Jessica’s Friday column “End of Tech Startups” argued that today’s big technology companies are nimble, smart, and well run—and that until there is another fundamental technology disruption, the window of opportunity for startups is limited to more traditional markets with less competitive players.
I agree with Jessica, but I don’t think she takes her argument far enough. This new generation of tech companies not only leverages technology to better compete, they also enjoy a position within enormous markets as marketplaces, and that makes them unassailable in a way that their historical brethren were not.
The upshot is, I believe startups are going to be locked out of certain types of businesses forever.
Limited Markets
When you zoom out, human beings don’t really do that many things. We sleep, eat, move around, communicate, procreate and try to stay alive. Those are, broadly speaking, the areas around which the entire economy pivots.
Many of the biggest and fastest growing companies in the world map directly to these basic and simple human needs at scale. Facebook strives to be Talking To Each other Co., Google strives to be Information Company, Airbnb basically strives to be Sleep Co. and Uber ideally wants to be Moving Around Co.
Before modern technology, the idea that one company could dominate such a fundamental activity would have been absurd because we believed that things became less efficient when they got bigger. So, they would ultimately collapse on themselves and lose to nimbler, smaller players in certain geographies or sub-businesses. Companies could only get so large.
The historical laws of physics, however, have recently changed. We have new super powers. We can now remember everything, talk to anyone on earth instantly and process massively scaled data in a way which was pure science fiction a generation ago.
These new tech physics change two things. First, they allow bigger companies to better manage themselves at scale. Real-time analytics, collaboration systems like Slack—when coupled with the right people and culture—mean that it is possible for big things to be better run.
Second, new technology allows businesses to organize efficiently as large marketplaces. Facebook is a marketplace of personal content. Each person is both a buyer and a seller of content offered in various audiences. Uber, Airbnb, and Amazon are two-sided markets with distinct buyers and sellers.
The companies are all the same in that they don’t produce things, they serve as meeting places and coordination points for others to complete complex transactions. As a result, these types of businesses are perfectly paired with the communication technology wave we just experienced.
The fact that they are all marketplaces is a key factor in their success—and future unassailability—because marketplaces have a special property that almost all other business lack: they generally get better the bigger they are.
The Trouble with Marketplaces
To be sure, in the past, marketplaces had serious trouble scaling just like other businesses. Lack of access to communication, memory, and processing forced markets to generally sub-specialize and standardize the goods they were selling.
When information about what to buy and sell was scarce, people bought a relatively small number of public stocks they could get information on. Commodities like grain and pork-bellies had to be bucketed and standardized into a few types and indexes so that they could be bought and sold in a practical way.
Today, however, communication technology has relieved a massive amount of that pressure. Now, people can search for and negotiate between a heterogeneous set of vacation home options, for example, and a market can efficiently mediate transportation requests across millions of people all with slightly different needs.
What’s Next
You can look at history and say that this is mostly business as usual. The winners of network businesses of the past—phone, broadcasting, airlines, even big-box-retail—tend to stick around for a very long time and be extremely hard for startups to compete with. But then something new comes along.
But I am not sure a next technology driven “swerve” will change these dynamics as has happened in the past. That’s because these new dynamics have released the upper boundary of how big companies can get. At the same time, technology gives business more return on scale, so it is unclear to me when, if ever, startups will get back in the game.
There is a real chance, as a result, that the opportunity for anyone to challenge Airbnb in the race to be Sleep Co. is closed for decades not years.
To be sure, the current dominant generational players face enormous threats. Companies like Uber and Airbnb face huge regulatory risks—one check on infinite scale. Regulators will ultimately struggle to build cases because they’ll need to show that consumers are adversely affected by the companies’ growth.
Others like Facebook have had to take drastic measures to maintain their networks through shifts like the move from desktop to mobile.
All that said, it does feel like this time it is different. New levels of scale are within practical reach. A broadcast TV network or the phone company never could credibly stake human communication as their market in the way that is now possible. Airlines couldn’t reasonably stake transportation, and big box retail couldn’t stake commerce. But marketplaces have changed that and that is exactly what might be possible now.