I read an interesting article about the sudden move of Wall Street Quant Traders from banks to creating tech startups.
In short, as the story goes, to prevent breaking non-compete agreements, many brilliant minds were moving in – what seemed – completely unrelated fields, like self-driving or robotics.
In other words, a built-in disincentive by Wall Street is creating whole new industries, which might be completely unrelated in the short term but that might become competitors in the long run.
It struck me how the system’s built-in disincentives trying to stiff competition – in the short-term – actually create whole new markets in the long term. In this case, intelligent people move to new industries to prevent legal issues.
And when assessing long-term competition, it’s vital to look at the sudden moves of very skilled and intelligent people.
In other words, competition in the tech industry is linear in short but pretty much non-linear in the long.
New industries that might seem unrelated might swallow old industries in the long.
Another example I like a lot is when innovative players (those who see the market as a whole without clear boundaries) enter new spaces.
Take the case of Tesla, entering into the insurance business.
Would you even put Tesla on the competitor’s map if you were Geico?
Chances are, you won’t, and probably you won’t do that because competition seems linear in the short term.
Thus, your competition might look like the following graph:
There is also another interesting point to make.
When you look at Tesla’s insurance business, you know that, for now, it’s part of the service business, but you’re not sure how much it generates for the company.
A real-time insurance business model enables Tesla to build its own insurance arm, by dynamically adjusting the premiums, based on real-time driving behavior.
Reduced insurance premiums hooked with the leasing arm, enable Tesla to scale its demand side of the business.
Indeed, in 2021, the service business generated $3.8 billion in revenues for Tesla, and we can assume that the insurance arm drove a good chunk of its growth!
Thus, it might be too late when we finally have accurate data about the Tesla insurance business revenues and, most importantly, margins.
Take another case, that of Amazon, which left everyone flabbergasted, when it showed its AWS numbers, in 2016:
When Amazon opened up its AWS numbers (as they had to comply with SEC’s requirements), AWS was the fastest-growing segment, speeding up at a double-digit rate of growth per year.
For instance, when Amazon finally shared the data for AWS, it had already become a giant in the cloud space, and companies like Google and Microsoft had to rush and ramp up their cloud operations to keep up!
It was also becoming more profitable than Amazon’s core business!
Keep in mind that executives in the industry, who were well-positioned to see this coming, didn’t see it!
Interviewed by Charlie Rose in October 2014 (when AWS was already generating over $4 billion in revenues), asked about what he thought of Amazon AWS, former Microsoft CEO Steve Ballmer said:
They make no money, Charlie! In my world, you’re not a real business until you make some money!
https://www.youtube.com/watch?v=PSqb5s3xTlc
It's, of course, too easy to pick on Steve Ballmer, but you get the point.
He completely missed the fact that not only AWS was making money, but it was also making it at wide margins, actually, higher margins than the core Amazon business!
Therefore, good businesses are often hidden and hard to predict, and when you realize it might be too late, the time window to catch up might be very, very tight!
And still today AWS is probably the most valuable part of Amazon. In fact, while the online stores' did generate over $222 billion in revenues, they run at very tight margins (Amazon runs the stores for scale, not for profits).
On the other hand, AWS contributed to over 55.5% of overall Amazon’s operating margins.
And it's both scalable, and profitable.
To sum things up:
In a tech-driven world, competition seems linear only in the short term
Indeed, while you might be able as a dominant player to stiffen competition in the short term, your future competitor might come from an unexpected place.
Take the case of Tesla entering the insurance business.
If you were a traditional insurance player, like Geico, operating since 1936, would you even place Tesla on your competitors' map? When looking at the business world, you want to keep an open eye on what niches are developing, which might, non-linearly, develop as take-all industries!
One way is to look at where highly skilled people are moving
Indeed, usually, very talented people are also the first ones to move from one industry to another.
For instance, by randomly playing with LinkedIn's Economic Graph I figured that a lot of talent is moving to green jobs, which tells you something!
Why is this important?
When you're working on a product, you need talent. And often talent is attracted, quickly, from a new, emerging industry, which is becoming commercially viable, fast.
And when this talent moves away to these new industries, as a company, you lose momentum and it becomes way more expensive and much much harder to retain talent.
Another way is to look at built-in disincentives in large, existing industries and what other sectors these incentives are making emerge
In this scenario, it's as important to look for both disincentives to keep working in an existing industry and incentives to join a new, developing industry.
Wall Street, for instance, might be able to stiffen competition in the short term via non-compete agreements.
But in the long run, this will haunt them back, potentially creating industries that might eat up Wall Street!
The last and critical point. What, in the short term, seems an unrelated industry - in the long run might end up becoming larger and eat you up!
How do you prevent that? Keep an open eye on the few data points that matter.
If you were Steve Ballmer in 2014, instead of laughing at Amazon AWS, you would have sent around some of your key people to ask what startups were building their business on top of Amazon AWS.
You would have figured out that upstarts - at the time - like Netflix had been migrating their whole infrastructures on AWS.
Netflix completed the full migration to the AWS cloud in 2016 (this process had started back in 2008) when it became way more expensive for Microsoft to pick up. Eventually, Microsoft did ramp up its cloud operations and it did manage to gain traction through Microsoft Azure.
Yet it might have been way cheaper if it had acted before. And not everyone has the resources of Microsoft to pick up traction in an industry much later on when the time window of opportunity is much narrower.
Much smaller companies, do not have this luxury.
Keep these things in mind!