Interview: Hamilton Helmer & Chenyi Shi on How to Build an AWS-Like Second Business
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All i'm sorry before equal going, is this going to be a question of is this the scale economy or network economy? Yes, out. Damn, go for Jimmy because I don't .

know the answer. We've stumped the experts who.

Easy, you wait, you wait, you who? Easy, you me down, say.

Welcome to this special .

episode of acquired the podcast about great technology companies and the stories and playbooks behind them. I am then .

gilbert David roth.

and we are your hosts. Eight years ago, I pitched David on an idea for two different podcast. One was on grading technology acquisitions that became acquired.

The other idea was to do episodes on companies that managed to create two separate multi billion dollar innovations. Our hypothesis is that most companies have really one big founding insight and that the rest of the company's history is just drafting on that. Well, hamilton helmer and Cheney g.

Friends of the show, coincidentally, have been expLoring literally exactly that idea. And they've been asking questions like, what percent of the profits of the biggest companies in the world came from a second business line? They have a new framework, in addition to seven powers, to help founders answer the transforming question. If I were to expand the scope of what my company does, how should I .

go about IT? And this is a particularly interesting time to do this episode with them because I feel like a bunch of the companies we've covered recently on the show, this has been like a key part of the story, whether it's amazon in AWS or LV main, how all the businesses, the image itself have been transformed over the years. And even particularly, i'm thinking about nintendo and are in nintendo series and going from like a supplier for the eua to dominant video game console manufacturer. You and David.

I can say, and I have already recorded the interview with Cheney and hamilton and like we address exactly that. So listeners, this is a really fun one to do and having hamilton and Cheney and IT just concretizing a lot of the very abstract thinking that we sort of banter about on the show, but never quite Crystalize. They Crystalized IT for us.

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Hamilton and Cheney, welcome back for the third time to acquired our .

pleasure.

Always great to begin. The quired audience has grown so much since the last time we did this together. We thought IT might be fun first to sort of humanize the seven powers a little bit and do a little background of what is this thing that we talk about on every acquired episode. How did the two of you come to be world experts in this?

Yeah, yeah. Delighted to do that. So as i've said, I think on other episodes, my understanding as an economist is the ground zero for economic vitality, is the strength of the entrepreneurs sector, is a famous economist called jasa champeen resort, posited that, and that was different than sort of Normal economic theory at the time, because that was very dynamic and not sort of mathematics.

And so I believe that very strongly. And of course, the work on valley is a center for that. So the thing that really interested me was, can I contribute to that anyway? Is there anything that I can do that helps you that and my discipline is sort of business strategy. And so there's a real question about, is there anything useful the business strategy can add to that sort of creative dynamic effort of all these people? And i'll cue IT up with an example that I used to use in my classes stamper sometimes, which is that if you can imagine me holding up two devices.

see that the ipod with the touch wheel. And I have no idea. Is that calculator, right?

So that's the first hand held calculator in the united states, boomer. And so here's the issue is that here are these two devices. They were wildly successful to begin with, incredible product market fit bomba.

One from maybe three million to nine hundred million and a couple of years, which back in those days was real money. And course calculators are interest in starting point, because, you know, the japanese calculator, busy com, sort of what started the whole CPU revolution. And so tremendously successful. And you all know the story, the ipod that was the beginning of apple as incredible business model, but IT also was the precursor to the iphone bomber, on the other hand. And that speaks to wide seven powers.

not exactly a household name today, right?

You'd never heard of IT. So that dates me and you, so you might be .

saying that innovation is not sufficient. Yeah.

innovation that our disruptive technology is not sufficient is very disruptive of you. An above as maker or or monorails calculator maker puts you out of business very disruptive, but completely one out of business after a while. And I had tremendous brand recognition was the thing, and this huge spin up, and that speaks to strategy.

And so what you wonder is, if your helping the people founding those companies, is there anything that you could say that would maybe guide them to be a little more IP addition, a little less bombs, right? But the problem with that is that the nature is the two of, you know, from your required side of all, all the other things you've done. The nature of developing business is adaptive and evolutionary.

Is not, like you said, a bunch of bright people in the room and you figure out the straps and say, okay, we're just going to execute from now. It's you go forward in time and effort and new information comes in. Oh, that customer didn't do what I thought.

Uh, this competitor is coming in this way. The technology front is changed all the stuff, and you have to adapt to that over time. And so the problem with that is that, okay.

Well, then if it's that way, how does the body of thought contribute to that? And the answer to that is that if you can provide a useful mental model, or is jane calls a pattern recognition, you provide something so that as entrepreneurs are moving through space and time, they can see what's a little more likely to end up eye otian, a little less likely to end up bombs. That kind of metal model is actually hard to construct.

And what I say in the book is the very high hurdle that has to clear is that IT has to be simple, but not simpler stic so simple IT has to be that way. Or people often remembered IT. If it's some complex theory that you have to go back and look at up every time, it's not going to help out or you're making business decisions.

And that simpler stic means that it's gotta cover most of the situation to face and other is IT has to be really fully exhausted and that's a high hurdle. So there were a number of strategy frameworks before. They were extremely interesting and made great contributions but weren't simple but not simmo lisc. Probably the most prevalent was porters, five forces focused on body calls. Industry attract must IT was a tremendous contribution, but it's not insufficient of if you're in an attractive industry, IT doesn't get you the kind of security that an ipod is.

right? Samsung is in an attractive industry called smart phones, yet their P N L looks quite different than apples.

right? And there's been statistical work just buttering ying that point more generally that industry tractor. This doesn't explain a lot of firm differences and profitability.

Another one was Christian sens. Work on disruptive technologies, which is just phenomenally interested in a highly area. But this examples, perfect disruptive is actually not correlated with long term profitability.

IT has to do the product market fit. IT basically says you've come up with a Better way of doing something that takes out the income bat disrupt. So very interesting in that frame, but not for the bomar ipod problem.

And then there's a whole strain of flood around capability analysis. You can do a lot of things with capabilities, but it's not common. That's the basis of why you build great business models.

Other people have those capabilities as well. So what that meant from a concept development framework is that right? So I had to go back to square one and say, okay, i'm thinking about pattern recognition for treating neurons. What simple but not simplistic.

And one of the keys to that question is persistence, which is that if you were to say apples profitability next quarter is not a random draw, right? It's highly persistent and there's statistic work on that, that suggest that generally true for very successful companies. And .

importantly, not just next quarter, but four quart from now and eight quarters from now sort of have a pretty high level of confidence. You know we don't know, ten years or her now, and that's what we're gna get into on the episode, but we know a year from now.

Face s always used to say the line now this quarter is already baked. This corner was baked three years ago. I'm working on a quarter five years from now.

Yeah, there's that. But I think also the fact that he says that this quarter is bake also sort of tells you about something about the business model on the way. And so that persistence tells you that there are economic structures that create attractive outcomes.

