Many VCs, startups, and consultants believe that today’s unprofitable Unicorns will eventually make enormous profits because of the “Winner Take All” phenomenon, a phenomenon that the world’s most valuable companies benefit from. Platforms operated by Microsoft, Apple iPhone, Amazon, Facebook, and Google have been money machines churning out enormous profits for many years if not decades because they have virtual monopolies for their products or services. These monopolies come from strong network effects and switching costs, phenomena that some claim exist for today’s Unicorns.
For instance, Microsoft can charge high prices for its software because users do not want to pay the switching costs associated with moving their files to other word processing, spreadsheet, or power point software, costs that were even higher 30 years ago. With large amounts of files created in Microsoft’s formats, moving to different software would require users to make large expenditures in time and money. Many of these users are now “locked-in,” a process that began with the network effects associated with Microsoft’s software; the more people who could share Microsoft-compatible files, the greater the benefit from using Microsoft-compatible files. Thus, most of the world, particularly the corporate world, use Microsoft products and are willing to pay high prices that enabled Microsoft to become one of the most valuable firms in the world.
Other software providers such as Oracle, Computer Associates, and Apple have also benefitted from high switching costs. Apple’s users have invested much in iPhone compatible apps, as have developers, investments that neither want to lose by changing to Android. Although Apple has a smaller share of the smart phone market than does Android, its app sales are twice those of the Android store, thus creating a huge cost for users or developers switching to Android. Switching to Android would reduce the potential sales for an app developer and the amount of available games for a user.
Similarly, Facebook users are attracted by the large number of Facebook users and probably would not pay the cost of transferring their profiles and associated data to a new social networking provider, even if a new one began to succeed. Amazon’s users are attracted by the wide variety of third-party products sold on Amazon and the third-party sellers would not like to pay the cost of transferring their websites to another host or to become independent. Its cloud users would also not like to incur the costs associated with switching to a new host, costs associated with “dev workflows, documentation, education around processes, [and] the engineering work needed to transition providers. “ For Google, advertisers are attracted by its domination of the search business and many of them do not want learn new tools and analytics, and content providers do not want to modify their Web sites, even if another search provider became popular.
What about the businesses for today’s Unicorns, a subject that I have been addressing in many articles in this series? In this article, the 12th article in the series, I first discuss examples with zero or extremely low chances of “Winner Take All” and then move to those with somewhat higher chances.
Ride sharing and food delivery have some of the lowest chances of “Winner Take All.” Users and drivers can easily switch between Uber, Lyft, and traditional taxi companies. Users and restaurants can regularly switch services for food delivery companies. Users of e-commerce sites can easily switch sites when purchasing mattresses, juicers, or other products that have recently been popularized by online web startups. It is highly unlikely that any of these businesses will ever exhibit Winner Take All phenomenon.
Even fintech startups probably have lower switching costs than do Apple, Microsoft, and other leading tech firms. Borrowers and lenders can easily switch sites, as can insurance customers. There may be some benefits from sticking with a peer-to peer loan company, online bank, or online insurance company, but the benefits are probably not larger than those of the brick-and-mortar era. Moreover, many of the large incumbents have already moved online and are now moving forward with Big Data and machine learning. Not only is it unlikely that consumers will become locked-in to any of the services provided by the fintech Unicorns, it is still uncertain whether these services can attract sufficient lenders and borrowers to build any network effects.
Payment services might be a small exception. Although retailers and card holders are accustomed to handling a wide variety of credit cards, they would prefer to minimize the variety of digital money they handle and thus a small number of credit card companies (Visa, Mastercard, American Express) have historically been strong in the U.S., with some differences between countries. AliPay, WePay, and Square may achieve “Winner Take All” and the fact that they are already profitable provides additional evidence of this possibility. But because phones and digital cash registers can easily store multiple payment software, the real winner-take-all will only occur when the payment services become embedded in the business processes of other companies. For instance, Ant’s AliPay and Tencent’s WeChat Pay have achieved this level of embeddedness in messaging aps and are now being used to pay for e-commerce, food, grocery and other deliveries, for retail payments and taxi, train, and plane tickets, and to do insurance. and loans. This is a big reason why Ant Financial had 15% margins in 2019 that rose to 30% during the 1H of 2020 as the lockdown made AliPay essential for many people.
