🔑 Key Takeaways
- Brooks Running CEO Jim Weber will share his inspiring story of overcoming cancer and growing a successful brand, with funds raised going to Climate Pledge Arena's philanthropy. Additionally, Solana Foundation offers an accessible way for everyday people to participate in the crypto ecosystem through their stake pools.
- Stake pools provide liquidity to blockchain networks, while Strategy 3.0 framework helps in understanding the power involved in building successful companies through platforms. Understanding these concepts can benefit founders and inventors in creating valuable companies.
- Achieving product-market fit and reducing transaction costs is the first step to creating platform power, but maintaining and increasing that power requires a comprehensive analysis of economic value creation, identifying barriers to entry, and staying ahead of technology trends.
- To succeed on a platform, companies must focus on creating a differentiated experience to attract and retain loyal customers. Preventing customers from multi-homing is key to capturing value and maintaining a competitive edge.
- In markets with diverse consumer preferences, companies have a chance to develop power if the power curve flattens out slowly. This is evident in YouTube's success due to its unique and vast content that caters to user preferences, making it hard for competitors to catch up.
- YouTube's dominant position in the market owes to its ability to reduce search costs for viewers, diverse content library, and low costs for creators' multihoming, fueling its continued success and increasing revenue generated through advertising.
- Understanding your customer's mindset and finding power opportunities are crucial in determining market success. Experimentation is needed, but be wary of potential long-term consequences, such as the downfall of Apple's Mac3.
- In the early stage, prioritize customer acquisition and scaling over profitability. Consider power equation and differential scale when deciding on pricing. Use tools such as Modern Treasury to manage payment operations and focus on core products.
- TSMC's pricing strategy may sacrifice current profits for future revenues, but it helps maintain market leadership through capital commitment, lower costs, and higher margins on higher performance products. Upstream suppliers remain a challenge.
- In order to build and maintain company value, it is crucial to have predictability in future customers and carefully manage those with high switching costs. Developing switching costs can also be a useful strategy.
- To succeed, platforms must prioritize proving value to customers, offering something unique, and building up network effects. Founders should expect new challenges after product-market fit and approach them positively.
- Flywheels and network effects are vital for product-market fit, but they do not necessarily indicate power. Platforms with indirect network effects like Uber hold more value, and swapping logos can determine a competitive advantage. Multihoming enables quick adoption of technologies by other companies.
- Analyzing power in platform networks involves understanding the unique economic and industry structure of each participant, considering the size of at least one side of the platform, and evaluating multihoming and dynamic and static questions.
- By providing easy switching between platforms, multihoming can prevent the creation of winner-takes-all markets. But for it to work, one platform must deliver significantly more value and maintain scale on at least one side. Multihoming can give startups a fighting chance against established players.
📝 Podcast Summary
Jim Weber of Brooks Running to Speak at Acquired Live Event
Acquired is hosting a live event featuring Jim Weber, CEO of Brooks Running, on May 4th in Seattle. Brooks Running is a successful standalone division of Berkshire Hathaway that went from a small revenue to over a billion in revenue per year competing with Nike and Adidas. Jim battled cancer along the way to make fantastic running products. The funds raised from the event will go to Climate Pledge Arenas philanthropy, the One Roof Foundation. The event costs $20 per person and will have other announcements soon, so if you're interested, go to acquired.fm/arenashow. Solana Foundation is creating a new ecosystem with stake pools that provides a great vehicle for ordinary people participating in the crypto ecosystem.
How Stake Pools and Strategy 3.0 Can Help You in Building Successful Companies
Stake pools allow users to provide liquidity to blockchain networks through staking while earning potential staking rewards, without subjecting their assets to lockup periods. They also simplify the process of validator selection and management. Seven Powers and Strategy 3.0 aim to provide founders and inventors with a framework to understand the different types of power involved in building successful companies, particularly focusing on the second major step of company value: developing power through platforms. Platforms, broadly defined as intermediaries for transactions, have ancient roots and are integral to many of the most valuable companies today. The framework should work for both modern digital platforms like Uber and ancient matchmakers from 3000 years ago.
The Importance of Assessing and Maintaining Platform Power
Platforms are intermediaries of transactions that leverage technology to radically reduce transaction costs, opening up new markets and decreasing friction. The first step to creating power is achieving product-market fit through better matches and reducing transaction costs. However, the second step - maintaining power - can be challenging, as competitors can easily catch up due to the availability of technology. Assessing platform power requires a comprehensive analysis of economic value creation and perception, as well as identifying barriers to entry for competitors. To maintain and increase power, entrepreneurs and inventors must stay ahead of technology trends in order to create new markets and reduce transaction costs.
Creating and Capturing Value on Platforms
Platforms create value by efficiently matching heterogeneous participants. The value delivered varies with participation and geographical density, but with diminishing returns. The power question involves benefit and barrier, i.e., creating and capturing value to prevent competitors from taking away the differential value generated by the platform. Multi-homing is a major challenge for platforms as they don't own their customers, and customers have the freedom to patronize other platforms. The differential scale of the platform is what provides a competitive edge for the platform. For ride-sharing platforms, preventing customers from multi-homing is the key to creating and capturing value, which requires providing a differentiated experience that is frictionless and attracts loyal customers.
