No Trespassing
In the early stages of a company’s lifecycle, when its leaders reach forks in the road of strategy, they often consider their options in the context of competition. Do they want to do what competitors are doing or something different? Do they want to be a big fish in a small pond or a small fish in a big pond? Should they attempt what others have tried and failed at, or should they take the innovative approach?
Off to the side, there is another path, overgrown with weeds and shrubbery, never taken. We rarely notice it as a viable strategic option. That’s because it’s blocked off with a colossal sign that reads: Private Property. No Trespassing. Behind this sign are industries dominated by monopolies or oligopolies.
Ask founders where they believe the most opportunity lies, and virtually none will tell you that it’s behind the No Trespassing sign. Yet in my experience, those fenced-off markets are often exactly where there’s the most to gain.
In 2015, when I founded podcast hosting company Anchor with Mike Mignano, nearly all podcast hosting was controlled by entrenched incumbents, all of which charged creators for hosting, distribution, and analytics, and which had done little to innovate since entering the market over a decade before. Within a few years, we’d overtaken all of them, not only in terms of market share, but also in terms of contribution to growth of the overall podcast market.
Something similar happened with podcast consumption. In 2015, nearly all podcast consumption happened on Apple devices and, in large part, on Apple software. But by 2021, when I was at Spotify, I witnessed firsthand how Spotify overtook Apple in podcast consumption for the first time, despite entering the field only six years earlier.
The following year, we began developing our audiobooks strategy at Spotify. The audiobooks industry had long been (and in many ways still is) dominated by an incumbent: Audible. Within two years—just last fall—Spotify launched a first-of-its-kind premium audiobooks product, granting account owners access to 150,000 audiobooks as part of their existing premium subscriptions. Although I left the company shortly after that launch, I still strongly believe in the strategy that I’ve seen work before in podcasting. We decided to take on a seemingly fenced-off market and offer consumers the first, truly viable alternative to Audible.
In all three of these instances—podcasting hosting, podcast consumption, and audiobooks consumption—my colleagues and I were told to tread carefully, to explore other avenues, to respect the No Trespassing sign. This advice came from people who had worked in these respective industries for a long time, and whose perspectives were often skewed by their familiarity with the status quo. Their view: The incumbents have too broad an existing user base, too much brand recognition, and too strong an incentive to defend their strongholds for a challenger to disrupt them.
I can’t help but disagree. I’ve come to learn through first-hand experience that monopolies often serve as the ideal competitor to take on. There are four main reasons why:
Monopolies have already proven the industry is viable and lucrative
Monopolies refuse to cannibalize their own dominance
Monopolies have institutionalized their inefficiencies
Monopolies have the most to lose from making mistakes, whereas startups have the most to gain
Let’s look at each of these in depth. Before we do: If you aren’t yet subscribed to this free newsletter, click here to get it in your inbox weekly.
The Proof-of-Concept Already Exists
Companies, particularly startups, often look at green fields as areas that have the most upside with the least competitive risk. “What can I build that’s differentiated from what others are doing?”
In fact, the opposite is almost always true. Uncharted territory is often the highest-risk area to build in, because its viability has not yet been proven. The cost of validating hypotheses and finding product-market fit is often astronomically high. In fact, the player that typically wins in these spaces is the one who comes after the first several rounds of companies making first mover mistakes (I like to refer to this phenomenon as the Faux First Mover Advantage). Apple is one such company whose products are rarely first, but are often perceived as being first and—more importantly—the best.
Furthermore, early validation by someone in green fields often attracts swarms of other hungry players and their institutional funders. We’re seeing this play out today in AI; we saw it several years ago in crypto; we will see it happen in the near future in AR/VR. The assumption that undeveloped industries stay undeveloped for long is a fallacy. Over time, the cost of competing drops, and the likelihood of being differentiated plummets.
