Below is a selection of the resources that have helped me get a handle on the impact that the internet has had on distribution, the rise of abundance in content and goods, how the algorithmic feed has served as a solution (and a prolific mechanism for advertising), why consumer brands can't scale like they used to, and potential approaches for building in an era of abundance.
In making content free and reducing the costs of exchanging goods and services, the internet has shifted the focus from aggregating supply to aggregating demand. The unbounded nature of the web has resulted in an evolution of the 'algorithms' used to acquire and service users.
From supplier to user
The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era the latter depended on controlling distribution.
There have always been far more users/consumers than suppliers, which means that in a world where transactions are costly, owning the supplier relationship provides significantly more leverage.
The fundamental disruption of the Internet has been to turn this dynamic on its head. First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale. Ben Thompson Link
Retail vs ad rents
Old definitions, new use cases. Pay for placement on Amazon: “Advertising”. Pay for placement in Walmart”: Marketing. Ben Evans. Link
But here’s the kicker: with the Kirkland products, brands don’t have to spend nearly as much money on marketing. They don’t need to pay for Facebook ads or run television campaigns. Adam Keesling Link
I generally think about retail as sitting on a spectrum from logistics to experience. At the logistics end, you know exactly what you want and retail’s job is to provide the most efficient way to get it. At the experience end, you don’t know, and retail’s job is to help you, with ideas, suggestion, curation and service. Ben Evans. Link
The differing algorithms of Walmart and Amazon
Walmart can be thought of as a bounded search for the optimal selection, inventory, and pricing of SKUs that a local market could support. It was bound, or constrained, by the characteristics of the local economy, and so each Walmart location was a direct reflection of the local market dynamics. The immensely difficult job of the local management team was to predict and implement the optimal mix that could theoretically have been found if every possible permutation were tested by the local economy. Undershooting or overshooting – that is, having too few or many SKUs, or too little or much inventory – would be a costly mistake.
Bezos, in other words, wanted to build an unbounded Walmart. By removing the constraint of geography – and therefore the local economy – and by adding search functionality, the new formula became simpler: the more SKUs it added, the more items would be discovered by customers; the more items that customers discovered, the more items they would buy. In this world of infinite shelf space, it wasn’t the quality of the selection that mattered – it was pure quantity. Zack Kanter Link
Amazon is pursuing customers and bringing suppliers and merchants onto its platform on its own terms; Shopify is giving merchants an opportunity to differentiate themselves while bearing no risk if they fail. Zack Kanter Link
A shift in the economics of information and the resulting collapse of mass media is affecting users of commerce, education and politics in equal measure. In every setting, people are grappling with how to find the right products, the right people, or the right content.
The collapse of mass media
Growth in information, which has historically been (1) slow and additive and (2) only done by gatekeepers, is now (3) exponential, and (4) can be created and distributed by anyone.
More information is published in a week than you can read in a lifetime. The explosion of information is leading to a clash between two opposing modes of organizing life: one hierarchical, industrial, and top-down; the other, networked, egalitarian, and bottom-up.
In the past decade, the information environment has inverted from information scarcity to information abundance, and the effects are evident in every corner of society. David Perell Link
Customers have more choices than ever before
By creating unlimited shelf space and reducing information asymmetries, power in the internet age is shifting from suppliers to customers. The world is increasingly demand driven. Customers have more choices than ever before. They can buy anything, at any time. Through the internet, brands can serve a long-tail of unmet consumer needs, which weren’t served by big box retailers. Small direct-to-consumer brands are popping up left and right. Their products go beyond their utilitarian purposes and reflect the identities of people who buy them. David Perell Link
And oceans of knowledge at their fingertips
Previously, the success of universities depended on privileged access to information. But today, there’s more information on the smartphone in your pocket than in the university library.
With oceans of knowledge at their fingertips, digital natives use the internet to educate themselves. They crawl physics pages on Wikipedia, fall down YouTube rabbit holes, and communicate with other enthusiasts on obscure Discord servers. David Perell Link
Facebook's genius was to build algorithmic feed based on interests and connections, and to rent out this graph to brands that wanted to find 'lookalikes' to those that had already bought what they were selling.
Identity is missing from the internet
Shopify Tobi likes to say that the web was really great, but it had two critical design flaws. The first design flaw was that payments weren’t built in, even though they almost were. And that is kind of what allowed Amazon to grow up and win this whole slice of commerce. And the second flaw was that identity was not baked into the web. It was up to websites to decide how they managed identity and how they attract people’s identity. And that ultimately led to things like… it led to AOL having this initially last presence around owning people’s identity.
