Acquired - Interview- Hamilton Helmer & Chenyi Shi on How to Build an AWS-Like Second Business

0:00Oh, I'm sorry before you keep going is this gonna be a question of is this a scale economy or network economy? Yes. Oh damn go for it Jenny because I don't know the answer We've stumped the experts Welcome to this special episode of acquired the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Eight years ago I pitched David on an idea for two different podcasts. One was on grading technology acquisitions that became acquired. The other idea was to do episodes on companies that managed to create two separate multi-billion dollar innovations.

0:58Our hypothesis is that most companies have really one big founding insight and that the rest of the company's history is just drafting on that. Well, Hamilton Helmer and Chen Yixi, friends of the show, coincidentally have been exploring literally exactly that idea and they've been asking questions like what percent of the profits of the biggest companies in the world came from a second business line.

1:23They have a new framework in addition to seven powers to help founders answer the transforming question. If I were to expand the scope of what my company does, how should I go about it? And this is a particularly interesting time to do this episode with them because I feel like a bunch of the companies we've covered recently on the show, this has been like a key part of the story, whether it's Amazon and AWS or LVMH and how all the businesses LVMH itself have been transformed over the years, and even particularly I'm thinking about Nintendo and our Nintendo series and going from like a supplier for the Yakuza to dominant video game console manufacturer.

2:05Yep, and David I can say you and I have already recorded this interview with Cheny and Hamilton and like we address exactly that. So listeners this was a really fun one to do and having Hamilton and Cheny on it just concretizes a lot of the very abstract thinking that we sort of banter about on the show but never quite crystallize, they crystallize it for us. Yep.

2:26Well, if you want to go deeper, you can become an acquired LP to come closer into the acquired kitchen. We have by monthly Zoom calls, and we just announced that we'll be asking our LPs to help us pick future episodes. So you can join at acquired.fm slash LP. Subscribe to our second show, ACQ2, formerly the LP show, which is now public for expert interviews with founders and investors. Search ACQ2, no space in any podcast player.

2:54Join the Slack. There's now over 15,000 smart, thoughtful kind members of the acquired community at acquired.fm slash Slack. It's pretty cool, but I will say that only represents like 5 to 10% of you who listen to acquired every month. So for the rest of you who haven't joined, come join us in the Slack. All right listeners. Now is a great time to talk about a new partner of ours here on acquired LaGora.

3:20the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

3:49They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with.

4:08Lagora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:21And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time LaGora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months truly insane numbers and that is the real test

5:14Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm, or you're in-house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. Without further ado, this show is not investment advice. David and I may have investments in the companies we discuss.

5:41and this show is for informational and entertainment purposes only. Hamilton and Cheny, welcome back for the third time to acquired. Our pleasure. This all is great to be here. The acquired audience has grown so much since the last time we did this together. We thought it might be fun first to sort of humanize the seven powers a little bit and do a little background of what is this thing that we talk about on every acquired episode and how did the two of you come to be world experts in this. Yeah, yeah, delighted to do that. So as I've said, I think on other episodes, my understanding as an economist is the ground zero for economic vitality is the strength of the entrepreneurial sector. So there's a famous economist called Joseph Schumpeter who sort of posited that and it was different than sort of

6:37normal economic theory at the time because it was very dynamic and not sort of mathematical. And so I believe that very strongly. And of course the Silicon Valley is a center for that. So the thing that really interested me was, can I contribute to that anyway? Is there anything that I can do that helps with that? And my discipline is sort of business strategy. And so there's a real question about Is there anything useful that business strategy can add to that sort of creative dynamic effort of all these people and I'll queue it up with an example that I used to use in my class at Stanford sometimes which is that if you can imagine me holding up two devices see that's the iPod with the touch wheel and I have no idea is that calculator right so that's the first handheld calculator in the United States boomer and so

7:34Here's the issue, is that here are these two devices. They were wildly successful to begin with. Incredible product market fit. Bomar won from maybe three million to 100 million in a couple of years, which back in those days was real money. And of course, calculators are an interesting starting point because the Japanese calculator of busy comm was sort of what started the whole CPU revolution.

8:00And so tremendously successful and you all know the story of the iPod. That was the beginning of Apple as incredible business model. But it also was the precursor to the iPhone. Bomar on the other hand, and this speaks to why seven powers not exactly a household name today. Right. You never heard of it. So that dates me and you. So you might be saying that innovation is not sufficient.

8:29Yeah, innovation or disruptive technology is not sufficient. It was very disruptive if you were an abacus maker or a Monroe calculator maker, it puts you out of business, very disruptive but completely went out of business after a while. And then had tremendous brand recognition was the thing and this huge spin up. And that speaks to strategy. And so what you wonder is if you were helping The people founding those companies, is there anything that you could say that would maybe guide them to be a little more iPod-ish and a little less bulmarish, right? But the problem with that is that the nature as the two of you know from your acquired side as well as all the other things you've done, the nature of developing business is

9:22Adaptive and evolutionary. It's not like you said a bunch of bright people in the room and you figure out the strategy and say, okay, we're just gonna execute from now. It's you go forward in time and effort and new information comes in. Oh, that customer didn't do what I thought. This competitor is coming in this way. The technology frontier has changed all this stuff and you have to adapt to that over time. And so the problem with that is that Okay, well then if it's that way, how does a body of thought contribute to that? And the answer to that is that if you can provide a useful mental model, or as Jenny calls it pattern recognition, you provide something so that as entrepreneurs are moving through space and time, they can see what's a little more likely to end up iPod-ish and a little less likely to end up boomerish. That kind of

10:21metal model is actually hard to construct. And what I say in the book is that the very high hurdle that it has to clear is that it has to be simple but not simplistic. So simple, it has to be that way, or people won't remember it. If it's some complex theory that you have to go back and look it up every time, it's not going to help a lot when you're making business decisions. And not simplistic means that it's got to cover most of the situation you face.

10:50In other words, it has to be relatively exhausted. And that's a high hurdle. So there were a number of strategy frameworks before that were extremely interesting and made great contributions, but weren't simple, but not simplistic. Probably the most prevalent was Porter's Five Forces focused on what he calls industry attractiveness.

11:13It was a tremendous contribution, but it's not insufficient. If you're in an attractive industry, it doesn't get you to the kind of security that an iPad has. Right. Samsung is in an attractive industry called smartphones. And yet their P&L looks quite different than Apple's. Right. And there's been statistical work just buttersing that point more generally that industry tractiveness doesn't explain a lot of firm differences in profitability. Another one was Christiansons work on disruptive technologies, which is just phenomenally interesting in the highly aridite, but this example is perfect. Disruptive is actually not correlated with long-term profitability. It has to do with product market fit. It basically says you've come up with a better way of doing something that takes out the income but it disrupts it. So very interesting in that frame, but not for the Beaumont iPod problem.

12:11And then there's a whole strain of thought around capability analysis. You can do a lot of things with capabilities, but it's not common that that's the basis of why you build great business models. Other people have those capabilities as well. So what that meant from a concept development framework is that I sort of had to go back to square one and say, okay, I'm thinking about pattern recognition for entrepreneurs.

