'The Fundamental Problem With Silicon Valley's Favorite Growth Strategy' (qz.com) 114
Tim O'Reilly, writing for Quartz: The pursuit of monopoly has led Silicon Valley astray. Look no further than the race between Lyft and Uber to dominate the online ride-hailing market. Both companies are gearing up for their IPOs in the next few months. Street talk has Lyft shooting for a valuation between $15 and $30 billion dollars, and Uber valued at an astonishing $120 billion dollars. Neither company is profitable; their enormous valuations are based on the premise that if a company grows big enough and fast enough, profits will eventually follow.
Most monopolies or duopolies develop over time, and have been considered dangerous to competitive markets; now they are sought after from the start and are the holy grail for investors. If LinkedIn co-founder Reid Hoffman and entrepreneur Chris Yeh's new book Blitzscaling is to be believed, the Uber-style race to the top (or the bottom, depending on your point of view) is the secret of success for today's technology businesses. Blitzscaling promises to teach techniques that are "the lightning fast path to building massively valuable companies." Hoffman and Yeh argue that in today's world, it's essential to "achieve massive scale at incredible speed" in order to seize the ground before competitors do. By their definition, blitzscaling (derived from the blitzkrieg or "lightning war" strategy of Nazi general Heinz Guderian) "prioritizes speed over efficiency," and risks "potentially disastrous defeat in order to maximize speed and surprise."
Many of these businesses depend on network effects, which means that the company that gets to scale first is likely to stay on top. So, for startups, this strategy typically involves raising lots of capital and moving quickly to dominate a new market, even when the company's leaders may not know how they are going to make money in the long term. This premise has become doctrine in Silicon Valley. But is it correct? And is it good for society? I have my doubts. Imagine, for a moment, a world in which Uber and Lyft hadn't been able to raise billions of dollars in a winner-takes-all race to dominate the online ride-hailing market. How might that market have developed differently?
Most monopolies or duopolies develop over time, and have been considered dangerous to competitive markets; now they are sought after from the start and are the holy grail for investors. If LinkedIn co-founder Reid Hoffman and entrepreneur Chris Yeh's new book Blitzscaling is to be believed, the Uber-style race to the top (or the bottom, depending on your point of view) is the secret of success for today's technology businesses. Blitzscaling promises to teach techniques that are "the lightning fast path to building massively valuable companies." Hoffman and Yeh argue that in today's world, it's essential to "achieve massive scale at incredible speed" in order to seize the ground before competitors do. By their definition, blitzscaling (derived from the blitzkrieg or "lightning war" strategy of Nazi general Heinz Guderian) "prioritizes speed over efficiency," and risks "potentially disastrous defeat in order to maximize speed and surprise."
Many of these businesses depend on network effects, which means that the company that gets to scale first is likely to stay on top. So, for startups, this strategy typically involves raising lots of capital and moving quickly to dominate a new market, even when the company's leaders may not know how they are going to make money in the long term. This premise has become doctrine in Silicon Valley. But is it correct? And is it good for society? I have my doubts. Imagine, for a moment, a world in which Uber and Lyft hadn't been able to raise billions of dollars in a winner-takes-all race to dominate the online ride-hailing market. How might that market have developed differently?
Just follow the Trump model: (Score:2, Informative)
Don't pay your workers, cut corners, and if you fail completely just file for bankruptcy and let your creditors clean up the mess, multiple times, because you're a feckless coward who doesn't understand legitimate business.
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The bankruptcy follows the failed company, not the people at the top.
The creditors follow the failed company, not the people at the top.
Yet the people at the top enjoy being at the top while it lasts, then get to safely glide over to sit at the top of the next venture.
You seem to want corporations to hire CXOs based on merit and results, not politics, image, and nepotism. Good luck with that.
Re: Just follow the Trump model: (Score:2)
"hire CXOs based on merit and results, not politics, image, and nepotism"
That would spoil the whole point of the Surveillance Valley venture capital "startup" system. It's meant to be a jobs program for dumb as rocks Stanford grads and Ivy Leaguers who are too dim to land a real job on Wall Street. What, did you think they were trying to run a business or something?
