About two years ago, MKBHD posted a video titled “Apple vs The Paradox of Choice”. If you haven’t seen it, I recommend you watch it before reading this article. In a nutshell, the video talks about anti-competitive behaviours practised by large companies using Apple as an example and how they have an unfair advantage over smaller companies due to their distribution networks.
The Video
To explain this, Marques uses the analogy of a shark and the remora fish in oceans. A shark and remora fish have a symbiotic relationship i.e. both need to be associated closely for their survival and overall well-being. The remora fish swim around the sharks to feed off the scraps from the shark’s prey and the shark allows it to do that because it also eats the parasites off of the sharks’ body keeping the shark clean. However, if you analyse their relationship objectively, it is the remora fish who is more dependent on the shark. Drawing from this analogy, Marques makes the point that Apple is the shark of the tech industry – a company akin to the apex predator that has nothing to fear, while there are several smaller companies like the remora fish whose entire business models are dependent on Apple’s products (iPhone, iPad, Mac, Airpods) and platforms (iOS, iPadOS, MacOS). He argues that even though Apple benefits from these smaller companies which enhance the value of Apple’s own products and services; Apple can at any time decide to build those products or services on its own. This would cause survival difficulties for the smaller companies. This is because now, instead of simply complementing their offerings for Apple they also have to compete against Apple and its unfair advantage of distribution on its own platforms. To explain this, Marques uses the example of AirTags and how Apple leveraged its iPhone network to build a much larger network than Tiles, instantly reducing their value and appeal to consumers. He then also states examples of apps on iOS and MacOS such as flashlight, spotlight, nightlight and how Apple has silently killed these third-party products by baking these utilities right into its OS.
The Question
This video really got me thinking as to how can the smaller fish survive in an ocean controlled by Sharks?
What is a Shark?
In order to answer this question I want to first dive into what makes Apple the shark? After analysing Marques’ video three key characteristics emerged which make Apple or any company with similar characteristics the shark:
- No resource constraint:
A company that does not have any constraint in resources whether financial or human and new product development can be fueled using internal resources without the need of an external intervention.
- Massive user base:
A company with at least one product that has a massive user base such that it enjoys a significant market share in that industry
- Owns a computing platform:
A platform is a framework or a set of rules that facilitates access to a system. Although there are multiple ways of classifying a platform, I like the approach taken in this Medium article which classifies platforms into 9 different categories. In context of this article, the sharks Marques is talking about are companies that own Computing Platforms.
A computing platform is a platform that enables interactions between users of the platform and developers on the platform. Characteristics of Computing Platforms include:
- Platform owns the user meaning the environment in which the end users and developers operate is defined by the platform owner
- Computing Platforms are subject to strong bi-directional network effects once they reach a critical mass. Users attract developers, developers make apps, apps attract users, users attract developers and so on.
Microsoft Windows, MacOS, iOS, Google Android are examples of operating systems which act as a computing platform etc.
Thus, to sum up the definition of ‘Sharks’ in the tech industry – Sharks are companies with:
- abundant resources and
- a massive user base and
- owned platforms
which give their products an unfair advantage in development, distribution and adoption over companies which do not possess any one or more of the above points.
Some Answers
Now that the definition of sharks is clear, the next step is to answer how can the smaller fish survive in an ocean controlled by Sharks? Or to rephrase the question in a more general manner, how can product focussed companies compete against companies that own platforms?
To me ‘survival’ or ‘competition’ in this context would mean that smaller fish are able to achieve user growth and / or control user churn for their products alongside the presence of sharks. On these lines, there are five strategies I can think of which would help in creating moats, stickiness in products which would help achieving the above objectives:
- Ubiquity
- Interoperability
- Stored Value
- Personalisation
- Exclusivity
Please note that the applicability and relevance of each strategy would depend on the nature of each business. Certain strategies might be more suited for certain types of businesses than others. Also, since the video mostly talks about Apple, the examples I’ve used for each of these strategies are also of products that compete against Apple’s pre-installed apps.
1. Ubiquity
Ubiquity means something that can be commonly found, something that appears everywhere. Most sharks in order to strengthen their ecosystem or platform appeal, keep their products exclusive to their own platforms or offer a subpar experience on competing platforms. A product focussed company can mitigate this by taking the contrary approach and establishing a presence on as many platforms as possible. Making your product ubiquitous – accessible from multiple platforms is the first step towards turning your product into a verb. If your product can leverage continuity / synchronisation features across platforms, it can further widen the moat.
