dollars. After all, with a little less that $4 Billion in revenues last year, its valuation is an unprecedented 25X of revenues. And for a company which is 8 years old and based primarily on the sale of online ads, itself a fast changing precarious commodity, this sounds like madness. 

And it may well be, unless we understand that a major shift has happened in our world over the last decade. Though only recently visible, it always existed in principle, since the evolution of a monetary system because of its predominance in technology and how it has enveloped our lives.

This shift is of Real Sustainable Value and Competition – From Products to Environments.

When we think about competition in a corporate or capitalistic sense, we see images of Coke Vs Pepsi, GM Vs Toyota, Rin Vs Wheel, Airtel Vs Vodafone etc (For ease of understanding I have clubbed Brands and Products as one)

This is because of a number of reasons – positioning of products, market size, penetration, brand connection, loyalty, advertising etc

99% of us, especially well bred, old paradigm educated, propaganda fed students of MBA, think of today’s consumer driven competitive landscape in this way. A vast battlefield of competing logos, brands, strategies, PR activities, taglines and consumer engagement.

But that 1% realises that the paradigm has shifted, in fact they realise that the real paradigm of interest is not to win battles at the battlefield… it is to ensure direct/indirect control of the battlefield itself.

 

No, this isn’t another version of the Blue Ocean Strategy or a treatise on how to control the market with brute force, monopolistic laws or just plain illegal stuff.

I want to show how certain organizations (like facebook) and investors, have gone beyond winning battles i.e. creating better products/services than your competitors, to controlling the battlefield i.e. controlling the environment in which products are created and compete.

 

Now before I tell you how and why, can you name a class/type of organization which makes the most amount of money in the world??

Think Hard.

The answers, surprisingly, isn’t energy, though it is certainly close. It’s called ‘Governments’.

Governments across the world make a ton of money using taxation, excise, customs, surcharges, trade payments, investments etc. And how do they do this? By making laws, controlling the police and the army, collecting taxes, providing security, developing infrastructure, declaring war or peace, developing international relations etc. Basically governments make revenue by controlling the overall environment of a country. Yes, Governments do run for-profit companies, but they constitute a small portion of total revenues.

The USA, understands this and hence profits from the commerce of crude Oil. Hence, it is susceptible to jitters from its relationships to Oil Exporting Countries. Its focus on securing and stabalizing sea routes, pipelines, countries and infrastructure for oil trade is partly explained by the fact that Oil is traded in Dollars in the world’s main futures exchanges – NYMEX (New York) and the ICE (Europe). Add to this the American companies which control the technology, resources, expertise, infrastructure, connections, distribution and delivery network. What you get is a Government-Corporate complex which controls the Crude Oil Industry in the world (The Environment) without having the oil reserves, even to service its own needs.

 

But what about Facebook? It is not even close to the kind of influence and power that is exhibited by the above 2 examples. 

Well, Newsflash! It’s not just Facebook, but Google, Apple, Windows, X-Box, Salesforce, Amazon, eBay and many of the other New Age Big Boys, who were until recently scrappy startups, are all dealing in creating, maintaining, enhancing and controlling environments. They now exhibit similar influence and power in the environment they wish to control.

Facebook (FB) today controls a large chunk of a very well developed social networking environment. Today we see videos, pictures, ratings etc using the FB platform. Our networking, messages, connections, social planning is also done there. Already, millions are using FB to buy real and imaginary products, especially through social games. While the race for monetizing that fantastic data produced by FB has already begun (At the core of it, FB sells data and access to people willing to pay for it), new ventures based on FB, like selling credit cards using your profile info, insurance, offering product discounts and even selling Daal/Rice have proliferated. 

So what have they done? Facebook has created a rich environment where others can connect, profile, sell and expose their products/services to prospective customers. The real game changer here is the fact that they know enough details about you to let companies and brands target and approach you far better than previously possible. And since FB controls all the laws, rules, elements of this environment (somewhat) all it has to do, is to take care of it and take a cut from all those products fighting for market share. It is this ability that is being touted, in part, by Morgan Stanley, the lead banker for the IPO.

