One of the enduring truths of big companies is that they aren’t innovative. They are “innovative” in the marketing sense, but fail to ever execute on new ideas, particularly when those ideas cannibalize existing products and revenues.
So it often takes a real competitor to force these incumbent, legacy businesses to evolve in any meaningful way. Usually that change leads to disruption, in the classic way that Clayton Christensen describes in “The Innovator’s Dilemma.” An upstart company creates a new technology or business model that is better for an under-served segment of a market, and as that company improves, it competes directly with the incumbent and eventually wins over its market with a vastly superior product.
Unfortunately, real life isn’t so easy, as WeWork and MoviePass have shown us over the past few years.
In both cases, there were incumbents. In movie theaters, you had AMC and the like, which built a business model around ticket sales (shared with movie studios) and food/beverage concessions that targeted occasional customers at a high price point. Meanwhile, in commercial real estate, you had large landowners and family holders who demanded extremely long rent terms at high prices, often with personal financial guarantees from the CEO of the tenant firm.
Neither product offered was great, and there were obvious improvements to their models, namely, subscriptions. Why couldn’t AMC offer a subscription like a gym membership, and why couldn’t a startup rent real estate for a short period of time (perhaps even at a premium rent) as it figured out its path forward?
Neither vertical ever really figured this out, and so disruptive upstarts entered the market. WeWork raised gargantuan sums of venture investment to show landlords that they should offer short-term rental contracts, while MoviePass raised debt round after debt round through its publicly-traded owner Helios and Matheson Analytics to prove out the subscription model for theaters.
As of today, both companies were and are huge failures, but the same cannot be said of the markets they serve.
Indeed, the models that these startups offered are actually available to consumers today. You can sign up for AMC’s A-List and watch three movies per week with a monthly subscription, while short-term rental contracts are widely available from traditional landlords in most major commercial markets.
These startups and others like them raised billions to act as the innovation departments of legacy businesses. So why didn’t disruption end up working?
Ultimately, WeWork, MoviePass and others never owned the core product that their consumers bought, namely real estate and theaters. The economics of WeWork never made sense without the company actually owning its properties and accruing the full financial advantages of being a landlord, any more than MoviePass could make the math work for its business model without actually owning the theaters it was pushing its customers to.
The problem with these new disruptive approaches is that while they could build a brand, gain traction and become popular points of discussion among key customers, they never figured out how to own the underlying capital (i.e. real estate and theaters).
This isn’t the first time we have seen this before. We have seen startups in the social space that built on top of platforms like Facebook or Twitter only to see their ideas “borrowed” into the core apps of those companies. We have seen fintech players that build out new models of asset management that are then copied by big banks.
At the end, all of these startups made the same mistake: They lacked a strategy to get around the ownership powers of the incumbent. They essentially acted as the experimental lab and innovation department for these legacy businesses, and while as a consumer I appreciate the positive externalities of their innovations, the reality is that their founders, employees and investors are much less pleased with the outcome.
The key to avoiding this trap is to start going beyond looking at just “scale” and asking how you are going to own the actual customers and the platform that serves them. How can you be rigorously independent? How can you protect yourself if incumbents start copying your business model innovation or product?
The answer in the social world is often network effects. Or maybe it is a fee structure à la Robinhood that is hard to compete for traditional banks (although they are trying these days). Or maybe you lock in new distribution channels that prevent incumbents from catching up to you anyway.
There are different approaches, but one way or another, there has to be ownership of the underlying platform. Maybe that means slower growth in the early days as you maintain ownership rather than become the innovation fodder of an incumbent company. That’s the reality of complicated spaces like real estate, or food, or fintech. Yet, too many founders press the accelerator and give up their competitive advantage in the process.
Don’t be the wallet that funds your largest competitor — you want to jealously and selfishly guard the returns from your own innovation.
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