Why giants thrive - Special report on companies
economist.com
economist.com
- Premise (support)
- Big companies benefit from supply chain economies of scale/network effects (Pankaj Ghemawat calculates that America’s top 1,000 public companies now derive 40% of their revenue from alliances, compared with just 1% in 1980)
- R&D in countries with cheaper cost of labor/materials (PwC, an accountancy giant, produces an annual survey of the world’s 1,000 most innovative companies. It found that last year those that deployed 60% or more of their R&D spending abroad enjoyed significantly higher operating margins and return on assets, as well as faster growth in operating income, than their more domestically oriented competitors)
- Regulation inevitably imposes a disproportionate burden on smaller companies because compliance has a high fixed cost (Nicole and Mark Crain, of Lafayette College, calculate that the cost per employee of federal regulatory compliance is $10,585 for businesses with 19 or fewer employees but only $7,755 for companies with 500 or more)
- Small companies can't game the tax code like large companies can (The country’s tax code runs to more than 3.4m words. The Dodd-Frank bill was 2,319 pages long. Big organisations can afford to employ experts who can work their way through these mountains of legislation; indeed, Dodd-Frank was quickly dubbed the “Lawyers’ and Consultants’ Full-Employment act”. General Electric has 900 people working in its tax division. In 2010 it paid hardly any tax)
- Large companies have a "buffer" during poor economic periods and can simply buy out smaller companies (the mortality rate for all American listed companies over a five-year period is as high as 36%, but for companies worth more than $1 billion it is only half that)
I was surprised not to see a mention of the evolution of the legal treatment of corporations discussed, as well as a discussion of the decline of unions and the weakening of the average employee's bargaining power. But otherwise a better article than I was expecting from the economist.
Nowadays that equation is somewhat reversed. Most startups expect crushingly long hours, and typically pay considerably less than the tech giants and have vastly lower total compensation. There's still the slim chance of a huge payday, but the expected earnings are far lower. And while there's still plenty of "keep doubling down on legacy tech" at the giants, there's also way more genuine innovation than there used to be, whereas startups are the output of tech industry magnetic poetry sets as often as not: "instagram for urban farmers", etc.
In the end I also agree that we should push for facilitating more new companies, and the article underlines a lot of the hurdles we need to lower or remove. The big questions in my mind: whether that can be done in a way that doesn't just further empower the big established players, and whether anyone has the political willpower to hamstring successful, generally well-liked companies to increase competition.
I think facilitating the creation of new, smaller companies is less about removing hurdles which, in the case of tax/legal regulations are mostly there as a (failing) mechanism of equitably redistributing wealth; it's more about waiting for (or moving towards) the explosion of the next paradigm-shifting tech platform that will actually allow the next generation of weirdos and mavericks to build/deliver supremely useful products/services. Color me skeptical on Facebook/Snapchat/Twitter...but I think we'll look back on this period as a time when biohackers/wetware were truly ahead of their time.
I think the article should have emphasized more that the acts highlighted only really impact companies that are publicly traded. I don't know of any company with "19 or fewer" employees that is publicly traded.
It was penalized in two ways: First, it had to pay for those 900 people. Second, it had to organize its finances in such a way to take advantage of that tax code. The purpose of the tax code is (ostensibly) to reward behaviors which society values, in proportion to the value they could provide in general government revenue and the amount required to cause those behaviors. Maybe this is a good thing.
That is less (probably far less) than it saved in not paying taxes. Otherwise it wouldn't spend money on them.
>The purpose of the tax code is (ostensibly) to reward behaviors which society values
But if corporate lobbyists have gotten loopholes inserted in the tax code, which they do all the time, then the corporations can behave in ways that obey the letter of the law but are bad for society.
One of the big advantages the giants have is that while no doubt they hire very capable engineers, the number of engineers who need to leave to make a dent on their performance is a really large number, and gives them a really long notice to correct things. In other words, at any given point of time they have many more 'dispensable' employees.
