Venture Bytes #27 – The Myth of One

Posted September 23, 2016

The Myth of One

All across tech land, and tech commentary lands, there is a belief that there will be one winner in a category. The belief seems to be that you are the leader or you cling by your cracked fingernails to a perilous ledge. Eventually your grip loosens and you fall into the abyss.

There is no disputing that profit and influence are returns to scale in many areas of technology. Tech has always had its IBM, HP, Microsoft, Oracle, Amazon, Google, Salesforce, and Facebook. These firms have been powerful, iconic, and become nouns and verbs. They have also always had competition. Sometimes upstarts, sometimes other majors; we always have several firms and there don’t seem to be stable enduring monopolies in tech. We love the story of the entrepreneur astride the globe. We see the drama. The realities don’t validate this story very well. Monopoly and bloated price have continuously been attacked and conquered by innovation and improvement.

In economics we have a few widely used and reasonable measures of concentration. The most widely used is probably the CR4. The concentration ratio 4 measures the market share, by output, that the largest or leading 4 firms have in aggregate. This type of measure is important because we do live in a domestic economy with many oligopolistic industries. A few large firms dominate many areas of the US Economy. Think about autos, banks, health & beauty, pharmaceuticals, airlines, media, search, social, ecommerce. Oligopoly is not monopoly – rule of one. Oligopoly is defined as domination by a few firms.

Using US Census data on industry concentration ratios from 2002 and 2007 we can see the CR4 rise from 23.2 to 28.1 in the information areas of the US economy. Information is a broad category but includes software and publishing. In software the CR4 fell from 39.5% to 38.9% between 2002 and 2007. It appears that the software and content industries are like most sectors in the US economy. These areas have monopolistic features but are nowhere near concentrated enough to suggest room for only one market participant. There has been and remains a sense of first, or nothing, in the discussion of competitors in the start-up ecosystem. As far as we can tell this is either a position popularized by VC legends looking back on the possible influences of their success, or a myth that inspires employees to work long hours and that intensifies employee and founder stress. What seems clear is that many hold the top and the lead, as a topographical map of the venture landscape. There seems to be very little evidence to suggest this is accurate and a fair amount of evidence to suggest it is false.

Are Bots the News Apps?

Bots are in the spotlight lately. Facebook set the ball in motion with the recent launch of bots on its messenger platform. The idea of bots taking over the mundane tasks of ordering take-out food, chatting with the doctors, or checking the score of a big game, is appealing to many.

By many accounts, the time is right for bots to take center stage. A fatigue factor has set in with the clutter of apps for every conceivable idea. Even as the download numbers are still growing, the app economy per se is clearly maturing. Too many apps have come up, many of poor quality, and a quarter of all downloaded apps abandoned after a single use. Users spend 84% of their time, according to market data, in only five apps each month, led by social media and instant messaging apps from the leading Internet giants who control a disproportionate share of the data and mindshare. Equally important, a majority of the developers are not participating in the app economy. The 20 most successful developers grab nearly half of all revenues on Apple’s app store, according to market data. Building apps and promoting them is getting more costly.

Against this backdrop, a new software ecosystem is sure to emerge. Folks are looking to get more done and spend less time hunched over tiny screens doing basic utility functions. The smartphone remains challenged in battery life, real estate for screen and tiny virtual key size. Developers struggling to get noticed on the app stores, or hoping to capitalize on the growth of enterprise messaging, are looking to a new way to reach their users – via a chat interface. You can find chatbots on many messaging apps, including Facebook Messenger, WhatsApp, Kik, WeChat, and the Russian messaging app Telegram. Even the more work-focused service Slack has its own built-in bot that helps you set reminders and jot down notes. Twitter has bots too which will reply to you, but usually not offer any assistance.

A number of startups are emerging. Some provide tools: Chatfuel is a web-based offering that lets users build bots for Telegram. Others offer specialized services: Digit allows users to interact with their bank accounts and find ways to save money; Pana is an online travel agency that takes text messages and turns them into bookings. MeeKan sets up meetings for users of Slack, a popular corporate-messaging service. Then there are firms which want to be the foundation for other services. Assist aims to be the equivalent of Google’s search box—to find bots.

Another firm, Operator, hopes to become the Amazon of bot-commerce: when a shopper requests, for example, certain sports shoes, its system can contact a salesperson in a nearby shop or get one of its own “experts” to handle the order. Alphabet’s launch of Allo is a nod to the growing importance of messaging platforms as an OS for chatbots.

That said, bots have hurdles to cross to really challenge apps. While commercial applications of AI are getting better, it is still early. The enabling technology is not fully developed, yet. Users want seamless, instant and contextual information, hallmarks of popular apps such as Uber, Yelp, Amazon, and Facebook Notify offer. Users don’t want to chat with machines that ask them irrelevant questions.

The bot economy is up for grabs. Just as the app economy grew quickly only after Apple and then Google became enthusiastic champions, the bot economy will also need industry leaders. Microsoft and Facebook appear to be on the frontlines of this race. Microsoft introduced tools to create clever new services and Facebook opened its messaging platform to all sorts of bots and launched an online shop which will list the services. Telegram launched a bot platform and a “bot store” with thousands of bots, such as news alerts from media organizations, or feeds that link to football videos or porn.

The future of the bot economy is promising but uncertain. It is too early to say whether bots will ultimately replace apps or simply play a complementary role, the app fatigue factor notwithstanding. And if mobile platforms become the norm, as is widely expected, how critical a role will bot chats play on the platform? Important questions but no clear answers yet. Time will tell.