Why, in 2016, is there still no good, widely available, digital address book? Why is mobile calendaring still so incredibly broken? Why is there no widely used news reader or personal journal?
It isn’t for lack of trying. These are all well-known consumer problems littered with startup failures and big company misses.
When you ask people in the startup community why these problems are unsolved, you usually hear it’s a “product issue.” People say no one has yet figured out the right experience that appeals to consumers and scales quickly and efficiently.
I disagree. It isn’t about product. It’s about getting paid. There are plenty of products people want, but they’re not good businesses. It is because they fail as businesses that they can’t be built as products, not the other way around.
Take productivity apps. People won’t pay enough extra for a good calendar or address book vs. a mediocre one to power a healthy business without massive scale. And, since most of these apps aren’t inherently “viral,” the cost of acquiring new customers is too high to justify a low contribution-per-customer business.
A lack of a great business model makes maintaining long-term focus and attracting a top-notch team to solve a problem nearly impossible. This lack puts things which consumers might want fundamentally out of reach as realized products.
Big Companies Can’t Stray Too Far From Their Model
This isn’t just a startup problem. The big companies—which in theory have armies of engineers and lots of patience—can’t address these problems because they have better uses for talent and money.
Take Apple. Apple gets paid by selling hardware. Phones are almost 70% of its revenue at this point. If you want to understand why iCloud has struggled for so long, and why Apple has failed to develop good services in general, all you need to recognize is that those businesses are not core to how Apple gets paid. They are economic afterthoughts.
The problem with afterthoughts in the context of big companies is that the best people don’t want to work on them, and whenever there is a tradeoff between the core business and an afterthought, the afterthought loses.
So, for something like iCloud, or Apple Music, it’s no surprise that they struggle to produce good consumer products. And it is no surprise that Apple’s attempts in some categories without obvious business models—like productivity apps—have failed too.
Could a great music service or better cloud services help Apple sell more phones? Of course. However, dollar for dollar and moment for moment, these services are not the easiest or next best way for Apple to sell more of the hardware that makes them who they are.
Monetizing Attention
Google is, of course, the other giant to reference in this discussion. On one hand, with its massive search-advertising cash cow, historical “20% time” policy and extreme freedom for engineers, Google has supported more products with no immediate business benefit than almost any big company I can think of.
Even Google, however, ultimately shut down Google Reader rather than invest the money and time to make it great. And while Google’s mail and calendar products are the best of the options available, the company is clearly under-investing in them relative to what they could.
Why? Because Google gets paid for high-intent clicks from search. Products that don’t drive the core economics of the business are easy to start, but hard to make succeed in the culture and framework of business decision making.
The same thing goes for Google failures like Google+. For all the possible reasons you could call on to explain the failure, the easiest one is simply that the product didn’t matter enough to how Google actually made money. That meant the Google+ team was unable to get the A-talent internally they needed on the project or make the necessary tradeoffs against other Google priorities.
To me this is the most important part about Google restructuring into Alphabet. I imagine its leaders recognized that as long as all of Google’s projects were housed under one economic engine with unbeatable profit margins, it would be extremely hard for the company to succeed at anything else.
So far, it is unclear if Google’s restructuring to Alphabet will work. If you follow the logic of this proposal, it would seem obvious that Nest could not succeed under the old structure, and it still isn’t clear that it can under the new structure. After all, everyone is still getting paid in a shared stock currency. But it is at least a valiant attempt.
Facebook, obviously, has something similar going on with Oculus, Instagram, Messenger, and a lot of the connectivity projects they are pursuing. Facebook makes money from attention, which is related to how Google makes money. But Facebook differs because its business isn’t about specific, demand-oriented clicks; it’s about the ability to get a message in front of a specific type of person.
And, perhaps, setting up Oculus, Messenger, Instagram and other bets as more autonomous units allows Facebook to pursue projects that aren’t necessarily the quickest way to grow the attention-currency that drives the company’s revenue and stock price.
Non-Viable Startups
Startups can do things that big companies can’t. They can choose lower-margin businesses and target markets too small for big companies, but might one day grow.
However, startups—even those with missionary founding teams—still exist in the broader ecosystem and can’t address problems with worse business properties than their peers.
Without the most competitive business model, in a world of talent and capital fungibility, it is impossible for less economically optimized businesses to get the resources they need to solve big problems over a long period of time.
So, every once in a while you see a startup pop up with a passionate team and the promise of solving one of these non-economic product problems. But then those companies fail, or get acquired and dissolved because their chosen product focus area doesn’t support a viable business that can grow.
The upshot is that if I had to bet, I’d say that in 2020 we still won’t have good software for contact management, calendaring, news-reading or meeting new people.
For the big companies that have the theoretical ability to solve some of these consumer problems, there just isn’t enough money and value up for grabs to make them worth solving. They exist in a blind spot where they aren’t important enough for their core businesses, like selling phones or ads.
For the startups that might go after the problem anyway, there isn’t enough money available in the game because the products alone aren’t meaningful businesses.
Any way you slice it, people won’t pay enough for these solutions per-person, and they are too hard to scale efficiently to make them truly great businesses, which is why they, sadly, cannot exist.