Monopolies, on the other hand, operate in validated industries by definition. They could only have achieved their positions through product-market fit, and they can only defend their positions long-term by continually offering user value while operating a business with healthy financials. In other words, monopolies have already done the hard work of validation for you. And for that reason, they have de-risked the upside of taking them on. For instance, in the wake of the early podcast boom of 2014 (following the success of the podcast Serial), we at Anchor saw the surge of creators rushing to create in this new medium on the incumbent platforms, and knew precisely which user need we were serving by competing in that space.
Room for Innovation
Monopolies rarely innovate. It’s not because they can’t—there’s likely no player in their industry who can do more to continually offer better value to consumers. However, the lack of a clear competitive threat offers them little incentive to do so.
Yet there’s more to the story than a lack of incentive. There is, in fact, a counter-incentive. Monopolies rule over lucrative businesses. Embracing disruptive features or models might mean diverting profits or margin away from what is working well.
Consider the podcast hosting players I mentioned at the top. When Anchor began competing with them, we offered an array of differentiated value propositions to podcasters that none of those incumbents replicated. For instance, we allowed users to host audio files for free, with no limits to quantity or file duration. The others generated most of their revenue from monthly hosting subscriptions, so growing their user base by forgoing this revenue would cannibalize much of what made their businesses function. We had nothing to lose by doing so and everything to gain; they had little to gain and everything to lose.
Podcasting was the last bastion of the antiquated model that charged creators with small audiences for usage. All other mediums—from video to photos to text—had shifted away from making money off creators to making money with creators as they grew. It was that No Trespassing sign in podcasting that allowed this legacy paradigm to persist in audio well beyond those other mediums.
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Baked-In Inefficiencies
Big players with large market shares typically bake their ways of working into the very fabric of their operations and strategies. Why? Because that’s how they got to their dominant positions in the first place. Yet as anyone who has worked for large companies is aware, inertia can lead to tremendous inefficiencies.
A prime example is Apple’s market position in podcasting consumption. For many years, distributing your podcast to Apple’s platform was a manual, tedious process that required human approval. Why didn't the company invest in improving and streamlining this process? Quite simply: With a controlling market share, they had little reason to. Its inefficient process for growing its catalog laid the foundation for competitors (like Spotify) to do it better and faster.
Even in the early days of Anchor, this inefficiency gave us a supply-side advantage. We were able to abstract away from creators the pains of distributing their podcasts to Apple by offering a service that managed this for them. We called it “one-tap distribution,” and it was one of our most beloved features.
Every industry concentrated in the hands of a few leading companies suffers from these institutionalized inefficiencies. Finding them and correcting them is one of the most effective strategies for a challenger to solve real user needs and begin shifting market dynamics.
The Ability to Break Things
Startups can make mistakes. Their ability to do so quickly and cheaply is, in many ways, the one thing that gives them a leg up. By contrast, it is extremely costly for monopolists to make mistakes. This can manifest in depleted market share or revenue for the reasons mentioned earlier. They instead stay focused on what has worked in the past, because it’s proven and comfortable.
Herein lies an opportunity. Markets evolve, consumer needs change, and a startup’s capacity to experiment and learn can position it to chip away at an incumbent’s business.
When Anchor first started, we made “move fast” a core value. It was baked into our DNA—from our shipping of features on a weekly basis to the constant redefinition of our strategy—and I’ve carried that outlook through the rest of my career. Startups can pivot and fail and learn rapidly. In fact, it’s one of the only advantages they have over deep-pocketed competitors.
I often share related advice with first time founders: “Most of your assumptions will be wrong. You have to iterate your way to find out which ones are right.” The first part of that advice is true for monopolies, too. It’s the second part they can’t quite get behind.
Don’t Be Afraid
Many of the industries of the future will emerge by dismantling the antiquated old guard or, at the very least, by forcing them to get with the times. The only way this can happen is through competition.
Ignore those signs that read Private Property. No Trespassing. Take on the monopoly. Challenge their strongholds. Doing so will lead to healthier markets, better products, and happier consumers.
Turning away from those paths because of the intimidating Goliath that you might encounter along the way may very well be the missed opportunity your startup needs.
What’s Next?
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