While everyone has expected eventual consolidation of martech, this hasn’t happened to date. Why?
For a possible answer, we can look at a fascinating study conducted by a UCLA team looking at the fossil record of cars. There is a reliable record of the introduction of new automobile makes and models since 1896. In essence, this creates a “fossil” record, similar to biology, where we can look at the evolution of a technology over an extended time period.
In this case, the researchers were looking to isolate the factors that led to the greatest introduction of new models and the discontinuation of old models. When many new models were being introduced, the evolution of automotive technology accelerated.
The researchers wanted to see if this pace of evolution was tied to strength of the economy, changes in oil prices or the number of other cards on the market. What they found was that competition in the marketplace played a bigger role in the variety of car models than either economic growth or oil prices.
However, these periods of rapid innovation didn’t last forever. Inevitably, there was a period of consolidation, where the major manufacturers focused on a few models to increase profitability. It’s a lot more profitable to produce a popular model with relatively few changes over a long period of time.
Once again, we have an oscillation or wave happening.
What is interesting about this study is that these periods of rapid innovation always come from an open market with many competitors -- exactly what's happening in marketing technology right now. That's because open markets always drive more innovation than can be achieved within hierarchical organizations.
As Eric Raymond showed in his brilliant essay on the open source movement, "The Cathedral and the Bazaar," the evolutionary forces of a distributed open market (or “bazaar”) always trump vertical integration (“cathedrals”) when it comes to spinning off fresh ideas.
In their book “Creative Destruction,” authors Richard Foster and Sarah Kaplan show that organizations (cathedrals) tend to favor incremental innovation with occasional forays into substantial innovation. But markets (bazaars) unleash transformational innovation. The unpredictability and risk increases by a factor of 10 as you go from one version of innovation to the other, but so do the rewards. Innovation in markets grow on a logarithmic scale. It’s why some players like Tesla and Google have espoused the open-source “bazaar” approach in areas where rapid innovation is essential, like sustainable transportation and artificial intelligence.
There is another critical factor at play here as well. The market/bazaar, being ruthless, quickly culls competitors down to those that have the best market potential. This explosion of innovation and the subsequent winnowing need a brutally competitive market environment -- a rugged landscape, in evolutionary terms.
Organizations/cathedrals are reluctant to pull the plug on losers as they fall victim to the sunk-cost fallacy and loss aversion. Markets/bazaars operate like nature -- “red in tooth and claw” -- with a brutal efficiency in dispatching the less-fit.
After this explosion of innovation and the subsequent purge, there is a period of consolidation when the biggest players benefit. Let’s call this the cathedral phase. Here, operational efficiency takes over, looking for greater profitability. Here, market-tested innovation is acquired by the largest organizations and systematically incorporated into a replicable template that allows for scalability. Here, the cathedral model does what it excels at, maximizing profits.
Of course, there is a trade-off to this phase Innovation withers and dies in this environment, leading to eventual stagnation, which triggers the need for break out innovation all over again.
Will marketing technology follow the cathedral/bazaar pattern? In his last landscape, Scott mentioned that rather than coalescing around an “a small oligopoly of platform providers competing for that starring role,” the martech ecosystem seems to be embedding plug-and-play compatibility, allowing for a longer “bazaar” phase.
Perhaps, with the elimination of market friction, we’re getting to a point where profitability can be uncoupled from the need for scale. I guess we’ll have to wait and see how many martech vendors end up on the 2017 version of Scott’s slide.