Is it time to (Score:2)
resurrect fuckedcompany.com?
Premise is wrong. (Score:1, Insightful)
Neither Uber or Lyft think they will ever be monopolies.
This article is what you get when you do economic analysis based on reading Marx.
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You've obviously never done any actual economic analysis or read Marx...
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You believe they think a monopoly is even possible on ride hailing?
It's marxist dogma that all business people want and expect to get an eventual monopoly. It's one of the dumbest things in Marx (and that's saying something). About the only thing dumber is the expectation that government will just disappear once given enough power.
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Running a business at a consistent loss for market share is definitely a sure fire to monopolistic practices. Where do you think the money is going to come from?
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What does 'want' have to do with anything? Expect is the appropriate standard.
It is a fact that Marx's thin analysis of capitalism claims that all capitalism inevitably leads to monopoly. It's idiotic, but look around, plenty of dogmatic commie lens using idiots on /.
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You believe they think a monopoly is even possible on ride hailing?
It's marxist dogma that all business people want and expect to get an eventual monopoly.
Is it possible? Sure, Lyft/Uber/Whoever just has to convince a legislature to grant them one. "We've decided to address the congestion issues in Manhattan by granting Uber an exclusive contract for ride-sharing services on the island (in exchange for letting us regulate their operations)." Been there, done that, bought the T-shirt.
Do you mean, could Uber or Lyft get an effective monopoly (that is, over X% of the drivers and/or riders, where X might be anywhere from 60 to 99)? That's where I think Tim glosse
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As soon as they try to profit from their position, they are _done_. You install a new app, which all the drivers also use.
Network effects only work when there is one natural winner.
What we're seeing here is pursuit of dumb investor money. You should recognize it. They don't care about anything long term. All they want is the suckers money.
Monopoly profits (Score:2)
I think the limiting factors on monopoly profits (in an unregulated market) are the size of the barriers to entry and the amount of money the customers have.
Clearly, the customers can afford much higher prices. They've been paying higher prices to taxi services for years.
Barriers to entry for a ridesharing service trying to compete with a monopoly provider (either Uber of Lyft, whichever wins) don't seem that high to me. They have to put together an app and then advertise the shit out of it. That seems d
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Uber and Lyft also have the problem that fleet management has economies of scale that Uber and Lyft cannot realize since individual drivers own and maintain their vehicles which do not have those economies of scale. So, basically, Uber and Lyft drivers have higher cost than other hire care services. So, Uber and Lyft have to pay enough for the individual drivers whose costs are higher than taxis to at least seem like they are making money otherwise drivers will stop driving. In order to try and create a mon
Network effect (Score:3)
Actually most rideshare drivers have both the Uber and Lyft apps running at the same time. When they accept a ping on one app they set the other to offline until the ride is complete so they can protect their acceptance rate. There is actually another app, called Mystro, that manages this process for you. It also allows the driver to set various preferences and automatically prioritize certain rides over others. Mystro is supposedly working to incorporate other gig services like Door Dash, Postmates, an
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It depends on the market size. In a
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It's marxist dogma that all business people want and expect to get an eventual monopoly.
And it's capitalist dogma that (a) monopolies will somehow be prevented by the free market without government interference, and (b) profit-making organisations welcome healthy competition even if it leads to them making less profit.
The (alleged) marxist position seems a lot more realistic to me.
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Still nonsense. That's just double nonsense based on technical vapor and inane marxism.
What are the barriers to entry?
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Being in a duopoly is a pretty good position also. Life is easier when you have 1 competitor instead of 7.
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Every uber and lyft driver with the sense to hand out his cell number (for better rates) is already a competitor. As are the local cab companies, gypsy cabs and car shares.
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Individuals can't always be available at the right place at the right time. That's why Ublyft have big servers: efficient and timely allocation of resources. Yes, it's an option, but a limited one. And if the web ones get big enough, they'll buy out local cab co's.
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It depends on the market. In small markets there can be _one_ driver. How many Uber rides in a row would you need to take with the same person before you worked a side deal?