But then down the road, this is how you get to places like Facebook who provide this incredible service for people, by giving them an identity that they can use to talk to other identities. But ultimately (that) turned a lot of the internet and subsequently a lot of the world of commerce into something that happened inside walled gardens” Alex Danco with Jim O'Shaughnessy’ Link
Making way for FB's algorithmic feed (and a gigantic ad business)
Almost any social network that achieves scale has to launch an algorithmic feed to prevent a tragedy of the commons when it comes to directing its users' attention. These interest rate hikes are key to fighting content inflation. Eugene Wei Link
The Algorithmic Feed, Content Creators & Broken Promises, Eric Stromberg Link
But as online identities proliferated, the natural size of each of these audiences was shrinking at the same time as CPMs crept up, leaving brands without pre-existing (celebrity) audiences unable to scale in the way that is required by their source of capital (VC).
CPMs have rapidly increased
We’ve reached a point today with ad spend in tech that feels metaphorically similar. Startups spend almost 40 cents of every VC dollar on Google, Facebook, and Amazon.
We don’t necessarily know which channels they will choose or the particularities of how they will spend money on user acquisition, but we do know more or less what’s going to happen.
Advertising spend in tech has become an arms race: fresh tactics go stale in months, and customer acquisition costs keep rising. Social Capital Link
Generating diminishing marginal returns
Competitive bids for the same inventory, addressing the same audience, drive up demand for the same real estate within a feed or a story, causing ad prices to skyrocket.
The holding companies of tomorrow will shift their attention from controlling supply to controlling demand — from building around industries to building around audiences.
Re-marketing to an existing customer is significantly cheaper than trying to persuade a first time customer to buy your product — sometimes nearly 90% cheaper. David Perell Link
Same calculation, different setting
The other implication is eventual company size. When effective marketing spend eventually reaches a ceiling, then the higher the LTV/CAC, the bigger the company can get. Steady state revenue = annual marketing spend x LTV/CAC x 1/contribution margin. Jeremy Liew Link
Even though the basic idea of the escalator has remained virtually unchanged since its first application, it is heralded as a technology critical to the postwar prosperity. A direct equation between a building’s cash flow and number of visitors is formulated: maximum circulation = maximum sales volume. Store area is calculated in direct relationship to volume and flow of shoppers. Stores are now devised according to the equation, retail area above ground floor / capacity of the stairways < 1/20. That is, to carry one person an hour to every twenty square feet of merchandise area above the ground floor is to accomplish maximum dollar volume. Elena Burger Link
One solution is to remove the need to scale in the first place, and instead focus on re-activating your existing customer base, trading this recurring revenue to fund (more linear) growth. Approach: Infrastructure-led.
SG&A looks set to become the primary growth vector in the 2020s
As the Internet growth tailwinds subside, what’s left? Harder problems. This could mean companies with an atoms component, or with a tougher sales process, perhaps stemming from a weaker market need or more robust competition.
Higher SG&A spend means more predictable growth, paving the way for debt as an asset class. John Luttig Link
Pulling speculative capital 'along' to the deployment phase
Thus financial capital is under pressure from eager money growing faster than good opportunities and begins to look around for other profitable or exciting things. Carlota Perez Link
Making way for recurring revenue as an asset class
What we’ve seen over the last decade is that software enables a whole new business model – recurring revenue – which is both good for customers and is good for investors. It’s good for investors because it becomes more “predictable” in the sense that it starts to look more like a fixed income yielding asset. Alex Danco Link
“Software contracts are better than first-lien debt. You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. We get paid our money first. Who has the better credit? He can’t run his business without our software”- Robert Smith via John Street Capital Link
And shifting the atomic unit of value from the equity contract to the revenue contract
Sell the smallest unit possible. Sell the thing itself: your revenue. And the purest way to represent that – the atomic, tradable unit of the subscription economy – is the revenue contract. Alex Danco Link
Pinduoduo's team buying flips the traditional retailing model from being supply driven (“how do we sell what we’ve produced?”) to demand driven (“how much should we produce?”)
Before the internet, most of manufacturing and retailing was “how do we sell what we’ve produced?” Even today, despite having direct relationships with consumers, many brands still order inventory from their suppliers up front before any sales are made.As it amassed users, Pinduoduo began predicting, and then influencing consumer demand elsewhere.
