Potential to change the structure of markets

We invest in IT enabled services that have the potential to change the structure of markets. We see many plans that claim to incrementally improve the efficiency of an existing company or market. Some of these have pretty compelling economics, but in our view the upside here is capped by the structure of the existing company or market. We would prefer to invest in a business that at least has the potential to change the structure of market. Google is again a convenient, if over used, example. In their best years, the major TV networks book revenue from 300 to 400 customers. Analysts estimate that Google has more than 600,000 customers. They have fundamentally restructured their part of the advertising industry.

It does not surprise us that the real leverage of an entrepreneurial enterprise comes from participating in, or exploiting fundamental change in a market. Those of us who worked in the information technology business in the mid 90s remember the emergence of the enterprise software business. At the time, many departments had automated some of their functions using information technology. The enterprise software folks came along with the promise of integrating those islands of information. The best implementations, however, did not just link the existing systems and business processes; they launched major enterprise re-engineering efforts. The vendors and consultants who installed enterprise software argued correctly that the only way to fully capitalize on these systems was to restructure the enterprise to exploit the new integrated data asset and enhanced information liquidity. We believe that we are seeing the same phenomenon play out today; but at the market level.

Yahoo, eBay, Amazon, Google and MySpace have all, in some way, restructured their markets. We believe that despite the success of this first generation of web services, the market is still in its infancy, and that liquidity of information on the net is shortening market cycles making it likely that the next generation of web services will have an equally disruptive impact on this still very young market structure.