The Modern Giants
Some of you wrote back asking if Clayton’s theory applies to the modern giants too, and are they as susceptible as their predecessors. I thought it was an excellent question; let’s explore it together.
Who are the modern giants?
FAANG (Facebook-Apple-Amazon-Netflix-Google) or FAAMG (Facebook -Apple-Amazon-Microsoft-Google) are the common acronyms that describe the most valuable tech companies of our era.
Are they very different from the giants of the past?
I feel that modern giants are built differently in a few ways. They have certainly learned from the mistakes of their predecessors, and have improved significantly in many areas.
But are they still vulnerable to the curse of Clayton’s theory of Disruptive Innovation?
Let’s first talk about the differences between the modern and the ancient giants.
The ancient giants built supply-side moats; they owned the resources in short supply and controlled the production. Consider the case of the oil fields, coal mines, or railroads, where tight control over physical resources led to success. Or the stores like Walmart, JC Penny, etc. who controlled exclusive tie-ups and good relationships with wholesalers and distributors. Or the newspapers or media in general, who controlled distribution in a small physical area (a city or a state).
They were disrupted when either they ran out of their hold on supply (in case of coal mines, railroads, etc.) or when the new-new-thing disrupted the consumer behavior, mainly through technology. Newspapers are a perfect example of the latter. With the advent of the internet and the proliferation of mobile phones, physical newspapers got replaced by news apps. NewsInShorts, Dailyhunt and, ET Now have significantly reduced the circulation of printed newspapers and magazines.
The modern giants instead built demand-side moats; their direct relationship with the customers meant they controlled consumption. Facebook is valuable because billions of users use the app daily to connect with their friends (who are here because all their friends are here too - Network Effects). Google is valuable not because it crawls a hundred million websites (I mean that too), but because it has billions of happy users who find value in the highly personalized and contextual search results. Amazon is valuable because it provides a very convenient shopping alternative to the physical world - much cheaper products delivered to your doorstep instantly. Netflix is valuable because you get access to an infinite catalog of movies by paying a small subscription fee.
In this brave new world, power comes not from controlling production, but from controlling consumption. These companies have harnessed the power of the internet; built a direct relationship with the customers, at scale, that was just not possible in the past.
The most common reason for the failure of any big companies is their ability to change directions quickly and continue innovating. Over time, they become slow and bureaucratic. But on both these count, I find the modern giants to be exceptional. Amazon famously coined the 2-pizza rule, and despite having more than 100,000 people now, it’s still able to execute as nimbly as any startup. Google continues to be at the forefront of innovation through its investments in machine learning & AI. Their tech is far superior to anything available in the open market today.
Apple continues to innovate on the consumer products. From MacBooks to iPhones to iPads to iWatch, they seem to be, at least so far, a few steps ahead of everyone else.
Facebook & Microsoft continue to be the most vigilant ones acquiring the right kind of companies and successfully integrating them into their existing products to maintain their dominance.
For now, the FAANG companies appear to be the strongest, fittest, and the most agile companies out there. They have dominated the world for a large part of the last decade and seem to be well set to continue their dominance.
But at their peak, hasn’t that been true for everyone? All giants look too big to fail, till they eventually do.
The risk for these companies is that they are now the incumbents. That puts them head-to-head against the mavericks - those with nothing to lose under the current system who will, by sheer necessity, build something new.
The fact of the matter is that change is inevitable; the question now is that who will drive that change? The incumbents or the mavericks?
Over a long enough timeframe, my money is on the mavericks.
Best,
Kaddy