It would be as if Facebook went a step further than partnering with direct to consumer brands dropshipping from overseas, and instead created a Shopify-like tool for those brands’ suppliers. In some cases, these were similar to a Pinduoduo private label. In others, manufacturers were building a consumer-facing brand for the first time. Turner Novak Link
Vertical supply chains, subscriptions and connected devices enable the 'streaming of goods'
Anytime you can make something important, legible to computers, you can change the world. If you look at all of the revolutions that happened after smartphones got significant penetration, it was because suddenly people's locations were legible, and the world around them was legible with cameras. Suddenly you have, Ubers, Instagram, all these things. So fundamentally, we're making the stock level in your house of coffee legible to us, and then eventually to coffee sellers. Not just your level, but also using those levels, we can figure out how fast you're going through it. Michael Meyer Link
We need a new Google
To make Google usable, users are adding faux-query modifiers that to supress the “garbage Internet”.
Introducing Boogle, a proxy for Google that’s just Better Google Search. It’s a query expander. We predict the correct operators for your query, proxy Google’s results, and serve.
Picking a vertical that doesn’t have strong typeahead completions would help you build community around your search engine. Recipes, fitness, fashion, etc. don’t have decacorn conglomerates like Github or Reddit. That might mean it’s easier to build community around them, and put your flagship search engine on top. Daniel Gross Link
And context-driven search
Google is almost completely silent on matters of taste — try searching for “well-written blog post” and counting the number of well-written blog posts in the results.
What if we could avoid these difficulties entirely by changing the problem? Instead of requiring the system to determine whether something is well-written, we can give it some writing and ask it to find other writing in the same style. This lets us sidestep the difficult question of defining “good writing”. Instead, we ask the user to provide an example of what they personally view as good writing. Jacob Jackson Link
Algorithms are replacing brands
Consumers increasingly trust Amazon, Stitchfix, and other aggregators to sort and surface the best products, which diminishes the importance of individual manufacturers. This means the algorithm is the new consumer brand--signaling trust and quality. Li Jin Link
Operationalizing trust. USV Link
And aggregating around emotions
Aggregators historically focused solely on consumers functional needs (price, choice, time..). Not their emotional needs. But it doesn’t have to be the case, as aggregators too can be soulful and captivate their audience just like “product brands". Yacine Ghalim Link
Curators are the new creators
The business of influencer bundling has only just begun. Curators are the new creators, and as consumers, we’re going to be willing to pay someone with good taste to help us sort through the ever-growing mass of information at our fingertips. Gaby Goldberg. Link
Note that when personalization meets the conversational approach, the experience is very similar to seeking the assistance of a personal shopper. Marie Dollé. Link
But all curation grows until it requires search
If you wanted to find 5 new sites to read about a topic you care about - ice-climbing, or vintage furniture, or experimental electronic music, or children's picture books - where would you find it? Can you create a platform for all those lists without turning into Yahoo? Ben Evans Link
We need a Facebook of ecommerce Ben Evans Link
Category niches have been growing since we came online
There is demand for nearly every one of those top 10,000 tracks. He sees it in his own jukebox statistics; each month, thousands of people put in their dollars for songs that no traditional jukebox anywhere has ever carried. Chris Anderson. Link
In 2019, globally, we spent around $60 trillion on products and services as a civilization. Now, even if you assume, "Gosh, three to 4% CAGR over the next 20 years, by 2040, this is going to be closer to 120, 125 trillion in volume totally spent by the world." And if you take any definition, or for example, some online penetration costs 30 to 35% across products and services, you end up with 40 to $45 trillion conducted via the internet only in e-commerce and some services. Ram Parameswaran Link
Brands are becoming service companies
We believe that it’s going to become increasingly hard for brands to stay relevant by only selling their physical goods without also creating useful services that consumers invite into their lives. They too need to become a relevant part of people’s lives by creating services that are meaningful. Rehab. Link
Facilitating jobs to be done
If I ask Gramercy Tavern what you're selling they'd say food. And I'd go, "No. You're actually selling seven different experiences plus some merchandise. Nick Kononas. Link
What we are selling is not the software product — the set of all the features, in their specific implementation — because there are just not many buyers for this software product. That’s why what we’re selling is organizational transformation. The software just happens to be the part we’re able to build & ship (and the means for us to get our cut). Stewart Butterfield. Link
“Perhaps what people are seeking (when going to the doctor) is not treatment but reassurance." Rory Sutherland / Brett Bivens. Link
And becoming a mainstay in their customers' lives
For companies that offer subscription products, they are more than just simple revenue streams; they are vectors for cementing relationships with customers. While many apps and subscription products do offer a straightforward service in exchange for recurring payments, others seek to establish a beachhead or “touchpoint” in the subscriber’s life. Drew Austin Link