Local cab cos can continue to open far longer than Uber can stay capitalized. Most places don't have medallion systems. Even after Uber made their value drop, the total value of NYC medallions is a good fraction of Uber's market cap. That's one city.
Monopolizing unregulated car hailing is just impossible. Watch for the eventual surv
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they try to get into being dominant.
that's what they try. if they think that or not is irrelevant, since that's what they try to do and do it by being quicker. neither one of them knows for sure if they'll be profitable after they do that.
look, for a good example look at gamestop. it's not like people have quit buying games, it's just that gamestop flooded the market with stores by opening new stores and buying up other stores to dominate the market - and they do dominate the market, but who the fuck knows
author forgets that people are selfish (Score:4, Interesting)
author is focused on the overall market or societal impact
Which of course doesn't matter at all to the founders & investors.
blitzscale is the 'greedy' approach. entrepreneurs and investors typically just care about their own company succeeding, and to hell with what that means for the market in general or consumers. they WANT to build a monopoly, duh.
Foreshadowing? (Score:4, Insightful)
Which I guess is the point of their advice. If your objective is to be healthy enough to get a nice profitable IPO or buyout, but not healthy enough to survive past that, then it might be a great strategy.
Re:Foreshadowing? (Score:5, Insightful)
Especially when the losers just write it off as tax deductible. Who cares if the business is viable if its filling your wallet? (Scamming people is the American Way - don't like it? you are un-American!)
In short, the real victims are the tax payers - everyone else involved wins enough to pay for at least half a dozen congress-critters.
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Vs the structures of a controlled Communist China and a tax collecting EU.
The tax, regulations and laws of a EU nations when trying to start a business, keep a business, grow a business.
Hire skilled people to work on merit? Hire a quota of below average workers under gov regulations. Due to the gov approval of starting the business?
That freedom allows the US to change to any new and emerging situation. To scale get ideas up. T
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"makes the US great"
How's that going for you?
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The tax rate in the EU.
US freedom is great like that.
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The tax rate in the EU.
You think the EU levies taxes? How cute!
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Better than Communist China. The tax rate in the EU. US freedom is great like that.
Is that a libertarian haiku?
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wasn't blitzkrieg something that ultimately did well as a short term tactic but failed as part of a larger strategy
No, it succeeded as part of a larger strategy. That larger strategy, however, is a different matter.
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If you get an innovative idea and can convince VCs to provide significant funding, then you wind up with a near monopoly because your are the de facto first in that niche industry. If your idea is not innovative and you can scale quickly but inefficiently, there is nothing to prevent a competitor with better business tactics to effectively out-compete you.
The general purpose of rapid scaling it to shift from a prototyping operation operating at a loss to a production operation operating at profit. If that t
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Not really. Blitzkrieg doesn't introduce any particular strategic weaknesses that didn't exist before. Sure it's expensive, but not as expensive as losing battles.
It was so successful, it's informed basically every major military operation since it was invented. Even the Allies used Blitzkrieg tactics (at D-Day and beyond).
Re:Foreshadowing? (Score:4, Insightful)
Not exactly. Blitzkrieg, or the tactics that led to it, were something that worked really well against enemies who didn't have the tactics and equipment to counter it. Once the enemy had the tactics, troops, and equipment to counter blitzkrieg, it became less and less capable of producing the kind of dramatic results it did early in the war. To a considerable extent, this worked to Germany's advantage; they were on the offense when blitzkrieg was effective and on the defense when it had lost its effectiveness. The problem Germany had in WWII wasn't with their tactics but with adopting war aims that were beyond their ability to achieve. It was always a mistake to go to war with the world's largest country and the world's richest country at the same time.
As far as the "enemies who don't have the tactics to counter it" part, I suspect we may already be past that point when it comes to VC trying to win monopolies. Everyone now knows that is the goal, and the competition is going to be trying the same stunt. At some level, the entrenched businesses that they're trying to supplant know it, too, and they're going to do everything in their power to slow the newcomers down. As an example, look at the political pushback existing taxi companies orchestrated against Uber and Lyft.