Even business software, such as new types of enterprise, database, security, and AI software probably have lower switching costs than do those of the past (See tenth article in this series). The reason is that software offered over the cloud has smaller switching costs than in the past when installing software onto a company’s local mainframe took big investments. It is much easier to switch software services when they are offered over the cloud than in the past when installing software on a local mainframe required much time and money. Moreover, the little consolidation among business software startups over the last decade, despite the average 14 years since founding for most of the business software (Unicorns), also suggests winner take all is unlikely.
On the other hand, this might change in the future as these online software services are integrated with others, thus creating much more complex, unique, and thus harder to quit services. But the chances of the startups benefiting from this integration and rising switching costs are probably smaller than the dominant firms benefiting from them. Firms like Microsoft, SAP, Salesforce.com, JD Edwards, Symantec, Oracle, Google, or Amazon are more likely to acquire these startups and integrate them with their existing software services than the Unicorn startups doing the acquisitions and integration. In fact, these incumbents have already acquired at least six Unicorns (Qualtrics by SAP, Git Hub by Microsoft, Hortonworks by Cloudera, Jasper and AppDynamics by Cisco, and MuleSoft by Salesforce). Whether these Unicorns would be highly valuable startups if they had not been acquired is hard to say. What we can say is that they were not sufficiently revolutionary to be overlooked (Slack might be an exception) and ignored by the big incumbents, while Microsoft, Oracle, and Apple were ignored for the first five years of their lives and trivialized much longer.
The biggest chances for “Winner-Take-All” success might reside with the new social networking services such as those from Snapchat, Instagram, or WeChat, new information sharing services like Pinterest, or new mail services such as those from Slack. There are strong network effects associated with all of them and if one were to develop a huge share of the market, high switching costs might occur. But other than WeChat, most of these services only appeal to a small segment of the population, and they are extremely unprofitable.
In summary, I see little reason to expect many of today’s Unicorn’s to achieve “Winner-Take-All” status. Venture capitalists and entrepreneurs are over-estimating the possibility of winner-take all just as they did during the dotcom bubble and they are now doing so for startups that have less a chance of achieving winner-take all than did the startups during the dotcom bubble. None of today’s Unicorns have the high switching costs or high market share that currently exist with Microsoft, Apple iPhone, Amazon, Facebook, and Google. With the partial exception of Apple’s iPhone, all their products have high market shares and even the iPhone has a high share of the paid app market, a market that attracts the best developers of games and other apps.
Few if not none also are breakthrough products, the types of products that enabled today’s “Winner-Take-All” incumbents to make huge profits. A lack of breakthrough products is also why none of today’s ex-Unicorns have a market capitalization high enough to place them within the top 100 firms in terms of market capitalization, an argument I made in the fifth article in this series. Not only does the lack of breakthrough technology make it hard to turn a profit, it also makes it easy for incumbents to copay the Unicorns, thus preventing a Unicorn from dominating the market before an incumbent can enter. In all these services, multiple startups and incumbents are offering very similar services, and thus there are small profits and little chance of winner take all occurring.
 https://medium.com/@jeffreyleefunk/are-there-any-industries-in-which-ex-unicorns-are-profitable-747eca652170 https://medium.com/@jeffreyleefunk/how-successful-are-todays-startup-unicorns-893043f32d24
 Information Rules: A Strategic Guide to the Network Economy, Carl Shapiro and Hal Varian, 1999.
 https://medium.com/@jeffreyleefunk/what-will-happen-to-todays-privately-held-unicorns-valued-at-1-4-trillion-13f507797487 https://medium.com/@jeffreyleefunk/why-are-todays-startup-unicorns-doing-worse-than-those-of-the-past-1c8ece718ab0 https://medium.com/@jeffreyleefunk/are-there-any-industries-in-which-ex-unicorns-are-profitable-747eca652170 https://medium.com/@jeffreyleefunk/how-successful-are-todays-startup-unicorns-893043f32d24 https://medium.com/@jeffreyleefunk/unicorn-ipos-continue-to-disappoint-investors-37c2007e7b73 https://medium.com/@jeffreyleefunk/the-most-valuable-startups-founded-since-1975-none-have-been-founded-since-2004-8bc142b67051