A second benefit of being a giant is that you can forego revenue streams which would be the size of an entire business at a competitor to gain some advantages in the market - for e.g. Google made Android free. I don't think they could have pulled off such a move when they were younger and poorer. This diversity of income streams gives them plenty of time to leave behind lagging products/services and concentrate on the cash cows - that is, they can apply the Pareto principle at a much much larger scale.
Contrast that with the potential disruptors who simultaneously compete with the large companies for employees, could sometimes get killed if just a few key hires leave, rarely have diversity of huge income streams to allow them to change course, and then have to bear the burden of regulation without the cushion of the cash pile. It lends a more stable environment for the large companies to move in the direction where the market expects them to go without having the tremors which the small companies face when they try to do similar things. During those tremors - engineers at the smaller companies - don't usually like to stick around and see what happens. This has been compounded of late because of the huge salary difference between working at a giant versus working at a smaller company.
Where it goes slightly off track (IMO) is listing all the reasons/ways big companies have an advantage. They're all true, but some of them are basically the same as they've always been. The change/trend is the interesting part.
The main point I took from this is: Network effects is the new economies of scale.
Economies of scale is an almost fundamental law in microeconomics and the generally accepted reason for companies getting big. Bigger factories make stuff cheaper. It's a big deal if it is being surpassed by a law of network effects.
Since technology (especially software) has low variable/marginal costs a naive guess would suggest that technology should strengthen, not weakon this rule.
For network effects to match or overtake economies of scale as a driving factor is interesting.
If you're looking for a positive side for startups, here's mine: Network effects are easier to build than economies of scale for a startup. Invention, creativity and fresh perspectives are sometimes enough to build networks.
Marketing: This is actually a pretty even ground, in terms of paid advertising. However, for free advertising, you're at a disadvantage. Amazon has a domain authority of 98. You're not going to rank higher than them. Unfortunately, since marketing is one of the most constant, and highest costs of e-commerce. That puts you at a significant disadvantage.
Pricing: Because Amazon can drive so much traffic to their site, and because they have an efficient website, they can drive sales. This is great leverage to negotiate lower prices from suppliers. This is a 2 part advantage. Now with lower prices, they are more attractive to consumers, and they have more money to drive other parts of their business. This puts you at a significant disadvantage.
Detailed Data: Because Amazon can drive so much traffic to their site, and because they have an efficient website, they can drive sales. With this, they can collect data to help them target areas to make their business more efficient. Assuming no
marketplace customers, they can make precise decisions on what to make investments in. Of course they've grown so big, that competing with them is impossible. So there are marketplace customers. This means they're not only collecting data from their own business but from your business too. They host the marketplace and have no qualms about competing with you if you're successful. This puts you at a significant disadvantage.
Fulfillment: Because of their size, Amazon can afford to have multiple warehouses. This means they can strategically locate inventory across the world, combined with an efficient lead time they can make guarantees about delivery. That drives more sales. This puts you at a significant disadvantage.
Delivery: Because of their size, Amazon can afford to buy whole truckloads with carriers. This means they pay less for delivery. With cheaper delivery, they can offer free delivery. That helps them drive more conversions. This puts you at a disadvantage.
Amazon is the digital equivalent of Walmart. You cannot beat them on their terrain, the only solution is to come up with an idea that customers like more, so that they'll switch even for higher prices and longer delivery.
I'd be curious to know how much innovation in big tech happens internally vs buying out smaller companies.
I agree, it seems the same to me. Which is terrible (for consumers), of course.
Even when they don't actually kill off the product, the products will often languish in a weird limbo where they are basically still around but effectively end-of-lifed on new features. For example, Google Voice, the Google Nik Collection of photography plugins etc.
Google alone is sitting on a giant bunch of products/services that could be (and sometimes at one time were) paid products that they acquired, made free from cost (great!) and then just did absolutely nothing with in terms of advancing them (not so great!). Things that could be a wonderful small business, but aren't worth Google's time because the return for them wouldn't register at their scale. And the kicker is that because Google has these for free, it is really difficult for other companies to come in and try to make a competing product, because even if they make something that is significantly better, there's way more inertia in adoption from users because Google's free thing exists.