Subject: Re: "I've got more programmers than you"
From: Ben_Tilly@trepp.com
Date: Wed, 3 Oct 2001 10:16:22 -0400


Tom Lord wrote:
> Stephen Turnbull wrote:
> > And inherent financial weakness is going to restrict where FSBs
> > can be competitive.
>
> There's nothing inherent about it.

I think that Stephen's point is fundamentally accurate.  An FSB is by
nature working in a market where a primary revenue stream (sales) is
hard to come by, and the primary barrier to entry (the need to produce
a product) is likewise gone.  So an FSB starts life with inherent
limitations on the kinds of financial strategies they can choose to
follow, and with a serious check on their potential profit margins.

However in return for that an FSB gets many advantages in dealing with
consumers.  And we have all seen those lists.  (Many of the items of
which restate the limitations that FSBs labour under, and points out
to consumers why those limits are in the consumer interest!)  There is
no question in my mind that those advantages are real and an FSB can
do very well for itself.  Furthermore an FSB with a good product is
very scary to any potential proprietary competitor because even if the
FSB can be eliminated, their product lives on and new companies can
form around it.

But none of those advantages stops the initial weaknesses from being
real.

Perhaps a good analogy is to knights versus unarmoured warriors.  When
you put on armour, you gain a tremendous strength in battle.  You can
take serious blows without injury.  When you take off the armour you
are suddenly much weaker.  You cannot afford to take blows.  However
you develop other advantages.  You can see better.  You can move both
more quickly and quietly.  You endure longer.  These advantages exist.
They are significant.  But they do not alter the fact that you have a
fundamental weakness.  You cannot afford to take a single serious
blow.

Similarly with proprietary versus FSBs.  A proprietary company has
numerous advantages.  If it has control of a market, it can derive
more revenue from that market to offset other operations.  Nobody can
enter into competition with it without sinking a lot of effort into
building a competing product.  It owns the resources that it has, and
can fairly easily transfer them to an area based on current need.

An FSB does not own these advantages.  An FSB can leverage more
resources for less money.  But it cannot command those resources to do
what it wants done.  An FSB has many advantages in persuading
customers.  But it cannot prevent another FSB from trying to enter its
market.  An FSB cannot easily get monopoly rent from marketplace
power.  The advantages of an FSB are advantages.  But none of them
alter the fact that as a business it has to be somewhat indirect about
extracting cash from consumers, and this makes it much more tricky to
convert product penetration into revenue streams.

Cheers,
Ben