The problem with this post, and other pieces by Spolsky is that he creates an example out of two extremes on what really is a sliding scale.
Amazon burned through a lot of capital. B&J grew slowly during decades.
In real life, things are seldom so black and white. Every company has a unique story.
What about Facebook, that grew organically at first and then took on massive investment once it was clear that college kids loved it and they could benefit from outside investment to grow even faster.
Or what about DropBox that took a small seed funding round but then quickly exploded in popularity and then took more investment. Where do they fit on Spolsky's scale?
The truth is - they don't. Which makes the whole premise of the article wrong, you don't need to decide if you are Amazon or B&J. Just do what makes sense for the business you are in.
Facebook started college only and had no competition in that space, so they did well but had the luxury to expand slowly, essentially the B&J model in the article. When it was obvious the next step was to open themselves to the public at large, the social network lockin effect worked against them. Everyone at the time was using MySpace or Friendster or whatever else was popular at the time (I honestly don't remember). In order to make a dent, they had to hit hard and fast, so they took some funding and exploded out of the gate.
The point I'm trying to make is, Facebook mixed both the Amazon and the B&J model for growing a company. They did one, then the other, which really made sense for them considering the position they were in at the time.
Facebook and dropbox both have high network effects and high lock in. Once your friends are on facebook, you won't want to leave and if your not on it yet, you will want to get on.
To me, they are clearly go big or go home style companies regardless of what small investment they started with.
Perhaps we choose dichotomies such as the article suggests because they serve as useful points for further discussion.
You offer many examples of companies that do not fit the two extremes of Spolsky's article. Where would you place them on the sliding scale you mention? Both have grown quickly and taken venture captial. I would place them more toward the Amazon side of the scale.
Very little in the world is black or white. Conflict and disagreement happens quite often. What you do about conflict and disagreement is the important part.
"""The problem with this post, and other pieces by Spolsky is that he creates an example out of two extremes on what really is a sliding scale. Amazon burned through a lot of capital. B&J grew slowly during decades. In real life, things are seldom so black and white."""
Maybe, but shades of gray are neither guiding principles nor reference points.
We measure shades of gray as 10% white or 20% black etc, i.e distances from the extreme, not with reference to other shades of gray or as an absolute gray value. (Even if we could enumerate enough sub-segments on the "sliding slice", we still intuitively understand segment 4/10 to mean something like: 4/10 close to white, 6/10 close to black).
"Every company has a unique story" is another way of saying: I cannot understand and generalize anything specific about how companies operate. Not very helpful. Science works with generalization and taxonomy.
"""What about Facebook, that grew organically at first and then took on massive investment once it was clear that college kids loved it and they could benefit from outside investment to grow even faster."""
Then they went towards the white end of the scale first, the black later.
You still need to do the science though. Taking two examples and drawing general conclusions from that is just wrong. It's a case study of how B&J and Amazon have operated, which in itself is interesting.
But it's wrong to state that you either are a B&J-type company or an Amazon-type company, nothing in the article supports the fact that those are the only possible types.
The most important thing to understand about these models is that it's very easy to get big fast but very much harder (especially with software) to get good fast.
Good almost always takes several iterations. If your market is filled with high quality offerings by competitors then getting big fast could be a recipe for burning a lot of capital before your product becomes good enough to compete, or simply burning enough capital to go out of business before it has matured.
How does Amazon have a "strong network effect"? I'd still use it even if none of my friends did; it's not like Facebook (or instant messaging networks, to use the 11-year old example from the article) where my friends not using it would render it useless (or even less useful).
The only things I can think of is that (1) customers will advertise for you by word-of-mouth, and (2) it's cheaper per user the more users you have (economies of scale), but Ben and Jerry's has both of these properties as well and the author says it has "no network effect". It is true that its reviews have a strong network effect, but that's not the part of their business they profit from directly - you can easily just check Amazon for its reviews and then go to Buy.com to actually make the purchase.
Can someone clarify what he might mean when he says Amazon's business has a strong network effect?
I also don't really understand how Amazon has "strong customer lock-in", either. Maybe "weak customer lock-in" would be appropriate, as once you make an account it's easier to order more items, since you don't have to figure out the design of the website and re-enter your credit card and shipping info. Amazon Prime clearly has strong lock-in as you're paying for a one-year subscription in advance, but nowhere near the majority of customers use it (I would assume) and it didn't even exist in when this article was written.
Amazon plays off its suggestions of what else to buy, that data is from the network, not your personal network, but the data is only valuable once you have enough users, or else the data is too spiky.
These suggestions to just throw one or two more targeted items into your basket is where they really excelled.
Do people really use these suggestions though? I don't think I've ever used them personally (maybe once?), but maybe others do. And even if people use them very frequently, I still don't think that would make the usefulness of Amazon grow as a "square" of the number of users as the article implies.
Yes, I've used them many time, and I know my (non technical) girlfriend does too.
I've found similar novels that I've liked through the suggestions, bands I've enjoyed and recently when buying the 'Lean Startup' I ended up buying 2 of the suggested books.
Many time I end up not buying the item I originally went there for, instead buying one of the suggestions, or the suggestions on a suggestion... depends how the reviews look.
As I see it Amazon were the first to really use this data successfully and meaningfully.
The other networks I guess would be the Amazon Wishlists which for a time were hugely popular. I still see wishlist links on personal and informational sites, as a way to give back to the site creator. That network is pretty powerful too!
