There are only 5 ways to build a $100B+ company. What are they?

What tectonic forces create truly successful tech companies? I analyzed the reasons for the success of companies with a capitalization of over $ 100 billion and identified five patterns that distinguish these companies from all the others. This article will be about this.

Let me start by saying that these companies have something in common – they all operate in large, concentrated, winner-take-all markets. And they all launched their flagship products in a “window of opportunity” when the market was unoccupied, and they outperformed the competition.

The difference is in how exactly these companies won the competition and created a sufficient barrier to fence off new competitors and close the “window” for entry of other entrepreneurs.

I am sure that the strategies I have identified are also applicable to smaller businesses operating in smaller markets. But one thing is certain: all of the companies I have analyzed use at least one of these strategies to create a monopoly or oligopoly in the market.

So, let's list these strategies/effects.

1. Network effect

The network effect occurs when there is a chicken and egg problem. Marketplaces like Amazon are a prime example. The more buyers, the more sellers, and the more sellers, the more buyers.

Another example is social networks and messengers. I will use the messenger that most of my colleagues and friends use, even if I like it less than another product.

This category also includes taxi services (Uber) with passengers and taxi drivers, dating services and various teamwork tools.

The peculiarity of these companies is that large expenses on marketing are usually characteristic of the first stage. Then the flywheel of positive feedback starts spinning, and the one who is the most agile quickly captures the entire market.

Often these companies enter the market through specific communities, where they try to get a critical mass of users to start the flywheel of positive feedback. Thus, almost all social networks began their expansion from specific university campuses, and taxi services – from specific cities.

Since in markets with network effects the winner takes all, quickly displacing other players, good funding of projects in the early stages plays an important role.

2. Platform effect

This effect has some similarities with the network effect, but has important differences. Here, the positive effect is created by a set of technologies and products around the key technology. The more users a product has, the more other developers/companies adapt their services and technologies to it. And, as a result, the product becomes more and more convenient for users.

The most prominent representatives of this effect are Apple and Microsoft. The meaning of the effect is that developers of applications (or other products) can adapt them only to a small number of platforms.

If you have created an operating system that for some reason began to dominate at the very beginning of the market's emergence, other players (developers) will adapt their programs specifically for it. And after a short time, it will turn out that most applications run on your operating system (or another platform), while your competitors do not. This will encourage users to choose your platform. And the more users you have, the more actively third-party developers will create applications for your platform. And the positive feedback loop that starts will make you a monopolist.

This happened with Microsoft in the PC operating systems market, and with Apple and Linux if we take the server OS market.

A similar story is happening in the Android and IOS mobile OS markets, which have built-in corresponding app stores.

I can give an example from my own experience. When I was buying a mobile phone, there was an option to take a model of one Chinese brand with its own app store. But this app store did not have one not very popular, but necessary for me local security system application. And this was the decisive factor in choosing a model on which I could easily run all the applications I needed.

Another example is companies like Intel, NVIDIA and other technology corporations that are trying to create standards in the market so that all other solutions can adapt and integrate with them.

A similar model is used by CRM systems such as Salesforce. They have the most different integrations and extensions, which determines their popularity.

3. Unique content/product

This is the main engine of the entertainment industry. If you do not have your own films, TV series, music or games, it is unlikely that you will be able to build a large company in this segment.

The most striking example is Netflix, which creates its own unique content, which is a driver of subscriptions.

A person will not want to sign up for 10 subscriptions, but will choose the provider that has the most content that interests him.

However, users often subscribe to multiple subscriptions, and sometimes do so not because of the content mix but to consume something specific. This makes the market less concentrated and allows for the existence of several large players.

4. Natural monopoly

In some markets, providing quality services requires building a large amount of infrastructure that does not make economic sense to duplicate.

It is hard to imagine that your home would be supplied with resources by ten water and fifteen energy companies. History, of course, knows such examples, but that was a long time ago, at the time of the birth of these markets.

In addition to utilities, rail transport and a number of other industries, the most relevant example in the modern technological landscape is telecom operators.

In almost every country you can count 2-5 mobile operators and 1-2 trunk line operators.

After all, the number of base stations or networks at the federal level is limited.

In this market, as a rule, the winners are companies with either access to capital, which allows them to build infrastructure and occupy an “ecological niche,” or companies with administrative resources, for which laws and other regulations are literally written.

5. Technological barrier providing a better product + habit

This is the effect that I personally like the most. There is something competitive about it, like the Olympics. I can formulate it like this: If a user can switch between products relatively easily, eventually they will get used to using the best one. If you can make a product that is noticeably superior to the competitors at some point, most users will use your product, and you will have more resources to increase the gap with the competitors.

A clear example is Google. Using another search engine is easy, just type its name into the browser. But if a search engine searches better than its competitors, you will get used to using it and will not use other solutions. At most, you will use two search engines for slightly different queries.

To win in this market, you need to make the best product in quality and maintain leadership until the market completely switches to you. And when this happens, the quality gap and the habit of customers using your product will play in your favor. Competitors simply will not be able to overcome the quality gap when you have all the resources. After all, they also need to change the habit of your users.

