The Three Curses of Internet Success
From the rise of the Internet in the 1990s, through the dot-com bubble and continuing today in the Web 2.0 era, hotshot Internet technology companies are frequently cursed with success. The three curses are Success Without Revenue, Success Without Profits and Success Without Barriers to Entry. These curses led to the Web 1.0 bubble bursting, and could scuttle the dreams of many in Web 2.0.
Curse 1: Success Without Revenue
Success Without Revenue is mainly associated with a first-mover, land-grab mentality. The belief is that you must grab the traffic now and can figure out how to monetize it later. This certainly can happen, as exemplified by Google and Yahoo, but it is very difficult to accomplish.
Curse 2: Success Without Profits
Success Without Profits is caused by a number of things, most often the cost of scaling up all aspects of the business without being able to realize economies of scale. In fact, it involves discovering that there are diseconomies of scale. The relatively low costs of starting a web venture based on a clever idea often mask the true cost structure required to operate an industrial strength business.
Curse 3: Success Without Barriers to Entry
Barriers to Entry can make start up costs in a market so high that new entrants are discouraged. Internet technology has made the traditional barriers vary hard to achieve. Consider these classic barriers:
The world-flattening forces Tom Friedman has popularized have impacted no businesses more than those that are Internet technology based. No surprise here, since the enabling Internet technologies provide the underpinnings of most of the flatteners. These forces have made effectively erecting any of the above barriers exceedingly difficult.
The result of not putting up barriers to entry is that a successful idea attracts lots of competitors who learn much from the first mover. This tends to fragment and commoditize the market, reinforcing Curse 1 and Curse 2.
The best defense against the three curses is to avoid first mover status. In fact, it is often best to avoid early mover status. This may seem sacrilegious, but smart later entrants tend to do better. Do you remember Excite, Lycos, Alta Vista and Infoseek? Something about pioneers and arrows in their backs…
First mover or not, there is no substitute for a credible business plan that spells out a scalable business model that includes revenue and profit. Failing that, the plan should be for more of a proof-of-concept business model and to be acquired as an early exit strategy.
Copyright © 2006 Philip Bookman
Curse 1: Success Without Revenue
Success Without Revenue is mainly associated with a first-mover, land-grab mentality. The belief is that you must grab the traffic now and can figure out how to monetize it later. This certainly can happen, as exemplified by Google and Yahoo, but it is very difficult to accomplish.
Curse 2: Success Without Profits
Success Without Profits is caused by a number of things, most often the cost of scaling up all aspects of the business without being able to realize economies of scale. In fact, it involves discovering that there are diseconomies of scale. The relatively low costs of starting a web venture based on a clever idea often mask the true cost structure required to operate an industrial strength business.
Curse 3: Success Without Barriers to Entry
Barriers to Entry can make start up costs in a market so high that new entrants are discouraged. Internet technology has made the traditional barriers vary hard to achieve. Consider these classic barriers:
- Owning scarce resources
- Owning exclusive operating licenses
- Achieving economies of scale
- Setting expectation for a large advertising presence
- Creating high exit costs for potential competitors
- Creating high switching costs for customers
- Achieving exclusive control of channels
- Owning key intellectual property rights
The world-flattening forces Tom Friedman has popularized have impacted no businesses more than those that are Internet technology based. No surprise here, since the enabling Internet technologies provide the underpinnings of most of the flatteners. These forces have made effectively erecting any of the above barriers exceedingly difficult.
The result of not putting up barriers to entry is that a successful idea attracts lots of competitors who learn much from the first mover. This tends to fragment and commoditize the market, reinforcing Curse 1 and Curse 2.
The best defense against the three curses is to avoid first mover status. In fact, it is often best to avoid early mover status. This may seem sacrilegious, but smart later entrants tend to do better. Do you remember Excite, Lycos, Alta Vista and Infoseek? Something about pioneers and arrows in their backs…
First mover or not, there is no substitute for a credible business plan that spells out a scalable business model that includes revenue and profit. Failing that, the plan should be for more of a proof-of-concept business model and to be acquired as an early exit strategy.
Copyright © 2006 Philip Bookman
Labels: software strategy
posted by Phil Bookman at 9:16 AM
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