The Amazing Power of Deflationary Economics for Startups

Posted on Dec 22, 2011 | 81 comments


I’m often asked by people what investment areas interest me.

It’s true that I have a functional focus on three areas: Performance-based marketing, digital television and mobile computing. I try to invest in things that I know and that I believe I might have better knowledge and relationships than the masses of VCs.

I have other areas of interest & competence such as cloud computing and document management given my background.

It’s also true that I’m mostly founder driven, where the founding team & my personal relationship with them leads to a strong mutual working relationship. If that bond isn’t there or if it feels like I’m in a bidding process for the highest price, I might as well be Wells Fargo.

But one theme in pervasive in all my thinking about investing in Internet-based companies: Deflationary economics.

And it’s something I think you ought to consider when building your Internet businesses.

Here’s what I mean

When you think about the great achievement of the Internet in aiding content, commerce & communication they include:

  • Large scales of connected people & information never seen before in humanity
  • Unprecedented transparency of information
  • Open standards that make it easier to plug into other products & services, creating a global bazaar
  • Socially connected individuals and platforms that enable faster roll-outs of successful products
  • Payment ready consumers (Amazon, iTunes, PayPal) and businesses (Google AdWords, Square)

So which types of businesses become super successful given this environment?

Ones that offer amazing value (low relative margins) at high volumes that makes it nearly impossible for high-cost incumbents to compete. That’s what I mean by deflationary economics.

It is a classic case of the Innovator’s Dilemma in practice.  If you’re a startup and you haven’t read my summary of Clay Christensen’s seminal work please do.

It’s the single most influential piece of work in determining my investment philosophy and how I think about markets.  In a recent panel discussion I participated in with Fred Wilson he said the same.

Why Deflationary Business Win

In the simplest form, new startups have a product that is INFERIOR to that offered by the competition but at a dramatically lower price with the seller opting for a very thin margin on their product.

Initially their only customers are people who can get by on the reduced functionality or perhaps don’t have the money to spend on the expensive product.

Often it turns out that the market is greatly expanded by having a lower price point new entrant. And over time the new entrant attracts enough business that, as depicted in the graph above, the quality of the product slowly increases over time.

The new entrant keeps margins low but suddenly has a lot of profits due to large volumes of business.

How does the incumbent respond? Not by dropping price & quality – they don’t have an advantage there. Instead they spend more money trying to innovate on product quality and call attention to the weaknesses of the new entrants product quality.

Often major customers defect en masse to the new entrant as they realize that the huge price premium is not justified by the product differentials.

That is what Clay Christenson defined in his book as “The Innovator’s Dilemma.”

And this approach to looking at startup industries is what I call “deflationary economics.”

How it May Apply to Your Business?

When I’m asked about all of the mistakes I made at my first startup (I made them all) I often tell people that the single biggest mistake that I made was charging too much for my products.

We knew how to sell – we had clients paying $1 million / year. We knew there was value in what we provided. In order to grow we hired successful and expensive sales people who in turn were able to (and incentivized to) sell projects at higher margins and close big deals.

This was a mistake.

We grew really fast for a few years. But eventually low-cost new entrants came into the market offering most of our features at 10% the costs. We still won large customers but over time it became harder to compete.

Had I taken the lower-margin approach I really think I’d be sitting atop a $1 billion+ company today.

So when you start your company think carefully about whom your target customer is. If you’re trying to be a value-based product or trying to scale to a large market size you may want to think about deflationary economics.

  • Does your product dramatically reduce costs in an industry with large incumbents and fat margins?
  • Can you provide a narrowly focused product to a niche of that market who will be attracted to dramatically lower costs?
  • As your business grows can you find ways to continually lower your costs by whatever means?

I would also think about how you use scale to your advantage to keep margins low.

  • Are you offering a product where the supply costs will continue to drop precipitously? (think Amazon’s Storage costs)
  • Are there alternative ways to monetize your product where incumbent are not? (think virtual goods of Zynga, ad supported models, freemium models)
  • Are there ways to offer super low margins on your product knowing that you will overlay other product offers to the same customers later that will improve your margins?

