Competition, markets, and open source

On Wednesday, at WEA’s housing and transportation conference, I met an economist who’s studying competition and the shrinking number of small / medium-size businesses. New business formation isn’t behaving as most people would expect it to in a strong economy.

She thought open source, both software and methodology, might be a solution to make small and medium-size businesses more competitive. However, I argued the exact opposite: open source is a business strategy for an extreme form of taking the entire market.

I think one root cause of large companies growing larger is that technology lends itself to extreme operational efficiencies. With a technology company, the marginal cost of an additional customer is effectively zero. If Amazon can operate at 10x global scale with the same operational costs, it can take a smaller margin and still be very competitive. Traditional businesses can’t compete if they have a larger percentage of margin dedicated to operational costs.

So, if it’s true that more of the market is going to larger companies, is this worth solving for? And what are potential solutions? One result of current market dynamics is difficult to unwind: Amazon yields amazing customer value and worsening employment options (either by destroying jobs entirely or offering poorer wages).

Amazon’s Achilles heel

Brand. Brand is the key differentiating factor when it comes to influencing purchase decisions in a mature market. And Amazon's marketplace is a race to the bottom cesspool that's antithetical to customer loyalty.

Consider this search for "tablet arm":

Which of these should I choose?

  • Three of the four have relatively similar ratings.
  • All of them are within the same price point.
  • None of them are from a name brand I know I can trust.

Such indecision! I could spend 20 minutes scouring through the reviews, but who knows which are real and which are fake these days. Or, I could buy them all and return the ones I don't want. But packaging stuff back up and taking to UPS is a hassle.

For exactly this reason, I went to Best Buy yesterday (for the first time in decades), looked at video cameras, and bought a nice Canon for a cheaper price than it was listed on Amazon.

I like brands. Brands mean I can form trusting, long-term customer relationships with companies. The Amazon marketplace is overrun with knock-off products from generic drop shippers — bad and getting worse.