Re: Foreshadowing? (Score:3)
The problem is we've let venture capitalists (Score:5, Insightful)
Once you've got more money than you can spend that's not money anymore, it's power. Folks figured this out in the 50s, 60s and 70s and reigned it in with high taxes and a ton of Wall Street regulations. Then Reagan came along and shit all over that. Clinton didn't help either.
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Money is always power, duh. Even in amounts you could spend.
The worse problem is power can be easily turned into money. Clintons are a perfect example. Neither ever held an honest job. Multi millionaires.
Buying your competitors is a losing game without significant barriers to entry. It never ends and you can never profit. As soon as you try, the market is flooded with competitors.
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Compared to Trump, Bill worked his ass off (but only if you count the many hours of the day and night he was wearing his reading glasses). Whatever the honesty of being POTUS then, it hasn't gotten better since.
Trump's daily schedule v Obama and Bush [bbc.com]
A true social order where all the top jobs are honest jobs is called "socialism" (but only when armed with a large can of DDT++ to prevent
When the working class spends it (Score:2)
Yeah, the Clinton's suck eggs and you'll never go broke hating on them. But buying competitors rules. Again, you can count on the working class to need certain things. You can buy your compe
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They supported and promoted idea using their name brand, wealth. The money made is theirs due to that ability.
To enjoy. To invest in any way they want. To risk again on anther really great idea.
Should that money go to a Communist party? To an EU government to redistribute to random people?
In a direct wealth tax to some gov project?
You don't understand how venture capital works (Score:2)
a. They only invest when the probability of a big payout is high or when it's guaranteed (often by the government in the form of bail outs).
b. They use the losses to offset taxes paid on the wins.
c. If all else fails they game the system. Like art dealers, where they buy a painting for $1 million, then another from the same artist for $2 million, declare demand for the paintings makes them worth $10 million each, donate them to a gallery and write off $20 m
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b. They use the losses to offset taxes paid on the wins.
Offsetting taxes is not the same as profiting. You still need gains in excess of the losses to make profit.
That's where the risk is.... VCs need hits in excess of strikeouts. And they need to occur in the correct order. And the time horizon isn't infinite... there is risk to holding investments before they can be monetized.
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In that light, you can look at the consolidation of wealth as a failure of democratic principles.
Check my post once more (Score:2)
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Not that I was disagreeing with you about the other part. I wasn't really commenting on that.
Too much money, too little substance (Score:2)
The time-honored recipe for disaster. Why do humans never learn?
There is no market... (Score:1)
... the problem is that human beings are too limited intellectually to act in accordance with the economic doctrines preached in the universities. Most of us who have experience with mankind, know that our species is full of shit, the corporations are full of shit, the politicians are full of shit and humanity itself is full of god damn bullshit.
Take videogames for example for the first 30 or so years of PC game history, we got complete games singleplayer+multiplayer in the same package until the internet
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The way the UK responded to computer advancements with direct gov investment.
What France wanted its gov to invest in for computer "eduction".
Given freedom to import, people selected fun, creative, innovative and advanced US products and services.
Better prices, more selection. Not been stuck on what some UK or French gov thought a "computer" should be for a decade.
The best brands rise as people like their products.
The
Dance -- Good rid dance (Score:1)
It took 100 years for competition to come along and kill the government-protected taxi market, charging too much and not doing enough.
It's still fighting with mighty death throes
Seriously, before whining, look at the long term effect of the previous government "solution".
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Wiki has an interesting read on deregulating the Taxi industry. Generally seems to result in higher prices, lower wages for drivers, lower profits for companies and in the more extreme free markets, lots of deaths from the cartels that arose to defend their routes. Did seem to work OK in New Zealand though.
There's a reason those regulations (dating back to the 17th century) arose. The real problem is corruption in the form of corrupt regulations. This seems quite pronounced in America where the free market
financial imbalance (Score:4, Interesting)
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They [the super wealthy] don't care about investing tons of money in unprofitable companies because, really, who cares if they lose money? They've got more money than they'll ever need.