A great example of this is Spotify which is available on any computing platform imaginable – Windows, Mac, Web, iOS, Android, Xbox, Playstation and the list goes on. Further, you can easily switch between platforms or devices and continue playing your audio on the next device from where you left it off in the previous device.This vastly helps Spotify maintain its #1 position in spite of Apple pre-installing Apple music on all Apple devices.
2. Interoperability
Interoperability refers to the ability of a product to operate with other products. Building interoperability into products can vastly help in lowering down the barriers to entry for new users and making it easy for them to try the product. This can be particularly helpful for companies entering an already crowded space.
An example for this is Brave – the company behind the privacy focussed browser. Brave is built on Chromium – the same open source browser project used by Google Chrome. Hence majority of the Chrome extensions work on Brave. This makes it vastly more customisable than Safari because of the extension network. With its privacy features, Brave is far more privacy oriented than Chrome. Despite being a latecomer to the already crowded browser industry, Brave has managed to amass 57 million monthly active users as of March, 2023. A large part of this can be attributed to Brave’s compatibility with 100000+ Chrome extensions.
3. Stored Value
Generally, stored value refers to financial tools / instruments which have monetary value stored in them which increases the urgency to use them like prepaid gift cards. Morgan Brown and Sean Ellis in their book Hacking Growth extend this analogy to digital products by stating that getting users to add their information into a product / service makes it more valuable to the user. The more information a user adds, the more likely they are to stick with the product and find it hard to switch to an alternative product, thereby increasing the switching costs. Stored Value can act as a strong hook for products that save personal user information whether in the form of data or in the form of user preferences and personalisations.
Example: Evernote – The note taking app. The more information a user feeds into Evernote in the form of notes the greater is its utility for the user. This database of information present in Evernote can act as a significant switching cost if the user wishes to move to an alternative note taking app like Apple Notes since the user will have to take the manual efforts of moving all the notes and adapting to the new template.
4. Personalisation
Personalising the user experience of your product for every user can act as a great retention lever for retaining users. Artificial Intelligence (AI) can largely help here for building recommender systems and / or generative AI systems based on user behaviour and inputs. This strategy would work great in combination with Stored Value because Stored value requires conscious effort on the part of the user to actually use the product and give inputs. These inputs can act as a great starting point for personalisation without requiring any extra effort from the user and also simultaneously mitigating the cold start problem.
Again, Spotify does a great job at this by building unique playlists based on your music taste and preferences. The more you use Spotify, the more it knows your music tastes and the better recommendations it builds. This makes it harder to switch to a competing service like Apple Music which barely offers any personalised music recommendations.
5. Exclusivity
In the case of content companies, having exclusivity over content / owning content intellectual property plays a huge role in differentiation and preventing the commoditization of your product. This is the key difference between music streaming apps and video streaming apps. Most video streaming services have forrayed greatly into developing original content or possesses exclusive ownership over titles. This makes it hard for an apples to apples comparison between various services since each service even though priced differently enables access to different content titles.
For example, the choice between Netflix and Apple TV+ is not a straightforward decision. Indirectly they both compete for the user’s entertainment time however the content available on these platforms is completely different. Thus the user’s decision boils down to the quality of the content and the urgency to watch it and not which service came pre-installed with the device.
Conclusion
Like I mentioned earlier, the ultimate applicability of each of the above strategies would largely depend upon the nature of the business and the industry in which it operates. Also, I understand that the companies mentioned in the above examples are not at their current position because of that strategy alone but due to a combination of extrinsic factors and as well as intrinsic decisions. That being said, these strategies are not mutually exclusive and produce synergies when clubbed together. Most companies use a combination of the above strategies.
In nature you have to live as what you’re born with. So a remora fish can never become a shark or any other fish no matter how hard it tries to. However, this is where the life of tech companies differs significantly from the life of fishes. As a business you can be whatever you wish to – a shark, a remora or any other fish. There are plenty of examples in history wherein companies successfully detached themselves from the shark and formed their own identity. This is one of the defining characteristics of startups.
“If you want to make money at some point, remember this, because this is one of the reasons startups win. Big companies want to decrease the standard deviation of design outcomes because they want to avoid disasters. But when you damp oscillations, you lose the high points as well as the low. This is not a problem for big companies, because they don’t win by making great products. Big companies win by sucking less than other big companies. ”
Hackers and Painters: Big Ideas from the Computer Age – Paul Graham
This quote beautifully justifies the existence of startups (the small fish). As companies grow big, they also become increasingly risk averse which paves the way for bold startups willing to take risks. And no matter how big the sharks grow, opportunities will always arise for the smaller fish to challenge the dominant position of the sharks as is the case with ChatGPT and Google. However, just like in nature, only the fittest will survive.