Technology

 

Perspiration Principle 261: Who’s Behind Door Number 2 – Better Be You

05.02.2018

 

[Originally published on Inc., republished with permission of the author.]

I have written in the past about certain structural aspects of markets – especially concerning players who capitalize on the relative scarcity of prime assets or highly-desirable partners – which permits a limited number of those players with early access to, or control of, these kinds of assets to exercise an overwhelming competitive advantage in their marketplace and to withstand the attacks of even far larger and better-funded entrants for extended periods of time.

 

The base case for this market condition which most easily demonstrates the necessary pre-conditions (and the consequent impact on the players which get shut out) took place many years ago in the airline industry at the very beginning of the era of frequent flyer programs. I analogized the situation at that time to a highly-competitive game of musical chairs with cross-industry partners taking the place of the chairs. The winners got dates and the wallflowers got screwed.

 

In that case, American Airlines quickly and quietly linked its rewards program to regular purchases which their members made using their MasterCards. In the points acquisition frenzy of those early days, this new source of credits was immediately perceived and appreciated by the AA program members as an additional and painless way to accumulate incremental frequent flyer miles without doing anything different in their day-to-day activities. United promptly responded by entering into a deal with VISA and here’s where things got very interesting because American Express – probably the best and highest-value card marketer around at the time – found itself without an airline marketing partner and thus unable to respond with a comparable competitive offering.

 

Over the next several years, AMEX lost millions of cardholders and billions of dollars in terms of spend as even its most loyal cardholders shifted their expenditures to the cards that provided frequent flyer miles as an additional perk. Turns out that not manyAMEX customers were interested in accumulating miles on Midway or Southwest airlines or getting travel credits on Greyhound bus trips. And, as a result, VISA’s growth exploded, and it blew by AMEX which topped out at about 1/3 of the number of VISA cardholders.

 

I call these arrangements “cross-industry blocking alliances” and we see similar kinds of behavior in the more physical world as well. In the early 2000’s, UPS bought the Mail Boxes, Etc. chain of some 3000 stores intending to turn them into UPS outlets. A couple of years later (probably having little choice at the time), FedEx acquired the Kinko’s chain of about 1200 stores and these days all we see is the FedEx name on these locations. Just recently, FedEx partnered with Walgreens to further extend their physical locations and depots and, of course, CVS buying Aetna is another version of the market extension strategy.

 

Interestingly enough, we also just saw a related, but more modest physical example in Chicago involving the same two airlines. American Airlines threatened to not renew its operating contracts at O’Hare Airport with the city’s airport authority becauseUnited Airlines had been assigned more new gates than American. Dedicated and assigned gates are a finite and relatively scarce asset at any airport and the more gates you control, the more flights you can offer, the more passengers you can serve, the timelier your departures, etc. So, this was a highly-sensitive competitive issue for American which was resolved fairly quickly by allocating a few more “shared” gates to American.

 

The basic rule of thumb is that, as soon as a marketplace becomes effectively oligopolistic (dominated by a few channel providers – either buyers or sellers), you can expect to see a growing number of these kinds of exclusionary deals and partnerships. The frightening thing today is how quickly the digital world is being locked up and dominated by a few players.

 

So, you might ask, what does this have to do with you? In a word, the domination of the digital gatekeepers is going to be far worse and more pervasive than what we’ve seen before and, as more and more digital marketplaces become oligopolistic, and more and more industries are dominated by one or two massive platforms, we can expect to see a world where you – as a digital seller/provider – will no longer control the front door to your own store. Amazon’s Marketplace is a fairly obvious example of this new approach. How much would any vendor have to spend to try to pull customers to their stand-alone e-commerce website when more than 2/3rds of all the high value product searches in the U.S. now originate at Amazon – and notably no longer at Google? And, even if you got the customer to your site, how realistic is it for you to try to manage the delivery back end of the transaction whenFulfillment by Amazon (FBA) can handle the whole thing (including inventory storage) for you automatically?  

 

This new competitive environment isn’t about building B2B or B2C businesses, it’s all about P2P – platform to platform – and the platforms (basically the places the customers live their online lives these days) are getting fewer and fewer.  Your job is to figure out how to get in and stay in the game. If you’re fast, desirable and in the right place, you might get to ride along with the big guys, BUT they will increasingly control the consumer experience (the “front door”) and you’ll be Door Number 2 at best. This shouldn’t come as new news – it’s a FAMGA world – and we just live in it these days.

 

So, this is your wake-up call.  If you aren’t thinking about this issue and how you’ll play in this new environment where someone else controls the primary customer experience and owns the principal connection to the consumer, you’ll wake up one of these days when the music stops without a seat at the table or a business. If you aren’t developing open APIs and deep links and working to be sure that they are readily and easily accessible from within these other social and commercial environments, you are in for the rudest of awakenings and sometime soon to boot.

 

 

 


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