12:40What's simple but not simplistic? And one of the keys to that question is persistence, which is that if you were to say Apple's profitability next quarter, it's not a random draw, right? It's highly persistent. And there's statistical work on that that suggests that's generally true for very successful companies. And importantly, not just next quarter, but four quarters from now, and eight quarters from now, you sort of have a pretty high level of confidence. You know, we don't know 10 years from now, and that's what we're going to get into on this episode, but we know what year from now. Fezos always used to say the line, this quarter is already baked. This quarter was baked three years ago. I'm working on a quarter, five years from now. Yeah, there's that, but I think also the fact that...

13:27he says that this quarter is baked also sort of tells you about something about the business model on a way. And so that persistence tells you that there are economic structures that create attractive outcomes. And you then ask the question, can you generalize about those? Because if you can generalize about those, then maybe you can get to something sufficiently simple and yet comprehensive that is useful to entrepreneurs. And so after looking at that for decades, my conclusion was that actually it is simple. There are only seven of them. And in fact, if you're dealing with startups these days, that's usually a smaller subset of that.

14:17And so that, to me, was a fairly profound insight. And that's what Seven Powers is. It's just those structures that if you can get there, make you more iPod-ish and less bow-marish. And a key piece that I always have forced myself to remember whenever I'm analyzing a brand new business idea and trying to run it through the Seven Powers framework is Seven Powers is about defending the castle and less about is this a good idea or not? It is a second invention after product market fit to create a durable business. That's right. Gee, I wish I had said that. I think you did say that. I think this concept of a second invention is literally your words from a previous episode. So product market fit and power are more or less orthogonal. There are some complexities in that statement. And I'll tell you something Ben did that has occurred to Chenyin myself.

15:13over the last year which is a little bit different maybe than what said in the book which is that I used to think that it was sequential you get product market fit and then you deal with power but my biggest education is talking to founders I love their intelligence their creativity dare I say their youth and their deep thoughtfulness about stuff and what I'm finding is that The proper path is actually to be thinking about those things kind of simultaneously. Because what's going on is you're trying to figure out, okay, what am I doing with this business? You know, I've got this choice and this choice. And in the mix of that, there are both product market fit questions and power questions. And you don't just say, well, I'm just going to do the product market fit stuff and think about power later. You actually need to start thinking about it.

16:09you won't solve it completely at the beginning. You won't know, oh, yeah, I have power for sure, but you should be thinking about it. So persistence then leads you down to those structures. And part of the reason, you know, that it's really cool that you're sort of thinking about this in your interviews. And we think about it in our work is one thing I've said to you before is that the genome types of power are simple. They're only seven. My partner Bill says that it turns strategy from a As a question into a multiple choice question, although I don't know with chat GPT or the difference anymore, but the phenotypes that is the exact granular way in which they are articulated and carried forward are complicated. Jenny, yeah, and we might struggle for weeks trying to figure out whether something has power or not. I'll give you an example of how

17:02the idea of power is so important. So, you know, I'm sort of a sports car nut, and I used to drive so fast. And Porsche is a great example of here, which is- Ooh, yes. Think of that. The 911 first one came out in 1964, 60 years ago. Porsche wasn't sort of the sports car leader of the world at the time by any means. And so, what that enabled Porsche to do which I don't think was conscious exactly but sort of spun out in an evolutionary way over time, was that they took away the design element as part of the mix in what wins over sports car enthusiasts. So if you looked at a 9-11 and 1964 and a 9-11 today, they kind of looked the same.

18:00And so, what did that allow Porsche to do? It allowed to just constantly optimize the best performance features in the context of people would pay for that, you know, handling acceleration interior ergonomics and the technology frontier was changing fairly rapidly. Today, I'm just astonished at the performance you can get from a small scale Honda that'll go 155 miles an hour faster than a Jaguar XKE right back in my day and then all kinds of parallel developments and other aspects break sound and everything else and so they could constantly upgrade each generation not having to think about the design aspect to it but hit the performance envelope and people would pay for that. You need it all those things, right?

19:00and constantly they end up with this incredibly durable business model by far the most profitable automobile maker and devoted fans and great cars. Are you saying the fact that they abstracted away the design and they fixed the design meant that it sort of wasn't a hit-striven business. It wasn't do people like this design or not. Exactly.

19:23Why are you interviewing me? Well, you do the hard part, you know, I just get to synthesize. So yes, and then all of these elements like getting the PDK transmission just right, those are fixed cost investments. And if they can spread that over a larger number of automobiles, it's lower cost. So how many times have you seen sports cars that were quite interesting? And then they just couldn't keep upgrading them.

19:53To meet the great I mean think of the Toyota 2,000 or an early version of alpha male or something and to your point it's not just did people like them enough it's could they predict that enough people would like them to invest in the necessary things they needed to invest in and if they couldn't be certain or didn't have the hoods but I say there's going to sell a million of these things then you can't make the investments you need to right and so Portia was the one that just kept being right on that performance envelope because they were able to do all these investments. And it's a phenomenal business model. All right. Let's kick it over to Chen Yi. Anything to add, Chen Yi, before we move to transforming? I guess I'll just add on to the perspective of a student of the seven powers framework, not a creator of that. So one thing that struck me as the most useful way to apply the power framework is

20:46really as a cognitive leverage. So I think Ben, you mentioned, it doesn't really tell you what's the next thing you should build or what product is going to hit the market, but it kind of tells you what's the right strategy question to focus on. I mean, the way I put it is what is not important is as important as what's important. Naturally, you know, as founder and operators, you spend 90, 95% of time on operational excellence. It's so important. You have the right team, the right culture, the right execution. But there's 5% of time that you may spend on real important strategy questions, and those are what determines the eventual margin structure of the business, the competitiveness of the business. And what power structure can tell you is what is that 5% out of all the things you're thinking about, what really makes the real strategic importance that you spend all the time thinking about. That's one way I think this will be the most useful, maybe for a lot of members in your audience. And the other comment I'd have is

21:43Now that I've had the chance to work on the theory myself, it's actually amazing how it's not done yet. I've been in Hamilton's class seven, eight years ago at Stanford. I've been working with him for the past couple of years. I used to think, oh, it's all in the book, right? It's just there. There's seven of them and it's all described. But then as we dig into it, things that we don't know come up. We talked about platform last year and we're going to talk about transforming now. It's about the dynamics part of power and maybe even extend into corporate strategy, not just business strategy. So this kind of life within the theory is actually really exciting and fun to explore. Ooh, I know we're going to get into this in transforming. Can you define the difference between corporate and business strategy? I'll kick this one to you Hamilton. Thanks a lot. So business strategy is how to find power, if you will, in what you would think of as a single

22:41Defensible entity and corporate strategy is how you think about strategy in a multi-business unit corporation and the central problem of corporate strategy is Why is one plus one greater than two in other words is there any? Reason from a value point of view for two separate businesses to be under the same roof and there have been a variety of efforts in that. If you go back in the days of GE, wildly diversified companies, there's a theory for a while that that was really a good thing that you get sort of these diversification benefits turned out not to be true. And so it's really that question of why is it that if you're in one thing, it makes sense or doesn't make sense to be in another thing. And so again, think of Amazon, AWS. Why is that interesting?

