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Why giants thrive - Special report on companies

65 points by danblick 10y ago

typetypetype 10y ago
> Just as the old industrial giants used technological innovations to reduce their costs, the new tech giants use technological innovations to expand their networks. I'd be curious to know how much innovation in big tech happens internally vs buying out smaller companies.
- JoeAltmaier 10y ago
  It seems to me (unscientifically) that buying out generally kills a company/product. More about squashing competition and unifying a market, than innovation.
  - georgemcbay 10y ago
    "More about squashing competition and unifying a market, than innovation." I agree, it seems the same to me. Which is terrible (for consumers), of course. Even when they don't actually kill off the product, the products will often languish in a weird limbo where they are basically still around but effectively end-of-lifed on new features. For example, Google Voice, the Google Nik Collection of photography plugins etc. Google alone is sitting on a giant bunch of products/services that could be (and sometimes at one time were) paid products that they acquired, made free from cost (great!) and then just did absolutely nothing with in terms of advancing them (not so great!). Things that could be a wonderful small business, but aren't worth Google's time because the return for them wouldn't register at their scale. And the kicker is that because Google has these for free, it is really difficult for other companies to come in and try to make a competing product, because even if they make something that is significantly better, there's way more inertia in adoption from users because Google's free thing exists.
roymurdock 10y ago
Conclusion: The most powerful force behind the rise of the new giants is technology. But two other forces are pushing in the same direction: globalisation and regulation. - Premise (support) - Big companies benefit from supply chain economies of scale/network effects (Pankaj Ghemawat calculates that America’s top 1,000 public companies now derive 40% of their revenue from alliances, compared with just 1% in 1980) - R&D in countries with cheaper cost of labor/materials (PwC, an accountancy giant, produces an annual survey of the world’s 1,000 most innovative companies. It found that last year those that deployed 60% or more of their R&D spending abroad enjoyed significantly higher operating margins and return on assets, as well as faster growth in operating income, than their more domestically oriented competitors) - Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost (Nicole and Mark Crain, of Lafayette College, calculate that the cost per employee of federal regulatory compliance is $10,585 for businesses with 19 or fewer employees but only $7,755 for companies with 500 or more) - Small companies can't game the tax code like large companies can (The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax) - Large companies have a "buffer" during poor economic periods and can simply buy out smaller companies (the mortality rate for all American listed companies over a five-year period is as high as 36%, but for companies worth more than $1 billion it is only half that) I was surprised not to see a mention of the evolution of the legal treatment of corporations discussed, as well as a discussion of the decline of unions and the weakening of the average employee's bargaining power. But otherwise a better article than I was expecting from the economist.
- gtrubetskoy 10y ago
  I think an alternative way of looking at is that in a way "the deck is stacked" not in favor of start ups. I remember how in the late nineties no one worth their salt would ever agree to work for a behemoth because a start up was more fun, more opportunity to make money and learn something. Not sure whether it's the protracted poor economic period, or policy, or global trade, or all of those things, but I do believe that the world is better off favoring small over large and we should strive in that general direction.
swalsh 10y ago
Let's think about what it would take to truly take on Amazon. Marketing: This is actually a pretty even ground, in terms of paid advertising. However, for free advertising, you're at a disadvantage. Amazon has a domain authority of 98. You're not going to rank higher than them. Unfortunately, since marketing is one of the most constant, and highest costs of e-commerce. That puts you at a significant disadvantage. Pricing: Because Amazon can drive so much traffic to their site, and because they have an efficient website, they can drive sales. This is great leverage to negotiate lower prices from suppliers. This is a 2 part advantage. Now with lower prices, they are more attractive to consumers, and they have more money to drive other parts of their business. This puts you at a significant disadvantage. Detailed Data: Because Amazon can drive so much traffic to their site, and because they have an efficient website, they can drive sales. With this, they can collect data to help them target areas to make their business more efficient. Assuming no marketplace customers, they can make precise decisions on what to make investments in. Of course they've grown so big, that competing with them is impossible. So there are marketplace customers. This means they're not only collecting data from their own business but from your business too. They host the marketplace and have no qualms about competing with you if you're successful. This puts you at a significant disadvantage. Fulfillment: Because of their size, Amazon can afford to have multiple warehouses. This means they can strategically locate inventory across the world, combined with an efficient lead time they can make guarantees about delivery. That drives more sales. This puts you at a significant disadvantage. Delivery: Because of their size, Amazon can afford to buy whole truckloads with carriers. This means they pay less for delivery. With cheaper delivery, they can offer free delivery. That helps them drive more conversions. This puts you at a disadvantage.
- dx034 10y ago
  I think Amazon is a bit of a special case, since they use physical scale for their advantage. That's not the case for most other tech companies. Amazon is the digital equivalent of Walmart. You cannot beat them on their terrain, the only solution is to come up with an idea that customers like more, so that they'll switch even for higher prices and longer delivery.
- eli_gottlieb 10y ago
netcan 10y ago
I like this article. Where it goes slightly off track (IMO) is listing all the reasons/ways big companies have an advantage. They're all true, but some of them are basically the same as they've always been. The change/trend is the interesting part. The main point I took from this is: Network effects is the new economies of scale. Economies of scale is an almost fundamental law in microeconomics and the generally accepted reason for companies getting big. Bigger factories make stuff cheaper. It's a big deal if it is being surpassed by a law of network effects. Since technology (especially software) has low variable/marginal costs a naive guess would suggest that technology should strengthen, not weakon this rule. For network effects to match or overtake economies of scale as a driving factor is interesting. If you're looking for a positive side for startups, here's mine: Network effects are easier to build than economies of scale for a startup. Invention, creativity and fresh perspectives are sometimes enough to build networks.
rebelde 10y ago
Regulation? This article and politicians complain about regulation, but I don't see it affecting most tech companies, and don't see it disproportionally affecting small tech companies. It certainly isn't one of my big costs or worries. Does anybody else see it differently?
thr0waway1239 10y ago
I would like to see this from another angle though - not why they grow so big - but what it takes to kill such a company (i.e. cause it to fail). One of the big advantages the giants have is that while no doubt they hire very capable engineers, the number of engineers who need to leave to make a dent on their performance is a really large number, and gives them a really long notice to correct things. In other words, at any given point of time they have many more 'dispensable' employees. A second benefit of being a giant is that you can forego revenue streams which would be the size of an entire business at a competitor to gain some advantages in the market - for e.g. Google made Android free. I don't think they could have pulled off such a move when they were younger and poorer. This diversity of income streams gives them plenty of time to leave behind lagging products/services and concentrate on the cash cows - that is, they can apply the Pareto principle at a much much larger scale. Contrast that with the potential disruptors who simultaneously compete with the large companies for employees, could sometimes get killed if just a few key hires leave, rarely have diversity of huge income streams to allow them to change course, and then have to bear the burden of regulation without the cushion of the cash pile. It lends a more stable environment for the large companies to move in the direction where the market expects them to go without having the tremors which the small companies face when they try to do similar things. During those tremors - engineers at the smaller companies - don't usually like to stick around and see what happens. This has been compounded of late because of the huge salary difference between working at a giant versus working at a smaller company.

