The Power of a Network
Augmented reality or any new industry presents an interesting strategic dilemma. How does one analyze the competitive forces in an industry and develop a strategy when the industry and its players do not exist yet? Let’s look to the past.
Throughout history, the largest and most profitable companies have consistently followed a pattern. They entered a new industry and overtime built an extensive network that allowed them to achieve something akin to a monopoly. This was true with Standard Oil as well as Facebook and Amazon. It even held true for the East India Company, the main force of the slavery economy. These companies eventually wielded so much power that neither their suppliers nor buyers could bargain with them. Yes, they might in fact have had competitors, so technically they might not have been a monopoly, but at the end of the day the customers chose the larger network.
Is a company going to buy ads from Google which boasts a 92% worldwide search engine market share, or Bing which boasts a 2% share? The answer is easy. Not only does a company’s network give the company immense leverage, but it also creates a high barrier to entry. Unless another company can provide an overwhelmingly better product, there is little incentive for customers to switch.
When we consider the augmented reality industry, if we want to achieve mass adoption and high profitability, we should build products that enable us to achieve extensive network effects. By doing this, a company could become the Google or Amazon of the AR industry.
An interesting afterthought: The digital company networks and geographic networks (railroads, shipping, etc) of the past are very different in nature. For the most part, much of the digital infrastructure has been built (internet, operating systems, devices, etc), whereas in the past, the railroad or shipping companies needed to spend high capital costs to literally build their network. This should mean that it is easier for a new digital company to enter the market than it is for a non-internet company.