AI and market expansion theory!
how is the AI industry evolving in the next 10-30 years?
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Many discussions today around AI look into the technical aspect but are missing the broader picture.
Indeed, while the technical aspect of LLMs might contribute to developing the AI industry, there is a more critical aspect to consider.
That's the interplay between technology and business in what we can call "market expansion theory!"
Market expansion theory is a mental model that predicts incumbents will initially make the most of this first wave. But over time, native generative AI companies will dominate the market!
That doesn't mean all incumbents will disappear. It simply means we'll see a reshuffling of the competitive landscape (in 10-30 years), with new players dominating the big ones.
And that process might require 5-10 years to kick off!
For instance, a few days ago, I shared my take on Jeremy Barr’s insights show on how the AI convergence will play out!
The mother of modern market expansion
One of the most successful market expansions in modern business history was achieved by Apple.
As the company moved from a niche PC maker, it jumped to new markets until it created a whole new market with its iPhone (what is known as a blue ocean; or at least it used to be so).
As Apple created new products, those new products also comprised new technologies, and they were coupled with a different distribution model.
Platforms dominate distribution
When Apple jumped from computers to the iPod, it started to understand that a product alone wasn't enough to create a whole new market.
It needed a new distribution method and a new platform to enable consumers to consume content at a different level.
From there, the iPod, iTunes, and a new distribution model (single songs could be consumed instead of buying entire CDs) created a whole new distribution platform.
TDM: Technology + Distribution + Monetization
Netflix started as a DVD rental company. That was the most viable way to start a business that could compete with existing players like Blockbuster. Netflix could have tried to play it bigger.
Netflix had known for years that being a competitive player in the DVD rental space was "just the beginning of something else."
In a Wired article entitled "The Netflix Effect" from 2002, Reed Hastings, still current Netflix's CEO, highlighted:
The dream, 20 years from now, is to have a global entertainment distribution company that provides a unique channel for film producers and studios.
Thus, Reed Hastings was well aware of the potential of building a platform, yet he knew it took time to achieve the viability of that business model.
Netflix could have burned all its capital to enter that market early on.
Yet, Netflix's first announcement of "streaming" on its financial statement was in the 2007 annual report, which was presented in 2008.
According to the 2009 annual report, streaming is mentioned 88 times (FourWeekMBA analysis).
That is when things started to pick up!
Netflix jumped from a smaller, limited market to a much larger one with fewer physical constraints.
As Netflix switched from DVD rental to streaming, fulfillment costs related to DVD delivery slowly abated.
As of 2007, when Netflix's revenues were still fully derived from DVD renting, DVD rentals accounted for over 10% of its revenues (FourWeekMBA Analysis).
And suddenly, Netflix jumped from a limited market to an unlimited digital market without physical constraints besides server costs.
By 2019, server expenses increased by $18 million as more streaming was served on the platform (FourWeekMBA Analysis). And yet, this model was way more scalable.
Other examples that we're looking at currently are all around us.
Another interesting one is Uber and how, as the company scales, it explores new ways to achieve its mission.
However, be careful not to take this step too quickly, as a false step might lead to inevitable business deaths.
Technological platforms mature with the birth of an economic ecosystem around them. Conversely, "business platforms" require technological, distribution, and monetization changes that provide a new way of doing business and the basis for new business models to emerge.
Logical only in hindsight
While it makes sense to consider market expansion this way, it's essential to understand that this is logical only in hindsight.
In reality, companies need to adjust as they experience market changes.
For instance, Netflix has survived two eras of changed content distribution formats, and its survival is all but granted.
And in the next era, where augmented reality might become the next available consumer platform, the whole TDM framework might change again!
Recap: In This Issue!
TDM Framework: The TDM framework (Technology + Distribution + Monetization) is crucial for building successful platforms. Netflix exemplifies this framework by evolving from a DVD rental company to a streaming platform, enabling a larger market and reducing fulfillment costs.
Platform Maturity: Technological platforms mature as an economic ecosystem emerges around them. Business platforms, on the other hand, require changes in technology, distribution, and monetization, enabling new business models to emerge.
Example of Uber: Uber's exploration of new ways to achieve its mission demonstrates how a company must carefully navigate scaling while considering the potential risks of moving too quickly.
Hindsight Perspective: The logical framework for market expansion is often understood only in hindsight. Companies must continually adjust and adapt as market changes occur. Survival is not guaranteed, even for successful companies like Netflix, which weathered two eras of content distribution changes.
Future Changes: The emergence of augmented reality as a consumer platform could potentially lead to further shifts in the TDM framework and business models. One example of this is the transition to Generative AI.
Market Expansion Theory In Action!
