cdixon blog

Incumbents die due to irrelevance or ineptitude

Judging from the tech press, you’d think the biggest risk to successful companies is competition. But when you examine the history of technology, incumbents usually decline because the world changes and they lose relevance, or because they lose visionary founders and the organization decays. Some examples:

– Dell thrived when PCs dominated the computer market and Dell was the low cost provider of commodity hardware products. The shift to mobile and tablet computing meant that hardware quality (not price) was once again the primary basis of competition. As a result, Dell’s laser-like focus on cost reduction became a liability.

– The New York Times was, for many decades, one of the few premium channels through which brand and classified advertisers could reach mass consumers. Thus car companies and real estate brokers subsidized foreign reporting and investigative business journalism. The internet provided a vast alternative channel, and the Times became far less relevant. At the same time, the internet provided many new sources for breaking news, editorials etc, hurting the Times on the subscriber side.

– Yahoo didn’t lose because Google out-competed them on search. They lost because they didn’t really care about search – indeed, they outsourced algorithmic search to Alta Vista, Inktomi and then Google itself. The leading portals back in circa 2000 (Yahoo, Excite, Lycos etc) desperately wanted to keep keep users on their site – the buzzword was “stickiness” – but Google knew better and focused on getting users off of Google to other places on the web. Yahoo became just another place to read celebrity gossip and use generic web services.

– Netflix thrived when they could simply ignore the movie companies and rely on the first-sale doctrine to get DVDs. The market shift to streaming video created a new and brutal dependency. They had to go make deals with content companies. Now they are even trying to create their own content to lessen this dependency. They have a brilliant and visionary management team but this is a tough transition to make.

– Sony relied on its Steve-Jobs-like founder, Akio Morita, to repeatedly develop incredibly innovative products (among them: the first transistor radio, the first transistor television, the Walkman, the first video cassette recorder, the compact disc) that seemed to come out of nowhere and create massive new markets. Since he left, the company has floundered and the stock has fallen dramatically.

– Google’s biggest risk isn’t a direct competitor. Startups and incumbents who’ve tried to create better search engines have barely cut into Google’s market share. Google’s primary risk – and they seem to know this – is that they are no longer relevant when people find content through social sites, and where an ever increasing portion of the web is uncrawlable.

Google released their “Dropbox-killer” a few days ago. I don’t know if Dropbox has yet achieved incumbent status, but they certainly seem to be the market leader. They also seem to have a very competent management team. So if history is a guide, Dropbox’s biggest risk isn’t a competitor but irrelevance – if, for example, files become less and less important in a web services world and Dropbox doesn’t adapt accordingly.