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.