In some cases, the transition is further complicated by Vendor Lock-in (when you are technologically tied to a supplier and lose the ability to easily change it), if users tie their infrastructure, data or business processes to the platform. And here we can recall both public clouds and simple mail services. But, in general, I attribute Vendor Lock-in to one of the varieties of user “habit”. Although, perhaps, Vendor Lock-in should be singled out as a separate, sixth factor. I do not do this, since Vendor Lock-in is a factor in user retention, and not in conquering a market niche.

Such markets are the automobile industry, the aircraft industry, and the microelectronics industry. The market leaders have created such a technological gap in these industries and have so closed off their distribution channels that it is virtually impossible for new companies to enter this market. Unless they are from China, where there is a huge isolated market.

The example with China is indicative. Only by creating a large domestic market, protected from external competition, can you ensure the possibility of competitive domestic companies appearing on it. At the same time, as a rule, they start with the production of simple, low-quality goods, gradually catching up with the market leaders. This was the case with Germany, which at the beginning of the twentieth century tried to catch up with England. There are also more modern examples – Japan and South Korea. Just 40 years ago, Japanese cars were considered the lowest quality “buckets of bolts”.

Another strategy is to create a quality Open-Source product when there are only proprietary solutions on the market. Even if Open-Source is inferior to commercial products at first, it has a chance to take a market share due to its openness and “free”. At the same time, Open-Source is also well suited for undermining the positions of platform monopolies. And, frankly speaking, popular Open-Source is rarely created by enthusiasts. As a rule, these are professional teams of commercial companies that use open software as a strategy for market penetration.

Let's consider these effects using specific companies as examples.

To do this, I will take a list of the largest technology companies by capitalization, but I will omit those whose business I do not know enough about.

1. Microsoft

My favorite example, as the company exploits almost all of the effects described.

• The Windows operating system is a classic example of the platform effect. At the dawn of the operating system market, Microsoft was installed on IBM computers (then the largest PC manufacturer). Many developers began to make their programs compatible with Microsoft's OS, and this operating system became the most convenient for customers. And the more customers, the more interesting it is to make your software compatible with it. The flywheel of positive feedback made Windows a monopolist in the PC operating system market.

But Microsoft lost the battle for the server operating system market to Linux. A large developer community and a true open license allowed Linux to beat Windows in the server OS market using the same mechanics that Microsoft had previously used.

And Microsoft suffered an even more crushing defeat in the mobile operating system market, where a duopoly of proprietary iOS and open Android was established. Apple and Google were able to create app stores where third-party developers placed their products. The mechanics are the same – the more clients, the more applications, the more clients. Oh, and in 2009 I had a smartphone on Windows Phone).

But Microsoft has occupied its main market – PC OS – quite tightly. At the same time, in order not to “shoot itself in the foot”, Microsoft does not particularly fight piracy, making its products almost open source. After all, if a person does not want to pay, he will not. But if he is used to using the product at home, his employer will buy a license for this product for work use. And regardless of whether the user pays, he creates positive feedback for the platform, using applications adapted to it.

The success of MS Office is due to the presence of its own standards (docx, xlsx, etc.), which I personally attribute to the platform effect. But besides this, in my opinion, it is simply a quality product that is convenient to use. And the main driver here is the “best product” plus the habit of using it.

The cloud business brings Microsoft tens of billions of dollars. The main driver here is the effect of natural monopoly. Creating a cloud infrastructure with dozens of data centers and hundreds of managed services is very expensive and difficult. And whoever can occupy an ecological niche wins. So far, AWS and Azure have been able to create the most advanced cloud infrastructure.

We can also highlight the vendor lock-in, which is created when the entire infrastructure is transferred to the cloud. But this can be classified as a “habit”, only not an individual one, but at the organizational level.

There are two effects that play a role in this product – platform and content. The platform effect is that your console must have enough games to be purchased. And since unique games (content) are only available for your platform, users will choose your console.

2. Apple

Apple's main strength is in vertical integration, which allows it to control the quality of a product at all stages of creation, and the platform effect.

Apple was able to create a product of sufficient quality that a large number of customers got used to using it. And when a product is used by a large number of customers, third-party developers will adapt their applications for this OS.

Apple has a closed ecosystem. But it is large enough to achieve a platform effect.

The situation here is similar to the PC market. Only the App Store is added, which greatly enhances the platform effect.

At the same time, Apple not only makes money from selling electronics, but also takes commissions on purchases in the App Store and billions of dollars in payments from Google for setting their search engine as the default in Safari.

To summarize, Apple's main competitive advantage is the habit of users to use the company's products, which from the point of view of these users are of the highest quality, and the platform effect due to the developed ecosystem.

3. Google

Google's core product is a search engine. And of course, Google has the advantage of users who, through their behavior (clicking on links and viewing pages), help rank relevant content more accurately. But the main advantage is precisely the quality of the product and the habit of using it.

And Google does a lot to develop a habit. In addition to high-quality search, Google has made the most convenient browser – Chrome, in which Google's search engine is built in by default. In turn, Chrome is often supplied with the Android mobile operating system, which is also controlled by Google.