23:40And the static part is one plus one is greater than two. The dynamic part and that's what our transforming discussion is about is what is it about the business that you currently have that is somehow useful in doing something else? So you guys did the all wonderful episode on AWS demathologizing, but Amazon did have capabilities that made it not completely alien territory. Well, let's get into it then. So I'll give you a quick intro to transforming kind of why we think it's interesting. And then Cheny and I can sort of pull it apart a bit and you can ask questions. So there are really three reasons that we think about this. The first is that if you're interested in creating businesses, it's important. And by important,

24:38I can give you a little data on that. So I did a study once of the S&P 100 largest market gap companies in the world and looked at if you pull the part, their value and look where their profits came from. And you asked the question, what share of their profits came from businesses that wasn't their original business? What would you think if you were asked that? Can you help us with a year of when you looked at this? I did it.

25:07just prior to the financial crisis, so it was 2007. David, what was your guess? My guess was 80%. Knowing that timeframe, I've maybe dialed it down a little bit to 70-ish percent. I think it's low because I'm thinking banks, oil companies, like the largest companies in the world to that point weren't technology companies. And I have to imagine that those are more single business line statics still drafting off their original innovation companies, but Hamilton wouldn't be asking this question if it were a boring answer. I don't know if you consider the answer boring, but it turned out to be about 50%. In the tech world, which you guys intersect more, you can think of all the examples we talked about, AWS as an example, the lead off example in my book of Intel getting into CPUs. That's transforming right there in memories. Certainly the lion's share of Apple's revenue is not

26:03Right. The iPhone, they were not in that business before. Google and the Android, Microsoft and operating systems and applications, they were originally a language company. But as both of you said, sometimes not, the soccer board at Harvard started right out of the gate with Facebook. And so 50% is a big number. Yeah. Half of all corporate profits of the largest companies in America came from something other than their original innovation. Right. So that sort of flagged you.

26:32And so it's important as one. The second is that it's hard to get right. It's a difficult area. There are reasons that have to do with motivation and there are reasons that have to do with understanding. And Cheny will talk about some of the common business nostrams that sort of fall apart in this. On the motivation side, I'll just mention that from a founder point of view, they just found it something that works.

27:02and so they're accustomed to that success and so sometimes they may not appreciate all the idiosyncratic uncontrolled elements that went into that success and they're very creative and they want to just move forward and so they're inclined to do that and that's a great motive for us. I love that. That's the lifeblood of an economy but it also means that you can sometimes get into stuff that you really don't know how to do it. Especially for first-time founders, if it works out of the gate, Then you have no idea to what to attribute the success. It could be skill. It could be luck. Of course, it is some combination of it, but you have no idea the percentage that skill and the percentage that lock and you say, well, it worked. I will just repeat the exact same process again. And surely I will create success again. And that is almost assuredly not the case. I have several companies in my mind that thought that and definitely did not happen. Right. And then on the people that often sit on their boards or finance them, there's also

28:01a dissonance, which is that if you think of the VC community, the business model and VC's issue find really interesting things to invest in, and then hopefully they go up in value, and then there's an exit which you profit from that increase in value, which is to this wonderful engine, if you think about what drives the US economy, you know, it's just phenomenal. But in the early stages of how people think about value, There isn't yet this track record of persistence because people are often, for example, spending a lot to acquire customers and so profitability may not be evident yet in the fundamental economics haven't really asserted themselves. And so the only thing left is kind of how the top line is doing. You know, so are you growing like crazy? And so when you hear BC's some kind of complaint that people waited too long to IPO,

28:57What that message really means is that all the sudden people's perception of the company change from the top line to the bottom line and they miss the window. What that says is that that investor community is focused on top line growth as it should be because it's the best marker available but it doesn't tell you much about power. And so it's hard to do. And then the third thing which of course you would expect from us is that I actually understanding power tells you some interesting stuff about transforming.

29:27So three things is important. It's hard to get right and power matters. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would not and you're done. But in an AI first world, that doesn't hold up anymore. Yep. Your risk surface changes every week now.

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31:20Something else just finally occurred to me. I've never thought about it before, but if you are analytical and can figure out and quantify a company's power, then you can assign it a more accurate multiple of profit than anyone else can because if You can observe, oh, a company has a 24% operating margin. Many, many years in a row, you can decide, okay, fine, I kind of know what the operating margin is going to be in the future and I can figure out how I want to value this company. But if it's a new company and it just settled into some steady state of profitability and you understand the power dynamics, you can be better than other investors at predicting the sort of net present value of all the future cash flows of that company rather than a very

32:08brute force way of doing it, of just slapping the same multiple on that everybody else does. Yeah. So Ben, not only is going to supplant me in writing seven hours, but he's going to take over a strategy capital. I think that job falls to tenure. Yeah. So we're sort of constrained about talking about our investments of too much. But basically, the proposition of strategy capital is if you have a differential understanding of long-term competitive outcomes in places where that's really hard to figure out.

32:36that you can value things more carefully and so I completely agree. And you properly constrained it. If there's a long history of financials, it's already in the price. So does Walmart have power? Sure. Right. My dog can tell you that. Right. Right. Right. I'd like to meet your dog sometime. So that's why it's important. And I'm going to just give you a quick take on what I mean by transforming when I laid this topic out to the two of you. I said that If you're thinking about increasing value in a company, there's sort of two questions. What can I do better and what can I do next? And you spend most of your time on as you should on what can I do better. So you think of Amazon developing a better search engine when you look for a product. You've got to think about that, right? And that's most of your time. But then you also think about, okay, well, what can I do next? And that's what transforming is. And that would be Amazon going into AWS and you can imagine

33:36thinking about whether to do AWS is a very different exercise than optimizing the search engine. So transforming is sort of a separate topic. Fundamental thing in strategy is think all business definition, which is what really are the boundaries of your current business? So I think actually in our prior email conversation, David, you had the question of how do we go about research something like this? And typically we started with looking at what others have been talking about. This is exactly where we come across a lot of common narratives of where do you find our next level of growth? We've all heard about, you know, go listen to your customers. There's Amazon School of like customer obsession. That's fairly popular. People will go after 10 expansion, you know, expand geographically, go different segments, or you know, full or core competence, et cetera. And as we look through this, I think one issue we found is

34:33They don't seem to be conclusive about the chance of success of these transforming steps. So, in other words, you can't say if you do X, you are more likely to succeed. For example, there's this whole school of thought around marketing myopia that says, you should define your industry definition widely. The reason why railroad industry goes into decline is not because people don't have demand.

34:59for transportation, because they can't think of themselves as a broad transportation company. They should have moved themselves into cars and trucks and airplanes and even telephone, which are new forms of transportation. And I think this is one of the best sellers of Harvard Business Review of all time, which speaks to the popularity of it. So the question we will ask is, does companies that follow marketing my opium all tends to be successful? Does that give us a way to predict success?

35:27And we can kind of think of examples on either side, right? Like Disney today is not just a theme park company or animation company. They seem to be a broad entertainment company. They're pretty good at coming up with the next form of entertainment that people will love and want to watch. On the other side, Uber at one point was all in.

