Ask the Wizard

One great way to beat your competitors is to have less of them, and the best way to have less competitors is to stop creating them, inviting them into your markets, and fostering their growth.

Once again, I will discuss the market I know best, software startups. In the software business, I would say that most companies actually create or facilitate the emergence of their biggest eventual competitors. Companies in this market create competitors through the following strategic decisions:

1. No open API. I will do an entire post on API's here at some point, but when you create open api's for your software product or service, all sorts of secondary benefits accrue to your company that you will be unable to predict on day 1. You may even discover interesting business models via 3rd party development that opens your eyes to new possibilities. But the best reason to always build out API's for your product is that it makes it easier for the rest of the world to extend your product or service rather than start competitors. Here's a simple example: there's a smaller content management system that's used mostly outside the US. Because FeedBurner has an open feed management API, a couple of independent developers were able to build a robust FeedBurner plug-in for this content management system that we'd never heard of. If the FeedBurner API didn't exist, there's an opportunity for a competitor to emerge that services this market and gets a beachhead. API's are not an obvious investment for companies because a) it's not obvious how you monetize them and they're a lot of work to maintain and b) people wrongly believe that API's invite competitors to build on your back. In fact, the opposite is true. API's inhibit the necessity to build competitors as third parties will simply leverage the API to extend your own offering. My cofounders and I have seen tens if not hundreds of examples of this over the years.

2. No free version. You don't have a free version? There are lots of people who want a free version of whatever it is you provide. You say you have put too much work into your software to offer a free version? Too bad, there are lots of people who want a free version of what you provide. You say you can't make money with a free version? Too bad, there are lots of people who want a free version of what you provide. Guess what happens when you don't provide these potential customers with a free version? Somebody else builds a free version. Guess what happens when those free version customers are ready to upgrade to a paid version? Nine times out of ten they use their existing vendor's solution since they now have a relationship with this provider. That other company doesn't have a paid version you say? They will. That other company's paid version isn't as good as yours, you say? It will make no difference. If you want to create powerful competitors to your company, make sure you have no free version of your software product or service.

3. Partnerships in non-strategic areas that place company X between us and our customer. This one is particularly dicey for a couple reasons. First of all, you can't do everything yourself and there will be a bunch of services your customers want that aren't a core competency. You can deny them these services or find partners that can provide them, and the right thinking service provider generally believes that happier customers are better customers. Similarly, your customers don't think of themselves as "yours", so attempting to create unnatural relationships in which company X can provide their services through you but only if they don't have a direct connection to the customer ends up feeling weird and wrong to the customer (think mobile operators). In almost every startup I have been involved with, we have created future competitors this way. It's possible, I don't know, that you either have to say "we own the customer and never shall others get anywhere between us and our customers without routing through our proprietary stack" OR "we're going to find ways to provide the most robust set of services to our customers, and we understand that implies we will be fostering competition in specific niches of our potential market". Certainly, the mobile network operators and Apple have taken the former position and it's hard to argue that this has hurt them. However, it's also clear that there's ongoing discussion in the marketplace that an iTunes competitor with a less proprietary/closed stack would be something people would like to see. Yahoo! has traditionally taken the latter path and obviously, they fostered Google's growth by providing the powerful new search engine with a platform for accelerated audience reach. One takeaway here is just to realize and be very honest with yourself that certain partnerships can facilitate the emergence of a niche competitor then make sure you understand the implications before diving into anything.
   

Now, even if you have a free version and you innovate regularly, and you have an open api, and you don't create unwise partnerships, you may still find yourself facing enormous competition (see Netscape v. Internet Explorer), but you can certainly make your life easier by not choosing decisions that either invite competition or sow the seeds for rapid competitor growth.