Most of the Internet’s Greatest Successes Have Been Deflationary

Craigslist – Think about what Craigslist achieved. It’s remarkable. They took an industry that had charged people large sums of money (the classified industry) and made it almost entirely free. How do existing incumbents compete with that?

Craigslist is kind of an anomaly in that it’s founder seems to run it in a non-traditional style and with some objectives other than the pure profit motive. But by providing free listings he build critical mass (volume) so charging small amounts for certain types of listing (i.e. recruiting) he could build a very profitable business.

Craigslist is everybody’s favorite business to say, “I’m going to disrupt them” but somehow nobody has really been able to. Given their terrible UI I’m sure it will eventually happen. But beating free is hard, as is creating a two-sided market (chicken & egg problem).

Amazon – Amazon is the ultimate deflationary business. Everybody knows the story well. They launched as an online book seller.

They had huge scale advantages because they could offer a much wider book selection since they didn’t need to be limited to the physical floor space of a physical retailer.

They had huge cost advantages because they didn’t need to pay for retail space or all of the retail workers. They even

 

had a government break because they didn’t need to charge taxes and thus consumers got an even better price.

But Amazon didn’t try to build a hugely profitable business. Does that sound dumb? I always see naïve journalists comment negatively on businesses that are “not profitable.” Sometimes it’s good to not focus on profitability & sometimes it’s bad.

There is a tension between profitability & growth. The more you want the latter the more investments you make in people and infrastructure now to pay for faster growth that expense of short-term profitability.

It doesn’t work for every business. But if you are growing uber fast, building for scale and have access to capital to fund your growth then it’s always the smart play.

So instead of maximizing price they kept cutting costs.  Innovator’s Dilemma. How do physical retailers compete with that? Especially when Amazon will offer free shipping for its best customers.

And Amazon wasn’t content with just being books, they wanted to be THE Internet retailer. Walmart in the cloud. This generation’s Sears Catalog. So they kept cutting costs of everything they offered.

And then they decided they wanted to be the Internet retailer of computing services so they created Amazon Web Services

(AWS). And they made it so cheap that everybody gravitated towards them. They had a scale advantage and were driving deflationary economics (in other words, massively driving down the costs of goods & services).

I was at Salesforce.com when Amazon was super aggressive on that storage pricing. I met with our network experts to figure out whether we could launch a competing service. The assessment of our best experts was that we couldn’t. Their view was that Amazon was taking a loss on providing Internet storage.

I have not inside data on that but I’ll be they were right. I’ll bet that Amazon’s view was to start with a loss leader because they knew that storage costs could come down and that they could add more service on top of their storage product and ultimately provide a profitable bundle of IT services to their customers.

In other words, storage might have been a “loss leader.” In any event, they had such scale advantages in providing this Internet infrastructure that to this day nobody in the industry has come close to matching them.

In my estimation this is one of the biggest strategic mistakes Google has made in not competing more aggressively with AWS. The Cloud is the future at Amazon has an enormous lead. As far as I know, the revenue in AWS is not publicly broken out but the last rumor I heard was that it had crossed $1 billion per year.

Google – They have led the deflationary pressure on advertising, bringing whole industries into chaos. This has particularly hurt the print media businesses that can no longer charge enough to pay for editorial, printing & distribution.

They are bringing deflationary economics to word processing, spreadsheets and office automation. They are bringing deflationary economics to local advertising.

I guess I would describe Google as the ultimate scale & deflationary business.

Skype – As with many deflationary businesses, Skype started by giving away its product for free. Free phone calls anywhere in the world is as deflationary as it gets.

Telecommunication companies are still charging people for phone calls when the costs to them of providing the calls is infinitesimally small. Data transfer is what costs telecom companies money these days.

Ultimately when Skype had 10’s of millions of users it rolled out products that made money. They started with “Skype Out” which was placing a call from a Skype line to somebody on a normal telephone. They charge for this call, but they charge at rates that are an order of magnitude cheaper than a telco.

