
Why giants thrive - Special report on companies - danblick
http://www.economist.com/news/special-report/21707049-power-technology-globalisation-and-regulation-why-giants-thrive
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roymurdock
Conclusion: _The most powerful force behind the rise of the new giants is
technology. But two other forces are pushing in the same direction:
globalisation and regulation._

\- Premise (support)

\- Big companies benefit from supply chain economies of scale/network effects
(Pankaj Ghemawat calculates that America’s top 1,000 public companies now
derive 40% of their revenue from alliances, compared with just 1% in 1980)

\- R&D in countries with cheaper cost of labor/materials (PwC, an accountancy
giant, produces an annual survey of the world’s 1,000 most innovative
companies. It found that last year those that deployed 60% or more of their
R&D spending abroad enjoyed significantly higher operating margins and return
on assets, as well as faster growth in operating income, than their more
domestically oriented competitors)

\- Regulation inevitably imposes a disproportionate burden on smaller
companies because compliance has a high fixed cost (Nicole and Mark Crain, of
Lafayette College, calculate that the cost per employee of federal regulatory
compliance is $10,585 for businesses with 19 or fewer employees but only
$7,755 for companies with 500 or more)

\- Small companies can't game the tax code like large companies can (The
country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319
pages long. Big organisations can afford to employ experts who can work their
way through these mountains of legislation; indeed, Dodd-Frank was quickly
dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric
has 900 people working in its tax division. In 2010 it paid hardly any tax)

\- Large companies have a "buffer" during poor economic periods and can simply
buy out smaller companies (the mortality rate for all American listed
companies over a five-year period is as high as 36%, but for companies worth
more than $1 billion it is only half that)

I was surprised not to see a mention of the evolution of the legal treatment
of corporations discussed, as well as a discussion of the decline of unions
and the weakening of the average employee's bargaining power. But otherwise a
better article than I was expecting from the economist.

~~~
gtrubetskoy
I think an alternative way of looking at is that in a way "the deck is
stacked" not in favor of start ups. I remember how in the late nineties no one
worth their salt would ever agree to work for a behemoth because a start up
was more fun, more opportunity to make money and learn something. Not sure
whether it's the protracted poor economic period, or policy, or global trade,
or all of those things, but I do believe that the world is better off favoring
small over large and we should strive in that general direction.

~~~
AStellersSeaCow
I agree that the shine has worn off startups, but don't agree with the
reasoning. Startups were great in the 90s because VCs and investors were
desperately hurling money at businesses that they didn't even remotely
understand. Why work long hours in a stuffy traditional office at MSFT or IBM
when you could make more at a carnival-like startup where you spend more time
playing foosball than working?

Nowadays that equation is somewhat reversed. Most startups expect crushingly
long hours, and typically pay considerably less than the tech giants and have
vastly lower total compensation. There's still the slim chance of a huge
payday, but the expected earnings are far lower. And while there's still
plenty of "keep doubling down on legacy tech" at the giants, there's also way
more genuine innovation than there used to be, whereas startups are the output
of tech industry magnetic poetry sets as often as not: "instagram for urban
farmers", etc.

