"This is a message to YCombinator companies and hopefuls: if you tell Facebook about your startup before you reach critical mass and you get found by Facebook in any way you're an idiot. They will steal your company's ideas and try to get you to take a small price for your company and vision and take a job at Facebook. Which by the way is going to be a job that sucks. Don't do it. It's a scam. It's a trap. It's a trap. It's a trap. Insert Star Wars quip here. It's a trap. IT'S. A. TRAP. End of message."
s/you get found by Facebook/you get involved with Facebook/
My point is simply that there are a lot of very straightforward ideas that merit far more than a signing-bonus exit.
There are many bases of competitive advantage, but I don't have a clear picture of this one. The main customer-side advantage I see is that your product becomes identified with the idea/technology in the customer mind (perhaps of a tiny niche) - not that it's better than something else, just that it exists. But there's still a problem of getting to this state.
The most reliable source of supranormal profits is superior knowledge of one kind of customer (Way #3). Ideally this will be the kind of customer that larger companies are overlooking. The founders of SAP, for example, were employees of IBM Germany for many years and got exposed to the accounting challenges of large manufacturers. When they quit IBM, they were among the best situated programmers in the world to build an accounting system for manufacturing companies. It is not because these guys were the world's best programmers that SAP is today bringing in $10 billion per year in revenue and has a market capitalization of $60 billion. It is because these guys were the best programmers who understood the problems of their customers.
Of course, it's still problems and knowledge, and so not qualitatively different from those in a specific niche. I guess the misleading thing is that by the time a mass market is mass, they are well-known (or appear to be).
As an example, Youtube was once small. And while the consumers were perhaps (?) easy to understand, the producers (who created the value), were a much smaller group, a more specific kind of person, using specific new tech (mobile phones) with specific problems. And it only later grew into a mass market (though I guess arguably the producers are still "one kind of customer".)
Ideas can never be stolen. If I have an idea and tell you about it, then you use it, I've still access to that idea and can still use it too.
Yes I worked in IP for a time. Yes I'm a pedant. But there is a very important distinction both morally and legally between theft and copying (eg tortuous IP infringement).
Yeah, I'd call that stolen (or at least 'attempted theft'), because they were about to lose their rights. Thankfully, the JMRI guys won in court, so they got their rights back.
That a company has the money and the scale to implement anything they choose to, trivially or not does not mean they will actually succeed in the marketplace.
Small companies doing one thing have something big companies do not: relentless focus.
What a startup can create that a large company cannot steal would loosely be defined as a social network; mind-share among people who believe that your company is the go-to place for your service.
If you have built your service on top of Facebook, it will be very difficult to build your site so that you, and not Facebook, are what your customers thinks of when they think of your product. If it's truly a killer Facebook app, they will likely even be happier with a slightly inferior but fully integrated solution. Because they control the social network, the mind-share, that fuels your app.
If Google's Sergey, Larry, or Schmidt were as ruthless as Zuckerberg, I have no doubt that Youtube would have been left to die.
Things just aren't that simple.
Viacom is simply not interested in running a money losing venture, otherwise they would have bought Joost instead of partnering with them. Disney didn't need the Youtube brand when they already invested heavily in go.com back in 1998. Look what happened to Hotmail dominance after Microsoft bought it. And what is Apple's experience with web apps?
So yes, things just aren't that simple.
I said that Google had the option of letting Youtube weaken, and buy them at a discount...or fully letting them die out and have Google Video dominate. Each decision with a different risk/reward ratio. They chose the lowest risk/reward since $1.6 billion is probably a relative drop in the bucket for them.
And I could have bought McAfee, I just lacked $7.7 billion.
Relentless focus on the above factors (content, mindshare, usability) helped them win - have I missed any?
By parking it under the google brand they may have made a mistake. Another - possibly small - effect of that is that you have two steps before getting to a site, video.google.com, is less convenient than youtube.com, and much less easy to promote as a brand separate from the search portion of the site. Many people read 'video.google.com' the same way they promoted 'images.google.com', as a search engine for online videos (which it now has become, for the most part) instead of an easy way to share your videos with your buddies and the rest of the world.
I don't think it will be possible to quantify this effect, but I notice that microsoft named their search engine 'bing.com' after several tries of doing it as a subsidiary, and that google has not attempted to bring youtube.com under the google domain as the replacement for video.google.com (which still exists), it is now the 'search' arm of google for video, returning youtube.com mixed with other video results, just like what you'd expect.
Further thought: google video was 'better' in that it had higher resolution videos, and it displayed more of them on the screen at once. While youtube had one low resolution video. It was quicker to load and to run, and more suited to slower machines (perhaps especially mobile phones, whence videos oftentimes came?) Google video has always annoyed me in this sense. I note that now, they've increased youtube video resolution (it's 'better'), and also snipe: upgrade to a "modern" browser. Although understandable, it isn't the path to max adoption, and max. network effects