The super wealthy didn't become super wealthy by not caring if they lose money. Really, that's a very silly premise.
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Fair enough. Of course, somewhere up the line of antecedents, someone had to start with no inheritance. From the first article you linked:
UFE defines as “born in the batter’s box” those Forbes 400 rich who hail from poor to middle-class circumstances. Some had nothing growing up. Others had parents who ran small businesses. About 95 percent of Americans, overall, currently live in these “batter’s box” situations. Just over a third, 35 percent, of the Forbes 400 come fro
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Not according to your link... (Score:2)
They generally become super wealthy by inheriting it.
That's not quite what your inequality.org links says.
22% had inheritances up to $1M
11% had inheritances over $1M
7% had inheritances over $50M
21% made the list solely through inheritance ($1.1B+)
What's "super wealthy"? Getting an inheritance "up to $1M".... that's like, everybody. And 12% of US households are worth over a $1M, so I think it takes more than that to be "super" wealthy.
Secondly, getting an inheritance doesn't mean you didn't make your billions yourself. Bill Gates came from a rich family, but
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For what it's worth, the majority of the money in VC funds comes not from super-wealthy individuals (although family offices are in there), but from institutional investors like pension funds and endowments which make money for a much broader group of people.
This is something I think folks don't realize (Score:2)
Uber valuation is insanity (Score:5, Insightful)
Anybody that has a few hundred millions can come out with lower commissions, pump advertising like there's no tomorrow and people will jump immediately.
This is basically just people who lost a ton of money on Uber so far, and are now waiting to get out ASAP with other sucker's money. Hopefully at a profit, but if they can recoup anything they'll probably be very happy.
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I'm skeptical too, but ... I suppose the theory is that Uber can bankrupt the startup via predatory pricing, then return to monopoly profits afterwords.
The major airlines have been relatively successful with the strategy over the years
Amazon (Score:2)
Re: then return to monopoly profits (Score:2)
The problem is that the barriers to entry are too low to ever let them really get groovy with the predatory pricing. Especially if they can't kill Lyft. Killing Lyft would bring close FTC scrutiny, so they might not even try.
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I'll call you an Uber for Fyre Festival
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Hold on there, I haven't finished my patent search for "ordering a cab .. with a computer!"
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For a company with no profits, and with absolutely nothing proprietary that can't be replicated easily as long as you throw money at it to operate at a loss (like Uber does)?
They have a gigantic user base. Just getting someone to use your app in the first place is a massive advantage, and is really the hardest part getting this stuff off of the ground these days. That alone is worth something. Whether it's worth $120 billion is another question.
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Uber has _16,000_ employees. To write and maintain a couple of apps and some infrastructure.
Never underestimate large company inefficiency. They are almost as bad as governments.
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welcome to blitzscaling, or as we used to call it in the olden times, throwing money at a problem.
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Communication overhead scales on the order of N^2. Not a good plan.
Not that you are implying that 'throwing money at a problem' is a good plan.
Not a New Problem (Score:3)
This rapid growth at all costs strategy is not new. The robber barons of the gilded age would literally kill the competition if given the chance. In more recent times Jack Welch, the CEO of GE from 1981 until 2001, was famous for his "#1 or #2" strategy.
Here is an excerpt from the 2003 article The Competitor: Jack Welch's Burning Platform [informit.com]:
SQL server, the Microsoft product? (Score:2)
...is another crap product (at the start) that got out faster.
Overall, society gets a new concept faster. We are able to rationalize about the woes in public.
Otherwise you have "Magic Leap" where we don't know what we are going to get until we get it, and it's usually missing the mark.
That's worse for investors, buyers, and society.
IT consumer needs simplicity and universality (Score:2)
This technology is so complex that the average non-engineer couldn't wade through a litany of incompatible choices. And would get stuck in islands of unusability. So, what, I have to install 10 ride-sharing apps, depending on where I'm going to be, and carry 5 different kinds of payment card to use them, because each service uses a different payment infrastructure?
Probably the ideal end-state, as far as