35:45on mobility, right? It was not just about cars. You know, if you just remember the scooters buses, yeah, bikes, and they were serious about flying cars at one point, right? The giant helicopters. Oh, that's right. Yeah. Right. So that didn't seem to end up that well, even if it ends up in the same mobility definition. So what that means is we can't tell whether following a certain school of thought is definitely going to be leading success, which means we don't have a theory behind it, right? So That sort of stays our problem is, can we say something that's a bit more definitive, you know, a bit more having the predictive power there? And as we thought about it, the real reason why we have this issue is a lot of these popular narratives kind of tell you about economic value. But they don't tell you much about business value. In other words, they tell you about value creation, but not value capture. In other words, we're basically saying product market fit is not power.

36:44Coming back to the very first conversation about why we did this in the first place is that the point you just made is the fundamental one, which is that creation of economic value is pretty orthogonal to capturing some of that value for yourself, which is to say the creation of company value. So creation of economic value and the creation of company value are different animals.

37:09And both are important. And there's a dynamic connection in the sense that if you create economic value, it sort of creates the opportunity to think about capture and so on. But just a single-slicing time, they're very different. But that's a fundamental point about all this. Yeah, I think that's a good way to put it, which basically means all of the common narratives out there are really useful. They're really useful as a degenerators. They tell you where to look for the next product market fit out there.

37:38And we think the understanding of power is the missing link here. We have all these ways to come up with options, but how do you assess which one of them is really the best idea? And that's what we set out to give a better structure to. Yeah, and so I'll just say how power kind of helps you out in a way. So I mentioned this sort of a therial concept before this definition. So it's rather important. So if you think about Uber versus Netflix, where they go next, right?

38:03Uber at first, their thought was this was an international business. That means that going into China somehow their strength would be transferable into that effort and they could be successful. Netflix thinking about going international, thinking that if they started streaming in Korea.

38:26That would make a lot of sense and are you considering the international a separate business or you thinking about this as like should we expand the core business and just address a broader market so that's the question the key thing there is if you have a established business is the drivers of power in that Extensible to that additional segment you're considering whether geographic or customer or whatever and because if it is the risk reward of doing it, the calculation beginning, is so much better because being able to carve out value to yourself is really hard. And if you can build on to something that already does that and it works in that environment, then oh boy, go there because that's so much easier than doing something really new. And so Netflix streaming in Korea.

39:21It built on, see, saying you can share content across countries, right? It built in the same fixed cost economics of content development and worked. Overs, if they have a source of power, it has to do with geographical density in a specific area, like the Bay Area or something, and going into China, if they're head-to-head with DD or something, they don't have any advantage at all, and so it doesn't work.

39:49Right, they get to bring their technology platform over so they're amortizing all the engineering design product management cost, but they have to go re-acquire both sides of the marketplace in full and create that density, which is actually the expensive part of the business. Exactly. And if it turned out that the engineering part was 75% of the cost structure, I mean, content for Netflix is 50% out of 70% then it would have been fine, but it's not just as you said. And so when you're thinking about business definition, in some businesses international is part of the same business which is to say it's under the same power umbrella and in some businesses it's not and you have to understand that in terms of what you're doing and if you're thinking about what's next if you can go to things that are under your current power umbrella oh boy is that great if Portia wants to sell cars in China as opposed to selling them in the US no brainer right

40:46Still all the same unbelievably hard engineering problems that went into creating the car you're selling in the US, you can find a way to distribute that. Yeah, and a Chinese competitor would have to go through the same calculation, you know, so the first point of this conversation is that to properly assess transforming directions, the first thing is carefully understanding your current base of power.

41:13and then looking at this new segment, whether as I say, it could be customer, geographic technology, whatever product, and seeing whether it relies on that as well. Because then, oh boy, the world looks rosy. But on the other hand, if you think it does, and it doesn't, it's like Uber and China. I don't know, what did they lose a billion dollars or something? I don't know what it was. Maybe more once you consider all the divestiture. Yeah.

41:43they used to be compensated by the shares and do you know what their shares are worth now. So anyway, so that's starting point. It's interesting, right? Like I'm thinking about we're in the middle of our Nintendo series as we're recording this and this really is an interesting framework to think about it because on the surface, it could be pretty far flung. I'm thinking about Nintendo made playing cards with the Japanese organized crime as their primary customer and then moving from that to video game consoles is a pretty big leap, but you know what they had originally that is the same thread through the whole business is they had an absolutely ironclad lock on their distribution networks especially and then over time through playing cards into toys into video games into toy retailers right and that's such an interesting case David because oftentimes it's that kind of subtlety

42:36about locking in a distribution channel, for example, that's sort of kind of invisible, but may actually be the very thing that makes that such an, I mean, if you think of Sony on the other hand, when they went into game consoles, that was a different business, I'd say, and brutally hard. And it relied on some capabilities. So it shows why the capability thing doesn't get you there. I mean, yeah, some engineering at the time analog was king there and digital was thought of as a backwater.

43:06but it was a very difficult, and now it's the source of their profitability. Right, but it was a long journey for Sony to get there. And like all these things, there were a few principal actors, a few leaders that had they not been there. It's hard to imagine it ever happening, some innovative hard-driving people. So Hamilton and Cheny, can we ask you, what are the most common power types?

43:32in today's technology driven world where people might find expansion opportunity inside of their current power umbrella. I think particularly for earlier stage companies, the three most common power types that you would find are scale economies, network economies and switching costs.

43:52Well, it's actually often common that you have counter-positioning because that's how you tackle your incumbent in a space. But there are a couple other power types that doesn't really come in until the more mature phase of the business and that's laid out in a book like Process Power or Brand Power. You really need to develop them after years and years of experience honing in on the core business. So for the benefit of the audience today, we thought it would be more useful to focus on the three types of power, skill, network, and switching cost.

44:21which is probably the most common that we find out there. And are you not including counter-positioning here because it's hard to find a second business under a counter-positioning umbrella? Let me just weigh in and say I agree with her sort of leaving off because to have power right you have to have it versus all potential and existing competitors. The counter-positioning one is typically the type of power that you would have against incumbents.

44:48but it doesn't work against them want to be because they don't have the same problems and so the one that you have to think hardest about is versus other companies that are doing it just like you and so for bull mar it would be Texas instruments doing calculators and so that's why she left it off the list yeah so regardless of what's the core power prospect i'm calling it a prospect because it's a pretty hard bar to clear but Even if you're still in the make for you, and you think this is going to be the mechanism that protects you from competition and long run, the first step is always to get a really clear understanding of what that core business power prospect looks like. So back to your example of Uber, if the core power prospect of Uber is actually scale economy, which says the technology framework of doing the matching automatically is so hard and requires so much cost to build, then international expansion would have been totally rational.

45:44right? Because you're just spreading that fixed cost over more geographies and getting a head start in every single place you have. But the truth is it's not. The majority of cost of that business actually lies in acquiring and maintaining their customers. Which means if anything, the route you should really try to get to is network economies, if you have one. And the scope of that network defines each market is actually heavily bounded geographically and so every new.

46:10country, even you city, you go into as a complete new business and you have to start from scratch. So that's just an example of getting a definitive answer or a confident answer about where core business power looks like gives you a very different place to look on where to transform or where to take it to the next step for your business. So it's almost like, okay, so I'm at here in Seattle. If I was operating in Uber like service, I have this.

46:34power, which is all the drivers and all the riders or a high density of that. That means nothing where David is in San Francisco. So instead of launching Uber in San Francisco, maybe I should try and figure out other things to leverage my network for here in Seattle because that's the place where I have the durable competitive advantage versus others. So Uber eats, right? Right. So I think the jurors go out whether right sharing and food delivery belongs to the same business. Maybe they do. But it's more plausible than different geographies.