Google today knows and compiles most of your data online. What you searched for, how you used it, what’s happening on your gmail, what you posted on google+, which cat video was viewed on youtube, which book you searched for etc. And with the recent news of its new ‘simplified’ privacy policy, it is clear that Google is hell bent on tightening its own environment, which until recently was fairly fluid.  

The real game changer for Google is poised to be the Android OS which is currently being given out for free, simply because it promotes better and more precise search for smartphone users. Search still contributes 98% or so, of revenue to Google and it is competing head-on with Apple and now Microsoft.

All of them are fighting for control of the Smartphone OS environment simply because their reach in the market creates pressure on developers to pay them a cut, just to sell apps on those smartphones.

Amazon recently released the Kindle Fire, because it wanted to be part of the online/e-commerce environment through which it will be easier to sell since the purchase experience will be as frictionless as possible. It is notable that most analysts feel that the Kindle is being sold at either cost or lesser. Why? Because it lets Jeff Bezos control e-commerce.

 

Other notable examples like Ebay (Online marketplace and e-Commerce environment control), Windows (Desktop/Smartphone environment control), Xbox with kinect (Gaming platform, online interactive motion control environment), Apple (Hi-end Personal electronics environment control) show that the world of technology is fast moving towards a set of players who will soon control platforms or environments, in which we may be forced to operate in, simply because these platforms are established, provide access and moved in with a grand vision early on.

 

It will be some time before we can see an Indian Startup with the balls, resources and vision to control an entire environment. Only then can we truly say that we have ‘Arrived’.

Theory of the 3 evergreen competitive advantages

I know I am too young to come out with a theory of the world. But then the young are expected to do stupid stuff.

For those of you who think I am talking about TOE (Theory of everything) i.e. the theory which describes all physical phenomena, then I am sorry.

Please see String Theory or Theory of everything.

What I want to talk about is the theory of the The 3 evergreen competitive advantages.

Why? Because just like that new mobile phone you bought a couple of months ago, human tech evolution and the speed of change/development today has ensured that almost every differentiated product and service you can think up of, will become commoditized even before you can say “Oh Shit”

But you already know that.

So if major multi-billion dollar corporations now struggle with sustainability of profits and have to churn out “sexy” “wow” and “awesome” products all the time, what can a small meek mortal like you do?

What can one do to ensure that the tidal waves of change don’t wash away all that competitive advantage you have created in your job/startup/life/company etc?

That’s where the theory of 3 comes into play.

This has been used for centuries by those who have understood it.

For anyone interested in history, pertinent examples will come up all the time in every setting of human civilization.

The three things one must continuously build on, sometimes in this particular order, to do well and stay ahead. 

1. Knowledge – Information is now commoditized, available to anyone with an internet connection. Its now our ability to join the dots, analyze information and predict outcomes in advance that leads to a build up of knowledge. Patents are useful, but with the speed of tech development they too have been rendered useless in many cases. Now, more than ever, a human mind that can pick up bits of information and make sense of them, in real time and execute , should be considered far more powerful that any computer with a million economic and business projection models. And I don’t mean, that becoming a geek is desirable, just that be good enough in whatever one choose to do, to be considered a geek.

Because they wrote it wrong. It was always “The Geek shall inherit the earth”

2. Reputation – Once you have knowledge in your hands, it is extremely important to cull a reputation from it by executing stuff. If you wont execute, you wont have results and hence no reputation. Brands, Rockstars, Doctors, Successful Executives all understand this. Otherwise you will end up being full of un-applied and hence non-verifiable knowledge that never did anyone any good. Oh and in my experience, the fact that “good schools” make you a well rounded person, is utter crap. Our future is only in the super-specialization of what we love to do.

3. Access – Finally, with a heavy tranche of knowledge and a solid reputation, you must aim for access. Access to the right people, with the right opportunities to offer. Its what helps get people jobs, projects, movies (take a quick look at the buffoons masquerading as actors) and other such stuff. Why? Because those who offer you the opportunity, need what you have built. A reputation and knowledge to push their interests along. No one does it because they like your face (admittedly, they might do it because they are mad, but don’t count on it)

Many successful startups have gone through these 3 steps and found great sustainable success.

In my next post I will give supporting evidence for these three. Just so that you know I have really thought about this stuff. And that I didn’t write this when I was high.