Love vs Lock In

Economists love to talk about “scarcity” and the fact that we live in a world of limited resources.

However, in the digital world this need not necessarily be the case.

Phil Libin of Evernote is of the view that if you’re in a traditional industry like minerals extraction or transportation, then customers will either go for your stuff or your competitors stuff, but almost certainly not both. And so it’s more or less a zero sum game.

However, Libin believes that in the world of technology it’s really not zero sum. There is room for people to use multiple products. It’s not a scarcity based economy. If anything, it’s a love based economy. It’s an economy where the affinity that people have towards your products and towards your brand controls how much money you make. If you’re in the technology industry it’s a mistake to think about the world in terms of scarcity.

Libin believes that while the tech world does lend itself towards having one business dominate in a particular segment (for example, Google in search), this is only because the tech world is becoming more of a meritocracy than it’s ever been. Libin asks, quite reasonably, why would you use the second best product when you can use the best?

The problem with Libin’s view about meritocracy (apart from the fact that it seemingly contradicts his view that there is room for everyone in Silicon Valley’s love based economy) is that it’s only a half truth. One of the strongest forces that enable (or inhibit) many technology companies are network effects. Companies that have lots of users can be extremely valuable because users benefit from each other rather than from anything that the company itself provides.

A case in point is Facebook. There is not a month that goes by that I don’t consider leaving the network, or don’t talk to a friend who is thinking about doing the same. But people typically return when they realise that, despite Facebook being a horrible and pointless waste of time, everybody else they know is on there too.

Network effects can protect incumbents long after their time has passed and this explains not only the persistence of Facebook but also that of other technology products including Microsoft Office and Whatsapp.

The technology industry may not be a zero sum game, but nor is it quite the meritocracy that Libin would have us believe.