Expect this industry to be whiplashed by deflationary economics in the next 5-10 years. It’s no wonder they’re pushing so hard to be become our Internet supplier and our TV suppliers. Unfortunately for them neither of these businesses will escape the deflationary maelstrom either.

TextPlus – Speaking of telecom disruption, a new breed of mobile telco is emerging that are riding the deflationary wave. It’s the reason I invested in TextPlus. At 25 million downloads & 10 million monthly active users we’re achieving a scale that makes it a very attractive opportunity.

We started offering free text messaging at a time when most telcos are still charging $240 / year for unlimited-texting plans. In many parts of America that’s a lot of money for families to be absorbing for something that costs the telcos almost zero. That’s one reason a free texting app has been so popular.

But beyond that TextPlus now offers free phone calls to other TextPlus users and out-of-app calls are a fraction of the normal costs by mobile providers.

Expect a deflationary revolution in the global telecom market – at a minimum for voice services. And with 6 billion global handsets you can imagine what an immense market this will be.

LinkedIn – Lots of people talk about LinkedIn as a social network. What interests me is the deflationary impact that LinkedIn and other recruiting websites have had on the recruiting market.

Think of the principles I described about Internet economics of Craigslist: huge scale, many parts of the service are free and monetize the narrow features where businesses are willing to pay – and at hugely deflationary prices to their normal recruiting fees.

Zynga – Deflationary. In the offline world people were buying consoles and then paying for game titles separately – many in the $29-49 price range per game. Along comes an immensely scaled business that offers games for free.

I know, it isn’t offering the same quality of games so I’m not arguing that the entire game console business goes away over night. But it is hard to argue longer-term against the deflationary pressures that Zynga brings.

Maker Studios – Network television costs $50,000 – 100,000 per minute to produce. Reality shows can be cheaper, with the lowest-end costing $6,000 – 8,000 per minute.

Maker Studios is an Internet producer of content relying on deflationary economics. It produces shows for $500 – 1,000 per minute. It’s no surprise that it has now become one of the most viewed networks of video programming in the world, achieving 500 million video views per month having only raised $3 million in venture capital.

Maker Studios produces shows like =3 by Ray William Johnson (NSFW), one of the most subscribed to shows on YouTube. Many episodes are garnering 8-12 million views while its network competitor (and equally brilliant show) Tosh.O is getting 3 million views.

Other shows like Epic Rap Battles of History (my personal favorite – if you get addicted we’ve produced about 15 or so now. The best ones have been watched more than 35 million times) and Animonsters are delivering huge audiences and significant revenues.

I know that the networks, studios & cable companies don’t yet see this business as a threat. My experience in looking at deflationary businesses says that they should pay attention to it. Deflationary economics tend to eat at the core of traditional offline businesses.

Of course I could go on and on including businesses like AirBnB, DropBox, Box.net, Yammer and so on. All deflationary. But by now you more than got the point.

So What Do I Look for In My Investments?

Exactly what I’ve outlined.

  • Teams that care about keeping costs low.
  • Teams that want to drive waste out of the system.
  • Teams that have a “lean” mentality.
  • Teams that are comfortable with transparency of pricing & costs and don’t mind competing in that environment.
  • Teams who aspire to build really big businesses and believe in deflationary economics.

  • http://bothsidesofthetable.com msuster

    In consulting if you’re going to pursue this strategy you really need some hugh cost advantage to do so (offshoring, better leverage rations, different pricing models (maybe more rev share / less fees) otherwise I’m not sure it works.

  • http://bothsidesofthetable.com msuster

    Re: regret – absolutely. If I knew then what I know now! But for now I’m very happy as a manager and not a player. I’m not sure I could hit the 3-pointers any more ;-)

  • http://bothsidesofthetable.com msuster

    I agree that that is highly likely.

  • http://bothsidesofthetable.com msuster

    I’m not sure there is a solution. The only way to pursue this strategy is to have investors that believe it as well.

  • http://bothsidesofthetable.com msuster

    You and me both, Mark. We were in the market at the same time. It was harder to have this vision back then. Still, you guys did a great job of growing.

  • http://bothsidesofthetable.com msuster

    I’m not really a “one post a day” kinda guy. Doesn’t suit my ADHD.

