Upstarts vs. BigCos and corporate transparency

Jeff Bone jbone@jump.net
Wed, 09 Jan 2002 16:22:31 -0600


Gordon Mohr wrote:

> > In a transparent world, the optimal
> > strategy for the shareholders (who
> > can own P, Q, and R) may be that P
> > sticks to its knitting, which would
> > encourage innovation at Q & R.
>
> This last point is gigantic.

Considered out of context it is, and indeed it's the thing that has most given me
pause during this discussion.  Until I realized a couple of things...  first, a
relatively risk-conserving investment in P is preferable to a speculative
investment in Q or R, for folks that can or do own any or all of these.  That is,
the risk-adjusted rate of return on P is going to be higher than Q or R.  It is for
this reason that rational shareholders of P (regardless of their investment status
vis-a-vis Q or R) will prefer P to not "stick to its knitting" but rather to
directly combat competitive / disruptive innovation.

Second, while there is probably a liquid market for P, there is much less often a
liquid market for Q and R while they are at "innovator" stage.  Given this, the
"mass" of investment interest will always be with the established player.
Independent of transparency, there will always be more money riding on the
proposition "Goliath maintains the status quo" than on the proposition "David kills
Goliath."  Considered in the context of transparency and assuming that it has no
competition-quelching effect on Goliath, there will be *even more* money riding on
P and *even less* on Q / R.

Transparency turns the already high-stakes gamble of venture investing into
something more resembling the lottery.  From both the innovator's perspective and
the innovator's investors' perspectives, it's a losing proposition.

> However, transparency could be expected to
> check BigCo opportunism in a number of ways.

Don't bet on it.  Russell's ecological niche metaphor is a very accurate one, IMO.
Considered as such, I can't see why transparency would be anything other than a
competitive tool for those best able to use it.  It's not going to turn omnivores
into herbivores.

> The interaction with stockholders (and their
> portfolio preferences) that Dave points out
> is one way.
>
> Another: No more "FUD".

Again, don't bet on it.  FUD is often not a matter of if, but when.  Consider
instant messengers.  The enterprise instant messaging market (such as it is ;-) was
impenetrable by smaller players based on the presumed eventual entry of Lotus and
Microsoft.  Transparency really doesn't minimize this kind of market adoption
friction / prevent this kind of FUD.

> A BigCo can't bluff that it will enter a
> market with a well-developed offering if
> it really hasn't done the work, or is
> still wracked by internal division.

I see this is a quantitative rather than qualitative difference, and one with
little real impact on buying behavior.  Consider the Bass Model of Diffusion of
Innovations;  I've posted links to stuff about this before, Google it if you need
to.  Bass divides the world of potential adopters into "innovators" and
"imitators."  So as not to confuse the issue, we'll refer to these as "leaders" and
"followers."  (We're referring to the people that buy new gizmos just because it's
cool vs. people that buy them because several of their leader-friends bought
them.)  By far and away, the bulk of all market adoption of new innovations is the
result of followers, and those are the folks that are scared of buying "another
Betamax" and will wait until the established players enter a space.

No theory of competition can really be formulated without also considering a theory
of how market adoption of innovation occurs, and IMO Bass is a pretty reasonable
model with lots of interesting implications.  In addition, no theory of competition
can be formulated without also considering how and why investment into innovators
occurs, and this leads to...

> Similarly, BigCo's mere consideration that
> COPYing Upstart might be worthwhile will be
> public knowledge; this allows Upstart to
> adjust and would prompt BigCo investors and
> competitors to take more interest in Upstart.

No, sorry, it would essentially put the fear of god into Upstart's investors and
guarantee that the company wouldn't be able to get its next round of funding.  Net
result:  BigCo eventually gets to buy Upstart's innovation for pennies on the
dollar, and Upstart's investors get next to no ROI.  Lather, rinse, repeat:  just a
few iterations of this process will be enough to guarantee *no* investment into
early-stage innovators.  Again, a bit of observation of the world we actually live
in coupled with a little bit of reason / common sense seems to lead to the
inevitable conclusion that transparency kills innovation.

> And when things are going wrong with BigCo --
> projects are failing, customers are unhappy,
> and so forth -- transparency means Upstarts
> know exactly where to concentrate their
> efforts.

Look, even in the most abstract, this makes no sense at all.  Here's a metaphor:
consider a battlefield.  Winning a battle is often a matter of concentrating
resources strategically in certain areas / occupying certain essential strategic
positions.  (In today's real-world battlefield, this is turning out to be the
airspace over the theater of conflict.)  In almost all cases, stealth is an
essential factor in an aggressor's ability to take those positions and inflict
strategic harm on the defender.  Mapping over to business competition, it's clear
that the defender is the entrenched player, the aggressor the innovator.

> Finally, with observers flooded with public
> info about established firms, being so small
> that few people pay attention might provide
> an advantage much like secrecy.

As soon as your sales people start to sell innovation and disruptive technology
into an established player's accounts, they'll notice.  You'll never have enough
runway to actually take off.

> Transparency could easily wind up making size
> a net disadvantage when all effects are
> considered.

Possibly, but the advantages inherent in having multiple resources might outweigh
the disadvantages.  Plus, any disadvantage due to conspicuous size might be
balanced by the confusion and noise level generated by a large company;  a smaller
player looking for those competitive advantages in all the public information
regarding a bigger player is burning a MUCH larger proportion of their available
bandwidth in acquiring that knowledge than a larger player scrutinizing a smaller
player.

Tell you what, I'll go this far:  in a world with *no* existing, established
players, I'll grant that transparency might prevent the kind of market domination
we see in i.e. the enterprise desktop space.  But given that we can't reboot global
business, it seems rather academic. (Yeah, yeah, I know.  I *do* believe there's a
better chance of a legislative rewrite than completely overhauling some of the
fundamental assumptions we make about commerce, tho.  Could be wrong.)

I like the suggestion made ages ago:  make public companies transparent, leave
private companies alone.  *THAT* would guarantee not only continued but accelerated
innovation.

jb