Commentary

Getting Your Ass Kicked By A Really, Really Nice Guy

I have always imagined that I would one day get my ass kicked by a tattooed brute with a shaved head in a dark alley I accidentally wandered into.

I don't know who the folks at Autotrader.com thought would kick their ass, but it turns out it's a sweet, goateed man with a penchant for berets and sweater vests.

Craig Newmark, creator of Craigslist, puts the capital D in Disintermediation. He is a bold reminder of the greatest fear every company needs to have: someone who thinks completely differently.

He didn't just kick Autotrader's ass, though. He left them for dead in the ashes of a burned down house in a poverty-stricken neighborhood, nursing a bottle of Clamato.

 The worst part: he didn't even do it on purpose.

I See Dead Companies
Autotrader's value proposition, like the newspaper classifieds that came before them (also killed by Craigslist), can really be distilled down to one thing: distribution.

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Distribution-based business models attempt to provide value on both sides of the equation: aggregate enough sellers to offer buyers a wide range of products to choose from, and attract enough buyers to give sellers an efficient market.

Once at scale, these business models are indestructible via direct competition. Good luck creating a better auction business than eBay (Amazon and others tried), a better classifieds system than Craigslist (eBay tried), or a better chat system than Skype (hence Microsoft's $8 billion acquisition).

The reason these models are so difficult to disrupt is that they all share a Network Effect. The concept of a Network Effect was created in 1908, and popularized by Bob Metcalfe in 1980. It loosely states that the value of a network is the square of the number of users connected to it. More recently, companies like Facebook, Twitter, and LinkedIn have all been beneficiaries of this concept.

There is one interesting unanswered question, though: What happens when Network Effects break down and the gears start to turn in reverse?

Last One to Leave, Please Turn Off the Lights
There are countless stillborn social networking startups out there -- companies that built a field of dreams only to find out that the throngs of adoring users never arrived. I know, I used to be chairman of one of them.

The company was run by an incredibly smart and ambitious young CEO. He was a great technologist, had his finger on the pulse of his users, and had built several successful products before. For some reason though, this one didn't stick. Sometimes all the planning and money in the world can't predict what users will adopt.

The same is true of displacement.

It's equally hard to predict the fate of businesses that disrupt the very foundation of an existing service. Who would have guessed that a service like Netflix would get created that rendered Blockbuster's "brick and mortar advantage" a disadvantage? Who in the hotel business would have predicted that Airbnb would create a successful competitor out of private homes and tattered couches?

 One thing is certain: when a displacing business arrives, the damage happens so quickly that it often can't be undone.

I just watched this happen firsthand. When I moved from New York to San Francisco last month, I decided that I didn't want to bring one of my cars with me, and out of habit listed it on Autotrader. Six weeks and $80 later, I hadn't gotten a single inquiry. So I listed it on Craigslist and sold it in less than a week.

It's not Autotrader's fault. They are on the deteriorating end of a Network Effect.

It's a new phenomenon that I am guessing we will be seeing a lot more of, as intrepid entrepreneurs (and guys in berets) figure out how to displace the current industry giants.

I hope watching rock-solid businesses crumble seemingly overnight scares the hell out of you. That fear is the only thing that gives you a shot at survival when they set their sights on publishing.

Caveat Prodo.

6 comments about "Getting Your Ass Kicked By A Really, Really Nice Guy".
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  1. Kevin Lee from Didit, June 2, 2011 at 12:54 p.m.

    Plus the "really nice guys" are often passionate about the fact that there's a better way to accomplish something. In the past, new forms of media never fully killed the old forms. But I don't think that will hold true in the future. You mention publishing, but all forms of professional content creation are somewhat at risk, broadcasting, games, movies, etc.

  2. Amber Boone from National RV Trader, June 2, 2011 at 1:08 p.m.

    I used to work for AutoTrader Classics and National RV Trader- once they decided to discontinue the books, the efficacy of the ads went down.
    Management refused to listen to those of us who spoke with private sellers everyday. AutoTrader's success was actually in distribution. In my opinion, they killed print early to keep their website alive but that move doomed their business. They can't compete with Craig because craigslist is free. They went to battle on craig's turf and lost.
    Industry giants have a chance, if they can remember what differentiates them from their competition AND stay ahead of the curve. No small feat, that one.

