Scott Rafer on Dalton's letter: "Learning the wrong lesson"

Quantcast's free audience reports couldn't be copied by the incumbents (Comscore and Nielsen), because selling similar reports was their core business. They hated us, but we never spent a moment worrying about them. In fact we were always open to working with them, but they were bound up in a knot over our model.

Southwest undercut united and American by avoiding business and first class, flying only one model of plane (737), which lowered maintenance costs and allowed easier substitution of planes among flights. They skipped the hub and spoke model and flew out of peripheral airports that were cheaper, and boarded like buses with no reserved seats to shorten the idle time a the gate, etc. no long flights meant no meal service. There was no possible way for United and American to match them on price. They were afraid to adopt any of these changes because it might tarnish their brand. They were too focused on competing with each other.

Dell offered lower costs than their competitors by charging up front for the computer before buying the parts (which were steadily falling in price). The competition were stuck with a channel model where they shipped finished computers to channel partners for stocking in inventory, so they not only had to buy parts far in advance but had to give a cut to channel partners and retailers, making their prices higher and profit lower.

Netscape had a dozen competitors to their browser. Netscspe offered free downloads to anyone, and with a wink asked for a licensing fee. No individuals paid it, but corporations did because they wanted to be in legal compliance. Best of both worlds (free for individuals and paid by corporations, but only after achieving critical mass within the corporation). They crushed their competitors with this model, who were charging license fees to all customers from the beginning, as competitors didnt get the benefit of rogue employee groundswell to achieve critical mass in corporations.

Hilariously, Microsoft in turn crushed Netscspe by goong a step further, making Internet Exploror completely free, no wink needed. Netscspe browser revenue dried up as corporations stopped paying for Netscape because they already had a free license to ie.

This was funny to me, as it led to all sorts of crybaby behavior by Netscape screaming "antitrust!", when all Microsoft did was tweak the strategy used by Netscape themselves to crush the others.

All of these cases are "strategy", which is defined by Michael Porter as the way that you are different from your competitors. Ideally, in a way they cannot copy. Notice how a strategy allows you to avoid competing, because you're playing a different game altogether.

I suspect that the Facebook App Center is different than the iTunes App Store in an analogous way and will do nicely competing against it once Facebook chooses to do so.

Great examples. How do you think this would apply in Dalton's case though, where the very mechanism of building on Facebook/Twitter's platform can be shut down by Facebook/Twitter?

I don't claim to understand @pmarca at all. I've never even shaken the man's hand.

I've got some great supporters and advisors who help me tremendously. It just pains me to watch someone great like that drift further from a startup.

Scott - you say "It’s incumbent on you (and certainly also me) to make sure that we’re starting businesses in segments that actually require a new entrant and can not be filled by aproduct line extension from an incumbent. Whether or not they fill holes as early as Twitter, large companies with developer programs all consolidate their segments — and do so a economically as possible. That means every third-party developer grows up, sells cheap, or dies."

But what does ‘require a new entrant’ mean here? Who requires it? There is surely only one meaningful answer - the consumer. Moving on... What sort of new entrant offering ‘can not be filled by a product line extension from an incumbent?’ I suggest in the context we should parse this to mean ‘... platform company cannot build a competitive offering.’ But of course, there is little that such well financed companies who control the platform can’t build. More to the point there is still less that can’t build if all they have to do is copy an existing product. So this is a very strong condition. Perhaps you mean - software the platform company doesn't want to build? One answer along these lines is to build software for a small segment the platform company cannot be bothered to address. But for an ambitious developer who wants to add significant value to millions of users I am not sure it is possible to develop such an offering - insulated from potential competition by the platform company - unless the platform company has a clear policy vis a vis developers and provides very clear signals with a very clear record to trustworthy behavior that gives a high degree of confidence it is safe to proceed. But of course developer is taking a risk that the platform company can bait and switch. I am unsure what ‘large companies with developer programs all consolidate their segments’ means. But if it means that such platform companies have an inbuilt drive to purchase their devs I can’t agree. The big platforms have so much software on them that even the wealthiest company couldn’t buy it all even if they wanted to. I don’t know what a cannabilistic cash flow is. This may be a term of art I am just unfamiliar with. But if it means a cash flow built on the back of the host platform, this surely refers to the cash flow of all apps built on a platform. So I am unclear this idea moves the ball forward. If on the other hand the idea is that it will cost the host money for no clear ROI then this is indeed always possible, but just as obviously if there is no clear monetization strategy the dev is taking a huge risk. It can work out but of course most times, not surprisingly, it doesn't. (Clay Christen makes much of this dynamic and the challenges of marginal rather than absolute costing when he discusses such cases as Blockbuster competing with Netflix. But the undiscussed part of his argument is the hindsight effect. Blockbuster were right to ignore most of the market entrants. Most never got any traction. With a thousand flowers trying to bloom, which one will see the sunlight?) So building software that doesn't seem to make financial sense will doubtless reduce the risk of the platform company competing, but you'd better have something up your sleeve. The Instagram example is indeed important. But it is important precisely because of the very different behavior of Apple and Facebook vis a vis their devs. Apple has had long experience of working with devs and a deeply wired understanding of how to foster and manage relations with their developers. iOS is a platform. Apple provides some core apps but other than that it is a free range and the overwhelming majority of devs can be confident Apple isn’t going to compete with them. It seems to me that the whole point of DCs argument is that Facebook declared itself a platform, provided APIs, provided assurances that his product was seen as valuable and would be welcomed and then, having given him the confidence to build it, turned on him threatened to cut off his access to the platform on which his app relied and then offered to buy him out. This is very different behavior.

So to be honest, I don’t find the argument very clear. I’m not sure we agree on what the responsibilities of a company that declares itself to be offering a platform are. I can’t extract a convincing strategy here for how you feel devs can best to develop on a platform. And whilst you seem to feel you have some sort of lesson for DC about how to work on a platform even if the company baits and switches, I can't fathom what that lesson is.