And you then ask the question, can you generalize about those? Because if you can generalize about those, then you know, maybe you can get to something sufficiently simple and yet comprehensive that is useful to entrepreneurs. And so after looking at that for decades, my conclusion was that, actually that is simple.

There are only seven up. And in fact, if you're dealing with startups these days, that serious ly a smaller subset of that. And so that to me, was a fairly profound insight.

And that's what seven powers us is, just those structures. But if you can get there, make you more eye tish and lesson marriage. And a key .

piece that I O is enforced myself to remember whenever I analyzing a brand new business idea and trying to run IT through the seven powers framework is seven powers is about defending the castle, and less about, is this a good idea or not? IT is a second invention after product market fit to create .

a durable business.

I think you did say that. Think this concept of a second invention is literally your words from .

a previous episode. So product market, fit and power are more or less worthy. All there are some complexity in that statement. And i'll tell you something that out that has occurred to Cheney in myself over the last year, which is a little bit different.

Maybe then what's said in the book, which is that I used to think that IT will seek pencil, you get product market fit and then you deal with power. But my biggest education is talking to founders. I love their intelligence, their creativity. There I say their youth, and they're deep thought fulness about stuff.

And what i'm finding is that the proper path is actually to be thinking about those things kind of sim multi eec late because what's going on as you trying to figure out, okay, what am I doing with this business? You know, i've got this choice, in this choice and in the mix of that, there are both product market fit questions and power questions. And you don't just say what i'm just going to the product market fit stuff and think about power later.

You actually need to start thinking about IT. You won't solve that completely at beginning. You won't know. Oh, I have power for sure, but you should be talking about IT. So persistence and lead you down to those structures. And part of the reason you know that is truly cool the year sort of thinking about this in your interviews and we think about in our work is one thing I said you before is the the genotypes of power are simple. There only seven.

My partner bill says that IT turns strategy from a as a question into a multiple choice question, although I don't know what ChatGPT to the difference anymore, but the finances types, that is the exact granier way in which they are articulated and Carried forward are complicated. China, I yeah, we might struggle for weeks trying to figure out whether something has power or not. I'll give you an example of how the idea of tower important.

So yeah, i'm sort of that a sports star not and I used to drive so fast. And porch is a great example here, which is, oh yes, think of that. The nine eleven first one came out in nineteen sixty four, sixty years ago. 哼， porsha wasn't sort of the sports card leader of the world of the time by any needs.

And so what that enable portrait to do, which I don't think was conscious exactly, but sort of spun out in an evolutionary way over time, was that they took away the design element as part of the mix in what wins over sports are enthusiast. So if you looked at a nine eleven and one thousand nine hundred and sixty four and a nine eleven today, they kind of look the same. Yeah, you know.

And so what did that allow a potion to do? IT allowed to just constantly optimize the best performance features in the context of people would pay for that. You know, handling acceleration into economics and the technology frontier was changing fairly rapidly today.

I'm just astonished at the performance you can get from a small scale hander that'll go hundred and fifty five miles hour, you know faster than a ju R X K E right back in my day. And then they're all kinds of parallel developments and other aspects break sounded and everything else. And so they could constantly upgrade each generation, not having to think about the design aspect to IT, but hit the performs envelope, and people would pay for that. You needed all those things, right? And consequent, they end up with this incredibly durable business model, by far the most profitable or mobile maker and devoted fans and great cars.

Are you saying the fact that they abstracted away the design and they fixed the design meant that IT sort of wasn't a hit driven business? IT wasn't. Do people like .

this design or not? exactly. How are you on interviewing me?

Well, you do the hard part. You know, I just get some synthesize.

So yes. And then all of these elements, like getting the P, D, K transmission just right, those are fixed cost investments. And if they can spread that over a larger number of lot mobiles, it's lower cost. So how many times have you seen sports cars that were quite interesting and then they just couldn't keep upgrading them to meet the grade? I mean, think of the total to two thousand or an early version of ala .

or something. And to your point, it's not just did people like them enough. It's could they predict that enough people would like them to invest in the necessary things they needed to invest in? And if they couldn't be certain or didn't have the but but to say there is going where to sell a million of these things, then you can't make the investment you need to.

right? And so corner was the one that just kept being right on that performance on follow because they were able to do all these investments and is a phenomenal business mile.

Let's kick IT over the chinese. Anything to add chinese before we moved to transforming?

I guess i'll just add onto the perspective of a student of the seven powers framework, the creator of that. So one thing that is struck me as the most useful way to apply the power framework is really as a cogniac leverage. So I think ban you mention IT doesn't really tell you what's the next thing you should build or what products going to hit the market, but I kind of tells you what's the right strategy question to focus.

I think the way I put IT is what is not important is as important as what's important naturally. You know, as founder Operators, you spend ninety ninety five percent time on Operational excEllence is so important. You have the right team, the right culture.

There are execution, but there is five percent of time that you may spend on real important strategy questions. And those are what determines the eventual margin structure of the business, the competitive ess of the business. And what power structure can tell you is what is that five percent out of all the things you're thinking about? What really makes the real strategic importance that you spend all the time thinking about that?

One way I think this is would be the most useful maybe for a lot of members in your audience. And the other common i'd have is now that i've come have the chance to work on the theory of myself, it's actually amazing how is not done yet. Now i've been in tamil ton's class seven, eight years ago at t enford.

Now i've been working with him for the past couple years. And I used to think, oh, is all in the book right? It's just there. There are seven of them and all described.

But then as we dig into the things that we don't know come up, you know, we talked about platform last year, and we're going to talk about transforming now. It's about sort of the dynamics part of power and maybe even extend into corporate strategy, not just business strategy. So this kind of life within the theory is actually really exciting and fun to explore.

Oh, and we're gna get into this and transforming. Can you define the difference between corporate and business strategy?

I'll take this one to you.

hamilton. thanks. So this strategy is how to find power, if you will, in what you would think of as a single defensible entity. And corporate strategy is how you think about strategy in a multi I business unit CoOperation.

And the central problem of corporate strategy is why is one plus one greater than two? In other words, is there any reason from a value point of view for two separate businesses to be under the same roof? And they're been a variety of efforts in that.

If you go back in the days of g wildly diversified companies, there is a theory for a while that that was really a good thing that you gets hurt of. These diverse ation benefits turned out not to be true. And so it's really that question of why is IT that if you're in one thing IT makes sense or doesn't make sense to be an another thing.

And so I can think of amazon A W U S. Why is that interesting? And the static part is one plus one is created than to the dynamic part.

And that's what our transforming discussion is about, is what is IT about the business that you currently have that is somehow useful in doing something else? So you you guys do the all wonderful episode A A A W U S do method gizl。 But amazon did have capabilities that made IT not completely alien in territory.

Well, let's get into IT then.

So i'll give you a quick intro to transform in kind of why we think it's interesting. And then Cheney and I concert of pull IT a part of bit and you can ask questions. So there are really three reasons that we think about this.

