The Magic Formula for Internet Success

August 17, 2006 at 9:22 pm Leave a comment

In my last post I discussed how difficult it is to maintain market share in today’s business and technology environment. I promised that today I would reveal the magic formula for maintaining internet dominancy.

A brief recap on my arguments yesterday:

Today more then ever internet companies are feeling competitive pressure. It takes 50k or less to develop a working prototype on the internet. Any kid with a computer can build a replica of my space, craigslist, youtube… so in today’s world, you not only need to worry about the big guns coming after you, but you also have to worry about some teenager cloning your site.

In today’s post I would like to examine how certain sites were able to handle the competitive pressure from both the big and small companies, and how they managed to survive and what we can learn from this.

How is it that Craiglist.com enjoys such a market dominance even though there are over 100 small sites that have better technology and more user friendly design (edgio.com, oodle.com, epopuli.com and hundreds others). Not only that but Google (Google base), MSN (Live Marketplace) and many other huge companies have also tried to break into the space. Why does Craigslist still live? What is its secret sauce?

Why does ebay.com hold the #1 slot by HUGE margins? Yahoo, Amazon, Overstock, and many others have tried to break into its space.

Hundreds of small sites also tried with similar services and just couldn’t.

The answer is in the natural monopolies that these sites produce. The internet allowed for a completely new type of company, one of matchmaking. The company doesn’t produce or provide anything other then a marketplace. Craigslist lets “buyers” and “sellers” share information. Ebay is a marketplace for junk and other stuff. What they have in common is that the service can only survive by having mass penetration on both sides of the equation. They need the buyers and the sellers, and unless they have a huge stream of them, the companies don’t work and can not survive. It is a natural monopoly, internet style.

The thing is I can set up a craigslist clone, but unless I have 50million people looking through it, I can get as many people as I want to post real estate and jobs and the site is not going to work. It is a catch-22 situation for a web operator. They can’t get the buyers unless they have the sellers, and they cant get the sellers without the buyers.

In my opinion that is the biggest Sustainable Competitive Advantage an internet company can have. It means that no matter who, no matter how much, and no matter what technology they come up with, no one will be able to dethrone a market leader. That is exactly why craigslist can afford to have a shitty site. It is why Ebay can keep jacking up prices.

The same is true for monster.com, the reason they are so big is not because of technology and not because of their brand (though it does help), but because they have the largest user base of jobs and candidates. Match.com works the same way, if you are looking for a girlfriend, its where the women are, and if you are looking for a boyfriend, that’s the place to find them.

So what is the secret magic formula for internet dominance? The marketplace. Figure out a way to incorporate a marketplace into the equation and you will be set. Google.com did it with their advertising network. Amazon.com did it with their Amazon Marketplace service and with all the data they have on user behavior. The list goes on.

So find a way to create a natural internet monopoly and then maybe Google and those 15 year olds won’t be able to steal your business.

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Entry filed under: Start-up.

Fear of Competition How to Be a Great Start-Up CEO

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About

Exactly one year ago I set off on the most exciting journey of my life; I started Emerging Demographics Inc (the parent company of HireWorkers.com).

Along the way I was selected as one of the top 20 young entrepreneurs by BusinessWeek.com and the 21st coolest young entrepreneur by Inc. magazine. I have also appeared in ABC7, Telemundo, NPR, and been quoted in StaffingIndustry.com, WorkforceManagment.com, Entrepreneur Magazine, and various other publications.

Over the next few months I will recount some of the stories and lessons learned from building, developing and creating a business from scratch.

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