Chris Mims in WSJ writes about the new software conglomerates (I wrote about them for Quartz recently here) and says:
The large companies of yesteryear bet on things like economies of scale in manufacturing—everything gets cheaper to make, the more you make of it. Modern platform companies take advantage of something unique to the internet age. That something is “demand-side economies of scale,” which arise because platform companies are taking advantage of network effects, says Mr. Wu.
This is certainly true, and in line with Ben Thompson’s notion of the big tech companies as “aggregators” of consumer demand. And Mims and I seem to be on the same page on the subject of conglomerates.
But I think there are supply-side economies of scale here that we still are struggling to understand and appreciate. I’m not certain of this, and I certainly can’t quite describe them, but I strongly suspect they are there. There is something about being good at making software that is hard to buy your way into and easier to accomplish if you were born as a software company. Maybe that doesn’t exhibit economies of scale; maybe it’s best understood just as a capability that most large companies don’t have. But it’s not just the users that make Alphabet and Amazon powerful: the premise behind Alphabet’s self-driving car project isn’t that all those Gmail users are a good customer base. And it’s not exactly about data either; a bunch of search data isn’t necessarily what you need to make an autonomous vehicle work. Instead, the company knows how to start and scale up extremely large software-and-data projects. That’s part of the story.
Think of it this way: What if you just gave GE all that searcher data, or handed them control over google.com. Would they know what to do with it? And more importantly, would they leverage that business to expand into new domains?
Places where I’ve touched on this topic:
- How software is helping big companies dominate, HBR with James Bessen
- GE was the wrong kind of conglomerate, Quartz
- Blog posts: here, here.