The first is that if you're interested in creating businesses, it's important. And by important, I give you a little data on that. So I did a study once of the S M P one hundred largest market cap computing world and looked at if you pull apart their value, look, their profits came from. And you ask a question, what share of the profits came from businesses that wasn't their original business? What what do you think if you were ask that?

Can you help us with a year of when you looked at this?

I did IT just prior to the financial crisis. So two thousand and seven.

Um David, what was your guess?

My guess was eighty percent knowing that time for I maybe dialed down a little bit too. Seventy eight percent.

I think it's low because of thinking, you know banks, oil companies like the largest companies in the world to that point weren't technology company ties. And I have to imagine that those are more single business line statics still drafting off their original innovation companies. But we have wouldn't be asking this question if IT. We're a boring answer.

I don't know if you consider the answer boring, but IT turned out to be about fifty percent as so in the tech world, which you guys in respect more, you know you can think of all the exams we talk about. A W, U S is an example, the lead off example in my book of intelligence, into CPU. Yeah, that's transforming, right? There are memories.

certain. Ly, the lion share of apple's revenue is not very the iphone.

They were not in that business before google and the android microsoft into Operating systems and applications. They were originally a language company. But as both you said, sometimes not his. Robert harper started read out of the gate with facebook. And so fifty percent is a big number.

Yeah, half of all corporate profits of the largest companies in amErica came from something other than their .

original innovation, right? So that of and so important as one. The second is that it's hard to get right is a difficult area.

There are reasons that have to do with motivation and their reasons that have to do with understanding. And Cheney will talk about some of the common business, no storms that are of fall apart in this. On the motivation side, i'll just mention that from a founder point of view, they just founded something that works.

And so that are custom to that success. And so sometimes they may not appreciate all the idiosyncratic, uncontrolled elements that went into that success. And they're very creative and they want to just move forward.

And so they're inclined to do that. And that's a great motive force. I love that. That's the life blood of an economy. But that also means that you can sometimes get in itself that you really don't know how to do IT.

especially for first time founders. If IT works out of the gate, then you have no idea to what to attribute the success. IT could be scale.

E IT could be luck. Of course, IT is some combination of IT, but you have no idea the percentage, that skill and the percents that look. And you say, well, that worked.

I will just repeat the exact same process again, and surely I will create success again. And that is almost a surely not the case. I several .

companies in my mind that thought that .

and definitely did not happen, right? And then on the people that often sit on their boards or finance them, there is also a distant, which is that if you think of the VC community, the business model and VC issue, find really interesting things to invest in, and then hopefully they go up in value. And then there's an exit which you profit from that increase in value, which is to this wonderful engine.

If you think about what drives the U. S. Economy, you know, is just phenomenal.

But in the early stages of how people think about value, there isn't yet this track record of persistence, because people are often, for example, spending a lot to acquire customers. And so profitability IT not be evident yet. In fundamental economic seven really assert of themselves.

And so the only thing left is kind of how the top line is doing, you know? So are you growing like crazy? And so when you hear V, C, some kind complain that people waited too long to IPO, what that message really means is that all the sudden people's perception of the company change from the top line to the bottom line, and they miss the window.

What that says is that that investor community is focused on top line growth, as IT should be. This is the best marker available, but IT doesn't tell you much about power. And so it's hard to do.

And then the third thing, which of course, you would expect for us, is that I actually understanding power tells you some interesting stuff about transforming. So three things is important, is hard to get right. And power matters .

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I've never thought about IT before. But if you are in logical and can figure out and quantify accompanist power, then you can assign IT a more accurate multiple of profit then anyone else can. Because if you can observe, or a company has a twenty four percent Operating margin many, many years in a row, you can decide, O, K, fine. I kind of know what the Operating margin is gonna in the future. And I can figure out how I want to value this company. But if it's a new company and it's just settled into some steady state of profitability and you understand the power dynamics, you can be Better than other investors at predicting the sort of net present value of all the future cash flows of that company rather than a very brute forest way of doing IT of just slapping the same multiple on that everybody else does.

yeah. So then not only is going to the plant me in writing summer powers, but it's going to take over strategy capital.

I think I just a boss to Jenny, yes.

so trained about talking about our investments stuff too much. But basically, the proposition of strategy capitals, if you have a differential understanding of long term competitive about, comes in places where that's really hard to figure out that you can value things more carefully. And so I completely agree, and you properly constrained IT, if there's a long history of financials, is already in the Price. So the wallman t have power. sure.

right? My dog can tell you that. Right.

right, right, right. I'd like to meet your dog gs, sometime, so that's why it's important. And I just give you a cold take on what I mean by transform.

When I laid this topic out to the two view, I said that if you're thinking about increasing value on a company, that sort of two questions, what can I do Better and what can I do next? And you spend most of your time on, as you should, on, what can I do Better? So you think of amazon developing a Better search engine.

When you look for a product, you ve got to think about that, right? And that's most of your time. But then you also think about, okay, well, what can I do next? And that's what transforming is.

And that would be amazon going into A W U. S. And you can imagine, thinking about whether to do A W U. S is a very different exercise than optimising the surge engine. So transforming is sort of a separate topic. Uh, fundamental thing in strait is think of business definition, which is what really are the boundaries of your current business.

So I think actually our prior email conversion, David, you have the question of how do we go about research, something like and typically, we start with looking at what others have been talking about this, exactly where we come across a lot of common narratives of where do you find our next level of growth we've all heard about. You know, go listen to your customers. There's that is on school of customer session that's fairly popular.

People will go after team expansion, you know expands graphically, go different segments or in the four core. Competence is such a and as we look through this, I think one issue we found is they don't seem to be conclusive about the chance of success of these transforming steps. So in the the words you can't say, if you do acts, you are more likely to succeed, right?

Like for example, there's S A whole school of thought around marketing my opa that says you should define your industry definition widely, right? The reason why railroad industry goes into decline is not because people don't have demand for transportation, that because they can think of themselves as a broad transportation company, they should have moved themselves into cars and trucks and airplanes and even telephone, which are new forms of transportation. And I think this is a one of the best sellers of her business.

Review of all time just speaks the popularity of IT. So the question will ask is, does companies that follow market, my opa og, tends to be successful, you know, does that give us a way to protect success? And can kind of think of examples on either side, right? Like disney today is not just a theme park company or animation company.

They seem to be a broad entertainment company. They're pretty good at coming up with the next form of entertainment that people love and want to watch. On the other side, uber at one point was all in on mobility, right? IT was not just about cars. If you have to .

remember the bus bikes.

And there were serious about flying cars at one point, helicopters.

So that's right.

right? That didn't seem to end up that well even if IT end up in the same ability definition. So what that means is we can to tell whether following a certain school of thought is.

