Re: Barrier to entry.

From: James Santagata <jms_at_tribalnoise.com>
Date: Thu 23 Mar 2000 23:49:09 +0000

JAMES SANTAGATA WROTE:
> Amazon.com's brand has become a strong barrier to
> entry because they created and own the category of
> "online books.", it had nothing to do with fear.

ROB FRANKEL RESPONDED:
> I'd disagree here. Amazon has no barrier to entry
> from where I sit.

Amazon has several barriers to entry. Please consider
the following:

1) Differentiation via a solid brand -- they created
   and own the category of "online bookstore".

2) Patent: The USPTO just awarded Amazon the patent for
   their 1-Click technology. It's very powerful and B&N
   has decided not to fight this patent for now.

3) Technology: highly scalable, available system.
   Excellent search functions and shopping cart.

4) Switching costs: one click is easy to use, my info
   is already in Amazon's database. I don't want to have
   to re-input all of this at B&N for instance.
   Psychological switching costs: Amazon has not done
   anything to incentivize me to leave the fold and B&N
   has not done anything to incentivize me to join their
   fold. So, put, I'll stay.

5) Supplier relations: Amazon not only has strong
   relationships with material suppliers, but also with
   the investment/VC community. They were able to cajole
   the investment community to think twice and thrice
   before underwriting the B&N IPO. Amazon also was able
   to send out disconcerting press releases before the B&N
   IPO which really hurt B&N's share price.

> In fact, it could be argued that Amazon's
> lack of focus has actually made it more vulnerable
> than ever.

In some ways, I agree that Amazon may be weakening
themselves and opening themselves up for attack. On the
other hand, the competitors seem to be quite impotent
as well. Remember, you can be inept and successful, if
your competition is relatively more inept. That's the
beautiful thing about relativity.

Anyway, there are two focuses to be concerned with.
Internal and external.

For external focus, the concern is branding. Amazon may
have started to wade into the dreaded "bland extension"
trap with Zshops and auctions.

The addition of drugstore.com should not impact
Amazon's brand, since it is not marketed as Amazon's
drugstore.com.

This external focus can be improved if Amazon is
certain to create separate brands for each of these and
intertwine these with the appropriate category.

On the issue of internal focus, it is hard to say what
the outcome will be. Amazon seems to have developed
some excellent internet computing systems and
infrastructure. And they have brought in some very
smart people from Wal-Mart. If Amazon can leverage
these assets as well as their procurement and
distribution centers to benefit the new acquisitions
they have made and products they have launched, the
lack of focus may not be as pronounced as expected or
may not be a negative at all -- their may be some
synergies. Much will depend on Amazon's strategy, how
they execute and, of course, how the competition
responds.

JAMES SANTAGATA WROTE:
> eBay did the same for "online auctions" and Yahoo!
> did the same for "search engines".

ROB FRANKEL RESPONDED:
> Ummm, no. Both of them were first movers, so they got
> the major share of attention. From that they got a
> lot of business.

Attention alone won't give you business. Many people
had never heard of Owala juice before E-coli killed and
sickened several people. Awareness jumped, business
plummeted. Not all awareness is created equal. Not all
awareness is welcomed.

Also, first mover is useless if the value proposition
is not there for the customer. McDonald's could be a
first mover with ham sandwhiches in Islamic countries,
but I'm not sure there would be much demand. Rather it
would seem that many would be extremely offended by
this offering and the risk for a negative backlash
would be great.

> But if you look carefully, what BOTH
> did was legitimze the market for each of their
> categories, inviting tons more competitive search
> engines and auction sites.

These two companies created and owned their respective
categories. They are completely intertwined with the
category. Yes, they were first movers, but they were to
offer an acceptable value proposition and they were
able to capitalize on creating and owning their
categories. Being a first mover does not guarantee
success, as many earlier ecommerce sites can attest.
There is the bleeding edge and then there is the
leading edge. A first mover often walks the razor's
edge.

> Which means they FOSTERED entry, rather than
> creating a barrier.

It is very difficult for any barrier to keep out all
competition, short of a product that has no substitutes
and where demand is highly inelastic.

Economics tells us that pricing signals will attract
competitors. But we also know that there is room for
multiple competitors in any category. We see this with
watches, electronics, cars and artworks. That is not a
bad thing.

In addition, increased competition in a market can
actually bring attention and create network effects
that increase the entire market to the benefit of all
competitors. Can you imagine how boring the world would
be, if ice cream only came in vanilla?

James Santagata



Received on Thu Mar 23 2000 - 17:49:09 CST