47:02This is one of these things where it seems obvious on the surface and then we start to dig in, you're like, oh, wait, maybe it's not as overlapping of a network as I would have thought. Right. That's the question. Right. The drivers for food delivery are a overlapping but not that overlapping set of drivers for rideshare. And the set of consumers is obviously different as well, which you can see in the corporate action they took to ship a separate app called Uber Eats rather than bundling into one app. So you actually have like, two overlapping two-sided networks but not a fully overlapping on either side of the network. Ben, that's such a great example because it speaks to the point that of the complication of the phenotypes that until you peel back the covers, it just sounds, oh yeah, Uber Eats and Drivers, it sounds all the same. But when you start peeling it back, it may not be. So what that says is you have to have

47:53Quite a lot of nuance in your understanding of whether you have power to begin with and of course for Uber gets into the nature of platforms and exclusiveness of the sets that occupy either side of the platform and whether they overlap and y'all I kind of stuff and so without that nuance you just you miss it. Yeah, one other network economy is one that I'm curious to get your take on I see in your notes here is Microsoft versus Slack.

48:22Can you sort of walk through the Microsoft decision to enter the market of whatever Slack's product is? It's quite hard to define. Async, chat, work, communication with teams. Why or why not was that an interesting entrance and use of their power umbrella? So the interesting thing here is we can also think about Microsoft as a platform, right? You operate an operating system where on the two sides you have users and also you have applications. Now the interesting concept here is The users of Microsoft's platform has a really high cost affiliation, right? It's not just on the hardware side, you buy a physical machine, but also it's typically an enterprise-wide adoption. There's a procurement process attached to it. There's the distribution channels that, you know, similar to have the Nintendo one worked. And because of that, Microsoft's network scope basically extends to whatever demand my user side would have.

49:18without incurring more cost on their end. Without it don't have to do another procurement cycle maybe or not have to buy another hardware for. So that naturally extends to basically maybe all of productivity software. And that's how you see Microsoft Teams create at least a competitive hassle for Slack. I think we all have to experience that Slack is a really, really good product, but good products don't always win because when there is competitive advantage from an incumbent in the case of Microsoft, they basically have a network that can extend into the product slack as operating on. They create issues, you know, competitively. So we're heading in this conversation as we're saying, transforming is a worthwhile topic. And then we're saying that a starting point is understanding the power of your current business because if you can build off of that, it creates a wildly preferable risk return prospect for something you're getting into.

50:15And so that then takes us to the next topic, which is what if you can't build on your current thing, and you need to get into something that doesn't build on your current source of power, and the two of you, with all your interviews, actually have so much, you know, just wealth of information about what goes into people's minds doing that. But if you think about that, what are you into? You're basically You're starting a new business, right? Right. Congratulations. You don't have to file as a Delaware C corp and you probably have some people you've already hired that can work on it. But what other assets are you repurposing? Right. Exactly. And so remember that thing I said about the S&P 100. If you look at what they went into that generated a lot of value and asked the question, could you generalize it all about that?

51:11I'll create some definitions here a little bit, sort of three categories. If you think of does it satisfy the same needs or does it use the same skills? Those are the two dimensions, right? Because I have a consulting background and the whole world is always two-dimensional, right? And if it has neither the same skills nor the same need, I'd just call that pure diversification.

51:33rarely does that work. That's a very high risk proposition. You're basically creating new business something you don't know how to do at all. And when you say skills and need, that's the skills of my company and the need of my customers. The skills of your company. So what your engineers know how to do, what your salespeople know how to do, all those sorts of things. So like in that case, you'd be better off either.

51:55having people who are entrepreneurial within your company like leave and start a new company and spin it off or invest your treasury in other companies and as a big company you have all the agency problems of trying to get something off the ground with a lot of bureaucracy and everything else right there's some advantages but there's more disadvantages right there's probably more disadvantages and advantages and data supports that that unrelated diversification is typically not a great thing to do so the lower left of this two by two matrix is I neither have the team that is great at creating this next new thing, nor do I have the customers that want this next new thing currently. You got it. Right. And then if you look at the upper left, which is, it's the same need, but different set of skills, you can call that reinvention. And sometimes you're forced to do that. But the opportunity set isn't that great. Really, it's not like you're opening up the whole world opportunities. And so those are pretty rare.

52:54It does happen. I mean Netflix into streaming is reinvention. It can happen. It's hard to do. You're usually counter position because you've got a whole group of people that wants to do it the old way. Right. And they have a lot of power in a company typically because they've got the PNL. It requires sort of the founder sponsor to go pursue it. Yep. That's very insightful. It's exactly right. Otherwise, you guys want by agency problems. And so the different needs Skills sharing same skills are not same, but shared skills you can call that category co-action and that's where all the action is yeah, that's AWS for sure right exactly AWS right Wait, so this is the lower right? This is kind of the lower middle It's a bunch of not perfectly shared skills, but you know quite a bit about the stuff you need to do to get in there, but it's a different need and

53:49That accounts, I don't have the numbers in front of me, but I think it's 90% of the value in the S&P 100 of the new stuff came from co-action. And that's saying something that's pretty straightforward. And I guess there is no top right because that is your current product. Same team, same needs. Oh God, you're too fast for me. That's right. Same business. And then the extra credit on this will be, why are these axes not quite orthogonal, but I'll leave that to another.

54:19discussion. So if you think of Sony going into PlayStation, that was not the same as Sony going into cars. It was a different business, but they did have a lot of stuff. And so that basically says that you want to constrain yourself to areas that sort of meet with your current capabilities. Now occasionally there are companies that have capabilities that are so proprietary.

54:46that actually that aligns with power automatically, but that's very rare. I mean, I'd say like corning in glass technology, for example, it's such a weird material science so they could do glass stuff that other people couldn't do. Is 3M a good example of this sort of lower right where they know how to make all kinds of interesting stuff, but for completely different customer bases, completely different use cases? So my view of 3M is that They're basically a material science company. And material science is weird. It's not fully or at least it used to be. I'm not so current on it so much, but I'm not fully developed theoretically. There are all kinds of nichy idiosyncratic aspects to it. And so they were able to invent stuff. So if you think of posted notes, right, that was a not so sticky glue, right?

55:43And then they didn't know what the hell to do with it. And it went on for years. There was a champion in the thing that just said, no, there's something great here. And they almost missed it. It came down to a final marketing trial where they almost didn't follow up on it. Wow. It is great. I never really thought about that. I know it's a famous story, but objectively, it was a really crappy product that they made. And then they turned that crapiness into a feature.

56:10Well, I'd characterize it a little different. I'd say it was a very interesting technology with no product. It's kind of like Web 3. It's like a computer. It's like way slower. Too soon, Ben, too soon. Right, right. I love that. Maybe we'll find the sticky note, right? Maybe the fact that it's really slow is irrelevant given it's decentralized. Right. Yeah, it's funny. I guess we share a view in that. I don't find myself very popular in that view, but I agree with you.