Definitely going to be leading success, which means we don't have a theory behind IT, right? So that's what says our problem is can we say something that's a bit more definitive, a more having the predictive power there? And as we thought about IT, the real reason why we have this issue is a lot of these popular narratives gonna tell you about economic value, but they don't tell you much about business value said in other words, they tell you about value creation but not value capture. And the in other words, we are basically saying public market .

if IT is not power yeah coming back to the very first conversation about why we do this in the first place is the the points you just made is the fundamental one which is the creative of economic value is pretty orthoti C2Capturing som e of tha t val ue for you rself, which is to say the creation of company that so create economic value and the creative company value are different animals and also important.

And there is a dynamic connection in a sense that if you create economic value, IT creates the opportunity to think about and so on. But just A A single sized time, they're very different. But that's a fundamental point about yeah.

I think there's a good way to put that, which basically means all of the common narratives that they are really useful. They are really useful as generators. They tell you where to look for the next part market for out there.

And we think the understanding of power is to missing link here. We have all these ways to come up with options, but how do you assess which one of them is really the best idea? And that's what we set out to give a Better .

structure to yeah so I just say how power help you out my way. So I mention the sort of real concept before this definition. So rather important. So if you think about uber versus netflix, where they go next, right, uber is at first they thought was this was an international business or that means that going into china, somehow their strength would be transferable into that effort and they could be successful. And netflix thinking about going international, taking that if they started streaming and korea, that that would make a lot of sense.

And are you considering the international a separate business? Or you thinking about this as like should we expand the core business and just address a broader bucket?

So that's the question. The key thing there is if you have an established business is the drivers of power in that extensible to that additional segment you're considering, whether geographic or customer or whatever. And because if IT is the risk reward of doing IT, the calculation beginning is so much Better because being able to car about value to yourself is really art. And if you can build on to something that already does that and that works in that environment, that, oh boy, go there because as so much and doing some really new. And so that's like streaming.

And korea IT built on to saying you can share a content, ross countries, right? IT built in the same fixed cost economics of content development, and worked others if they have a source of power that has to do with geographical density in a specific area, like the bay area or something, and going into china, if their head ahead with D, D or something, that they don't have any advantage at all. And so IT doesn't work.

right? They get to bring their technology platform over, so their advertising zing all the engineering, design, product management cost. But they have to go reacquire both sides of the marketplace in full and create the identity, which is actually the expensive part of the business.

exactly. And if they turned out that the engineering part was seventy five percent of the cost structure, I mean content and for netlik of fifty for so we then there would have been fine, but it's not just as you said. And so when you're thinking about business definition, in some businesses, international is part of the same business, which is to say is under the same power umbrella.

And in business is is not. And you have to understand that in turn of what you're doing. And if you're thinking about what's next, if you can go to things that are under your current power umbrella, oh boy, is that great? If portia wants to sell cars in china, is opposed to selling them in the us, no brainer.

right? Still all the same. Unbelievably hard engineering problems that when into creating the car you're selling the us, you can find a way to distribute .

that yeah and a chinese competitor would have to go through the same calculation, you know. So the first point of this conversation is that to properly assess transforming directions, the first thing is carefully understanding your current base of power.

And then looking at this new segment, whether, as I said, I could be customer g graphic technology, whatever product, and seen whether he realized on that as well, because then all boy, a world looks rosy. But on the other hand, if you think IT does and IT doesn't, it's like uber in china. I don't know what did they lose a billion dollars of something?

Know what was maybe more when you consider all the disaster?

And ah and so they used to be compensated by the shares. And ti, I don't know what their shares are working now. So anyway, so at the starting point.

it's interesting, right? Like i'm thinking about we're in the middle of our nintendo series as were recording this. This really is an interesting framework to think about IT because on the surface, IT could be pretty far flung. I'm thinking about you intendo made playing cards with the japanese organized crime is the primary customer. And then moving from that to video game councils is a pretty big leap. But you know what they had originally? That is the same threat through the whole business is they had an absolutely iron clad lock on their distribution networks, especially in the over time through playing cards into toys, into video games, into toy retailers.

right? And that's such an interesting case, David, because often times it's that kind of subtle ty, about walking in a distribution channel, for example, that sort of kind of invisible, but may actually be the very thing that makes that such an I mean, if you think of tony on the other end when they went into game councils, that was a different business, I say, and brutally hard and ever relied on some capabilities.

So shows why the capability thing doesn't you there. I mean, yeah, some engineering at the time, analog was king there in digital was thought of as a backwater. But IT was a very difficult and Alice course.

the source of profitability. But IT was a long journey .

for only to all these things. There are a few principal actors, a few leaders that, had they not been there, it's hard. Imagine that ever happening. Some innovative, hard people.

So hamilton and Jenny, can we ask you, what are the most common power types in today's technology driven world where people might find expansion opportunity inside of their current power umbrella?

I think, particularly for earlier stage companies, the three most common power types that you will find, our scale economies, net k economies and switching cost. Well, it's actually often common that you will have kind of positioning because that's how you tackle your combat in the space.

But there are a couple other power types that doesn't really come in until some of the more mature face of the business and that slide out in a book like process power or brand power, you really need to develop them. After years and years of experience, you honey in on the core business. So for the benefit of the audience today, we thought I would be more useful to focus on the three types of power, skill network and switching cost, which is probably the most common that we would find out there.

And are you not including counter positioning here because it's hard to find a second business under a counter positioning umbrella?

Let me way in A I agree with her sort leaving enough because to have power, right, you have to have that versus all potential and existing competitors. The counter position one is typically the type of power that you would have against incumbent. But IT doesn't work against the wannabees because they don't have the same problems.

And so the one that you have to think hardest about is versus other companies that are doing to just like you. And so for bomba would be texas instruments doing calculators. And so that's why SHE launched off list.

yeah. So regardless of what's the core power prospect, i'm calling the prospect because this power is a pretty hard bar to clear. But even if you're still in the make for you and you think this is going to be the mechanism that protects you from competition and long run, the first step is always to get a really clear understanding of what that core business power prospect looks like.

So back to example of uber. If the core power prospect of uber is actually scale economies, which says the technology framework of doing the matching automatically is so hard and acquire so much cost to build the international expansion would have been totally rational, right? Because you're just spreading that six cost over more geography, you getting a high start in every single place you have.

But the truth is, is not the majority of cost of that business actually lies in acquiring and maintaining their customers, which means, if anything, the road you should really try to get to as newt economies, if you have one, and the scope of that network defines each market, is actually heavily bounded geographically. And so every new country, even new city, go into as a complete new business and have to start from scratch. So that was an example of getting a definitive answer or confident answer about where core business power looks like gives you a very different place to look on, where to transform a, where to take you to the next step for a business.

So most like a OK. So I met here in seattle if I was Operating an uber like service, I have this power, which is all the drivers and all the rides, or a identity of that. That means nothing where David is in services. Ces, go. So instead of launching uber and severity ago, maybe I should try and figure out other things to leverage my network for here in seattle because that's the place where I have the durable competitive advantage.

Verses others. So over.

right.

right, right. So I think the jury still out whether right sharing and food delivery belongs to the same business.

