Owning the OSS market

Another set of quotes from Peter Thiel below (actually a notes essay from Peter Thiel’s CS183: Startup – Class 4 lecture):

  1. For a company to own its market, it must have some combination of brand, scale cost advantages, network effects, or proprietary technology
    1. Brand is a tricky concept for investors to understand and identify in advance. But what’s understood is that if you manage to build a brand, you build a monopoly
    2. Scale advantages come into play where there are high fixed costs and low marginal costs. Amazon has serious scale advantages in the online world. Wal-Mart enjoys them in the retail world. They get more efficient as they get bigger
    3. There are all kinds of different network effects, but the gist of them is that the nature of a product locks people into a particular business
    4. there are many different versions of proprietary technology, but the key theme is that it exists where, for some reason or other, no one else can use the technology you develop

Yesterday we spoke about Peter Thiel’s “last mover monopoly” concept where an organisation develops a business model that makes it very hard for others to follow. The fragmented OSS market doesn’t have an organisation that owns it… yet.

Points B and C above go a long way to explaining why. B) The highly customised requirements of each OSS and the highly specialised workforce required to implement them mean that marginal costs are high. C) Whilst vendor lock-in is prevalent in the OSS industry, it’s only loosely formed from the network effect (ie the surrounding systems / processes that are integrated to a given OSS) rather than a particular OSS becoming increasingly compelling because other organisations have purchased it.

Points A and D would seem to follow more easily if B and C can be surmounted but are also potentially closely linked. Look no further than Apple to see that their particular amalgam of technology has generated a buzz that has driven the brand and vice versa.

I believe that there is one word that sums up the difference between the fragmented OSS market of today and a future last mover monopoly – ECOSYSTEM.

We are at a technological inflection point where high touch-point dynamics will prevail. Ecosystem-oriented OSS will be required to cope, but in doing so will also push their developers towards point B and C outcomes, with A and D to follow.

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2 Responses

  1. Ryan, instead of trying to always take example on the consumer market, would it not be more relevant to also look to other industries? E.g. companies that make systems and software for nuclear power station management or design of airplane engines? I am not sure that “brands” have the same importance in those very specialized markets than in consumer.

  2. Hi Roland,
    Great point! There are definitely great parallels to be found in the industries you mention. Military Command and Control systems are another example.
    I should add some examples to give a balanced viewpoint that is aligned to the head of the Power Law curve.

    At the moment I’m covering an entirely new model that focusses on the long tail section which is very much a consumer market that isn’t currently catered for very well by the OSS industry.

    With digital business models increasing in prevalence, more organisations are becoming dependant on their comms assets such as clouds, network aggregation / brokerages, WANs, etc so I believe this consumer market is waiting to be serviced. l also think that the repeatability, economies of scale and network effect aspects of this model makes it more suited to long-term success than the traditional model.

    Hopefully we never see the long tail occurring in military, nuclear power or airplane engine design software! Your point remains valid though! 🙂

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