If Android's success is due to the platform effect, then Google search itself and the Chrome browser are simply quality products that are easy to use.

And it is worth mentioning another Google product – YouTube. YouTube is a classic example of the network effect combined with unique content. The more users watch YouTube, the more content is created for it, and the more content, the more interesting the service is to users. Plus, the service has a lot of unique content, which further attracts users.

4. AT&T

A classic example of a natural monopoly, AT&T built a vast network infrastructure in the US, making it difficult for other companies to enter the market.

5. Amazon

Amazon has a lot of products, but let's look at the main ones

Jeff Bezos said that he adopted many approaches from Walmart (the largest retailer in the US). But the main factors of retail success that encourage customers to make purchases are the breadth of assortment, price and logistical accessibility.

If Walmart built the largest supermarkets possible in small towns (5,000-10,000 people), occupying the entire ecological niche and providing a large assortment, low prices and proximity to home, then Amazon used the marketplace model.

a) Third party sellers provide a wide range of products. You can buy whatever you want.

b) The volume of trade allows maintaining the lowest prices.

c) And the developed logistics infrastructure allows us to deliver goods as quickly as possible. In some cases, within a few hours.

This is the model used by Wildberries and Ozon. And these factors create a virtually insurmountable barrier to entry for other companies. After all, it is very difficult to immediately build tens of thousands of pick-up points, a network of warehouses, set up logistics, attract thousands of third-party sellers and millions of buyers.

There is a network effect here – the more buyers, the more third-party sellers use your service. And the larger the supply, the more buyers. And the effect of natural monopoly. To enter the market, it is necessary to build a huge logistics infrastructure from a network of warehouses and pick-up points.

6. Walt Disney

This is a shining example of a company producing unique content. With copyrights, you can not only earn money from film distribution, but also collect royalties from toy manufacturers, build your own amusement parks, and create your own online cinema.

7. Social network banned in Russia

Like all social networks and messengers, the key effect in this case is network. You will use the service that your friends and colleagues use.

8. Intel

Intel uses two types of effects. The technological barrier – it is very difficult to design and manufacture processors with such a level of technological complexity right away. And the platform effect, based on the X86 standard. When all third-party solutions are adapted specifically to your architecture, customers will choose you. And adapting your solutions to other solutions is impractical while there are few users there.

But right now we're seeing a crisis where Intel is starting to lose market share to companies that have been able to overcome that barrier. And they've done that because they have a quality product and an open standard that the market has embraced.

At the same time, Intel has already lost in the mobile chip market and the GPU market.

9. NVIDIA

At the time of writing, NVIDIA is one of the most valuable companies on the market, and yet its drivers are similar to those that led Intel to success.

NVIDIA has been able to create a technological gap in GPU production and is also promoting its CUDA standard, which is the most popular in the GPU market.

It's hard to say how long NVIDIA will be able to maintain its leadership, but at the very least, the company will make a lot of money from the AI ​​boom.

10. Salesforce

There is also a platform effect, when you have the most integrations, and a technological barrier, when you have a fairly developed product. Although CRM systems are not as complex as a spaceship, their creation is capital-intensive, and the market is quite inert. After all, if a company starts using a solution from one vendor, it is unlikely to change it.

11. Netflix

Netflix's main driver is unique content and the ability to create it in large quantities. It's similar to a network effect, but not quite. It's just that the bigger your budget, the more content you can create, and the more content you have, the more people will want to watch it.

12. Adobe

Adobe's main competitive advantages are standards, such as PDF. And for products like PhotoShop, it is a technological barrier that ensures product quality and habit of use.

At the same time, Adobe is still losing out in new formats for web design to companies such as Figma and Canva. However, to fix this, Adobe tried to buy Figma for $20 billion, but ultimately abandoned the acquisition due to antitrust restrictions.

13. Tesla

Tesla operates in one of the oldest markets – the automobile market. In such markets, only companies with disruptive innovations that allow new technology to surpass old solutions in one of the key parameters have a chance.

For Tesla, these disruptive innovations are electric cars and autopilot. If the company can achieve technological leadership in these areas and create a sufficient gap with its competitors, it will take a stable place in a huge market.

An additional benefit would have been a network of charging stations, which would have provided a natural monopoly effect, but for some reason Musk recently shut down this project.

14. Uber

Uber is a classic example of the network effect. The more drivers use the service, the faster the car arrives. The faster the car arrives, the more users use the service.

Uber was unable to win the competition in the Russian market and some others, but was able to achieve a leading position in the United States.

Conclusion

There may be other effects that I haven't considered. But if your company doesn't use any of them, the most you can expect is either a small business in a narrow segment (niching), or a business with minimal marginality, where the only competitive factor is price, and therefore cost price.

Almost all of these effects require either capital or rapid integration into a leading ecosystem at the time of inception and growth. And this explains why most of these companies were created in Silicon Valley.

But if you want to see yourself on the cover of Forbes, consider whether the network effect applies to your business, because it can help even a less-than-great product become a market leader. Maybe you can create a platform that becomes a standard in the market. Maybe your strength is unique content. Or you have the capital to create a natural monopoly. Or the talent to create the best technology product that no one else can replicate.