Ask the Wizard

In his last post, The Wizard talked about the possibly over-hyped desire to find businesses with network effects. Yes, we are going to start referring to ourselves in the third person around here when it suits us, and we may also hop back and forth between first person plural, third person singular, second person familiar, and on rare occasions, 1st person.

Anyway, I said that the way I liked to think about a company's strategic advantage was around Quantum Hidden Barriers to Entry. Let's build up this phrase. Of course, hidden barriers to entry are those great things that cause lots of people to look at what you're doing and say "that's simple, I could do that", only to realize that the more work they do to try to copy your solution or position in the market or whatever, the more they realize they are farther and farther away from what you've accomplished.

While barriers to entry are helpful if they're clearly marked, a potential competitor can size up the obstacle course and get a good sense for what needs to be done to get from point A to point B. Hidden barriers to entry are particularly helpful to your company because potential competitors will severely underestimate the level of investment and resource commitment required to compete with you. I cannot tell you how many times since we first launched FeedBurner I have heard the following comments from senior executives at large companies, industry pundits, hobbyists, and my five year old son: "We could build FeedBurner in [a weekend, three months with three people, whenever we wanted]". When you have hidden barriers to entry, you don't get too worked up about these kinds of comments because you know there are lots of pitfalls and issues and challenges that you don't understand fully until you are far enough along in development that you stumble into them and think "oh wow, now what do we do".

But there are even better hidden barriers to entry in some businesses. I'll call them Quantum Hidden Barriers to Entry. Quantum Hidden Barriers to Entry happen when you keep encountering new and unforeseen cliffs you have to scale as you move through different stages of market penetration. While hidden barriers to entry make it harder for potential competitors to enter the market, quantum hidden barriers to entry keep popping up as you move through stages of market penetration. When you are thinking about companies and markets, it's fun to think about the kinds of businesses where there might be quantum hidden barriers to entry. I think you can anticipate these when you see markets that are characterized by: spiraling complexity, market reactions to the first mover (gaming behaviors, 3rd party ecosystems, etc.), and centralized platforms

I'm probably missing a lot here and this list could be a lot more thoughtful, but right away, you can see a bunch of services that likely have Quantum Hidden Barriers to Entry in their markets. Digg and AdSense come immediately to mind for me.

By spiraling complexity, I mean that as the market progresses, there is more divergence than convergence in the problem space. Here's an example of a market that I think you can predict will have really cool Quantum Hidden Barriers to Entry: Virtual Currency Exchanges. If you're the first company to create a virtual currency exchange between say Second Life and World of Warcraft (I'm not a gamer, don't beat the hell out of me if this is a moronic example) so that people could do things buy a WoW Sword of Indifference by trading in two qubits of land in SL, you can imagine that as the market grows, there are going to be boatloads of quantum hidden barriers to entry. Certainly, there will be spiraling complexity - more games will want to participate in the exchange, international exchange rates may emerge that are different, who knows, but you can see that things will get more complex before they get more simple.

For entrepreneurs thinking about what kinds of problem spaces to attack or what kinds of markets might be most appropriate for a cool innovation you've conceived or built, this is a fun thing to think about.

I was going to call these "progressive hidden barriers to entry" but that implies gradually changing. I'm talking about going along nicely until you hit the next big cliff you have to scale, and it's not at all clear how high that cliff is (or how many more separate cliffs are between you and the guy you're trying to catch).

PostScript: I should point out that spending lots of time figuring out how you can hide land mines for those who come after you to stumble upon is never the way to build your business. If you have to cause barriers to entry, you're going to be spending more time looking over your shoulder and less time innovating and driving the market forward, and in that case you're probably only one market lifecycle from losing your place at the head of the pack in any case. Additionally, while some people may want to win at all expense, I personally don't think it's a lot of fun to win via unfair advantage, and since governments tend to hold this same view, it's probably best to leave the tripwires back there in the dark corners of your mind. It's a lot more fun to win by winning. Come back after lunch when the Wizard will toss out a few more obvious statements like "it's a lot more fun to win by winning". That's the kind of brilliant remark you will come to expect around here.