Chapter 28
Incumbents Can Fight Back
Do not expect incumbents to lose every time they face competition from an innovative start-up. Incumbent businesses are not all fat, drunk, and stupid. They can be powerful and viscous when they fight back and often have unique resources at their disposal.
As time marches forward incumbents can see where mistakes have been made by other companies that have come under attack from technology-driven competition. There is more of a playbook now and they can use their position of strength. They are also unlikely to be as surprised to see competition as they might have been ten years ago.
Some companies may choose to retrench. That may mean changing what they do. Consider IBM, which was an exceptionally early tech company. At one point it was a typewriter company, then a major mainframe computer leader, and then a leader in laptops. It clearly seemed to lose its way for a while but retrenched and focused on artificial intelligence and cloud storage services.
Some incumbents have the strength of brand to be able to act like a spoiled child on the playground who stomps their feet, takes their ball and goes home. A company like Disney may believe their franchises and brand value is strong enough that they will choose to compete with exclusiveness. They may intend to pull movies or television shows from video streaming companies like Netflix and only make them available on their own service. Several incumbent television networks in the United States originally formed Hulu, which was their own streaming service.
A counterpunch is an effective move by an incumbent if they can pull it off. As network television in the United States has lost viewers to anytime video services, they have changed their offerings. They have moved to more event style programs. These might be live events that people do not want to miss because they will be excluded from the conversation the next day. This is part of the attraction to programmers of reality television (at the low-cost end) and live sporting events (at the high-cost end).
Cherry-picking is often an effective way for an incumbent to defend its position. An incumbent may not want or need to do everything a start-up does. However, they can observe and pick out some of the best practices of these companies and what works for them. Large financial institutions currently appear unlikely to adopt crypto-currencies as a mainstream store of capital or means of exchange. However, it is quite likely that they will adopt the use of block chain technology (i.e., distributed ledger technologies) for record keeping and confirmation systems. Supermarket companies may not close up their local stores, but will offer internet ordering and delivery services that they may see being done by start-ups.
In some cases incumbents may form partnerships. For example, many companies have partnered with Amazon and eBay to have their own “store” on the site. However, on the other hand, Wal-Mart has struck back with their own website and online presence, a move into foods, and their own style of retail focus and brand positioning.
If you can’t beat them, buying them is always a strategy for an incumbent to take. This strategy has had mixed success. Time Warner had been a media giant and to some extent had foresight and saw the potential early on for the internet and bought AOL (America Online), which unfortunately turned out to be an epic failure. In a more specialized niche, retailer of pet supplies, PetSmart, chose to buy online competitor Chewy, but is still facing off with Amazon.
Incumbents have played the legal card, too. This has occurred in some peer-to-peer businesses like Uber. In addition to Uber’s avoidance of long-standing regulation of the taxi industry that is central to its initial success, there are safety and social issues that cities legitimately will want to manage over internet accessible taxi service, but some of the legal challenges are just about money. Legal challenges are generally temporary as ignoring regulation has often led to success for start-ups that have been able to avoid or fight their way through the regulatory pressure. Companies such as Uber and Airbnb (providing lodging in noncommercial residences), Google, Facebook, and Amazon have taken advantage of the lack of regulatory will, or understanding, to push their agenda. This is not a new phenomenon; going back a bit further, DHL’s overnight services were illegal at first in most every country, and the music industries’ streaming saga is another very public example. These companies have pushed until they met resistance and kept pushing. It has not prevented them from being able to raise capital and they have found it to be quite a successful model. This is also occurring today in the fintech areas where companies are popping up, challenging regulation at an extraordinary pace, including the cybercurrency markets, which have had some spectacular breaches, but continue to fight their way through attempts at regulation. In the United States, the fledgling marijuana industry may face this issue as state and national laws are not aligned. However, if there is an elimination of the national ban it may bring on more competition from major corporations than the start-ups want. Great marketing and broad public acceptance can sometimes overcome the pressure to uphold regulations. In such cases, the existing regulations often leave the incumbents defenseless (or at least disadvantaged) to compete. If a new service or product is in high demand and is better than what is offered, it will keep coming back to the market. It may come from a different company and the legal challenge may crush the pioneers, but it will be back.
Incumbents have access to technology and can innovate, too. They will not all go quietly into the night. Challenges from start-ups can sometimes make the incumbent better. In many cities, hotels and taxi companies have become more adaptive and flexible because of Airbnb and Uber, supermarkets now have delivery services, and years ago, we saw postal services improving their package delivery services. These are all reasons why competition and choice are good for the people and the economy.