established business vs. innovation

Dave Long dl@silcom.com
Fri, 11 Jan 2002 10:50:52 -0800


>                                              ... it's important to
> consider the resources that fat guys burn on activities other than
> building profit, namely activities *defending* current profit.

Defending from whom?  As an investor,
I don't care if my return comes from
the established player or the upstart,
only how large it is overall.  (Genes
don't care how long-lived an organism
is, only how many there are overall)

I have been running some numbers for
Pablosoft, Qatartech, and Rabatware,
and now I think I understand both of
our arguments a little better.

If Pablosoft makes defensive moves
by investing in Q or R, they increase
risk all the way around, and shift
investment from QTCH or RABT to PSFT.

However, that increase in risk means
that, overall, the PQR sector as a
whole is no longer as attractive an
investment as it was, which should
cause capital to flee.

Can PSFT choose projects such that
they get a larger slice of a less
valuable pie?  I think so, and I
can understand why management at
Pablosoft would think it a good
idea, but I am not sure why most
of their investors wouldn't prefer
to allocate portofolios across the
more valuable pie.

> (Ask Russell to run his rant about advertising in the cola market for
> you sometime.)

It sounds like this is a good time.
Advertising in the cola market sounds
like a parallel practice: it increases
everyone's operating leverage, yet
(unless consumers on average are both
more malleable and more loyal than I)
it has a negative sum outcome.

Investors may own both KO and PEP;
why do they consent to what seems to
be an inefficient use of capital?
Dollar bill auctions?

-Dave

> Let's please get our terminology consistent with each other, so that we
> know we're talking about the same things;  "laugh" was part of the
> quote, there are only three strategies we're considering for the dom
> player (i.e., laughing per se is not a strategy in my ontology, it's an
> effect) --- DISCREDIT / COPY / BUY.

Those are the three strategies we're
considering for the dom player after
an innovation has been proven.  Until
that time, you had mentioned IGNORE /
LAUGH.

If innovations, for whatever reason,
do not pan out most of the time, then
IGNORE/LAUGH is better initially than
putting resources into any activity,
even cheap ones like DISCREDIT.

(If IGNORE was not a viable strategy,
we should have a few megacorps making
both garden hoses and systems software)