56:37There's all this hand-waving about the wonders of decentralization and the world will be a great place and everything, and I'm waiting for that. We need the sticky note. We need the sticky note, right? Anyway, so I think that is just a simple observation, which is that the stuff that's most likely will get you there is a different need, but using some of the skills that you have. Nothing very complicated about it, but I think data bears that out.

57:04I would say a lot of tech companies today have the same set of capabilities. So is it about where you have differential capability versus other companies or just hey, you can repurpose a bunch of your engineers to do something interesting and sure everyone else can kind of do it too. So a really interesting question. I mean way back when before the idea of core competencies, there's a writer that wrote about I think they use the term distinctive competencies.

57:33which is exactly what you're getting at. And I would say that that was probably true of quarrying and glass technology, but it's rare. And I agree with you that a lot of tech companies have a lot of similar sort of stuff. And if you had a distinctive capability and that that had an application in an area, so let do the product, then oh boy, that's great, but it's hard. That's not common.

58:01And so if you're in this place where you can't build in your current power, you just have to realize, it says you were saying before, but you're back in invent space. And yeah, you can build on current capabilities, but that sort of table stakes, you know, you're into that level of risk. And like all those things, it's adaptive, you know, you sort of...

58:22try stuff and move forward in a positive way. And so my little mental waterfall so far from everything that you've shared with us is step one, identify the power in your current business and be brutally honest about it. Right, brutally honest and very granular. Yes. Step two, figure out if there is a new business to launch or expand into under that particular power umbrella. If so, great. Do that. If not, You have to go start a new business and where you should look for the most fertile ground for that new business is using your existing set of capabilities, but for a different job to be done for customers, look there and especially this is almost step four, if you have differential capability versus other companies who could also pursue that same opportunity. I love it. Yeah.

59:17Do you write that down, Cheney? I can make sure I remember all that. Yeah, I mean, ventures just help us produce theory. Right. Right. Yeah. No, I think you nailed it. Yeah. There's one point I want to make. There's a reason why it's sequenced that way. And there may be obvious but still worth iterating, which is invention is risky. If you have something underneath your existing power umbrella, and that's what Amazon did, they had this distribution logistics. They started with We all know books and CDs and electronics etc. It's a natural extension that not just leverage but also intensifies your existing power. That's way less risky. You know you start somewhere new but with a head start compared to anyone. That's a competitor. But the movement into Amazon Web Services is invention. And I loved your guy's story on how there's the four different sources of starting point of Amazon. People would love to think it's based on some existing competitive advantage of the business but it's really not. It's invention.

1:00:13They figured out a new thing that the market wants. But as successful as they are in AWS, they also flopped, you know, a fire phone, if you still remember that, they also lost billions and billions on Alexa. There's really no track record of a business who can continuously come up with successful invention. And that speaks to the riskiness of that, which is why it's only the point number three or number four on the list. Because if you don't have to go there, don't.

1:00:40But if you do have to go there, a collection is the most possible place for success. Thank God these things are power a lot distributed. Otherwise, to your point, because no one has ever successfully been able to do hit after hit after hit like this. It would be net unprofitable to pursue innovation. Right. I just want to underline what Chinese rightfully kind of pull that out as kind of a key point here is that the risk level of doing something that's under your current power umbrella or not. The difference is gigantic. So that should be your starting point because it is absolutely gigantic. And I think since we're back into invention and I am a huge fan of Amazon, the fact that they've been able to do what they do, I would argue that they couldn't have done it if they weren't willing to take the risk and have some failures, right? Absolutely.

1:01:39And so when Janine and I talk to companies, we'll often, when we hear it, if they have been successful at transforming, and we talk about future transforming, the narrative that makes us think, oh boy, this has really, really got our problem is, oh, we have a really defined process for innovation here. And there is a 17 step process.

1:02:07And we know exactly who to assign to it and blah, blah, blah, that's the red flag of all red flags, right? And then there are other in company things. You worry about sort of screening criteria. For example, some companies when they're thinking of doing new stuff say, well, I won't do it unless it will move the needle corporally, which means the market has to be certain size. This was Microsoft. I mean, it was like, oh, unless you're going to go create a billion dollar revenue product, I'm not green letting your document.

1:02:36Right, and usually if it's already a billion dollar market is either too late. But this is just a highlight that inventions really hard. It's hard for a large company to do it. It's hard for individuals to do it. And corporate strategy is asking a question on the transforming side, at least, of if you do it, are there cases in which your current platform or significant benefit to you? Where would you put the iPhone in this framework?

1:03:04Oh, iPhone is and the iPod are straight up co-action similar capabilities, but I mean, they are computers in sort of a generic sense, right? But the iPhone in a functional way it does compete a little bit with the desktop. Yeah, right. More so than they realized it would. They're kind of like maybe as high up as you can go towards the top rate of their sort of like the existing products of the company, but different on some key dimensions.

1:03:34Yeah, I mean, I would say that one of the things when you're trying to do business definition, there's the theoretical side is the power shared. And then there's the empirical side is to look at the composition of competitors and see if they're different. And that's suggestive that they're sort of different. And so the competitors for the iPhone are different largely than the competitors for the MacBook Pro. The good litmus test.

1:04:02You know, again, it's not perfect, but because sometimes that doesn't develop in exactly economic ways, but it's a pretty good way to look at it. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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1:05:48So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So here's an interesting, you can tell me if it's interesting, an observation on Apple. It's basically always been co-action when they come up with a new multi billion dollar product line. You've got the iPod, you know, absent, going and getting the new type of hard drive, they kind of knew how to build everything about the iPod already. And once they had the tiny hard drive, then great, all of our engineers know how to build something like this. iPhone, same thing, iPad, same thing. These are new jobs to be done for customers, but they have all the right talent to build them. AirPods, same thing. What? Maybe this ARVR device, same thing. We'll have to see if it launches here in the next few months.

1:06:38But interestingly, a thing where they didn't have a large amount of the talent in-house is cars. And so they had to go build completely new skills within the company to try to, you know, they've got what, several thousand people working on this car now still hasn't launched, changed strategy five times. They have no confidence. This is going to be a commercial success. It's a new requirement for customers.

1:07:02that requires a whole bunch of people that they did not have and capability they did not have. And that kind of speaks to where I think you're going with this framework that product has not been successful or even launched. That's closer to pure diversification, right? Yeah. So if you think of that horizontal axis, that thing I was talking about, that's a spectrum from zero to 100%. If you're in the car business, if you go from green cars to red cars, you have almost 95% shared skill, go from luxury cars to compacts, a high sharing, so Toyota can do it, go from cars to tanks, pretty different. Porsche did it under coercion by the Nazis. Right, right. It's not impossible, but quite different. And then if you go from cars to refrigerators, it's really different. So yeah, no, I agree with that analysis. But remember to not to forget the importance.

1:08:00of the entrepreneur in this because they are the locus of inventiveness and it doesn't happen without them and this isn't an automatic process or something mechanical. There's individual human creativity involved and it's especially evident at Apple but it's really true everywhere for all entrepreneurs and so that's why Cheney and I have to be fairly modest about what we're doing because what we're really trying to do is to provide pattern recognition for those people. But it doesn't substitute for them. It's just a tool. This is a good lead up actually to what I wanted to ask you as we wrap on internal transforming and new business development.

