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Software Superpower 2.0

Facebook, the leading social networking site, reached a couple of significant milestones this week, achieving a valuation of $50Billion and toppling search juggernaut Google as the world’s most visited site. This news got me thinking, do we have a new software superpower on our hands? Does Facebook possess an asymmetric advantage in the social networking space that allows them to lock in users and lock out potential competitors (particularly the cross category players – Oracle, Google, IBM, et al)? Have they successfully co-opted the resources and momentum of a superpower  to help to catapult themselves into the stratosphere? Do they have a business model that is sufficiently sustainable to enable them to wrest strategic new markets and service categories away from lesser foes? I believe that the answer to most of these questions is a qualified yes. Let’s look at the facts:

Sustainability: Facebook has apparently generated some $2Billion in annualized revenues in less than six years and is projected to grow at a 50% clip for the foreseeable future, an unprecedented achievement. This is clearly a business with legs.

Asymmetric Advantage: While the social media phenomenon has been dismissed by some pundits as a fad driven by users who are fickle and will quickly move on to the next big thing, I am not so sure. Facebook is a place where 500Million users can easily and reliably communicate with friends, view images, remember birthdays and access up to the minute status information instantaneously. All for free! It would really take something special to make all of those folks go to the trouble of porting contacts over to another service or, worse still, ‘friending’ everyone they know all over again. Make no mistake, they are locked in. That doesn’t mean that Zuckerburg and his crew are taking it easy. They are constantly adding new services like the new messaging facility they released last month, a calculated masterstroke that will make transitioning to an alternate service even more challenging. These guys are well versed in Customer Barrier Management. Their users aren’t going anywhere.

Locked-out Competition: Facebook also appears to have enough of an asymmetric advantage to fend off much larger players. For example, Buzz, Google’s attempt at social media market co-optation was an unmitigated failure.

Superpower Sponsorship: Microsoft had the right idea when they bought one percent of Facebook. Not only have they already seen a threefold return on their investment to date but they also secured an exclusive agreement to serve ads to Facebook users, an asymmetric strike against arch rival Google. All this despite the fact that Facebook is a viable threat to Microsoft’s core OS business. I am certain the Redmondistas are well aware of the potential harm that a rival platform like Facebook might do them but the truth us they have no choice here, they have to play nice. Arguably it is Microsoft that is leveraging Facebook’s momentum not the other way around.

Category Cooptation: In another year or so Facebook will go public and speculation is rife that they will enjoy a crazy valuation, perhaps as much as $100Billion. This is going to be a business with a deep war chest. They will have plenty of resources to build out new service categories and buy out or develop around competitors with technology that impacts their strategy.

So is this a possible software superpower? Let’s recap. Facebook is a company with incredible market momentum, massive barriers to entry, a locked in user population, the sponsorship of the most significant cross category software player in existence and  (soon) billions of dollars to counter threats and develop new markets. They are truly a superpower in the making.

 
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Posted by on January 4, 2011 in Technology, Uncategorized

 

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Customer Barrier Management: A Source of Asymmetric Advantage

A few years ago, I was asked by my then employer, a provider of SaaS-based storage services, to attend an IT trade show in London in order to get a sense of what the competition was up to and gauge attendance in case we wished to exhibit the following year. While picking up some marketing collateral at a booth, I managed to get into a conversation with a competitor sales engineer, who spotted the name of my company on my name tag. It was a pretty interesting discussion. He was a very passionate fellow who knew a lot about the business and had some truly visionary ideas about where the industry was heading. During the course of our conversation, I mentioned that although it was very difficult (at that time) to convince organizations to store their electronic data in our system, I felt that, once they overcame their concerns and signed up to our services, they would likely be customers for a long time, if only because of the sheer volume of data under management and the cost and complexity of moving to another provider. My interlocutor took exception to this viewpoint. He was angry! “Why would you want to lock your customers in?” he demanded, ” Is it the policy of your organization to hold its customers hostage? At my company, we are working to make it easy for clients to seamlessly transition away from our service!”  I walked away, bemused. “Why would any company want to make it easy for customers to leave them, potentially for another competitor”, I thought.

It might have been more appropriate to ponder whether software superpowers ‘hold their customers hostage’. I assure you that they do. They not only make migration  from their systems difficult by holding data in proprietary formats, they also erect barriers to competitors’ attempts to integrate or interoperate with their offerings. Think of the way that Microsoft Outlook natively rejects third party plug-ins, advising users via a dialogue box that ‘poor system performance is due to the [Salesforce, NetSuite, Mimecast] add-on’ and enquiring whether it should be disabled. Another example of the use of such tactics is the way that Apple’s iTunes software works with the iphone but not with Android phones, making it challenging to switch mobile phone platforms if users want to take their music with them. This kind of “Customer Barrier Management (CBM)” is a wellspring of asymmetric advantage for software superpowers. It is not only not an accident or an afterthought, it is core to their product strategy. After all, locked in customers are a source of continuous revenue and growth for the superpowers, not to mention an inaccessible area of the market for their competitors.

I am not suggesting that practicing CBM obviates the need to deliver value; aspiring superpowers must ensure that their offerings are ‘best-in-class’ and established players must continuously invest in the development of value-added features. No force on earth will compel potential customers to buy or stick with subpar products. I am merely recognizing that the most successful software businesses jealously defend their client bases from competitors by making migration and, in some cases, interoperability, next to impossible.

Both startup software businesses and single category players looking to expand into new markets (or resegment existing ones) can benefit from this approach by ensuring that all future PRD’s are asymmetric (meaning they both customer barriers and distribution though cooptation of superpower momentum are baked in to product design). Although serious consideration must still be given to how the product must function if it is to address customers’ needs, it is also important to think about how to architect the system in a manner that locks clients in. Failing to address this element of product development might well be an invitation for competitors to coopt the market long before a chance of superpower-dom is a reality.

 
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Posted by on October 29, 2010 in Technology

 

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