Economic loops for startups

March 19th, 2022

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…)

Internet economics: the main loop
Internet economics: the main loop

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…).

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 on November 25, 2021

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