1:08:47Does this framework apply to thinking about acquisitions as well for companies? Because I would imagine companies that are starting to think about transforming are also at a stage where they could be contemplating fairly large or transformative M&A. Is that different or should you think about that with the same rubric? Well, it's very related. If you're acquiring a company, the primary question you have to ask yourself is, why is this worth more to me than to the seller?

1:09:16because there will always be an information asymmetry. The seller will always know more about the asset than you will. There's a ton of financial analysis work on this and you can't get it perfectly, but basically they look at the stock price before and after acquisition and all this stuff. And if you distill all that, what it basically says is, you know, the acquires kind of break even or whatever and the seller does very well. And the fact that they figured that out.

1:09:46For a large segment of business was genius and so that then Question of what do you bring you can imagine now that touches on this subject of business definition and so on Then that's why Eddie trusted authorities get so upset about it if you horizontally acquire in something with scale economies That just makes you manage that much more and so people get upset about it and people would love to do it but you know hearts got rodina wallets you get away with it right and rightfully so but you have to be very very disciplined because often what happens if you're inside a large company and facing these decisions and i've been involved in many of them what happens is the argument that's often made to advance that is oh well we don't have to have the same number of accountants or

1:10:41We can kind of reduce their sort of these cost reduction personnel overlap thing. Never works because there are this economies of being in a large organization as well as economies and they're sort of a wash is a good assumption about it. And how much money are you really going to save? Right. And so that analysis doesn't get you there. You need something more fundamental and usually it's related to power or something like that.

1:11:05One of David and my learnings from doing our episode acquired top 10, the best acquisitions of all time, was there are exceptions, but most of the time something is a wildly successful acquisition. It is because you're able to find more revenue rather than find cost savings, because cost savings are capped, whereas new revenue has unlimited upside. Well, I'll add something to that, which is the cost of that revenue is favorable. Right. So think of Disney.

1:11:35So think of getting Lucas and Cameron stuff and Marvel. Wow, Marvel's incredible. Yeah. I've created a huge amount of corporate value by doing those things and Pixar. And that had to do with him taking franchises like LVMH was taking powerful brands that weren't fully exploited and figuring out how to economically exploit them, right? And Disney was taking branded entertainment that was powerful and being able to fully exploit it. And so it answered the question, why is this worth more to me? So you could take Star Wars stuff, which you sort of had the feeling George Lucas kind of wasn't so interesting to sort of exploit it. He just got about creative genius, right? And yet Disney could take it and run with it. And so I think that wasn't that you bought revenue that already existed. It was that you were able to exploit that.

1:12:32I'm curious if you have any thoughts on or if there's more nuance to what I always think of as kind of like the highest likelihood of success acquisitions are enterprise software acquisitions where a product is bought by one of the top enterprise software sales forces called Microsoft or Oracle or Salesforce or the like and then they plug it into the sales force. Is that similar to what we're talking about here?

1:13:00It seems very clear to me why XYZ good product that is sold in the same manner that sales force sells all of their products would be way more valuable to sales force than to its current owners. And David, real quick, I'll caveat that with like maybe highest likelihood to succeed but not highest magnitude of success. Right. Yes. I think that's what's interesting about it. Right. So examples like that they plug completely into the power structure of the current business. So.

1:13:28And you know high switching costs stuff right and so that they can deploy it to all their customers and get the same economics of high switching costs. I don't know if you want to add to that. Yeah, it actually occurs to me that there might be exactly a tight to switching cost. There might be another rationale for buying which is building takes longer than buying and timing matters particularly for companies with switching costs.

1:13:52Now, the interesting about switching costs going back to the power itself is it's non-exclusive, right? So your competitors, if they are functional equivalent, can also have switching costs. Now, if you go down this logic line, it creates the possibility of companies having switching costs but no profits. And the way it happens is if your competitors was able to build the same product, roughly the same product, and they fully realize this is the lifetime value of the customer. Should I acquire them?

1:14:19then it's rational to invest up to all of those value in the acquisition phase, you know, be it discounting, partner incentives, marketing campaigns, whatever it is, it's rational to spend up to all of that lifetime value to try to win that customer. And then what you end up with is companies with pushing costs but no profits. Right. And so that's why if you have switching costs, the key strategic challenge is to acquire customers when the cost of a customer does not fully arbitrage out the profit stream that you would expect from them. Right. Which is so funny. I think we talked about earlier of Slack and Salesforce and Microsoft and Teams right now. I haven't studied either of the businesses, but I would expect that despite all the Ballyhoo about all of it, neither Slack's for Salesforce nor maybe Teams for Microsoft is, but are not like huge transformative incremental drivers of profits for those two parent companies. So I think

1:15:15Sort of a non-obvious point of all this is that if you're thinking of doing something new, getting into stuff, that understanding business definition is critical, which is to say, into what areas does your current power umbrella extend? You don't understand that. Then the next one is the point that Cheny made, which is that expansion into areas where that umbrella extends.

1:15:41is radically more attractive than starting something utterly new. Oh, and then we'll add to that. That is not a good to have. If you understand a power umbrella, it's bigger than what you currently offer. And ignore it. You actually are creating competitive openings for somebody else to take on. Oh, that's a really important point. Absolutely. You're failing if you don't exploit it. Right. Because you can assume that eventually somebody else will. And that may completely ruin your competitive position. And for example, if it's based on scale.

1:16:11So point one, go to business definition, think very hard about where your power ball is, two, that if it does extend into an area you're considering to go there because it's really attractive. And then the third one is that if you don't have anything there and you still want to do something new, co-actions the name of the game, but understand that you're now into invention of a new business and with all the air things around it, risk adaptation, you know, everything, and hot burners matter.

1:16:40Jenny, that was such an important point about how if you miss a business definition, I'm going to ask you for an example. Can you think of a good example of companies that didn't understand the full extent of their business and got taken out as a result of it? Well, I'll throw something out. It's tough because you will tend to have to ownership bias. You only remember those companies that made it. Right. Right. Yeah. Who was that?

1:17:07Bowmore never heard of it, right? Or the handful of very few colossal failures that were so unbelievable that they're stuck in all of our psyche. For example, blockbuster. It could be the case that blockbuster failed where they had the distribution network and the customer relationships. So there was a source of power there, and they failed to exploit it in using that to launch their on streaming service, which mostly is because of boardroom blunders, but I'll fail you nonetheless.

1:17:34Might take a blockbuster as if they'd done a red envelope business a year earlier, Netflix wouldn't survive. Maybe another example is the credit card industry and how it involved. Oh, I love that. Right. It started basically as branded charge cards for particular retail store or gas station.

1:17:51and then turn into diners club which is a card for many restaurants and then very quickly it turned into a reversal card it's a card for basically everything they were basically extending your credit right they were saying this works here and we'll give you some credit at our store and then over time they would start saying yeah we'll spot you for that restaurant too we have a relationship with that restaurant right so to either of you have diners clubs cards I do not right and so they missed it yep I mean it's a great example they didn't understand that it was You're actually a platform where you want to cover as many purchases as possible. And it shouldn't be constrained. And so they missed the business definition. And Visa is one of the highest margin businesses in the world right now, right? Yeah. Visa's 50% margin. It's astonishing. Wow. Wow. We got to do Visa at some point. I can't believe Visa didn't IPO until like the 2000s. That is nice and natural. Were they owned by banks?