Maybe they do, but more possible geography.

And this is one of these things where IT seems obvious on the surface and then we start to dig in. You're like, oh, wait, maybe it's not as overlapping of a network as I would have thought.

right? That's the question.

right? The drivers for food delivery are a overlapping, but not that overlapping a set of drivers for ride share and the set of consumers is obviously different as well, which you can see in the corporate action they took to ship A. T APP called ubs rather than bungling into one APP. So you actually have like two overlapping two sided networks, but not a fully overlap ing on either side of the network.

Then that such a great example because IT speaks to the point that of the complication of the fano types, that until you peel back the covers, that just sounds all over reads and our sounds all the same.

But when you start peeling the back and may not be so what that serves, you have to have quite a lot of nuance in your understanding of whether you have power begin, within course, for uber gets into the nature of platforms and exclusiveness of the sets that occupy either side of the platform and whether they overall happened. Yeah, all I kind of a stop. And so without that new ones, you just you miss IT .

yeah what other network economies, one that i'm curious to get you're take on, I see in your note as microsoft versus slack. Can you sort of walk through the microsoft decision to enter the market of whatever slacks product is, is quite hard to define A C chat work, communication with teams? Why or why not? Was that an interesting entrance and use of their power umbrella?

So the interesting thing here is we can also think about microsoft as a platform, right? You Operate an Operating system where on the two sides you have users and also you have applications. Now the interesting concept is the users of microsoft platform has a really high cost of filling ation, right? It's not just on the hardware side, you buy a physical machine, but also it's typically an enterprise with adoption.

There is a procurement process attach to IT. There's the distribution channels that you know similar to have the tender one worked. And because of that, microsoft networks go basically extends to whatever demand my user side would have without inquiring ing more cost on the act without I don't have to do another procurement cycle maybe or do not have to buy another heartbreak for.

So that natural extends to basically maybe all of productivity software. And that's how you see microsoft teams create at least the competitive hassle for slack. I think we all have experiences that slack has a really, really good product. Good products don't always win because when there is competitive vantage from an incumbent, in this case of microsoft, they basically have a network that can extend into the products like is Operating in. They create issues, you know, competitive ly.

so what we're heading in this conversation is for saying transforming is a worthwhile topic. And then we're saying that a starting point is understanding the power of your current business because if you can build off of that, IT creates a wildly preferable risk return prospect for something you're getting into.

And so that then takes us to the next topic, which is, what if you can build on your current thing and you need to get IT to something that doesn't build in your current source of power? And the two of you, with all your enter views actually helps so much. You know, you to wealth of information about what goes into people's minds doing that. But if you think about that, what are you into? You're basically you're starting a new business, right, right?

congratulations. You don't have to file as a delaware c corp. And you probably have some people eve ready hired that can work on IT. But what other assets .

are you repurposing right? exactly. And so remember that thing I said about the S P. One hundred.

If you look at what they went into, that generated a lot of value and asked the question, could you generalize IT all about that, or create some definitions here a little bit? Sort of three categories, if you think of does not satisfy the same needs or just use the same skills, those are the two dimensions, right? Because I have a consulting background, and the whole world is always to mention, all right. And if IT has neither the same skills and nor the same need, I just call appear diversification and rarely, this network, that's a very high risk proposition. You're basically to creating new business.

something you don't have to do. And when you say skills, I need that the skills of my company and the need of my customers.

the skills of your company. So what your engineers know, how to do, what your sales people know to do, all those source of things.

So like in that case, you'd be Better off either having people who are entrepreneurs within your company like leave and start a new company and spend IT off or invest your treasury .

in other companies. And as a big company, you have all the agency problems trying to get something off ground with a lot of bureaucratic and everything else.

There's some advantages. But this more disadvantages .

there's probably more disadvantages tages and data supports that, that unrelated university is typically not a great thing to do.

So the lower left of this two by two matrix is I neither have the team that is great at creating this next new thing nor do I have the customers that want this next new thing. Currently.

you got right. And then if you look at the upper left, which is is the same need but different set of skills, you can call that reinvention. And sometimes you're forced to do that.

But the opportunity citizen, that great, really it's not like you're opening up the world opportunities. And so those are pretty rare. IT does happen. I mean, netflix and the streaming is reinvention that can happen is hard to do. You're usually canter position because you've got a whole group of people that wants to do at the old way, and they have a lot of power in a company. Typically because I got the P N L.

IT require a sort of the founder sponsor to go pursue IT.

Yes, that very simple. Exactly right. Otherwise, see that you guys wanted by agency problem.

And so the different needs, skills sharing same skills are not same, but shared skills. You can call that category coache. And that's where all the action is.

Yeah, that's A W S, for sure.

Exactly A W S.

right? Way to this is the lower right.

This is kind of the lower middle is a bunch of not perfectly shared skills, but you know quite a bit about the stuff you need to do to get in there, but it's a different need. And that accounts I don't know the numbers in from me, but I think it's ninety percent of the value in the S M P. One hundred of the new stuff came from the action. And that's saying something that's pretty great forward.

And I guess there is no top right because that is your current product.

same team, same needs that you're too fast for me. That's right. Same business. And then they extra credit on this will be why these axes, not quite or thal, but to another discussion.

So he sica SONY going play station that was not the same as SONY going into cars. IT was a different business, but they did have know a lot of stuff. And so basically said that you want to constrain yourself the areas that sort of meat with your current capabilities. Now occasionally, their companies that have capabilities that are so proprietary that actually that alliance was power automatically, but that's very rare. I mean, I say like corning and glass technology, for example, it's such a weird material science so I can do glass stuff that other people couldn't do.

Is three a good example of this sort of lower right, where they know how to make all kinds of interesting stuff, but for completely different customer bases, completely different use cases.

Ah so my view of three m is that there basically a material science company. And material science is weird. It's not fully or listed used to be i'm not so so much but are not fully developed theoretically.

They're all kinds of nickey idiots in chronic aspects to IT. And so they were able to invent stuff. So if you think of posted notes, right? That was a not so sticky glue, right? And then they didn't know what they have to do with that.

And I went on for years, there is a champion and thing that just said, no, there's something great here. And they almost missed IT. IT came down to a final marketing trial where they almost then follow up on IT. Wow.

IT is great. I never really thought about that. I may know it's a famous story, but objectively is a really crappy product that they made and then they turn that cravenness into a feature.

Well, i'd care Price of the different. I say IT was a very interesting technology with no product kind like web 3。

It's like .

a comment .

it's .

soon.

but right, I love maybe .

we'll find the sticky note, right? Maybe the fact that is really slow is irrelevant given its decentralized.

Everybody, I guess, really share of you and that I don't find myself very popular and that but I agree with you, there's all this handwaving about the wonders of decentralizing in the world will be a great place in everything. And i'm waiting for the we need the .

sticky note where .

you need the sticky note, right? Anyway, so I think that is just a simple observation, which is the the stuff that most likely will get you. There is a different need. But using some of the skills, they have nothing very complicated about that. But I think data bear set out.

