Survival the fattest
— July 17, 2014Survival the Fattest is a phrase made popular by Warren Buffet when he was referring to the newspaper business. He used this phrase to explain the monopolistic nature of daily local newspapers. In his talk to the local press club of Omaha in 1992, Buffet had the this to say about the newspaper business
There are 1600+ local daily newspapers in U.S and there are no competing newspapers. Essentially the economics of the business drive it toward one newspaper per city,town or metropolitan area. Nothing evil about it, but it’s just what Tom Lynch called “Survival of the Fattest”. If you finish 2nd at the end of the race, you are not in the game anymore. There are view few industries with this kind of economics.
Apart from the newspaper industry,this structure can also be seen in other industries like software, internet and finance. For example Microsoft became a dominant player in the PC market by gaining more than 80% of the market share for the operating systems. The following forces worked to Microsoft’s benefit.
1. Network Effect – As the Windows operating system and applications such as MS Word and MS Excel became popular, more people and organizations started adopting them in order to collaborate and communicate with each other effectively. This established the Microsoft operating system and applications as the industry standard.
2. Cost of Switching – Once organizations chose Windows as their operating system of choice, they made huge investments in IT infrastructure around Microsoft products and trained their staff too. This made it hard for organizations to switch to other platforms or products for a long time.
Similar examples can be found in social networking sites like Linkedin. Once the network of professionals on Linkedin reached a critical mass ( i.e. a certain number of members ) the forces of network effect and social proof formed a tail wind, which helped the company establish a dominant position compared to existing players like Monster Inc. Linkedin became industry standard, Once the recruiters and organizations started using Linkedin as their platform for recruiting and advertising jobs, Linkedin became the industry standard. Once professionals put in the effort to build their profiles and develop connections and a reputation on the network, they found it expensive to switch to a new network or platform. Monster tried to build a professional network based on the Facebook platform and failed for this reason. In industries where one dominant player ends up with most of the market share, there are multiple forces working in favor of the dominant player and they are.
- Cost of Switching
- Network effect
- Social Proof
These forces have a lollapalooza effect, which make it difficult for new entrants or substitutes to carve out market share away from the dominant player, while the dominant player can comfortably maintain high profitability and defend the market share. However companies or external factors can change the structure of any industry as Michel E Porter argues in his article on Porter’s five forces. for example the stronghold of Microsoft is beginning to weaken after decades. One of the reason for a gradual decline in Window’s market share is eroding network effect and cost of switching for the custoimers due to following reasons
- Proliferation of internet based applications in the last decade has undermined the importance of desktop operating systems and platforms.
- Open standards for document sharing and communication has reduced the cost of switching to alternative applications like Google Docs for organizations and individuals.
- PC as a form factor is rapidly being replaced by mobile devices like smart phones and tablets, where Microsoft is not a dominant player.
- As other operating systems like iOS and Android are gaining market share, they have approached a critical mass, where developers are focusing these operating systems for their applications and platforms. As a result iOS and Android with their eco-system of application are gaining favor in the business world
In conclusion, Some industries favor “Survival of the fattest” , however the structure of any industry is subject to change. The erosion of Network Effect and Cost of Switching can disrupt an industry structure and the fattest player might be forced out or marginalized by aspiring new players in the industry. When investing or operating a business it’s useful to understand the forces that make a player dominant in an industry and the forces that can change it’s position in the industry.
About author
Leave a reply
Hello I am Hari
I have more than 20 years experience in the information technology (IT) industry. I write about what I’m learning and some of the tips I have picked up along the way.
1 Comment
The Weekly Lineup: Eco-Friendly Edition | The Dividend Ninja