1:18:50I think it was a B of A, yes, founded in 1958 by Bank of America as Bank AmeriCard. Yeah, it was a consortium of banks, and that's right, I remember all this now. The IPO happened right in the middle of the Great Financial Crisis. It was March 2008. It was a talk about bad timing, but it didn't matter. Probably a good time to buy the stock. Yeah. Seriously. All right, Hamilton and Cheny, well we have you here. We got to ask you something that David and I were debating on our Nintendo episode, specifically in the 1980s.

1:19:20So you've got a console maker, Nintendo. They have a whole bunch of customers that are the people who are buying the consoles and playing the games on them. And they have a mix of first and third party titles. So they make Mario as a first party title and they have some third party developers making games for them. Final Fantasy and Dragon Quest and Castlevania. And of course the reason that those third party publishers are making the games for them is because they have...

1:19:4695% market share of people buying video game consoles and David and I were really going back and forth and we're like is it a scale economy because they can amortize the cost of game creation across so many consumers or is it a classic two-sided network effect or a network economy power I was thinking about this this morning. It's fun so I think it's both and the reason why it's both is because you can think of Nintendo as a platform that vertically integrated into the production site. Basically, all the first-party content is a vertical integration, and that's why they would exhibit economic structure that you would typically find in producers, which is a kind of scale. But at the same time, the third-party transactions are a nature of network economies.

1:20:38Some question we may have to analyze there is, is this platform really stable, which means is there a really high cost of it being attached to this platform? Can you multi-home et cetera? We have to go into that. Well, in the 80s, there were no other viable platforms. Right. So maybe they're just the one. So that's why you would observe economic structure of both scale economies and network economies. Now, there's a deeper question there, which I don't even have an answer to is, is one of them the cost and the other the effect? Or are both of them causes for power? Right.

1:21:07I love the answer. And I think she's right. I mean, when we look at platform things, there is the business of running the platform. So think of, for example, the fixed cost and over of their modeling and all that kind of stuff. And then there's the network economy aspects of a two-sided platform with people, you know, and so on. And you could have power in either one of those. But If it turns out that the cost structure is not there isn't a huge lump of fixed cost on it doesn't matter much, but I think Jenny got it right. Okay, well, we feel vindicated because that's kind of the conclusion we came to in the episode two of it's both and they're deeply intertwined. I'll give you an example of intertwined real life, which is we all know Amazon in retail has gigantic scale advantage in the infrastructure, right? Just all the warehouse and distribution centers they've built. But at the same time,

1:22:00you observe, you know, what you will call flywheels on the retail, right? The more buyers, more sellers, and the loop goes on. And this is what I call the mixing of reality between calls and effect. Because without a really strong distribution infrastructure, which gives them the cost advantage and faster delivery and prime and all of those benefits, there really isn't anything that makes their marketplace sticky among either side. So The so-called network effect you observe is actually an effect of the power in scale of the infrastructure underneath. But you would just observe economic structure of both, because platform just kind of mixed them all together. Yeah, and this isn't a cerebral pointy-headed kind of issue because it gets back to, if you find the thing that's caused rather than effect, that's the thing that you got to defend, right? And my intuition about this, and I don't know if it's right, is that...

1:22:53You have to introduce time as a variable in this to correctly understand the problem, but I think Cheny and I are involved in this deep debate right now about sort of the boundaries and relationship between scale economies and network economies. If you want to get even more confused, just remember that scale economy typically is defined as a situation which is scale increases cost-free and it goes down. That's often true of network economy.

1:23:22structural economic conditions that create it are quite different and understanding those if your business operator is really important because then they're less likely to get taken out better. Well, I think this is a great place to leave it. Hamilton Cheny, thank you so much for part three. Can't wait for part four in a few years. I don't know. Is this going to be a book? Is transforming? Are you guys going to publish this? Well, what we're talking about right now is there are a variety of topics that are extremely difficult phenotypes, if you will, to tease out and delay. And we seem to have enough of those that actually we probably could write a book about it. And so it's a topic of conversation. Great. At a minimum, you also have a newsletter. There should be a strategy capital newsletter. You'd break up there with Ben Thompson. Even if it's only like quarterly or something.

1:24:16Yeah, yeah, we've thought about certain fight papers in this and that. So I'm pretty lazy. Well, this is the problem. You need a bundle of skills to be like up in Thompson is you need to be both a great strategy thinker, which you both are. And you need to be a great writer, which you are. Seven powers is really excellently written. And you need to love writing and want to do it every day or every period, which I'm not sure that you do that's the part where David and I fall down to people keep saying oh you should turn a choir into a book or you should turn these into blog posts and David and I look at each other and we're like it takes us hours to write that sounds like hell I'd say my passion that I think probably Chinese herbal lines for this to is getting the theory right it's very satisfying and extremely hard to sort of go through and figure out you know how this kind of all fits together

1:25:14And of course, that's how you get to simple, but not simplistic. That's the only way you get to simple, but not simplistic. And so that's kind of the satisfying part, but I don't know the idea of writing other book scares the hell out of me. Yeah, it doesn't help when the theory's never done. You know, like, it's funny, I think David, you've mentioned it.

1:25:33Last time we talked about platforms, it doesn't feel completed. Like, the truth is, it will never be completed, and it's always in the work. I think nowadays, we got a lot clearer about it than a year ago, but it's always in the make. We'll think about something else, and it comes back to a platform like, oh, that's the missing piece. And realize, it's actually vertical integration. We were confused about the whole skill and geographical very long time. And then like, oh, that's what's missing. And the communication strategy is always a difficult piece as well.

1:26:00A bet of two of you spend a lot of time on each company that you do an episode on and it's things like that. And when everyone on do an example, you're like, is this really true? Then they have to go dig it all back and be like, am I just misperceiving what this really is about? Yeah, how did you delay or AWS? That one we actually talked to a lot of people who were around it at the moment of conception or theoretical conception over a variety of years. And there has been sort of canonical sources so you know we read Bradstone's book and we know Brad so we asked him you know who did you talk to to kind of piece this together and we had our own folks that we knew so there was a little bit of like actual first-party knowledge there but David and I had this a little bit of an aha moment a little bit of a sigh of relief when we were like oh

1:26:46We're not gonna figure out what the one story was so we actually can create an episode out of there's a bunch of stories and like we leave it to you listener and that that's probably the right answer is there is the one story with being a third party observer. To the extent that our version of what we told is true or closer to the truth than others no person who was personally vested and interested would be able to have that perspective yeah so and channeling kurosawa right yes exactly yes All right. Well, that's a great place to leave it. Hamilton, Jenny, thank you so much. Thank you both. Great. Okay. Our pleasure. Thank you. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

1:27:42crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

1:28:13So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right, listeners. Thank you. Thanks to Hamilton and Cheny for joining us. Very clarifying discussion. I felt, David. Totally. I mean, they really are too modest to say on the episode, but they are the very best people to do what they do because they sit at the intersection of academia.

1:28:41corporate strategy Hamilton worked for bane and strategy consulting for many years and active investing and they're working with founders every day getting their hands dirty. They truly are the best. Well listeners, we'd love to go deeper with you. You can become an acquired LP to come back into the acquired kitchen. David, do you like in that language? I've been I think of Steph Curry every time you say that. Cooking in the kitchen. Good, good.

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