Be What You Aren't

By Nicholas G. Carr

There continues to be a desire, among entrepreneurs, managers, and investors alike, to view Internet companies through the lens of traditional business strategy. From this perspective, the overriding goal is achieving a sustainable competitive advantage. The advantage may take the form of a defensible market position or a unique core competence, but in either case the result is a long-term barrier to competitors and an enduring pool of profits.

Investors initially bid up the valuations of dot coms to irrational levels because they believed that the first movers would gain sustainable advantages. If you were the first to put up a Web storefront or to offer a particular on-line service, the thinking went, you’d set off a network effect. Your initial group of customers would attract waves of new customers, they’d form a community, or network, of users, and they’d all be "locked in" to your site or service. Protected from competition, you’d raise your prices and make a bundle.

It was a nice theory, but the logic was sloppy. Because the Internet is an open system, it tends to dampen both first-mover advantages and network effects. Business models built on software code are relatively easy to replicate, so new entrants immediately rush into any market that’s generating profitability. Profit pools are sucked dry as soon as they form.

Yes, a few companies, like America Online and Yahoo, have been able to sustain first-mover advantages, but they’re the exception, not the rule. More typical is CDNow. When it was the first to build a sizable business selling CDs on-line, everybody thought its long-term prospects were bright. But when Amazon started selling music, CDNow’s first-mover advantage vanished overnight. More recently, we’ve seen the same thing happen to vertical B2B exchanges when consortiums of big companies announced plans to establish trading hubs of their own.

That doesn’t mean, however, that all Net firms are doomed. If the quest for sustainable advantage on the Internet is a fool’s errand, there is another type of advantage that is well worth pursuing - I call it leverageable advantage. A leverageable advantage is a privileged market position that, however fleeting, provides a stepping stone to another privileged position. It’s an advantage as a means rather than an end.

To see the power of a leverageable advantage, look at Ariba. It started out as a supplier of software for automating corporate procurement. As business-to-business transactions began to move to the web, it leveraged its privileged position on buyers’ desktops to transform itself into an infrastructure provider for on-line marketplaces. The shift is paying off. Ariba’s revenues doubled between the first and second quarter of this year. It’s on a clear path to profitability, and its stock price is rebounding strongly.

Stamps.com is attempting a similar business model transformation (though it may have waited too long). Stamps.com was a first mover in distributing postage over the Internet, but it realized that selling stamps on-line will inevitably be a commodity business. So it's now leveraging its existing relationships to morph its old model into two new models: a provider of Web-based shipping management for businesses and an outsourcer of merchandise returns for e-tailers.

Ultimately, as the Internet is incorporated into the operations of all businesses, more companies will be forced to seek leverageable rather than sustainable advantages. Their success will hinge on how quickly they abandon their advantages rather than how long they hold them. Pure-play e-businesses should keep that in mind as they consider whether to embrace the currently fashionable clicks and bricks strategy. Code is flexible. Bricks aren’t.

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