Let’s say you run a startup that has a successful product, and you are now considering what product you should build or acquire next. 🧵
Something I find useful is mapping out the typical economic loop from start to finish, and then considering the startup’s position within that loop.
I’ll explain by looking at the current internet landscape and the strategic position of Google, Facebook, Amazon, and Apple. (I’ll adapt this to web3 in a future thread.)
Consider the path of a typical internet session, from the user to some revenue-generating action, and then (in some cases) back again to the user.
(I wrote more about this here cdixon.org/2016/03/13/the…)
Suppose you are Google and a user clicks on an ad which leads to a $1 purchase. The strategic question is how Google positions itself to get the most of that $1 vs the complements and substitutes in this chart, now and in the future.
Note on complements: people usually think of substitutes when they think about competition, but with internet businesses complements are often a bigger threat & opportunity.
Hamburgers and hotdogs are substitutes. You generally choose one or the other. Examples in tech: AT&T vs Verizon, iPhone vs Android phone.
Hotdogs and hotdog buns are complements. Examples in tech: an internet provider and a search engine, a browser and a social network.
Many fiercest battles in the history of the internet have been between complements, going back to Microsoft vs Netscape.
Think of the economic loop pictured above as a model train track. Positions in front of you can redirect traffic around you. Positions after you can build new tracks that bypass you.
New technologies come along (which often look toy-like and unthreatening at first) that create entirely new tracks that render the previous tracks obsolete.
A big reason big tech companies invest in open source software is to “commoditize the complement” (see this classic Joel Spolsky post on the topic joelonsoftware.com/2002/06/12/str…).
It’s much better to have complements be open source and free vs controlled by a competitor. This is why, for example, the biggest contributor to Linux is Intel.
Looking at this chart, it should be clear why most of the big tech companies have efforts in almost all positions in the loop.
Amazon’s strength is its logistics network. Google and Apple are strongest at the device, OS and app layer. Facebook’s strategic position is the weakest but is making bold bets on next-gen devices. All four are trying to either commoditize or own adjacent layers.
Now of course what makes these strategic questions more art than science is you need to consider not just the loop today but in the near- and long-term future.
Predicting this is a complex and fascinating mix of technology, markets, psychology, culture, and strategy.
Ok web3 addendum (can’t help it 😂). Viewing internet services through the strategy lens is also one thing that makes “computers that can make commitments” so interesting. You can now commit various layers to permanent policies, which changes the whole surrounding chess board.
The strategy lens also helps contextualize what an incredibly visionary move of Google to buy Android in 2005 and then —maybe more impressively—giving it away for free and (partially) open sourcing it when conventional wisdom was still to charge for the OS (see Microsoft).
Originally published here.
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the current or enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; a16z has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.