I recalled an acquaintance from HBS recounting me his journey in selling his startup telecom company to a publicly traded company this story about competition: in his first year, he discovered he had several hundred competitors; on his second, they consolidated into 40 competitors; and by his third year, his company was the only left standing and he sold it for a substantial sum. He survived.
Then I see peculiar competitive paranoia. In another technology industry, one acquaintance lamented his marketplace because he noted several players already, less than 10, in sensor technologies. Having come from a world of patent filing fanatics, he felt that the marketplace was already crowded with several competitors! Yet, I remarked that an enterprise has to select the right “strategy” to beat its competitors. As Intel’s Grove once commented, only the paranoid survive. That is what free markets are all about—the only the best rise to the top.
Now let us address patents. Lawyers talk about it being the biggest barrier to entry, and I treat it as a boondoggle for patent lawyers between filing fees and then the legal costs for defending them. Yet, in some industries, it is the sine qua non for survival. In the pharma world, patents are critical given the high R& D and approval costs. So for that particular industry, bio-tech and pharma, the patents are critical.
But I have witnessed patent filings for consumer or healthcare products that don’t work, such as the Theranos portfolio. Or patents filed for phone designs that are easily circumvented. So patents do not create a solid wall for competitive market entry.
What about other industries? I find that patents play a marginal role for virtually all other markets. As a GC, I discovered that my employer had a telecom system for which someone claimed to have a patent. There were hundreds of companies applying similar or identical technology. The R&D or engineering technology could not have been challenging for this particular telecom application. After lengthy discussion with patent counsel, I thought that with the many current operators, the so-called patent holder would have a huge barrier to overcome in court to persuade all these companies to stop offering telecom services to their clients.
In some other niches, the patent offers a temporary dominant role. I recall that Xerox had one patent but other companies used different technologies to effect the same results. So the copying patent lasted for so long.
And I strongly believe that speed to market is critical more so than my concerns about patent holders. It costs more to convert a consumer to a new brand when there are fungible products out there. One can create brands but price and utility influence the consumer when the competition is fierce. Being first to market gives a competitive edge. In the case of Uber or AirBnB, knowing well that barriers to entry were virtually nonexistent, they attacked the markets with substantial capital and marketing to be dominant quickly. The incumbent competitors were the taxi and limo services. Their software platforms could be easily recreated. Speed to market strategy worked for them. The secondary players like Lyft now are forced to catch up or give up the market. In the case of Lyft, the company is redesigning its strategy to survive. Patents did not create that market, marketing did.
My comment is that one should not be dissuaded in finding competitors in their own industry. So when this acquaintance mentioned a few, I thought that he expected that the marketplace to be a blank slate to enter and be the dominant player on day one. Wrong. No such marketplace exists. First, one has to acknowledge the competitors. Second, then analyze what are the weaknesses and strengths behind each competitor. And, finally, apply the strategic fundamentals to outpace the competitors. It is all about survival.