I would say a lot of tech companies today have the same set of capabilities. So is IT about where you have differential capability verses other companies? Or just, hey, you can repurpose a bunch of your engineers to do something interesting and sure everyone else can kind of do IT to.

So a really interesting question. I mean, way back when before the idea of core component scissors or writer, that route about the thing, they use the term distinctive competencies, which is exactly what you're getting that and I would say that, that was probably true corn and glass technology, but it's rare. And I agree with you that a lot of tech companies have a lot of similar sort of stuff.

And if you had a distinctive capability and that, that had an application in an area, so I do the process, then a boy, that's great, but it's hard. That's not common. And so if you're in this place where you can build your current power, you just realized that says you were saying before and you're back in invent space. And yeah, you can build on current cape parties, but that sort of table stakes, you know you're into that level of risk. And like all those things, it's adaptive, you know user dry stuff and move forward in a and so my .

little mental waterfall, so far from everything that you shared with us is, step one, identify the power in your current business and be brutally honest about IT.

right? Very tally honest and very granular.

yes. Step two, figure out if there is a new business to launch or expand into under that particular power umbrella. If so, great do that.

If not, you have to go start a new business. And where you should look for the most fertile ground for that new business is. Using your existing set of capabilities, but for a different jo B2Be don e for cus tomers. Look there. And especially, this is a most step for if you have differential capability vers other companies who could also pursue that same opportunity.

I love IT. Yeah you write that bunching.

and yeah, that help us produce theory.

Resh IT, yeah no, I think you mailed IT. Yeah.

there's one point I want to make. There's a reason why it's sequence that way. And there may be obvious but still worth iterating, which is invention is risky if you have something underneath your existing poem, rella.

And that's what amazon did. They had this distinction, logistics. They started with. We are books and then cds and then electronics. eeta.

Its natural extension that not just leverage, but also intensifies your existing power. That's way less risky. You know, you starts somewhere new but with a head start compared anyone that's a competitor. But the movement into amazon web services as invention.

And I loved your guys story on how there's the four different sources of starting point of amazon people would love to think is based on some existing compete vantage of the business, but is really not as invention they figured out a new thing that the market wanted, but as successful as they are in A W. S. They also flopped, you know, fire phone, if you still remember that they also lost billions and billions on alexa.

There's really no track record of a business who can continuously come up with successful invention. And that piece of the risk ess of that, which is why is only the point number three number before on the list because if you don't have to do there, don't. But if you do have to do there, coaster is the most possible place for success.

Think god, these things are power of distributed otherwise, to your point, because no one has ever successfully been able to do hit after hit after hit like this, I would be net unprofitable to pursue, uh, innovation.

I just want to underline what chinese write fully. Kind of pull that out is kind of a key point here is that the risk level of doing something that's under your current power umbrella or not, the difference is gigantic. So that should be your starting point because IT is absolutely gigi.

And I think since we're back to invention and I am a huge fan of amazon, the fact that they've been able to do what they do, I would argue that they couldn't have done IT if they weren't willing to take the risk and have some failures. right? absolutely.

And so one tiny, I talked to companies well, often when we hear that if they have been successful at transforming, and we talk about future transforming, the narrative that makes us think, a boy, this is relief, you're really going to a problem is, oh, we have a really define process for innovation here. And there is a seventeen step process, and we know exactly who do assign to IT and blah, blah. That's the red flag of all red flags, right? And then the other in company thinks you worry about sort of screening criteria. For example, some companies when they're thinking of doing new stuff, 谁 well， I won't do IT unless I will move the needle corporately, which means the market has to be certain sized.

This was microsoft. I mean, was like, oh, unless you're gonna create a billion dollar revenue product, i'm not clean .

letting your document and usually if three billion dollar market is year too late. But this just a highlight that inventions really hard. It's hard for a large company to do IT. It's hard for individuals to do IT. And corporate strategy is asking a question on the transforming side list of if you do IT, are there cases in which your current platform are significant benefit to you?

Where would you put the iphone in this framework?

Oh, iphone is. And the ipod, or straight up correction, similar or capabilities. But I mean, they are computers insert of a generic sense, right? But the iphone in a functional way that does compete a little bit with the desktop.

yeah more so than they IT.

Would there kind of like maybe as high up as you can go towards the top rate of their sort of like the existing products of the company, but different on some key dimensions?

yeah. I mean, I would say that one of the things when you're trying to do business definition, there's the theoretical side is the power shared and then there's the peral side is to look at the composition of competitors and see if they're different and that suggestive that they're sort of different. And so the competitors for the iphone are different largely in the competitors for the macbook product. Good.

let me test know again.

It's not perfect, but because sometimes that doesn't developed in the economic ways, but is a pretty good way to look at IT.

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Head on over to vana outcomes, lush required and just tell them that then and David sent you and thanks to friend of the show, Christina anta CEO all acquire listening ers get a thousand dollars of free credit vent to become slash acquired. So here's an interesting you can tell me if it's interesting, an observation on apple. It's basically always been coache when they come up with a new multibillion dollar product line, you've got the ipod no absent going and getting the new type of hard drive.

They can't knew how to build everything about the ipod already. And once they had the tiny hard drive, then great, all of our engineers know how to build something like this. Iphone, same thing.

Ipad, same thing. These are new jobs to be done for customers, but they have all the right talent to build them. Ipod, the same thing.

what? Maybe this A R V R device, same thing. We will have to see if IT launches here in the next few months. But interestingly, a thing where they didn't have a large amount of the talent in house is cars.

And so they had to go build completely new skills within the company to try to you know, you've got what several thousand people working on this car now still hasn't launch changed strategy five times. They have no confidence. This is gonna. A commercial success is a new requirement for customers that requires a whole bunch of people that they did not have and capability they did not have. And that kind of speaks to where I think you're going with the framework that, that product has not been successful or even launched.

It's closer to period university, right? yeah. So if you think of the horizontal like this, that thing I talking about, that's a spectrum from zero one hundred percent.

If you're in the car business, if he go from Green cars or red cars, you have almost ninety five percent shared skill. Go from luxury cars to compacts, uh, hi sharing. So toyoy can do IT go from cars to tanks. Pretty different portion .

did IT under coersion by the not right?

It's not impossible, but quite different. And then if you go from cars to refrigerators is really different. So yeah no, I I agree without analysis, but remember to not to forget the importance of the entrepreneur s because they are the locus of inventively and IT doesn't happen without them.

And this is an an automatic processor, something mechanical. There is individual human creativity involved and is a special have IT at an apple. But it's really true everywhere for all entrepreneurs. And so that's why chinese I have to be fairly modest about what we're doing because what we're really trying to do is to provide pattern recognition for those people. But IT doesn't substate for them, is just a tool.

