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You are talking about horizontal economies of scale that means that companies can increase margins by doing everything themselves. With online services, vertica

You are talking about horizontal economies of scale that means that companies can increase margins by doing everything themselves. With online services, vertical economies of scale just now are becoming more dominant. Here's a for instance: If I were to create a new social network today, I might host it on Heroku, send email thru Sendgrid, store my data in Neo4J and make it searchable with ThriftDB, etc etc. There is only one consumer-facing brand, but hundreds of small companies contribute to creating that brand. But each of them also have hundreds or hundreds of thousands of other customers, which creates the vertical economies of scale. This is not new, corporations have had sub-contractors and suppliers throughout history. But what is new is that the small one-man shop will have a dozen suppliers from day one. It's a brand new ecosystem still in it's infancy, it didn't even exist to this extent when Facebook and Youtube was started. What existed then was the infrastructure services like server colocation and CDNs. So they relied on open source software, but they still had to deal with a lot of messiness you don't have to with SaaS. This is the embryo of that eco system. Give it a decade to mature and my bet is there will be a one man operation totally competing with Google on their core business. Oh wait, that already happened.

ericd 15y ago
You seem to have ignored the much more important part of my comment, which was to say that growing the number of companies isn't a direct replacement for growing the number of people at a company. There just isn't enough space in people's memory for a huge expansion in the number of popular brands, and that reality provides a very powerful reason for consolidation. How many email deliverability providers would you actually consider? You may research it heavily, but most people would just go to Sendgrid, or one of the couple others they've heard about. The others face a significant education challenge, and there's only so much company news/PR one person can stomach from a sector before they totally tune out. That is a fundamental bottleneck in the scalability of the number of companies that can feasibly operate successfully in any given sector. You don't see the same effects with little pizza shops, etc, because their reach is usually gated by locality, but the "flatness" of the internet causes many more "winner take most/all" scenarios.
- martinkallstrom 15y ago
  I think you are right that there isn't enough space in people's memory for a huge expansion in the number of popular brands. But they don't have to, because brands on the internet too are becoming localized. A Swedish email company may very well co-exist with Sendgrid, catering to other Swedish companies. The Swedish startup Kundo competes successfully with GetSatisfaction, in Sweden. A company specializing in sending out the same email to many people instead of one-to-one, may co-exist with Sendgrid, just as Mailchimp is. Create a matrix with the dimensions [every thinkable service a company needs] x [the number of possible functional specializations for each service] x [the number of geographical markets] x [the number of possible target groups in each geographical market] x [the number of companies that can co-exist catering to each target group] and you get a search space that can fit as many startups as there are sands in Sahara. Even with a very low fill-factor of that matrix there is room for millions of companies to co-exist over the entire planet. The debate is not to what extent there are huge numbers of market opportunities, because it's a fact that there are. But whether a larger corporation is more fit to compete within that matrix than many smaller ones. That balance is rapidly shifting. The flatness of the Internet does cause a lot of "winner takes all" scenarios, but it also makes it possible for the winner to be a small company. A company like Google still has to do PR to compete with Sendgrid if they create their own email sending service. Yes, they have their brand recognition to leverage, but it's possibile for Sendgrid to say "Google has mediocre customer services and may be a great search company, but we do only what we do best and that is one-to-one email sending with excellent customer service". And people are increasingly discovering that it is on a personal level more gratifying to be the founder of a small company competing for a very specialized market opportunity than to be an employee in a large company competing for a very broad market opportunity.

ericd 15y ago

You seem to have ignored the much more important part of my comment, which was to say that growing the number of companies isn't a direct replacement for growing the number of people at a company. There just isn't enough space in people's memory for a huge expansion in the number of popular brands, and that reality provides a very powerful reason for consolidation. How many email deliverability providers would you actually consider? You may research it heavily, but most people would just go to Sendgrid, or one of the couple others they've heard about. The others face a significant education challenge, and there's only so much company news/PR one person can stomach from a sector before they totally tune out. That is a fundamental bottleneck in the scalability of the number of companies that can feasibly operate successfully in any given sector. You don't see the same effects with little pizza shops, etc, because their reach is usually gated by locality, but the "flatness" of the internet causes many more "winner take most/all" scenarios.

martinkallstrom 15y ago
I think you are right that there isn't enough space in people's memory for a huge expansion in the number of popular brands. But they don't have to, because brands on the internet too are becoming localized. A Swedish email company may very well co-exist with Sendgrid, catering to other Swedish companies. The Swedish startup Kundo competes successfully with GetSatisfaction, in Sweden. A company specializing in sending out the same email to many people instead of one-to-one, may co-exist with Sendgrid, just as Mailchimp is. Create a matrix with the dimensions [every thinkable service a company needs] x [the number of possible functional specializations for each service] x [the number of geographical markets] x [the number of possible target groups in each geographical market] x [the number of companies that can co-exist catering to each target group] and you get a search space that can fit as many startups as there are sands in Sahara. Even with a very low fill-factor of that matrix there is room for millions of companies to co-exist over the entire planet. The debate is not to what extent there are huge numbers of market opportunities, because it's a fact that there are. But whether a larger corporation is more fit to compete within that matrix than many smaller ones. That balance is rapidly shifting. The flatness of the Internet does cause a lot of "winner takes all" scenarios, but it also makes it possible for the winner to be a small company. A company like Google still has to do PR to compete with Sendgrid if they create their own email sending service. Yes, they have their brand recognition to leverage, but it's possibile for Sendgrid to say "Google has mediocre customer services and may be a great search company, but we do only what we do best and that is one-to-one email sending with excellent customer service". And people are increasingly discovering that it is on a personal level more gratifying to be the founder of a small company competing for a very specialized market opportunity than to be an employee in a large company competing for a very broad market opportunity.