I think he was referring to the fact that people talked about Amazon, even outside of geek circles. It was the first big online retailer - before that, people just didn't buy things online. Amazon changed that by generating suffcient word-of-mouth buzz. That buzz in return allowed Amazon an easier job negotiating with publishers to distribute their books, which made Amazon cheaper than bricks and mortar stores, which increased the buzz, which allowed them to negotiate even better prices.
I mentioned word-of-mouth buzz in my post, but it didn't make sense to me that that could be the reason as Ben and Jerry's ice cream has the same thing going for it (as an anecdotal example, I never bought it until my girlfriend bought a couple flavors and I tasted them and found out how much tastier than generic ice cream it was).
And even if Amazon has more of this word-of-mouth going for it than Ben and Jerry's, I would think this would be a result of their implementation (i.e., it's a well-done site and that's why people tell their friends), rather than something inherent to its business model which is what the article is talking about.
I don't think it's what he was talking about, but Amazon also has their 'Prime' service which means free 2-day deliver on every item in their warehouses.
For me, that means I'm -way- more likely to buy from Amazon than anyone else, because it's both free and 2-day delivery. Yes, I pay $80 per year for the privilege, but that's still way cheaper than what I used to pay for shipping before Prime, and I always chose the 5-7 day option.
" If you want to chat with people, you have to go where they are, and ICQ and AOL have the most people by far. Chances are, your friends are using one of those services, not one of the smaller ones like MSN Instant Messenger. With all of Microsoft's muscle, money, and marketing skill, they are just not going to be able to break into auctions or instant messaging, because the network effects there are so strong. "
Care to elaborate? I still use ICQ and various xmpp accounts, plus skype. Had an MSN account a while back, but only for two friends who ended up switching away from it.
Yes, Microsoft bought skype, but that's not really "breaking into", that's "buying". You wouldn't say that Microsoft "broke into the FPS market by making Halo".
All of my friends switched from ICQ to MSN. The switch happened kind of fast too. Especially during the XP and hotmail era. XP comes with windows messenger pre-installed. Not to mentioned the whole Windows Live ID thingie.
I think the introduction of Windows/Xbox Live was the driving force that pushed it in the triple digits million userbase here, not an actual decision to switch to MSN. If all of your friends are suddenly on another service, it's no wonder you'll switch eventually.
Everyone I see frequently who still uses IM (and not just Facebook) uses MSN, so I guess it's a location thing. I'm in Ireland. (And AOL is out for people that want to talk to non-Americans, probably, as I had to jump through hoops to get a AIM to talk to American friends) .
It's very location specific. In the Netherlands almost everyone uses Windows Live Messenger, while in Germany (or so I heard) ICQ is still much more common.
Though these days I like to think Facebook is taking over because it kind of consolidates e-mail and IM.
This is a classic look at fragility versus optimization, much like what Nassim Taleb writes about.
A lot of his charts to demonstrate this concept (that the more "optimized" something becomes, the more fragile it becomes) look like the ones from this article. For example: http://bit.ly/sKM7B0
I'll try to find more images. Taleb's writing looks at this general concept in great detail across almost everything; in the context of business, basically what Joel says is right on the money. Great article.
By the way, I think I'd prefer running a small biz to an Amazon or Wal Mart. You?
This is Joel's humorous version of what Steve Blank refers to as "knowing your market type"[1]. Steve classifies them as new vs existing markets (there's also a third called "resegmented markets" but those just sound like existing markets to me).
He gave an example in one of his Haas lectures that I'll never forget of how disastrous it can be to mistake the two market types by comparing the marketing strategies of Blackberry vs Tivo.
Blackberry knew they were releasing advanced new products into a market of users that primarily only used pagers, so they described their product as a two-way pager, even though it's nothing like a pager under the hood. They described it in terms that people could instantly grok what the hell it was and early adopter usage was off the charts.[2]
If Tivo followed the same model, they should've described themselves as a tapeless VCR. But the company didn't just miss the obvious opportunity, they actively avoided it and even went so far as to ban the word VCR from any marketing, press releases or interviews. This came straight from the top, from the CEO, who believe that the VCR was primitive tech and the Tivo was so technically advanced as to be in a different class of gear.
Tivo got confused about what market they were in. They had great tech that was completely torpedoed by their marketing. As a result, Tivo's adoption curve was much slower, never got above a few million users, and didn't cross over into mainstream usage except as a verb.
[2] Bonus points for the self-taught MBA crowd: go read Clayton Christensen's The Innovator's Dilemma and figure out why Blackberry wasn't able to sustain their lead.
It looks like for the amazon-type companies the company's culture gets replaced by the founders image, as people need some way to grasp the company as a whole.
I was reading, nodding to myself and then I read about this fantastic new service called "PayMyBills.com which receive your bills for you, scan them in, and show them to you on the Internet"
I was very, very puzzled. THIS guy is tech savvy? And then I saw the date on the post.
Amazon burned through a lot of capital. B&J grew slowly during decades.
In real life, things are seldom so black and white. Every company has a unique story.
What about Facebook, that grew organically at first and then took on massive investment once it was clear that college kids loved it and they could benefit from outside investment to grow even faster.
Or what about DropBox that took a small seed funding round but then quickly exploded in popularity and then took more investment. Where do they fit on Spolsky's scale?
The truth is - they don't. Which makes the whole premise of the article wrong, you don't need to decide if you are Amazon or B&J. Just do what makes sense for the business you are in.