This is a good leader actually, to what I wanted to ask you, as we wrap on internal transforming a new business development, does this framework apply to thinking about acquisitions as well for companies? Because I would imagine companies that are certain to think about transforming are also at a stage where they could be contempt fairly larger, transformative ema. Is that different? Or should you think about that with the same? Rick.

well, is very related. If you're acquiring a company, the primary question you have to ask yourself is why is this worth more to me than to the seller? Because there will always be an information try.

The seller will always know more about the asset than you will. There is a ton of financial analysis worked on this. And you know you can't get a perfectly, but basically, they look at the stock Price before and after acquisition and all this stuff.

And if you distill all that, what IT basically says is, you know the requires kind of break even or whatever, and and the solar does very well. And the fact they figured that out for a large segment of business was genius. And so that then question of what do you bring you can imagine how that touches on this subject to business definition and so on.

And that's why anti trust authorities gets so upset about IT. If you horizontal acquire in something with scale economies, that just makes you bad so much more. And so people get upset about IT, and people would love to do IT. But hearts got roda all that you get over that right and right place.

So but you have to be very, very disciplined because often what happens if you're inside a large company and facing these decisions, and i've been involved many of them, what happens is the argument that often made to advance that is, oh. Well, we don't have to have the same number of accountants or we can kind of reduce their sort of these cost reduction personnel overlap thing never works because their this economies of being in a large organza as well as economies and that sort of a watch. This is a good assumption about .

IT and how much money are really gonna save.

right? And so that analysis doesn't get you there. You need something more fundamental and usually is related to power or something like that.

One of David, my learnings, from doing our episode, the acquired top ten, the best acquisitions of all time was there are exceptions, but most of the time, something is a wildly successful acquisition. IT is because you're able to find more venue rather than find cost savings because cost savings are kept wherethrough revenue has unlimited upside.

Well, i'll add something to that, which is that the cost of that revenue or is favorable, right? So think of disney. So think of getting lucas and Cameron stuff.

And marvel, wow. marvels. incredible.

Yeah, I ve created a huge part of corporate value by doing those things. And pigs are. And i'd had to do with him taking franchise. I got a was taking powerful brands that weren't fully exploited and figuring out how to economically exploit them, right? And disney was taking brand entertainment that was powerful and being able to fully exploited.

And so IT answered the question, why is is worth more to me so you could take star war stuff? What he sort of had the feeling in George look as kind of wasn't so interesting to sort of exploited. He was of a creative generate. And yet disney could take IT and run with that. And so I think that wasn't that you bought revenue that already existed IT, was that you were able to exploit that.

I'm curious if you have any thoughts on or if there's more nuances to what I always think of as canali. c. The highest likelihood of success acquisitions are enterprise software acquisitions where a product is bought by one of the top at a flight software. You sales forces call IT, microsoft, oracle or sales for the leg and then they plugged IT into the sales for us.

Is that similar to what we're talking about here? Like IT seems very clear to me why X, Y, Z good product that is sold in the same manner that sales for sales all of their products would be way more valuable to sales force than two. It's current owner .

and David are quick out copy out that with like maybe highest likelihood to succeed, but not highest magnitude of success.

right? Yes, I don't think that's .

what it's interesting about IT, right? So examples like that, they plug completely into the power structure of the chant business, so any all high switching costs stuff, right? And so that they can deploy IT to all their customers and get the same economic vice wishing gross, do you want to do that?

yeah. IT actually occurs to me that there might be exactly time to switching cost. There might be another rationals for buying, which is building takes longer than buying and timing of matters, particularly for companies with switching costs.

Now the interesting about switching costs going back to the power itself is not inclusive, right? So competitive, if they are functional equivalent, can also have switching cost. Now if you go down this logic line and creates a possibility of companies having switching cost but no profits.

And the way that happens is if your competence was able to build the same product, roughly the same product, and they fully realize this is the lifetime value of the customer, should I acquire them, then it's rational to invest up to all of those value in the acquisition. face. You be a discounting partner, incentives, marketing campaigns, what ever it's rational to spend up to all of that lifetime value to try to win that customer. And then what you end up with this comply with social cost, but no profits.

right? And so that's why if you have switching costs, the key strategic chAllenge is to acquire customers when the cost of a customer does not fully arbitrage out the profit stream that you would expect from them, right.

which is so good. I've thinking like we talked about earlier, slack and cells force and microsoft and teams right now, I haven't studied either of the businesses. But I would expect that despite all the belly, who about all of the neither slack for salesforce nor well maybe teams for microsoft is but are not like huge transformative incremental drivers of profits for those two parent companies.

So I think sort of a non obvious point of all this is that if you're thinking doing something new, getting IT to stuff, that understanding business definition is critical. And which is to say, into what areas does your current power umbrella extent you understand that? Then the next one is the point that china made, which is that expansion into areas where the extension is radically more attractive than starting something utterly new.

Oh, and I will add to that, that is not a good to have if you understand a power umbrellas bigger than what you currently offer and ignore IT, you actually are creating competitive openings for somebody .

off to take on. Oh, that's a really important point.

So you're fAiling if you don't exploit IT.

right? Because you can assume that eventually somebody else will and that may completely ruin your competitive position IT, for example, of this based on scale. So point one, go to business definition. Think very hard about worry. Your power relies too, that if that does extend and do an area, you can to go there because is really try pip.

And then the third one is that if you don't have anything there, you still want to do something new coache the name of the game, but understand that you are now into invention of a new business. And with all the air things around at risk, adaptation, need know of everything and alterraun matter. So Cheney, that was such an important point about how, if you miss a business definition, i'm going to ask you for an example. Can you think of a good example of companies that didn't understand the full extent of their business and got taken out as a result of them?

Well, i'll throw something out. It's tough because you will tend to have survived ship.

So you only remember those companies that made IT the right or the .

handful of very few colossal failures that were so unbelievable that, you know, they're stuck in all of our psyche. For example, block b ster IT could be the case that block busters failed where they had the distribution network in the customer relationships. So there was a source of power there. And they failed to exploit IT in using that to launch their own striving service, which mostly is because of board room blenders. But are failure in them, are less might .

take a black posture as if they have done a red Amber business a year earlier. Netflix wouldn't survive.

Maybe in the example is the dart industry and how involved oh.

I love that, right?

IT started basically as branded and charge cars for particularly retail store or gas station, and then turn into dinner club, which is a card for many restaurants. And then very quickly, I turned into universal card. It's old card for basically everything.

They were basically extending your credit, right? They were saying this work here and will give you some credit at our store over time. They would start saying, will spot you for that restaurant too. We have a relationship with that restaurant.

right? So the either view of dinner clubs.

cards, I do not know.

right? And so they missed IT you. I mean, it's a great example. They didn't understand that I was there was actually a platform where you might cover as many per as depth as possible and IT shouldn't be constrained. And so they miss the business definition. And this is one of the highest margin businesses in the world right now, right?

