tl;dr: With everyone effectively online, the Web2.0 battlefield changes from growth that rides the wave of market expansion to competition annihilation.
His primary point is that the “tailwinds” of more bandwidth, faster processors, and most importantly, more people and businesses coming online, is coming to an end.
The reason why that is important is that the rapid growth that characterized most 1st and 2nd stage Internet companies (I’d put Sprinklr in this group) was fed, in large part, by a growing market in number of users and companies.
Today, however, Luttig suggests that this era is over.
The future growth for Web 2.0 companies is not going to be able to ride the wave of an ever-increasing number of new users and companies that are “getting digital.”
Today, most people in developed countries that are the primary customers for these services and products right now, are already “digital” in some form or another. Same with companies.
Instead, growth for Web 2.0 companies can only come from one place….the competition.
Think about Dropbox vs. OneDrive vs. Box vs. Google vs. Amazon.
You really only need one place for backup cloud storage. Two, if you are a maniac like I am. But you definitely do not need 4.
As the market for cloud storage gets to near 100% penetration, the only way these companies can continue to fuel their growth is by stealing market share.
“We are building an exponential number of Internet companies that compete over ever-shrinking slices of consumer attention and enterprise spend, increasingly locked down by incumbents.
We can look beyond tech to guess what will happen.
How does a company like Boeing continue to grow its commercial airplane business? Sure, there’s nominal annual growth in demand for airplanes, but the primary growth vectors are zero sum: stealing market share from Airbus, or acquiring smaller manufacturers.”https://luttig.substack.com/p/when-tailwinds-vanish
It’s zero-sum all the way down.
Someone wins…most people lose.
The Changing Game
There are a few potential consequences to this evolution.
The first is that large incumbents, the FAANGs, have a tremendous advantage.
Ben Thompson of Stratechery fame and his co-host, James Allworth, in a recent Exponent podcast argued as much, effectively saying (and I am paraphrasing here),
“there’s definitely a scenario in which Microsoft, Google, et. al. dominate even more in a decade from now.”
There’s no question we could end with a “Five Families” scenario.
Then, they start knocking each other off, I suppose. The only downside are the civilians who get caught in the crossfire. Hint: that’s us.
A second implication is that the next wave of big Internet companies will be “meta-enablers” (my term), companies that help incumbents gain market share.
The key battlefield, in Luttig’s mine, will be “operationalizing growth.”
In his words:
“As growth becomes the key bottleneck of Silicon Valley Internet companies, software that measures and unlocks growth will become correspondingly desirable.
This may take the form of cross-functional growth software – an orchestration layer between sales, marketing, finance, and operations – helping to quantify ROI tradeoffs across divisions to help founders make strategic tradeoffs.”https://luttig.substack.com/p/when-tailwinds-vanish
Cross-functional growth software. If you read When Sun Tzu, Peter Drucker, and Andy Grove have coffee, this might sound familiar.
The Financialization of Web 2.0
The economics of Internet companies is different than “traditional” companies. There are terms like “MRR” (Monthly Recurring Revenue) and “ACV” (Average Customer Value) that didn’t exist in the pre-SaaS world. But they are here now.
One of the things that VCs, founders, and investors love about these metrics is that, as a business gets to maturity, they become increasingly predictable.
If you know that MRR= $x and ACV=$y and “churn” (how many customers leave you) is $z, then you can start to model out future cash flows.
And what that means is that the revenue that a Software-as-a-Service company gets starts to look like an income stream similar to mortgage payments.
The money comes in every month and, for the most part (barring coronavirus, I suppose), it’s fairly steady.
Once you have that, Luttig says:
“As Alex Danco highlighted in his recent article Debt is Coming, it is clear that recurring revenue securitization – the notion of selling your future ARR bookings at a discount – is the future.“
He’s totally right that, but he’s wrong about one key element. It’s not the future, it’s the present.
In Invoice-backed Securities, I wrote about a pilot program in Iceland involving IKEA selling its future receivables for cash today.
But that’s me being petty. The point is that as Web 2.0 companies increasingly mature, they will find new ways to generate cash outside of equity sales to VCs. One of those is against future revenues.
They will use that cash (really no choice) to engage in wars of annihilation against their competitors because that is the nature of Web 2.0 Internet businesses. They become, effectively, zero-sum games.
The financializaton of these businesses just becomes the newest weapon in that battle.
Pessimism and Optimism
On the one hand, the conclusion from Luttig’s article can be very depressing. The world in 10 years could be dominated by a cabal of the FAANGs and Chinese BATs.
As consumers, businesses, and voters, the lens through which we interact with each other will be artificially constrained without our awareness even. We’ll all be in our own Truman show.
On the other hand, there are many markets where the majority of users are NOT engaged.
One of them, of course, is crypto.
So, there’s reason for hope.
Networks and dApps that are built with “crypto-first” assumptions will benefit from riding a wave of a growing market as the (very high) barriers to adoption come down.
They already are.
Luttig says as much:
Founders may seize this moment to build new tools to better understand operational investments, create the financial layer of the Internet, or look beyond the Internet to build new platforms in biotech or energy.
Crypto is beyond the Internet.
The question is whether we can get there before the FAANGs close the gates entirely.