Great example of how disruption works: by shrinking the market

I came across another great example of how ‘deflationary economics’ work, as defined by Mark Suster at his blog ‘both sides of the table’.

First, if you’re unfamiliar with deflationary economics: it’s the principle that you can take a huge share of the market if you manage to make things a lot cheaper than they were before. As Suster says, it’s one of the things he looks at when he’s thinking of investing in a startup.

Examples he gives are:

  • Google: made advertising available cheaper and on a much larger scale. Is killing the media industry.
  • Amazon: keeps cutting costs and margins – even incurs losses – to stay cheap, despite market leadership. Is killing retailers.
  • Skype: made international calls free, now on 1 billion desktops. Killing telecoms.
  • Craigslist: made classifieds free. Also killing media.

(Note: I should really make a list of all the things that are killing the media, I’m sure it’s practically endless).

This is the definition Suster gives of deflationary economics:

“When you think about the great achievement of the Internet in aiding content, commerce & communication they include:

  • Large scales of connected people & information never seen before in humanity
  • Unprecedented transparency of information
  • Open standards that make it easier to plug into other products & services, creating a global bazaar
  • Socially connected individuals and platforms that enable faster roll-outs of successful products
  • Payment ready consumers (Amazon, iTunes, PayPal) and businesses (Google AdWords, Square)

So which types of businesses become super successful given this environment? Ones that offer amazing value (low relative margins) at high volumes that makes it nearly impossible for high-cost incumbents to compete. That’s what I mean by deflationary economics.”

Another example:

Another example appeared in an interview with Danny Rimer from Index Ventures: the open source movement (which is not exactly the same as the ‘open standard’s that Suster talks about).

Rimer was one of the first to bet big on open source, with mySQL, a relational database management system that made its source code available to the public. But the choice to make MySQL open was not wholly unselfish:

“I’ll never forget meeting (former mySQL CEO) Mårten Mickos,” Danny Rimer says. “He said, ‘The relational database market is a $9 billion a year market. I want to shrink it to $3 billion and take a third of the market.’” Mickos’ prediction turn out to be eerily prescient; mySQL sold to Sun Microsystems in 2008 for $1 billion.

Currently, Rimer is betting the house on cloud, by the way. If you know any great European startups who are consciously driving the price down in an industry, please let me know, I would love to talk to them.

I also wonder how many examples there are about deflationary economics in the services industry. Maybe Elance and 99designs. You could add eYeka to that, the French crowdsourcing platform for creatives (250 000 of them). But they consciously avoid being seen as a deflationary service. They told me in October that they have no ambition to replace the advertising agencies, but on the contrary become a link in the advertising value chain.

If you have any more examples, please let me know.

[Mark Suster, PandoDaily][photo: ecastro, Flickr (killing professional photography)]

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Raf Weverbergh

Editor of whiteboard. Raf Weverbergh was a magazine journalist whose work appeared in magazines like Rolling Stone, Playboy, Mail on Sunday, Publico and South China Morning Post. He is the co-founder of FINN, a corporate communications agency where he advises startups and multinationals on their PR and Mustr, the easiest media database for PR professionals. You can contact him on Twitter, Linkedin or Skype (rafweverbergh).

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