65 points by danblick 10y ago

> Just as the old industrial giants used technological innovations to reduce their costs, the new tech giants use technological innovations to expand their networks. I'd be curious to know how much innovation in big tech happens internally vs buying out smaller companies.

JoeAltmaier 10y ago
It seems to me (unscientifically) that buying out generally kills a company/product. More about squashing competition and unifying a market, than innovation.
- georgemcbay 10y ago
  "More about squashing competition and unifying a market, than innovation." I agree, it seems the same to me. Which is terrible (for consumers), of course. Even when they don't actually kill off the product, the products will often languish in a weird limbo where they are basically still around but effectively end-of-lifed on new features. For example, Google Voice, the Google Nik Collection of photography plugins etc. Google alone is sitting on a giant bunch of products/services that could be (and sometimes at one time were) paid products that they acquired, made free from cost (great!) and then just did absolutely nothing with in terms of advancing them (not so great!). Things that could be a wonderful small business, but aren't worth Google's time because the return for them wouldn't register at their scale. And the kicker is that because Google has these for free, it is really difficult for other companies to come in and try to make a competing product, because even if they make something that is significantly better, there's way more inertia in adoption from users because Google's free thing exists.

roymurdock 10y ago

Conclusion: The most powerful force behind the rise of the new giants is technology. But two other forces are pushing in the same direction: globalisation and regulation. - Premise (support) - Big companies benefit from supply chain economies of scale/network effects (Pankaj Ghemawat calculates that America’s top 1,000 public companies now derive 40% of their revenue from alliances, compared with just 1% in 1980) - R&D in countries with cheaper cost of labor/materials (PwC, an accountancy giant, produces an annual survey of the world’s 1,000 most innovative companies. It found that last year those that deployed 60% or more of their R&D spending abroad enjoyed significantly higher operating margins and return on assets, as well as faster growth in operating income, than their more domestically oriented competitors) - Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost (Nicole and Mark Crain, of Lafayette College, calculate that the cost per employee of federal regulatory compliance is $10,585 for businesses with 19 or fewer employees but only $7,755 for companies with 500 or more) - Small companies can't game the tax code like large companies can (The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax) - Large companies have a "buffer" during poor economic periods and can simply buy out smaller companies (the mortality rate for all American listed companies over a five-year period is as high as 36%, but for companies worth more than $1 billion it is only half that) I was surprised not to see a mention of the evolution of the legal treatment of corporations discussed, as well as a discussion of the decline of unions and the weakening of the average employee's bargaining power. But otherwise a better article than I was expecting from the economist.

