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Scott Adams is best known as the creator of the popular Dilbert comic strip. Dilbert, of course, has risen to popularity by poking fun at the typical white-collar office that so many of us have experienced first hand.
Adams has an interesting background. He has an undergraduate degree in Economics and an MBA. Many of his observations that are revealed in comic form through Dilbert come from his experiences working at Crocker National Bank and Pacific Bell.
Given his background, it's safe to say that Adams is more than just a cartoonist, which is what most of us know him as. He is indeed an intelligent person with some keen insight worth listening to.
This was demonstrated quite well in a recent blog post, sent to me by a reader of The Drama 2.0 Show, in which Adams discusses 'confusopolies.'
In 1998, Adams made a prediction:
"In the future, all barriers to entry will go away and companies will be forced to form what I call 'confusopolies'."
"Confusopoly: A group of companies with similar products who intentionally confuse customers instead of competing on price."
In his recent blog post, Adams revisits confusopolies and states:
"My prediction about confusopolies was better than I imagined. For example, I keep reading articles about entrepreneurs starting their own electric car companies. When the barriers to entry for starting your own car company come down, you know we're in a commodity world."
He mentions the possible implications of this:
"Thanks to the Internet, relatively efficient capital markets, and the fact that some company in China can make just about anything, anyone with drive can start just about any kind of company. The interesting part is that in the near future it can never be profitable to do so, because a hundred other people will start the same company next week and drive down your margins. Your only defense is to be confusing, so customers believe, incorrectly, that your product has advantages."
I don't necessarily agree with all of Adams' argument. There are still plenty of markets that support wide moat companies.
The moats that Morningstar looks for, for example, include low-cost production, high switching costs, network effects and intangible assets. These still exist although I'd probably agree that in many markets, they're often harder to establish.
I reject Adams' blanket statement that "anyone with drive can start just about any kind of company" and that "in the near future it can never be profitable to do so" simply because a look at the market shows that while most new businesses still fail, most still see the creation of and sustained success of highly-profitable companies.
That said, I think there is some truth to what Adams is saying, especially in the realm of technology and in particular, the consumer internet space.
One need only look at Web 2.0 to see hints of dynamic that Adams speaks of. How many social networks are there? How many photo sharing websites are there? How many social news aggregators are there? More than can be easily counted. How many of these are profitable? Relatively speaking, not a whole lot. The reason is simple - they're all competing for a relatively small pie
While most of the 'successful' social networks, photo sharing websites and social news aggregators do have a moat in the form of network effects, it's a weak one at that given the lack of defensible intangible assets and the fickle nature of the users who provide those network effects.
But one can even look at an established and highly-lucrative market such as search and find some evidence of Adams' confusopolies. Take Google, for instance. Google's advertising business has thrived in large part due to the fact that it developed the world's most popular search engine. Without all those individuals using Google to search, AdWords never would have become a cash cow.
How did Google attract all of those individuals who click on the text ads it serves? It built a better search engine.
But if you are to do a survey today, you'll probably find that most of the major search engines provide results just as good (and in some cases, better) than Google.
In my opinion, Google doesn't really have a competitive advantage technology-wise so much as it has a competitive advantage brand-wise. In other words, Google thrives in large part because we're confused - we believe Google has a better search engine, not because it really has one.
Of course, Google isn't going anywhere but I do think that the confusopolies dynamic Adams discusses is one that internet entrepreneurs who don't have a Google on their hands should give some thought to.
The reality is that it is hard to differentiate and stand out today. And if you develop something unique, it is hard to establish real barriers that will prevent someone else from copying your idea. If your company creates a website that gets 'hot', you can count on others copying it very quickly unless you have established a wide moat, which is especially difficult to do in the consumer internet space.
In a sense, many startups unfortunately have no choice but to employ the tactics of a confusopoly. They have to convince consumers that they have a better product even though they don't. This isn't to say that many don't have a decent product - the problem is that others who copy them often develop equally decent products that are otherwise hard to tell apart unless consumers are somehow confused.
There a plenty of tactics employed by confusopolies - some of them more honest than others - and perhaps this would make for an interesting future post.
In the meantime, I'd argue that - perhaps - the most serious of entrepreneurs should refuse to play the confusopoly game in the first place and instead focus on opportunities that lend themselves well to the development of a moat.