Can Big Tech Be Disrupted? A conversation with Columbia Business School professor Jonathan Knee

“These companies [Meta (Facebook), Alphabet (Google), Amazon, Apple, and Microsoft] are so successful—and generate so much consumer data and cash—that it sometimes feels as if they can’t be stopped. Not only have they been on the cutting edge of technology, but now they also have the power of incumbency. Yet according to Jonathan Knee—who is a veteran investment banker specializing in media and tech, a Columbia Business School professor, and the author of The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans—even digital superpowers face threats, from start-ups as well as seasoned competitors. In this conversation with HBR executive editor Alison Beard, he analyzes the strengths and weaknesses of the large tech companies and the strategies they might use to defend themselves.

[Beard:] So you don’t think we’re heading toward a world in which the “tech titans” dominate every part of our lives?

[Knee:] Today many people in the industry, as well as academics and investors, seem to think that the large tech platform companies uniformly benefit from strong network effects, which inexorably propel them toward global dominance. But that is demonstrably false. Let’s start with the notion of scale. The traditional view is that it helps companies by spreading fixed costs. The new, sexy scale on the internet comes from network effects, and people argue that it offers an inherently superior competitive advantage. But that’s crazy. In the absence of significant fixed costs, any network-effect-driven business is going to attract competition from new platforms that find they can break even at extremely low usage levels. Also, network effects are not the primary driver of competitive advantage at most of these companies. At Facebook, now Meta, yes: The more users it has, the better the experience of connecting and sharing is. For Microsoft, yes: Operating systems are a classic network-effect business. But the original success of Apple, Google, Amazon, and Netflix did not rest primarily on network effects. Apple is a consumer-products business. Google benefits from massive fixed-cost requirements reinforced by continuous learning. Amazon’s original retail business, which still accounts for a majority of its revenue, has no network effects to speak of, and neither does Netflix. All these companies will live or die by the same principles of competitive advantage we’ve long studied. Don’t get me wrong: These are all very good businesses, but each is good for different reasons involving multiple reinforcing advantages rather than a uniform silver bullet. And each has its own vulnerabilities. [..]

[Beard:] Amazon?

[Knee:] Did it disrupt Walmart? Absolutely. But Walmart is still a major competitor today, and Amazon is fighting against not only incumbents with established brick-and-mortar footprints and growing online sales (with free shipping to rival Prime) but also focused start-ups like Chewy and direct-to-consumer producers. Retail remains a difficult, highly competitive business where sustainable advantage is limited. The company has also made some questionable acquisitions: Whole Foods, when grocery is a structurally challenged category, and MGM, in an ill-advised bid to make Prime Video a real rival to Netflix. Investors may think MGM is worth it if only to halt Amazon’s relentless increases in wasteful spending on original content. Yet despite missteps Amazon has a culture of relentlessness and unlike the other tech titans has built some wildly successful unrelated businesses, such as Amazon Web Services, that do lend themselves to strong competitive advantage—in contrast to e-commerce. AWS generates a majority of the overall company’s profits and will probably continue to do so for the indefinite future. [..]

[Beard:] And what about the elder statesmen of the Big Five: Apple and Microsoft?

[Knee:] Personal technology was a thriving business before the Big Tech era. Apple did not and does not lead by market share in the key product categories. But in its primary business, smartphones, while it’s not the biggest, it is the biggest moneymaker—commanding more profits than the rest of the smartphone industry combined—and has the highest market cap, more than $2 trillion. The App Store and Apple ecosystem have created extraordinary shareholder value by monetizing its high-end niche.

Apple’s expertise lies in developing revolutionary, sleek devices, but the people who created the ones that define the company are gone. The fact that the company is trying to get into the health care and automotive industries—where it has no track record and innovative incumbents abound—suggests that it realizes it needs to plan for its next act. Though it’s had a terrific run, in the absence of the next generation of revolutionary gadgets, Apple’s continued financial dominance is by no means assured.

Microsoft, unlike the other tech giants, has always concentrated on B2B rather than consumer markets. After losing its way and ceding the mobile OS market to Google and Apple, it has refocused on improving its core software offerings and expanding its footprint within its corporate customer base while aggressively embracing the cloud. It has established credibility by using data from cloud-based applications to increase its responsiveness and continuously improve. But it faces new competitors that are both massive and nimble, such as Salesforce, whose acquisition of Slack threatens Microsoft’s ambitions in workforce productivity applications.

[Beard:] What advice would you give executives or entrepreneurs trying to topple a tech titan or at least take a portion of its business?

[Knee:] I’m a big believer in starting small. You want to focus on customer pain points within clearly identifiable, manageable communities where you can quickly build scale and earn loyalty. The growth paths of most great businesses look like ringworm—they started with an inner ring and built out to the next ring of customers and then the next. When you have a targeted market, there’s also a greater chance that it won’t attract or support competitors and that the specialized data collected is more valuable. Often these are customers that the giants can’t effectively serve. Consider 1stDibs, a marketplace for luxury antiques, art, and designer furniture, or Etsy, where people sell handmade crafts. Both eBay and Amazon have tried to attack those markets, but neither the merchants nor the consumers drawn to 1stDibs or Etsy want to navigate a more general marketplace. Those younger companies might have plenty of serious competitors in the future—Chairish is already one—but Amazon probably won’t be among them. TikTok is another great example of a start-up that found a niche product (short videos) and a demographic (Gen Z and now Alpha) that allowed it to effectively compete with all the Facebook (or Meta) platforms, Twitter, and YouTube. And if Microsoft had developed a product as solid as Teams in an earlier time, no one would dare try to take it on, yet today it must contend with Slack in team collaboration tools and Zoom in videoconferencing.”

Full article, A Beard, Harvard Business Review, January-February 2022.