Now, we're building around people
Facebook is a lot like Walmart in the sense that it's just utility oriented, and it doesn't really speak to a particular audience — startups that are able to authentically cater to niche communities will be the ones to watch in this new era. Erik Torenberg Link
Marketplaces are a good metaphor for social. it’s intuitive that one is applicable to the other. The central thing that unites them is that they’re both networks. People show up to a social network because their friends and favorite creators are on there, and buyers show up to marketplaces because the sellers are there. To reach a critical mass of community in order to be stable and grow, you generally need to pull together a cohesive group right away. A16Z Link
But these communities are better suited to depth vs breadth
There is not just one reflection of yourself – identity is prismatic. Twitter-Julian (armchair intellectual) is not the same as Instagram-Julian (hobby photographer) or Facebook-Julian (high-school drinking buddy). Google Circles and Facebook Lists always got this wrong: They let us change who we shared with, but not who we shared as. This is why social networking is not a winner-take-all market. We need different channels for our different, contradicting online personas.Julian Lehr Link
The in-group is the tribe you want to join and signal your affiliation to. The out-group is everyone else – people you want to distance yourself from. Signaling, however, grows stronger the larger the out-group is – as long as the out-group knows about the in-group. This is why luxury car manufacturers deliberately extend their advertising campaigns to people who will never be able to afford their cars: they are increasing the size of the out-group by educating people about the in-group. Julian Lehr Link
Back to start with the tool?
The idea is to initially attract users with a single-player tool and then, over time, get them to participate in a network. The tool helps get to initial critical mass. The network creates the long term value for users, and defensibility for the company. Chris Dixon Link
Market networks are also unique from a monetization standpoint. They combine the strong network effects defensibility and scalability of direct networks like LinkedIn or Facebook together with the lucrative revenue models of SaaS or marketplace businesses. NFX Link
NFTs are formalising untapped 'proof of work''in order to complement price signals and foster exchange. Approach: Legibility-led.
Social capital is accrued via participation, with proof of work acting as currency
Cultural imprinting relies on the principle of common knowledge. For a fact to be common knowledge among a group, it's not enough for everyone to know it. Everyone must also know that everyone else knows it — and know that they know that they know it... and so on. Kevin Simler Link
So my belief and hope is: participation as the core interactive model will be the wedge that a new social experience uses to disrupt Facebook Inc. I look for this in new social startups, and I wouldn’t be surprised if the biggest threat to Facebook Inc will be something that started looking like a game. Sarah Tavel
Almost every social network of note had an early signature proof of work hurdle. For Facebook it was posting some witty text-based status update. For Instagram, it was posting an interesting square photo. For Vine, an entertaining 6-second video. For Twitter, it was writing an amusing bit of text of 140 characters or fewer. Pinterest? Pinning a compelling photo. You can likely derive the proof of work for other networks like Quora and Reddit and Twitch and so on. Successful social networks don’t pose trick questions at the start, it’s usually clear what they want from you. Eugene Wei Link
Which can be bundled together with financial capital to match demand to supply
When angel investors wrote checks into startups, they were really buying two things: an asset with a potential financial return and a status symbol. Packy McCormick / Alex Danco Link
When you’re building something in social plus finance you have an interaction layer and you have a transaction layer. And the interaction layer is built around the emotional and cognitive pieces—that is content creation, that is messaging, that is all these social things that we see pop up—they appeal to these cognitive and emotional levers. And then you have a transactional layer, which is whatever your actual financial transaction is. That’s generally much more of a functional use case.
The magic in social plus finance happens when the transactional piece and the interactive piece are mutually reinforcing. A16Z Link
Fortnite’s monetization model is based on cosmetics: The skin your character wears; the looks of your glider and the tools you use; the way your character dances (emotes) – all of these are signaling amplifiers with different signal messages to uniquely express yourself in the game. And you have to purchase them. Julian Lehr Link
The rise of 'Believed in this first' as an asset?
Emergence of a new atomic unit of value — Every era has a raw “resource” (oil, idle cars/gig workers, friend graph, etc.) that when captured, catalyzes an immense wave of innovation within a sector. These are obvious and highly contested in hindsight but are largely non-obvious to incumbents at the time of discovery. Commentators often dismiss the initial market as “too small”. N-of-1 companies recognize this reorientation early and effectively build technology products that take advantage of external macro trends to capture an early foothold in acquiring the newly discovered unit of value. Tribe Capital Link
Whether it’s the long tail of “alternative alternative” assets, venture-backed company shares, software contracts, or sport teams the financialization of everything is on its way. John Street Capital Link