  • http://bothsidesofthetable.com msuster

    Thanks, Dhiraj. Yes, it has definitely impacted the photo business. Some companies have found ways to broaden their revenue sources and still build big businesses with ancillary products.

  • http://about.me/humphrey HumphreyPL

    Ahh apologies I didn’t explain myself well enough. The exorbitant costs are around the licensing fees for Big Data Software which aren’t needed and where we believe we can create better software for a lower price with better results. Thanks Again and Happy Hanukkah!

  • http://www.alearningaday.com Rohan

    Yeah. I know.

    Doesn’t stop me wishing.. ;) It’s a good thing.. :D

  • http://twitter.com/ScotchGuyDan Dan Bowen

    If Epic Rap Battles goes over that well…try Shit Girls Say.  With a wife, and 5 sisters-in-law, I’ve seen every single one of these expressions…
    http://bit.ly/t2VSyz

  • http://www.bluecoastrecords.com/ Cookie Marenco

    Thanks for the response, Mark.  In fact, I’ve known Peter Gotcher
    (Topspin) since Digidesign was 3 people in San Mateo.  Peter used to
    rent my gear to burn Linn Drum chips.  Pre Ian at Topspin, we were beta
    testers for them.  I understand that they needed to accommodate a wider
    audience, so we ended up building our own delivery systems.

    I didn’t really ‘get’ Ian until I watched your interview with him on
    This Week In VC.  You brought out the character of Ian that I had missed
    by only reading his blogs and seeing him on panels.  Thank you.  (I’m
    upto episode 45 of your series… incredible information that I wish I
    had known last year and saved me a lot of time working in impossible
    situations)

    Funny you should mention GunsNRoses…  the current drummer, Brain, is a
    good friend and co-producer on many projects with me (the non Blue
    Coast recordings).  Been working with him since the early Limbomaniacs
    and Primus days.  “Nevermind” was my number one ‘test the control room’ album.

    Anyway, good to know that big margins aren’t all bad.  It sure makes my life easier, even if it is harder to scale.  If you come to CES, please come visit in the Sony
    Room – Venetian, suite 30-321,
    where I’ll be demoing my label on their AR-1 speakers.  We’ll be having
    interesting discussions on the future of audio, I’m sure.  I’d love
    your insights on working with Sony if you ever have some time.

    thanks, again, for your wisdom!

  • http://jbp3.com/ John Petersen

    Ha. Reading between the lines here, that sounds like — I really love what I’m doing, BUT if the right opportunity just so happens comes around, I might have to dust off the Air Jordans

  • Mohsinbangalore

    Exactly. Last week I attended a talk by Jo ito who was an early stage investor in twitter. He was asked about the biz model of twitter and he said that the most important thing in the internet business is users , users , users. Once you have the users you will come out with some way to monetize a percentage of this users.

  • http://www.keshkesh.com/ Takeshi Young

    I wonder what the long term impact on jobs and the economy will be if everyone follows this strategy… small, efficient teams with a low margin strategy undercutting larger and established industries… the larger industries may enjoy higher margins, but they also support a lot of jobs & people.  The low margin strategy benefits all the engineers and entrepreneurs here in Silicon Valley, but it doesn’t seem to be creating as many jobs as it’s killing off worldwide.

    Also, interesting to note that Apple is one of the most companies of the past decade, and has taken the complete opposite approach, with their extremely high profit margins.  Their business isn’t really threatened by low cost competitors, because they differentiate on quality, exclusivity, and brand, rather than on price.

  • Marcus4_20

    Now this is some interesting shit!

  • http://gking.harvard.edu/ Gary King

    This post is an interesting and engaging analysis of a few exceptional businesses but — without further analysis — it is misleading as advice for all but a few startups (a subset you’ve given no way to identify).  Reasoning from exceptions is always fascinating but is a classic inferential error.  The really interesting thing about this post is that the problem is fixable.   What would need to be done is to measure the outcome for a representative sample of all startups (or all startups who might consider following this advice), and then compute the causal effect that interests you:  The percent of businesses that follow this advice and succeed minus the percent of other businesses that do not follow this advice and succeed.   We’d also need to adjust for the different types of startups that choose each strategy (to avoid inferential problems that would occur if, e.g., only well funded startups followed your advice.).    Its not difficult to follow this advice (and evidence exists that even businesses that follow good statistical practices like these do better than those who do not).

