Companies used to do one thing
To paraphrase one of Matt Levine’s “simple dumb models of corporate finance”:
- In the old & simple days, each company would do one thing.
- A founder knowledgeable with bicycle tyre tubes could raise money from investors to manufacture tyre tubes.
- The CEO could put the money into setting up a factory, hiring people, buying raw material, setting up distribution and getting into business.
- Once the business became profitable, the Company would keep making the best tyre tubes and they would start paying back shareholders (their investors) with dividends. And everyone would be happy with the investment.
- Investors would take these profits and invest them in other companies.
As such, the job of capital allocation clearly belonged to investors.
But the internet brought marginal costs to zero
When digital businesses in the internet-era came along, the marginal costs of serving new customers became virtually zero.
This caused 2 big strategic shifts:
- Aggregation theory: In a world with zero distribution costs, zero transaction costs and zero marginal costs, platforms which aggregate user demand are practically monopolies.
- Blitzscaling to get there: The outsize benefit of being the single monopoly amongst a winner-take-all dynamic means that profits can be ignored until you “own the market”.
So now, companies do everything
Going back to our story above – in a world where companies have a near monopoly on user demand, it doesn’t make sense for a company to make only one thing.
A CEO raises money to start an online bookstore. Once he’s successfully doing that, he doesn’t have to spend as much money to bring users back.
So it makes sense – when they come back – to sell them electronic or clothes or even bicycle tubes. And that’s fair game because now he’s become a retailer.
But now we commonly see companies stray much further from their core business. Next thing you know the retailer is integrating deeply vertically (AWS selling basic infrastructure for being able to run software businesses) and horizontally (commissioning films and selling TV shows).
So what is going on?
There’s a theory that a moat serves no other purpose except it “buys a company time to figure out the next great business“.
“a moat—a barrier that protects a company from low-cost competitors or new, disruptive technology—isn’t enough to build a lasting business…For tech companies, it’s always about what’s next — not simply protecting what’s here today.”
The logical endpoint of this is that any value delivered by revenue-driving products revenue today will eventually be abstracted away till they’re a utility.
“As the world moves faster, being a utility buys you time between now and the next big shift.”
The speed of adoption of new technologies continues to accelerate:

As this continues, specialist businesses are increasingly forced to become generalist – and we’ve seen this with the new technology conglomerates.
Over the years, we have seen dividend levels fall as CEOs usurp the role of capital allocators, instead preserving cash for reinvestment.
But…
This whole concept seems a bit off to me. And even as I type it, I don’t believe it’s inevitability.
For one, I think the state of anti-competitive regulation is to blame. US regulation has been behind in adapting itself to zero-margin type internet-era business models. Europe has made promising changes with GDPR (even though their timing may have the opposite effect of entrenching tech incumbents) but there is little talk of the tech conglomerates.
I think it’s encouraging to see spirited debates around tech policy in India. While certain moves around foreign competition are criticized, I find it encouraging that policy decisions are often taken in context of small businesses rather than blindly copying the state of affairs in more mature markets.
I look forward to inputs on the forces which will shape the kind of tech businesses that will be built in India.
Footnotes
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