In the end I also agree that we should push for facilitating more new
companies, and the article underlines a lot of the hurdles we need to lower or
remove. The big questions in my mind: whether that can be done in a way that
doesn't just further empower the big established players, and whether anyone
has the political willpower to hamstring successful, generally well-liked
companies to increase competition.

~~~
roymurdock
This is a good observation. I'd wager that an increasing number of startups
these days are executed with an acquisition by BIGCO as their exit goal
(inversely proportional to the frequency of startup IPOs). The startup is a
more involved test than a whiteboard exercise, as it credibly demonstrates
that you have the management skills and network to assemble a team and onboard
a few customers.

I think facilitating the creation of new, smaller companies is less about
removing hurdles which, in the case of tax/legal regulations are mostly there
as a (failing) mechanism of equitably redistributing wealth; it's more about
waiting for (or moving towards) the explosion of the next paradigm-shifting
tech platform that will actually allow the next generation of weirdos and
mavericks to build/deliver supremely useful products/services. Color me
skeptical on Facebook/Snapchat/Twitter...but I think we'll look back on this
period as a time when biohackers/wetware were truly ahead of their time.

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thr0waway1239
I would like to see this from another angle though - not why they grow so big
- but what it takes to kill such a company (i.e. cause it to fail).

One of the big advantages the giants have is that while no doubt they hire
very capable engineers, the number of engineers who need to leave to make a
dent on their performance is a really large number, and gives them a really
long notice to correct things. In other words, at any given point of time they
have many more 'dispensable' employees.

A second benefit of being a giant is that you can forego revenue streams which
would be the size of an entire business at a competitor to gain some
advantages in the market - for e.g. Google made Android free. I don't think
they could have pulled off such a move when they were younger and poorer. This
diversity of income streams gives them plenty of time to leave behind lagging
products/services and concentrate on the cash cows - that is, they can apply
the Pareto principle at a much much larger scale.

Contrast that with the potential disruptors who simultaneously compete with
the large companies for employees, could sometimes get killed if just a few
key hires leave, rarely have diversity of huge income streams to allow them to
change course, and then have to bear the burden of regulation without the
cushion of the cash pile. It lends a more stable environment for the large
companies to move in the direction where the market expects them to go without
having the tremors which the small companies face when they try to do similar
things. During those tremors - engineers at the smaller companies - don't
usually like to stick around and see what happens. This has been compounded of
late because of the huge salary difference between working at a giant versus
working at a smaller company.

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netcan
I like this article.

Where it goes slightly off track (IMO) is listing all the reasons/ways big
companies have an advantage. They're all true, but some of them are basically
the same as they've always been. The change/trend is the interesting part.

The main point I took from this is: Network effects is the new economies of
scale.

Economies of scale is an almost fundamental law in microeconomics and the
generally accepted reason for companies getting big. Bigger factories make
stuff cheaper. It's a big deal if it is being surpassed by a law of network
effects.

Since technology (especially software) has low variable/marginal costs a naive
guess would suggest that technology should strengthen, not weakon this rule.

For network effects to match or overtake economies of scale as a driving
factor is interesting.

If you're looking for a positive side for startups, here's mine: Network
effects are easier to build than economies of scale for a startup. Invention,
creativity and fresh perspectives are sometimes enough to build networks.

------
swalsh
Let's think about what it would take to truly take on Amazon.

Marketing: This is actually a pretty even ground, in terms of paid
advertising. However, for free advertising, you're at a disadvantage. Amazon
has a domain authority of 98. You're not going to rank higher than them.
Unfortunately, since marketing is one of the most constant, and highest costs
of e-commerce. That puts you at a significant disadvantage.

Pricing: Because Amazon can drive so much traffic to their site, and because
they have an efficient website, they can drive sales. This is great leverage
to negotiate lower prices from suppliers. This is a 2 part advantage. Now with
lower prices, they are more attractive to consumers, and they have more money
to drive other parts of their business. This puts you at a significant
disadvantage.

Detailed Data: Because Amazon can drive so much traffic to their site, and
because they have an efficient website, they can drive sales. With this, they
can collect data to help them target areas to make their business more
efficient. Assuming no

marketplace customers, they can make precise decisions on what to make
investments in. Of course they've grown so big, that competing with them is
impossible. So there are marketplace customers. This means they're not only
collecting data from their own business but from your business too. They host
the marketplace and have no qualms about competing with you if you're
successful. This puts you at a significant disadvantage.

Fulfillment: Because of their size, Amazon can afford to have multiple
warehouses. This means they can strategically locate inventory across the
world, combined with an efficient lead time they can make guarantees about
delivery. That drives more sales. This puts you at a significant disadvantage.

Delivery: Because of their size, Amazon can afford to buy whole truckloads
with carriers. This means they pay less for delivery. With cheaper delivery,
they can offer free delivery. That helps them drive more conversions. This
puts you at a disadvantage.

~~~
dx034
I think Amazon is a bit of a special case, since they use physical scale for
their advantage. That's not the case for most other tech companies.

Amazon is the digital equivalent of Walmart. You cannot beat them on their
terrain, the only solution is to come up with an idea that customers like
more, so that they'll switch even for higher prices and longer delivery.

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typetypetype
> Just as the old industrial giants used technological innovations to reduce
> their costs, the new tech giants use technological innovations to expand
> their networks.

I'd be curious to know how much innovation in big tech happens internally vs
buying out smaller companies.

~~~
JoeAltmaier
It seems to me (unscientifically) that buying out generally kills a
company/product. More about squashing competition and unifying a market, than
innovation.

~~~
georgemcbay
"More about squashing competition and unifying a market, than innovation."

I agree, it seems the same to me. Which is terrible (for consumers), of
course.

Even when they don't actually kill off the product, the products will often
languish in a weird limbo where they are basically still around but
effectively end-of-lifed on new features. For example, Google Voice, the
Google Nik Collection of photography plugins etc.

Google alone is sitting on a giant bunch of products/services that could be
(and sometimes at one time were) paid products that they acquired, made free
from cost (great!) and then just did absolutely nothing with in terms of
advancing them (not so great!). Things that could be a wonderful small
business, but aren't worth Google's time because the return for them wouldn't
register at their scale. And the kicker is that because Google has these for
free, it is really difficult for other companies to come in and try to make a
competing product, because even if they make something that is significantly
better, there's way more inertia in adoption from users because Google's free
thing exists.

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rebelde
Regulation? This article and politicians complain about regulation, but I
don't see it affecting most tech companies, and don't see it disproportionally
affecting small tech companies. It certainly isn't one of my big costs or
worries. Does anybody else see it differently?