gtrubetskoy 10y ago
I think an alternative way of looking at is that in a way "the deck is stacked" not in favor of start ups. I remember how in the late nineties no one worth their salt would ever agree to work for a behemoth because a start up was more fun, more opportunity to make money and learn something. Not sure whether it's the protracted poor economic period, or policy, or global trade, or all of those things, but I do believe that the world is better off favoring small over large and we should strive in that general direction.

swalsh 10y ago

Let's think about what it would take to truly take on Amazon. Marketing: This is actually a pretty even ground, in terms of paid advertising. However, for free advertising, you're at a disadvantage. Amazon has a domain authority of 98. You're not going to rank higher than them. Unfortunately, since marketing is one of the most constant, and highest costs of e-commerce. That puts you at a significant disadvantage. Pricing: Because Amazon can drive so much traffic to their site, and because they have an efficient website, they can drive sales. This is great leverage to negotiate lower prices from suppliers. This is a 2 part advantage. Now with lower prices, they are more attractive to consumers, and they have more money to drive other parts of their business. This puts you at a significant disadvantage. Detailed Data: Because Amazon can drive so much traffic to their site, and because they have an efficient website, they can drive sales. With this, they can collect data to help them target areas to make their business more efficient. Assuming no marketplace customers, they can make precise decisions on what to make investments in. Of course they've grown so big, that competing with them is impossible. So there are marketplace customers. This means they're not only collecting data from their own business but from your business too. They host the marketplace and have no qualms about competing with you if you're successful. This puts you at a significant disadvantage. Fulfillment: Because of their size, Amazon can afford to have multiple warehouses. This means they can strategically locate inventory across the world, combined with an efficient lead time they can make guarantees about delivery. That drives more sales. This puts you at a significant disadvantage. Delivery: Because of their size, Amazon can afford to buy whole truckloads with carriers. This means they pay less for delivery. With cheaper delivery, they can offer free delivery. That helps them drive more conversions. This puts you at a disadvantage.

dx034 10y ago
I think Amazon is a bit of a special case, since they use physical scale for their advantage. That's not the case for most other tech companies. Amazon is the digital equivalent of Walmart. You cannot beat them on their terrain, the only solution is to come up with an idea that customers like more, so that they'll switch even for higher prices and longer delivery.
eli_gottlieb 10y ago

netcan 10y ago

I like this article. Where it goes slightly off track (IMO) is listing all the reasons/ways big companies have an advantage. They're all true, but some of them are basically the same as they've always been. The change/trend is the interesting part. The main point I took from this is: Network effects is the new economies of scale. Economies of scale is an almost fundamental law in microeconomics and the generally accepted reason for companies getting big. Bigger factories make stuff cheaper. It's a big deal if it is being surpassed by a law of network effects. Since technology (especially software) has low variable/marginal costs a naive guess would suggest that technology should strengthen, not weakon this rule. For network effects to match or overtake economies of scale as a driving factor is interesting. If you're looking for a positive side for startups, here's mine: Network effects are easier to build than economies of scale for a startup. Invention, creativity and fresh perspectives are sometimes enough to build networks.

rebelde 10y ago

Regulation? This article and politicians complain about regulation, but I don't see it affecting most tech companies, and don't see it disproportionally affecting small tech companies. It certainly isn't one of my big costs or worries. Does anybody else see it differently?

thr0waway1239 10y ago

I would like to see this from another angle though - not why they grow so big - but what it takes to kill such a company (i.e. cause it to fail). One of the big advantages the giants have is that while no doubt they hire very capable engineers, the number of engineers who need to leave to make a dent on their performance is a really large number, and gives them a really long notice to correct things. In other words, at any given point of time they have many more 'dispensable' employees. A second benefit of being a giant is that you can forego revenue streams which would be the size of an entire business at a competitor to gain some advantages in the market - for e.g. Google made Android free. I don't think they could have pulled off such a move when they were younger and poorer. This diversity of income streams gives them plenty of time to leave behind lagging products/services and concentrate on the cash cows - that is, they can apply the Pareto principle at a much much larger scale. Contrast that with the potential disruptors who simultaneously compete with the large companies for employees, could sometimes get killed if just a few key hires leave, rarely have diversity of huge income streams to allow them to change course, and then have to bear the burden of regulation without the cushion of the cash pile. It lends a more stable environment for the large companies to move in the direction where the market expects them to go without having the tremors which the small companies face when they try to do similar things. During those tremors - engineers at the smaller companies - don't usually like to stick around and see what happens. This has been compounded of late because of the huge salary difference between working at a giant versus working at a smaller company.