    If an average startup (or your startup) follows this advice, what happens to its probability of success?   This fundamental question is not even addressed presently, but it could be.

  • http://www.justanentrepreneur.com Philip Sugar

    Agree 100%  on “internet scale”.

    My plumbing example is this: I see many businesses getting funded right now that aren’t a huge “internet scale” opportunity.

    Doesn’t mean they are a bad business.  Means that they are not a good fit for VC.  But they can be a really successful “plumbing” company.

    I’m pointing out with the lower cost of startup these companies can actually make it, where before they couldn’t.

    VC money is like rocket fuel, too much or too little is really bad.

  • TinyVox

    These are also called “substitution effects”, or am I missing something ?  Substitution effects with a technology story that makes things/bits cheaper to deliver, or delivers them properly. 

    It’s also known as a “punk rock attitude” – that the big players may think they’re all that, with all their features festooning their whiteboards, but they haven’t captured YOUR heart, so you’re going to do it your way, and what do you know, you’re Nirvana and they’re Guns & Roses.  Anyhow Merry Christmas Mark, this was a good post…

    Do you know about Dave Winer’s “fractional horsepower” theory ? Been trying to hunt down that ancient blog post, it’s up there with pmarca’s “product market fit” post as one of the top ten I’ve ever read. It proposes that a startup snip off a tiny hot feature of a hegemonic platform, and focus on making that feature the core of their own experience. Instagram snipping off “photos” from Facebook is the textbook fractional horsepower jiujitsu.

    Can I propose a Marshall McLuhan criteria for you as well ? That every great new startup literally adds a new bullet point on the laundry list of “what you can do”. Tools. We build TOOLS. Our action sparks action; our service spawns a community of tool users, who get other people to “do different” in these super high-touch, friendshiply kinds of ways that no marketing can mimic.

    If you’re an “early adopter”, you probably jump through hoops using whatever tools you’re using in order to get through the day. These hoops are pain points to solve. The incumbent never sees how massive their own market could be if they delivered their service differently, because they are fat and happy. To disrupt the fat and happy with competition is the American way.

    Holding forth on someone else’s blog ! Sorry about that :D

  • http://www.illi.st/ Judd Morgenstern

    Awesome post. Having gone to grad school for innovation (yes, that is a real masters program) and now pursuing a startup, I’m hungry for thoughts on how to apply this kind of theory at the startup end of the spectrum.

    One point of your post that I wish you could expand more on though was how “…new startups have a product that is INFERIOR to that offered by the competition but at a dramatically lower price…”

    Whereas ‘inferior’ often has a negative connotation, another way to consider the startup product is that creates a new ‘Value Curve’, often offering value in a new dimension where incumbent doesn’t deliver. At least that is the contention in Value Innovation.

    Different logic than Christensen, but I think complementary. I interpreted Christensen as essentially saying, if you’re going head-to-head with an incumbent or trying to steal their customers / market share, then identify (1) overly engineered/complicated products or (2) products with unnecessarily high quality, and then provide product of ‘good-enough’ value for low-end. 

    Value Innovation is more about finding new value dimensions (apart from cost & quality) so you’re not going head-to-head. Think Zip Car vs. car ownership, or Google Docs vs. MS Office, or Skype vs. Telecomm… New dimensions can include product features, service, delivery, business model and beyond.

    Realize this comment may have gone on a slight tangent from the point of your post :) But if Christensen’s work resonates, then you might consider Value Innovation as an interesting and *generative* model for identifying disruptive potential in startups.

  • TinyVox

    Giving it away for free is not a sufficient strategy for getting millions of users.  What will you do to achieve product market fit ?  The key is as Mark highlights triggering a substitution from a popular, but flawed, incumbent. 

