Are you a seal?
There is a theory that when a shark bites a surfer, this is because they look like a seal, especially from 50 feet underwater. The shark circles, comes close, and sometimes it takes a bite out of a leg, and sometimes it takes a bite out of the surfboard and gets a mouthful of fibreglass. Generally, it realises the mistake and leaves, though this may or may not be any consolation to the surfer.
I think about this theory a fair bit when I talk to big companies worried that Amazon or Google seem to circling around them, getting closer, and bumping into their legs. Maybe you look like a seal. And of course, maybe you are a seal.
What does it mean to look like a ‘seal’, in this analogy, or indeed to be one? Well, a trillion dollar company with tens of thousands of engineers runs lots of projects and experiments, and there are lots of things that theoretically they could do, and that they might explore. But you have to ask not ‘would it be a problem for me if they got into my industry?’ but rather ‘would it make any sense for them to get into my industry?’
How do you tell if it would make sense for them? I’d suggest a few overlapping questions:
Can this naturally be added to the existing skills, assets and points of leverage that they already have? Might they squash you without noticing?
Can it scale massively with little incremental, marginal cost?
Can they turn it into that - can they turn it from offline manual processes into low-friction, automated, scalable software?
Would they have to grow a new limb to make it work - would they have to create an entirely new kind of capability?
How big is it? Larry Page talked about the ‘toothbrush test’ - will this be as widespread as a toothbrush? Is it worth the oppportunity cost? Is it worth growing a limb?
If Google can turn your business into a trivial part of Google, it will try. If it would have to recreate your entire company inside Google, it probably won’t.
The canonical example of this is Google buying dMarc in 2006 for $1.2bn to get into the radio advertising business. It thought that this could be scalable, self-service, automated software - that it could be turned into ‘Google’. When Google discovered that it would have to send thousands of actual human salespeople all over the country - that it would need to grow another limb - it shut it down. Another more recent example is in home security: Google seems to have decided that the only way to make this work is with the kind of very local, manual, physical route to market that companies like ADT already have, whereas Amazon is still pushing to try to convert this into software. We don’t yet know where this will end up, but we do know that neither Google nor Amazon want to have thousands of home service engineers driving around twenty countries in trucks, climbing up ladders to install cameras. They could do that - they have the money - but that’s not their business. Google bit radio ads and home security and got mouthfuls of fibreglass instead of a nice juicy seal.
Meanwhile, Apple never created a record label, nor an MVNO, and it didn’t buy a bank to launch a credit card. It partnered with people for whom that was their actual business, and added something specific and unique on top. It found a way to turn credit cards into ‘Apple’ without having to grow the entire thing itself. Most of what Apple does is very asset-light, and it’s very selective about going beyond that. That doesn’t mean it won’t - it created retail as a new ‘limb’, and did the same with chips. But there has to be a very strong strategic reason to grow a limb. Google expanded into YouTube and Android for the same reason - these were fundamental strategic vectors that were worth the effort. Google doesn’t want to employ thousands of people to install home security systems, but it does have thousands of people driving Streetview cars - that was a limb worth growing. Conversely, it’s spent a decade circling around making its own smartphone hardware without biting (you could see this as option value).
Conversely, a few year ago when Apple had hundreds of billions of cash and lots of people speculated about what it might buy - Best Buy! AT&T! A bank! A movie studio! - I used to make fun of this way of thinking by saying that Apple should buy Boeing, “because it could make a better in-flight entertainment system”. Yes, perhaps it could, but that’s not what it means to be in the airliner business (and the IFE isn’t supplied by Boeing anyway). You have to ask what makes sense for them, not what scares (or excites) you.
All of these questions, of course, apply just as much to other Silicon Valley tech companies, several thousand of which are founded every year without generally worrying much about ‘big tech’. When I worked at Andreessen Horowitz, we invested in Everlaw, which makes cloud-based legal discovery software, and Honor, which makes a two-sided network for home help for the elderly. Google could make Everlaw, and Facebook or LinkedIn could make Honor, but we never worried about that, because these are not incremental features you can bolt onto the side of Docs or Groups. You need a whole company thinking about how the product should work, and a whole company thinking about how you talk to lawyers and judges, and nurses and families. The only way for LinkedIn to compete with Honor would be for it to make another Honor - it can’t turn Honor into LinkedIn.
This take me back to sharks. A Great White might indeed be the scariest thing in the ocean (or perhaps not), but is it interested in you? This was the problem with Jaws - the men in the boat care a lot about the shark, but there’s no particular reason for the shark to care about the men in the boat.