  3. Bruce May from Bizperity, June 2, 2011 at 2:23 p.m.

    We don't talk enough about the disruptive aspects of new technology. A lot of my consulting has focused on these kinds of issues. Any model that offers a service for free presents a serious threat to business models based on monetizing the same service. We are well aware of how this plays out with free content but the same affect applies with any kind of service. I see this as the single greatest threat to any business now that so many entrepreneurs are inventing new business models that leverage free services that overlap near competitions. A well founded start up and simply give service away for free to capture the market (i.e. YouTube, etc.). I learned this the hard way when Brightcove entered the market and began giving away their service for free. They had the money to directly attack the marketplace with this aggressive strategy which succeeded. After acquiring the lion’s share of the market they ran virtually all the competitors out of business. It’s easy to say that good strategic thinking is key to avoiding these threats but the truth is that they may be unavoidable. The best defense is to have a broad portfolio of value added services and lots of good partnerships that extend your reach into your industry segment so that you become well connected to the ecosystem and hopefully, inseparable from it.

  4. Rick Monihan from None, June 3, 2011 at 10:27 a.m.

    Schumpeter needs to be standard reading material for anyone entering today's workforce.

    The "Perennial Rain of Creative Destruction" is a rule. It cannot be revoked. It can be delayed, subverted, and avoided - but sooner or later something better comes along. The human mind doesn't sit still, and this basic fact drives the entrepreneur.

    In the mid-90's there was alot of talk and amazement at a concept called "Increasing Returns". An odd offshoot of the tech industry was the fact that very little capital input could generate massive returns for the initial investment. You build a successful program and voila! It keeps paying for itself with relatively no cost afterward.
    What this concept failed to recognize was that there are additional costs. Those additional costs are from innovation to avoid being left behind by something newer or better. This is why newer versions of Windows come out on a somewhat regular basis.

    The digital industry faces similar constraints. Schumpeter was unfamiliar with this industry - but the rules he set forth impact today's world in a manner he probably never thought possible.

  5. Ben Johnson from Interactive Internet Websites, Inc., June 3, 2011 at 12:26 p.m.

    Very insightful article.

    The focus on the downside risks associated with building a business based on network effects if very intriguing.

    There are a few key points the author overlooked, or didn't discuss.

    One is the question of barriers to entry. Network effects are a form of barrier to entry, largely explaining why eBay and Facebook have been able to grow enormously without attracting a slew of successful new entrants. (Those who tried give up when they discover how difficult it is to get over the entry barriers).

    But, the autotrader example suggests that network effects alone may not provide adequate, sustainable barriers to entry.

    If so, that's has enormous implications -- e.g. is Facebook really worth so many billions of dollars?

    Or perhaps the autotrader example demonstrates a slightly different point -- no barrier to entry is infinitely tall. Perhaps they badly misjudged the height of the barriers to entry that were protecting their monopoly power -- $80 might have been a sustainable price point in the context of print, but it was much too high a price point on the web, particularly when they were facing a potential entrant with a price point of "free."

    Perhaps if autotrader had charged $8, or $4, they would have had a sustainable business model -- and if their volume had increased 10 or twenty fold at that lower price point, it might have been enormously profitable for them.

  6. David Koretz from Adventive, Inc., June 3, 2011 at 1:18 p.m.

    @Ben,

    Great questions.

    I believe that one major shift that has occurred is that these barriers to entry are far more vulnerable to disruption then they were in the Standard Oil / US Steel days. All it takes is users typing in a new URL and they're done.

    I also think Autotrader overplayed their hand. If they made all ads $10, they would have been much less likely to have been so dramatically displaced then if they tried to maximize at $80.

    They should have renamed themselves "trader.com" and done a $9 list for a wide range of products. Leverage their traffic, and displace other things. It's probably too late for this now though.

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