This is fifty percent margins. astonishing.

why? Wow.

we ve got to do VISA at some point. I can't believe VISA didn't IPO until. Like the two thousands that is.

and is an act. Were they owe by banks?

I think IT was A B, A, yes, founded in nineteen fifty eight by bank of amErica as bank america.

yes. IT was a consortium banks. And that remember all this.

Now, the IPO happened right in the middle of the great financial crisis. IT was march two thousand eight. Talk about bad timing, but didn't matter.

Probably a good time to buy the stock. Yeah .

seriously, hamilton, and tell you where we have you here. We got to ask you something that David I were debating on our intendo episode specifically in the ninety eighties. So you've got a console maker, nintendo o.

They have a whole bunch of customers that are the people who are buying the consoles and playing the games on them. And they have a mix of first and third party title. So they make mario as a first party title and they have some third party developers making games for them.

And and course, the reason that .

third party publishers are making the games for them is because they have ninety five percent market share of people buying video game councils. And David and I were really going back and forth. We're like, is IT a scale economy because they can emitted ze the cost of game creation across so many consumers? Or is IT a classic two sided network, effector a network economy power?

I was thinking about this this morning is fun. So I think it's both. And the reason why is both is because you can think of nintendo as a platform that vertically integrated into the production site.

Basically, all the first party content is a vertical integration. And that's why they would exhibit economic structure that you would typically find in producers, which is a kinds of scale. But at the same time, the third party transactions are the nature of network economies. Now some question when we have to analyze there is, is this platform really stable, which means is there really high cost of being attached as platform? Can multihull a we have to go into that.

In the eighties, there were no other viable platforms.

right? So maybe they're just the one. So that's why you would observe economic structure of both scale economies and the economies. Now they're a deeper question there, which I don't have answer to is, is one of them the calls and the other the effect? Or are both of them causes for power?

right? I love the answer. And H, I think she's right. I mean, when we look at platform things, there is the business of running the platform.

So think of, for example, to fix cost and uber of their model in and all that kind of a stop. And then there's the network economy aspects of a two sided platform with people know. And so and you could have power either one of those. But if that turns out that the cost structure is not to isn't a huge lab of fix class, and that doesn't matter much. But I think china, you got IT right OK.

Well, we feel vdc ait because that's kind of the conclusion we. Came to on the episode two of its both and they're deeply inter .

twined give you example of into one real life, which is we all know amazon in retail has gigantically scale advantage in the infrastructure, right? Just all the warehouse disputed that us felt. But at the same time, you observe, you know what you will call fly whelks on the retail right, the movies, more sellers in the loop goes on.

And this is what I call the mixing of reality between calls and effect because without a really strong distribution infrastructure, which gets the cost of and faster delivery prime and the benefits, there really isn't anything that makes their marketplace sticky a on either side. So the so called network effect he observe is actually an effect of the power in scale of the infrastructure underneath. But you would just observe economic structure of both because platform just kind of mixed them altogether.

Yeah, this isn't about point headed kind of issue because that gets back to if you find the thing that caused rather than a fact, that's the thing that you ve got to defend, right? And my intuition about this, and I don't know it's right, is that you have to introduce time as a variable in this to correctly understand the problem.

But I think Jenny and I involved in the deep debate right now about sort of the boundaries and relationship between scale economies and network economies. If you want to get even more confused, just remember that scale economy typically is defined as a situation which is ale increases, cosplay goes down. That's often true of network gonna, but the structural economic conditions that created are quite different. And understanding those if your business Operator is really important because then you are less like we get taken out Better.

Why think this a great place to leave? IT hamilton chen, you, thank you so much for part three, can wait for part four in a few years, I know. Is this going to be a book? Is transforming you guys .

gonna publish this. Well, what we're talking about right now is there are a variety of topics that are extremely difficult, fino types of fear, well, to tease out and delay. And we seem to have enough of those that actually we probably could write a book about IT. And so it's a topic of conversation.

Great at a mimus h you also to have a newsletter, there should be a strategy capital letter. You'd break up there with pen top son.

even if it's only like quarterly or something.

Yeah yeah. We've thought about different file papers and this i'm pretty lazy each and probably good.

Well, this is the problem. We need a bundle of skills to be lake up. And thomson is you need to be both a great strategy thinking, which you both are, and you need to be a great writer, which you are. Seven powers is really excEllently written, and you need to love writing and want to do IT every day or every period, which i'm not sure that you do.

That's the part where David and I fell down to. People keep saying, no, you should turn, acquire into a book, or you turn these in the blog post. And David, I look at each other or like, IT takes us hours to write.

That sounds like hell. I'd say my passion and I think probably chinese. The lines for this too is getting the theory right.

It's very satisfying and extremely hard to sort of go through and figure out you know how this kind of all fits together. And of course, that's how you get to simple but not simpler. C, it's the only way you get too simple but not simplistic. And so that's of the satisfying part but you know the idea of right another .

book yeah IT doesn't help when the theory never done. You know like it's funny. I think they will. You mentioned last time talk about platforms. IT doesn't feel completed like the truth that is IT will never be completed and always in the work.

I think nowadays we ve got a lot clearer about IT than a year ago, but it's always in the make will think about something else and IT comes back to play. That's the missing peace. Real is a vertical degrade sed skilled out for a very long time.

And then like, oh, that's what's missing. And the communication strategy is always a difficult peace as well. If I bet the two of you spend a lot of time on each company that you do an episode is things like that.

And when everyone example you are like, is this really true? Then you have to go. They get IT all back and be like, and I just misperceive what this really is about.

yeah, how did you delay?

Or A U S. That one. We actually talk to a lot of people who were around IT at the moment of conception, or theoretical conception, over the society of years, and there has been sort of canonical sources.

So, you know, we read bread stones book. We know brad. So we asked them, you know, who did you talk to, to kind of piece this together? And we had our own folks that we knew. So there was a little bit of like actual first party knowledge there. But David, I had this a little bit of oho moment, a little bit a sigh of relief when we like, oh, we're not gonna figure out what the one story was so we actually can create an episode out of there's a bunch of of stories and like.

we leave IT to you listener. And that's probably, is there a third party to the extent that our version of what we told is true or closer to the truth than others, no person who was personally vested and interested would be able to have that perspective.

yeah. So in channeling curis sol, all right.

exactly.

yes.

right. Well, that's a great place to leave. IT, hamilton, cHennai.

Thank you so much. Thank you both.

great. Okay.

our pleasure. Thank you are right listeners. Thank you. Thanks to hamilton and Cheney for joining us. Very clarifying discussion.

I felt David totally. I mean, they really are too modest to say on the episode, but they are the very best people to do what they do, because they sit at the intersection of academia, corporate strategy, hamilton, work for bain and strategy consulting for many years and active investing. And they are working with founders everyday, getting their hands dirty. They truly are the best .

while listening ers, we'd love to go deeper with you. You can become acquired lp to come back into the acquired kitchen on our David you like in that language.

I I think of stuff curry every time we say that cooking in .

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