Existing Market: Online Retail (Amazon)
Expanded Market: Smart Home Devices (Amazon Echo)
Expansion Strategy: Amazon expanded from its core online retail business by introducing Amazon Echo, a smart home device equipped with the virtual assistant Alexa. This move allowed Amazon to enter the growing market of IoT (Internet of Things) and voice-activated technology.
Existing Market: Search Engines (Google)
Expanded Market: Operating Systems (Android)
Expansion Strategy: Google expanded from its dominant position in the search engine market to create the Android operating system for smartphones. Android's open-source nature helped Google gain a significant presence in the mobile device market, further extending its reach into the tech ecosystem.
Existing Market: Social Networking (Facebook)
Expanded Market: Virtual Reality (Oculus)
Expansion Strategy: Facebook ventured into the virtual reality market by acquiring Oculus VR. With Oculus, Facebook aimed to create immersive social experiences and expand its presence beyond traditional social networking into the realm of VR technology.
Existing Market: E-commerce (Alibaba)
Expanded Market: Cloud Computing (Alibaba Cloud)
Expansion Strategy: Alibaba leveraged its e-commerce success to create Alibaba Cloud, a cloud computing and infrastructure service. This expansion allowed Alibaba to provide cloud solutions to businesses while diversifying its revenue streams beyond e-commerce.
Existing Market: Ride-Sharing (Uber)
Expanded Market: Food Delivery (Uber Eats)
Expansion Strategy: Uber expanded its services by introducing Uber Eats, a food delivery platform. This strategic move allowed Uber to capitalize on its existing driver network and expand into the food delivery market, offering additional revenue streams.
Existing Market: Streaming Music (Spotify)
Expanded Market: Podcasting (Acquisition of Anchor and Gimlet)
Expansion Strategy: Spotify expanded from being a music streaming platform by acquiring podcasting companies like Anchor and Gimlet Media. This move aimed to capture the growing podcast audience and diversify Spotify's content offerings.
Existing Market: Electric Vehicles (Tesla)
Expanded Market: Energy Storage (Tesla Powerwall)
Expansion Strategy: Tesla expanded its focus from electric vehicles to energy storage solutions with the introduction of the Tesla Powerwall. This allowed Tesla to address renewable energy needs, making it more than just an automaker.
Existing Market: Social Media (Snapchat)
Expanded Market: Camera Technology (Spectacles)
Expansion Strategy: Snapchat expanded into hardware by releasing Spectacles, camera-equipped sunglasses that allow users to capture and share moments seamlessly. This move aimed to diversify Snapchat's offerings beyond its social media platform.
Existing Market: Online Payments (PayPal)
Expanded Market: Peer-to-Peer Payments (Venmo)
Expansion Strategy: PayPal expanded into the peer-to-peer payments market by acquiring Venmo. Venmo's social payment platform allowed users to send money to friends and family, complementing PayPal's online payment services.
Existing Market: Software (Microsoft)
Expanded Market: Cloud Computing (Microsoft Azure)
Expansion Strategy: Microsoft expanded into cloud computing with Microsoft Azure. Leveraging its expertise in software and enterprise solutions, Azure became a leading cloud platform, offering a wide range of cloud services to businesses globally.
Existing Market: Online Search (Baidu)
Expanded Market: Autonomous Vehicles (Apollo)
Expansion Strategy: Baidu, often called the "Google of China," expanded into autonomous vehicles with its Apollo project. By combining its expertise in AI and data analysis, Baidu aimed to develop self-driving technology and participate in the future of transportation.
Existing Market: Video Streaming (YouTube)
Expanded Market: Subscription Streaming (YouTube Premium)
Expansion Strategy: YouTube expanded its video-sharing platform by offering a subscription-based service called YouTube Premium. This allowed users to access exclusive content, ad-free viewing, and offline downloads, providing an additional revenue stream.
Existing Market: Mobile Phones (Samsung)
Expanded Market: Consumer Electronics (Samsung Smart Appliances)
Expansion Strategy: Samsung expanded its product portfolio from mobile phones to include a range of consumer electronics, such as smart TVs, refrigerators, and washing machines. This diversification aimed to create a more extensive ecosystem of connected devices.
Existing Market: Social Media (LinkedIn)
Expanded Market: Professional Learning and Development (LinkedIn Learning)
Expansion Strategy: LinkedIn expanded into the professional learning and development space by offering LinkedIn Learning, a platform for online courses and skills development. This move aligned with LinkedIn's mission to connect professionals and empower their careers.
Existing Market: Ride-Sharing (Didi Chuxing)
Expanded Market: Autonomous Driving (Didi Autonomous Driving)
Expansion Strategy: Didi Chuxing expanded into the autonomous driving field by launching Didi Autonomous Driving. Leveraging its extensive ride-sharing network, Didi aims to develop self-driving technology and play a key role in the future of mobility.
Ciao!
With ♥️ Gennaro, FourWeekMBA
