Contents
In this blog post, I explore why some of the world’s largest and most well-entrenched tech companies don’t die, despite being seemingly obsolete.
Checkout this video:
The Power of Network Effects
In business, the term “network effect” is used a variety of different ways. Sometimes it’s used to describe how a product becomes more valuable as more people use it. Other times it’s used to describe how companies can become so big and powerful that it’s nearly impossible for new companies to compete with them. In this article, we’ll explore how network effects can make it very difficult for new companies to compete with established tech companies.
What are network effects?
A network effect is when a product or service becomes more valuable as more people use it. The classic example is a telephone: the value of owning a telephone increases as more people have telephones and can be called. Other examples include social media networks, dating apps, and marketplaces.
Network effects can create powerful moats around entrenched tech companies. When a company has a large and active user base, it becomes very difficult for new entrants to compete. This is because the value of the product or service increases as more people use it, so users are less likely to switch to a new competitor.
This phenomenon is sometimes called the “network effect,” “direct network effect,” or “network externality.” A related concept is the “indirect network effect” or “two-sided market,” which occurs when there are two groups of users who derive value from each other (e.g., buyers and sellers on a marketplace).
Network effects can also work in reverse: if enough people stop using a product or service, it can become worthless (this is sometimes called the “network death spiral”). This often happens with social media networks: if everyone leaves for a new platform, the old platform becomes worthless.
How do network effects keep tech companies alive?
One key reason that big tech companies don’t die is because of network effects. Network effects occur when a product or service becomes more valuable to users as more people use it. For example, the value of a phone call increases as more people have phones. Of the major tech companies, Facebook, Uber, and Airbnb are all examples of businesses with strong network effects.
The existence of network effects gives incumbent firms a huge advantage over would-be rivals. Consider Facebook again. The more people who are on Facebook, the more valuable it becomes to each individual user. This creates a virtuous circle for Facebook: More users lead to more engagement which leads to more users. This is in contrast to most other businesses, which have what economists call “diminishing returns to scale” — meaning that as they grow, their costs increase at a faster rate than their revenue.
This virtuous circle is extremely hard for new firms to break into. New social networks have a hard time getting users because they offer less value to users than established networks like Facebook. As a result, new firms find it hard to raise money and attract talent — two key resources required for success in the tech industry
In short, network effects make it very hard for new companies to unseat incumbents in the tech industry This helps explain why there are so few major tech firms relative to other industries — and why those that do exist are so immensely valuable.
The Power of Economies of Scale
What are economies of scale?
Economies of scale refer to the cost advantages that large businesses have over small businesses. The main reason for this is that large businesses can spread their fixed costs over a larger number of products, which results in a lower per-unit cost. There are two main types of economies of scale: internal and external.
Internal economies of scale occur when a company grows larger and is able to take advantage of its size to reduce costs. For example, a large company might be able to negotiate better terms with its suppliers or be able to build its own components instead of purchasing them from an outside supplier. External economies of scale occur when an industry as a whole becomes more efficient due to the presence of larger businesses within it. For example, an increase in the number of airlines within an industry might lead to lower airport fees for all airlines due to the increased negotiating power of the industry as a whole.
Economies of scale are one of the main reasons why incumbent firms (i.e., established companies) find it so difficult to compete against new entrants (i.e., start-ups). New entrants generally don’t have the same economies of scale advantages as incumbent firms, which gives the incumbents a significant cost advantage. This advantage becomes even more pronounced as the industry matures and the fixed costs associated with entry become increasingly higher.
How do economies of scale keep tech companies alive?
In business, economies of scale are the cost advantages that a company enjoys when it increases its production or output. Economies of scale arise because as output increases, per-unit fixed costs decline. That’s because a larger production volume allows a company to spread its fixed costs, such as research and development or marketing expenses, over more units of output. This ideas also apply to technology companies.
In the tech sector, there are several examples of firms that have maintained their position for years, or even decades, by leveraging their economies of scale. In many cases, these companies have been able to keep their prices low and undercut any new entrants into the market.
One example is Microsoft, which has long been the dominant player in the desktop operating system market. Despite numerous challengers over the years, Microsoft has been able to stay ahead of the competition by using its economies of scale to drive down prices and bundle its products with other popular software applications.
Another example is Google, which has used its economies of scale in online advertising to maintain its position as the dominant search engine. By offering advertisers a larger audience than any other search engine, Google has been able to charge lower prices and keep its market share.
So how do these companies maintain their economies of scale? In many cases, it’s simply a matter of size: they’re just too big for any new entrant to compete with. But there are also several things that these companies do to actively maintain their economies of scale and keep competitors at bay:
1) They reinvest profits back into their business: This allows them to continue developing new products and expanding their reach.
2) They acquire smaller companies: This helps them consolidate their position in the market and take out potential threats.
3) They focus on creating a network effect: This means making their products more valuable as more people use them (think social media platforms like Facebook).
The Power of Branding
In today’s business world, it seems like entrenched tech companies can do no wrong. They have strong brands that people trust, and they continue to dominate their respective markets. However, there are a few companies that have been able to successfully challenge these tech giants. In this article, we’ll discuss how these companies were able to do this and what lessons we can learn from them.
What is branding?
Branding is the use of a name, term, design, symbol, or other feature to identify a product or service and distinguish it from those of other producers.
The practice of branding is thought to have begun with the ancient Egyptians who were known to have engaged in cattle branding as early as 2,700 BCE. Logos were also used in ancient Greece. In Rome, slaves were branded with the marks of their owners. And in England during the Middle Ages, blacksmiths used brands to mark the horses they shod.
The word “brand” originally referred to the burning of marks into wood or flesh. It was derived from the Old Norse “brandr” which meant “to burn.” Over time, the word came to be used more broadly to refer to any distinguishing mark.
In the 19th century, with the rise of mass production, branding became increasingly important as a way to differentiate products from competing manufacturers. The advent of trademark law in the late 19th century further strengthened the practice of branding by giving manufacturers legal protection for their unique names and logos.
Today, branding is an essential part of marketing for all businesses, large and small. A strong brand can build customer loyalty and help a company charge more for its products or services. Branding can also make it easier for customers to find what they’re looking for in a crowded marketplace and foster an emotional connection with a company or product.
How does branding keep tech companies alive?
In recent years, there’s been a lot of discussion about the power of branding, and how it can keep companies alive long after their products become outdated. In the tech world this is especially true – just look at how Apple and Samsung have managed to stay on top, despite the fact that their products are often no better than those of their competitors.
So, how does branding keep tech companies alive? There are a few key ways:
Branding creates an emotional connection: We connect with brands that we feel good about. When we buy from them, we’re not just buying a product – we’re buying into a vision and a way of life. This is especially true of tech brands, which often promise to make our lives easier or more fun.
Branding differentiates products: In a world where there are so many choices, branding can help to differentiate products and make them more appealing to consumers. When everything else is equal, we’re more likely to go with the brand that we’re familiar with or that we have positive associations with.
Branding builds trust: We’re more likely to trust a brand that we know and feel good about than one that we’re not familiar with. This is important when it comes to making big purchases, like a new piece of tech. If we don’t trust the brand, we’re less likely to take the plunge.
Branding creates loyalty: Once we find a brand that we love, we tend to stick with it. This loyalty can be hard to break, even if another brand comes along with a better product. In the tech world, this is especially true – just think about how many people are loyal to Apple or Samsung despite the fact that there are other options out there.