    Myspace had flaws, and Facebook fixed those flaws.  The founders of Facebook in hindsight had a “snob’s perspective” on Myspace.  You can see young @finkd and @sparker:disqus
     mocking Myspace in a pow-wow in 2005: “look how ugly! and you can’t find anyone, and all these spammers are on it, and nobody normal like students can even use this…”  

    Today there are are incumbents, delivering on value they promise. Are they doing a good job? Simply discern the CORE value proposition of an incumbent. “Myspace connects people and helps them share content.” Then, strip away everything else and rebuild it the right way. What’s the “right way?” Whatever will fit a LARGER market than the incumbent is even VISUALIZING. Certainly, the Myspace team wasn’t thinking, “if we optimize for college kids, we’ll be eternal!” 800lb gorillas still have blind spots. Market fit vision beats size.

    Any million-dollar business with a price of greater than zero could upon analysis reveal a billion-dollar business (e.g. “lunch”) lurking for you to snap up. A jump on such market-side insight will help you deliver a product to fit a LARGER market than the incumbent, not a “niche”. THAT’S THE SECRET: this jiu-jitsu doesn’t just STEAL the market from the incumbent. In fact, that happens LAST. This style attacks a market the incumbent doesn’t even really know it’s there; Facebook “pliaigarized” Myspace’s VALUE PROPOSITION, but rebuilt the DELIVERY MECHANISM for a market Myspace didn’t really know what to do with. This EXPLODES the market, not just “stealing” it.

    So see a big service and exclaim: “Millions MORE would use this if it just WORKED RIGHT (or WAS FREE etc) !” Build a project around delivering that. I look at the services we are destined to disrupt this way, and will begin expressing this disdain in my content creation operations.  The disdain for Myspace postulated here spread to everyone. 

    Great technology makes people truly loathe the technology they got along with in the past.  That is how Facebook users may look back on Myspace.  If there’s a part of the magic of the past that you recall that has been lost in the “upgrade” – there’s a startup idea in there.  You can provide that specific magic as a service, and your clients will not just pay – they’ll be GRATEFUL. 

    Gratitude is the core of viral marketing.

  • Coachhowie19

    Coach howie (BaseballLessonConnection.com) Baseball Trainer for kids

    great article, it deff works as we do many lessons for kids at a reduced rate!

  • http://twitter.com/drewux Drew McKinney

    Yep, it’s not a zero-sum game. What he’s describing is a different dimension of value. This is the fundamental problem with the author’s assumption:

    “Often major customers defect en masse to the new entrant as they realize that the huge price premium is not justified by the product differentials.”

    By this same logic, new entrants who feel the lower-priced product does not offer a high enough value will switch to the higher-value product, despite the higher price. If the world was nothing but Zip Cars there would be a market for premium Zip Cars, and even (gasp) individual car ownership. This is why there are still more advanced to-do Apps on the Apple market, all companies that make money, despite Apple having its own, free, reminder offering.

    In fact, many of the examples Mark uses (Linkedin, Salesforce) have terrible profit margins, pennies on the dollar. And they make software, a product which each incremental piece is free. Zynga is a better example, but their earnings are still a rollercoaster ride, and internally the company is a mess (speak to anyone that works there and ask how they enjoy the environment). Give me a 37signals and Halfbrick Studios any day over these behemoths.

  • Sandra

    Nice one, there is actually some good points on this blog some of my readers may find this useful, I must send a link, many thanks.

  • Stefan Wolpers

    Focus on monetizing the long-hanging fruit, which in my case means providing the old industry with an interims solution. 

  • http://twitter.com/cbradmorris Brad Morris

    Great post. 

    For the games example, I think Apple is an even better example than Zynga. Quality of iOS games is close or on par with DS/PSP games, yet they’ve driven down prices dramatically. Square Enix has been forced to offer games at or below $15 where they traditionally would have been able to sell them for much more. And when Nintendo investors start clamoring for iOS support you know something is up. 

  • http://seogear.net/ seo services

    Awesome blog. I enjoyed reading your articles. This is truly a great read for me. 

