Startup Lesson 25: Barriers to Disruptive Market Entry

I got into a very interesting – and quite civil – discussion on Twitter over the weekend about industry disruption, free markets, barriers, etc.  This discussion occurred on the tail end of a different discussion about Uber, Tesla, Comcast, and other industries that are being disrupted or are ripe for disruption.  There are the disruptors, the disrupted, and there can be pain on both sides.

Here are four examples of disruption, and the resulting pain of the incumbent players.

1. Uber: Uber entered the local transportation market with a better way of getting from point A to point B. Their cars are clean. You order a ride when you want a ride using your smartphone. You know what you’re going to pay before you ride.  You know who your driver is before he/she arrives, and when he/she is going to arrive. You can request a certain kind of car. They built their service product from the user’s point of view. What could be bad about all this?  The existing, very entrenched, very old school, very, very not-willing-to-change Taxicab industry doesn’t like Uber. Why? Because Uber does what they do very well, and they do it just very differently than the taxicab industry does,and people like it.

In any industry, when a competitor steps in and ups the ante, you fight back to protect your interests. There are lots of ways to fight back: improve your product or service, copycat the competitor, beat the competitor on their own weakness(es), perceived or otherwise, or do what the taxicab industry is doing: fighting competition with politics.  The taxicab lobby is moving city to city and sometimes state to state convincing local officials that Uber is breaking the existing transportation ordinances or laws, or that the laws should be changed so that Uber actually would be breaking the laws.

I don’t agree with this approach, but it is real. Existing legislation is a barrier to entry in many markets, and must be viewed as a potential threat to new players in a space currently entrenched by very established players.  Which brings us to…

2. Tesla: If you haven’t heard of Tesla Motors, you’re living under a rock. If you haven’t ridden in a Model S, then you’re simply doing it wrong. What a vehicle.  It equally pleases both your hard core performance car enthusiast and your most radical environmentalist. Elon Musk has built what can only be described as a game changer in his electric land-rocket.  To get a glimpse of how ruthless the automotive industry was, is, and can be, watch the movie “Tucker”. It’s still happening today.

Not only does Tesla build a fantastic car, they market the car differently, too. Specifically, you don’t go down to your local Tesla dealer and haggle to get your Model S. You go to the Tesla showroom, owned and operated by Tesla. It’s like the Apple store, but you spend 100x as much money.  Traditional car dealers are not fond of this method of marketing such an incredible product, so they are fighting back similarly to how the taxicab industry is fighting: politically. Most recently and most publicly, the state of New Jersey changed a state ordinance for the singular and sole purpose of prohibiting Tesla from selling cars directly to consumers in that state.

Now, here’s the thing about politics: they change. We call them “lawmakers” for a reason. It’s their job to make (or change) laws. Unfortunately, in our political system, he who has the most money to influence the most politicians has a really good chance of winning in a particular contest. In the case of Tesla in NJ, the local auto dealer lobby had a lot more influence over the state government, and they got the ordinance changed to (temporarily, at least) lock out Tesla.

Same conclusion as with Uber v. Taxicab lobby: I don’t agree with this approach, because it harms the free market opportunity, and uses the strong arm of government to prohibit the free flow of competition. You see this tactic often in old school industries that are simply not able to innovate in the face of new, lean, consumer-centric competitors.

3. Comcast: We had Comcast for TV and internet a few years back. No problems, but I had a choice between Comcast, AT&T Uverse, Dish Network, and DirecTV, so they were all vying for my business all the time, and to keep my business they all had to up their game. That’s good, because competition forces all players to be better and differentiate themselves from one another in an effort to win new business and garner their competitors’ customers.

But when we moved from Intown to Roswell, that changed. We still have a choice, but there are only two players: Charter and AT&T. Here’s a situation in which local government has determined that only certain players in a space are allowed to play. This is bad, because it’s less competition.  This is a market space ripe for disruption. Enter Google Fiber, which invited cities in Georgia to submit their applications to have Google Fiber installed for their residents.  This is good! I view this the same way I viewed Google as they stepped into the smartphone market by designating one “Nexus” model for each new Android OS. I see it as their way of destroying any market fears or barriers and going all Ralph Waldo Emerson on the space:

Do not go where the path may lead, go instead where there is no path and leave a trail.

Or in Google’s case, leave a scorched earth swath a mile wide to make consumers and businesses demand that existing players give them gigabit fiber or get out of the way.  The ISP market is one that is ripe for disruption and Google seems to be paving the way.  Comcast and others will be forced to respond to consumer demand for a better product and better service, and local governments must learn from the mistake of limiting competition.

4. Higher Education: I could get on any number of soapboxes on this subject, but here I’ll narrow it down to this: if you or your kid is graduating high school in a few weeks, what’s the very best way to ensure that you or your kid gets a job?  Isn’t that the purpose of “higher education”? To prepare individuals for a career in their chosen field?  I think it once was, but I believe that is changing.  One very solid example is right here in Atlanta, where the unemployment rate for software developers is zero. Nada. Zilch. Nothing. If you can code, you can get a job. It’s that simple.

So what do you do?  Well, you could go to Georgia Tech to learn computer science from one of the very best schools in the world. Or you could spend a summer learning to write code at The Iron Yard or Tech Talent South, and have a portfolio and a job in 3 months for 1/10 the cost.

No, not everyone is or can be a software developer. Not a good one anyway. But consider this model and ask yourself what you learned in college that you actually apply to your daily life at work. Ouch! Yeah, I hear ya. Now ask yourself how much college costs today. It’s un-freaking-believable!  My Alma Mater’s tuition has gone up 5X since I graduated.  So if my kids were considering PC, I would, ahem, encourage them to consider spending 25% of what it would cost for one year of PC on learning a tangible skill that guarantees them a job, and doing it over one summer instead of 4 (or 5!) years.

If this type of mini-trend continues outside the software dev market – network engineering comes to mind, as does accounting, paralegal, and many other skills – the “higher education” market is going to have to adjust, whether they like it or not. When your competition is a fraction of your price, your product is diminishing in value and skyrocketing in price, and your customers are unemployed (and in some cases unemployable), there comes a time when you gotta change.

What other market spaces are being disrupted or really need to be disrupted? What are the barriers to entry, and who are the entrenched existing players who will fight back?

What do you think about that?