The Power of Heterogeneity in Market Preferences
In markets with heterogeneity of preferences, where there are many dimensions that consumers care about, the power curve flattens out slowly, meaning there is an opportunity for power. YouTube is a prime example of this, as the platform has accumulated so much unique content that it is easier to find what you're looking for compared to competitors. This makes it difficult for other platforms to catch up with YouTube because they lack the same level of knowledge about user preferences. In markets where there are diminishing returns to density, the steepness of the power curve is critical in determining if any individual company can develop power. If the curve flattens out slowly, it is easier for companies to develop power.
The Power of YouTube's Network Economy in User-Generated Video Content Market
YouTube's network economy power and its ability to reduce search costs for viewers are key factors that contribute to its dominant position in the user-generated video content market. Despite the absence of scale compression, the platform continues to maintain its lead and generate increasing revenue through advertising, paying out a significant portion to creators. The high level of mindshare on the platform and the low cost of multihoming for creators also contribute to its success. The platform's value to viewers varies depending on their specific use case and perception of value, but YouTube's ability to provide a diverse and extensive library of content remains a crucial factor in retaining its user base.
The Importance of Understanding Customer Equilibrium and Power Opportunities
Understanding the equation going on in your customer's mind is crucial to determine the equilibrium of the competition. While Amazon sellers aim to sell more units at market price, eBay sellers want to sell their products for the highest price possible. The product-market fit and power questions are different. One needs to understand whether there is an inherent potential for power or not. It is hard to find a power opportunity in something that currently lacks it. Companies should try different things to find new power opportunities. However, it takes an inventor that is every bit as hard as the product-market fit inventor to find new power opportunities. Apple's Mac3 flub made it possible for IBM PC to take over the world, eventually resulting in a not-so-attractive long-term business.
Pricing strategy for platform businesses and how to maintain competitive position
In the early stage of a platform, it's important to acquire customers and scale rapidly while not worrying about profitability. As the business progresses, the power equation comes into play to decide when to increase prices. The maximum price that can be charged while maintaining leadership is dependent on the differential scale of the platform compared to its competitors. It's an active trade-off between power, which is market share and differential margin. Surplus leader margin, or the maximum amount that can be charged more than a competitor while maintaining competitive position plays a significant role in this decision-making process. Modern Treasury, a payment operations management platform, offers a solution for businesses to move money easily, allowing for teams to focus on core products.
TSMC's Pricing Strategy and Market Leadership
Modern Treasury's APIs make it easy to move money for various use cases. TSMC gives up current profits to gain future revenues, allowing them to maintain market leadership. Pricing may be tied to a strategic goal, but justification must be tied to underlying fundamentals. TSMC's pricing makes perfect sense even from a shareholder value perspective. TSMC makes a huge capital commitment and has lower cost per transistor and higher margin on higher performance products. They have backward integrated into fabs, allowing them to be fab leaders. Predictable material performance advances have profound implications for continuing the cycle. ASML and other upstream suppliers are really tricky for TSMC.
Importance of Predictability and Customer Management for Company Value
Predictability of future customers is profoundly important in creating company value. Being a leader in technology means you are a cost and performance leader in the business. TSMC's success comes from guaranteeing their future business and making the right technology choices. It's important for companies with high switching costs to manage their customers carefully and not become too extractive. Developing switching costs can be a good strategy for companies without power and think of it a different way than just locking in customers. Apple's vertically integrated model allows them to fund capital expenditures through hardware sales, while TSMC's horizontal model requires them to make a long-forward commitment and give up current profits to guarantee future business.
Importance of Value, Differentiation, and Power for Platform Success
To create value for customers, platforms must first prove that they provide enough value that customers should pay a fee and stay on the platform. Additionally, platforms must differentiate themselves by offering something unique and differential that adds value to customers. Furthermore, power is important for a company's durability, attractiveness, and success. Companies with network effects and direct network effects have a strong advantage and are susceptible to winner takes all kind of situations. Founders need to be prepared for more challenges after achieving product-market fit and approach them positively to climb the next hill.
Understanding the Importance of Flywheels and Network Effects in Product-Market Fit.
Flywheels are a sign of product-market fit, but they tell you nothing about power. Critical mass, ignition, and all are part of product-market fit. Network effects describe value creation and not competition. Platforms often have network effects that differentiate them from other platforms. Indirect network effects like Uber are more common because they have a value impact. An exercise to test whether a platform has power is to swap that logo with their competitor's logo in the middle of that flywheel. If it still works, they have a competitive edge, but a differential size on one or both sides of the platform prevents that. Multihoming also enables other companies to benefit from the same technology quickly.
Understanding and Analyzing Power in Platform Networks
Platforms are complex and have a lot of value, but analyzing power is important. Technology is a huge lever in facilitating efficient transactions and matches. Power comes from doing something materially better than another platform and is sustainable. The size of at least one side of the platform drives the difference in performance. The exchange of value between heterogeneous buyers and sellers creates value and drives the matching process. However, the signals that show product-market fit traction can be at odds with power. Multihoming and dynamic and static questions are critical in analyzing power. While frameworks exist, understanding the unique economic and industry structure of each participant is essential in analyzing power.
The Power of Multihoming in Competitive Markets
Multihoming, or the ability to easily switch between platforms, can diminish the lock-in effect that creates winner-takes-all markets. However, for multihoming to be effective, the value delivered by one platform has to be materially better than its competitors, and there must be a real material difference in deliverables between competitors. Maintaining scale on at least one side is also necessary to maintain the difference. Multihoming can be especially beneficial for startups in the technology and venture investing space, as it can allow them to compete against established players. In conclusion, multihoming with frictionless switching can be a critical factor in creating a competitive market and avoiding a winner-takes-all situation.