  • http://www.dancingbison.com/ Vasudev Ram

    Re Joi Ito saying – “the most important thing in the internet business is users , users , users. Once you have the users you will come out with some way to monetize a percentage of this users. ”

    Heard that said before, around the Internets, but I’m not sure I agree with it, and am not clear about how it will _always_ work (if that is what is meant). I read/heard Marc Andreessen say that too, somewhere. Except for the case of ad-supported business models (where more users is better, since by “laws” of probability, more will click on ads), and freemium (*), how can one be sure that monetizing will work just because of lots of users? Agreed that it _may_ work, but why do Joi and Marc (and some others) seem to be _sure_ it will work? (And yes, I do know who they are / what they have achieved.)

    (*) And even for freemium, whether even _some_ users will pay or not, would seem to depend on the specific service, not on a general “rule” of “users, users, users”. There could be many services which people will use if it is free, but not at all if it is paid.

  • http://twitter.com/eskyllc Jonathan Leong

    Powerful lesson and thank you for your sharing!

  • Scott

    I sure enjoy your posts. It seems that each post you pen has applicable and eerie coincidental timing to our current endeavors.  Thanks for penning these customized blog posts just for us.
    I must be on to something.  We seem to be moving in a way that is in tune with your comments.  I can’t say I know why we are doing what we are doing until I read your posts when I shout, “Exactly.  What he said.”   In some way it is a pat on the back that our intuition has some basis is theoretical thinking.  I’ll take it.Our deflationary economic startup is taking on the big boys in video content distribution services. Oddly enough, I’m attacking our own company’s profit center that is currently prospering.  We are part of the enterprise solution that we are looking to disrupt.  I find myself asking myself, “What the heck are you doing?”  We’ve got it good.  Why are we rocking the boat?  For some reason it seems the boat rocking is what interests me.  Is that the entrepreneur in me or the David or the thrill of the chase.   I guess it is on us to prove that there is more value in our new model – and in being the first to break from the long standing tradition.  It is a bit scary, but I like it.I’ve been racking my brain to find another startup that pushed this type of D.E. disruption even though it would likely hurt their current work, company, livelihood.  Is it an IBM that branched out to attack the Home PC market?  Probably not, since this didn’t cannibalize their corporate market.  Is it a travel agent that grew a online travel service, or a Blockbuster that dove into iVOD and Electronic Sell Through while tempting the fate of retail DVD outlets?  It may be that the writing on the way is there and you have to move forward to the next new thing or perish.  I’m not sure we saw that.  We do see a way to do it better.  Is that a viable enough reason to eat the golden goose?I’m sure there are examples – and I’d love to hear any examples that you may think of.  If nothing else it may provide some comfort in our gamble.Thanks for the tailored commentary.Scott SchlichterMotion Dispatch 

  • http://blog.openviewpartners.com/author/brandonhickie/ Brandon Hickie

    Thanks for this excellent post.  This is one of my favorite posts that you have written during the last year.  I know earlier this year, you wrote a blog post about Netflix and the Qwikster spin-off and change in pricing structure.  Do you think that this same deflationary economics mindset is something that Netflix should be thinking about given the expected widespread adoption of streamed video content over the next several years?  I know that this market is a little more complicated than the storage market in that content licensing rights for streaming create an additional cost component that is somewhat outside of their control and therefore introduces an additional pricing risk. The reason I ask is it seems that the cost of delivering streamed video services to a single subscriber should be less than the costs of delivering DVD-on-Demand services to their customers if the licensing costs are fixed.  I am not sure this is a fair assumption, but I would love to hear your thoughts on this.

  • Andres Herrejon Maya

    I’m not from the Internet services world, I want to penetrate branding and adding value to a commodity in which quality is a major subject (Hydroponic Greenhouse) and I’m trying to apply some of the precepts, theries and practical advices.

    But this is a subject that made me hesitate about approaching it in the raw.

    Becoming ridiculously cheap could end up damaging the industry profitability and lower tech development. Or even become an unattractive niche for a ruthless price war.

    Where is it healthy to stop and maybe take advantage of the work done by the competition, in adding value to a product and made it already an standard in price at high margins?

    Does it apply on my industry?