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

Oh, I'm sorry, before you keep going, is this going to 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.
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way.
We've got the truth. 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.
Our 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? They 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. Yep.
And David, I can say you and I have already recorded this interview with Chen Yi and Hamilton and like we address exactly that. So listeners, this is a really fun one to do and having Hamilton and Chen Yi 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.
Well, if you want to go deeper, you can become an acquired LP to come closer into the acquired kitchen. We have bi-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 join the slack there's now over 15 000 smart thoughtful kind members of the acquired community at acquired dot fm slash slack it's pretty cool but i will say that only represents like five 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, we want to share with you a new friend of the show, Anrock.
Anrock helps modern companies scale globally with automated sales tax and VAT, that's VAT, compliance. Yeah, AnrockC came on our radar screen because they're behind the scenes of many companies in the acquired universe like Vanta, Mutiny, Statsig.
And like them, they're also backed by Sequoia Capital. NROC is the first tax platform built specifically for modern business models like SaaS.
As the digital economy has grown, it sparked new regulations and compliance requirements from governments in a natural move to capture some of that revenue. But most tax solutions are still stuck in the retail era.
AnRock saw a gap in the market for software companies that are built from the ground up to be global from day one. So for modern companies, sales tax compliant is actually pretty high risk.
SaaS businesses that take a reactive approach lose on average 4.3% of revenue to unpaid tax, penalties, and interest. AnRock puts you in control of that global risk.
One platform that monitors your exposure worldwide, automates compliance end-to-end, and helps you forecast tax liability and stay audit-ready as you scale. This enables faster growth for software companies handling millions in revenue because when you're scaling, the last thing you want is tax complexity holding you back.
Definitely not. AnRock is trusted by thousands of finance leaders at the fastest growing companies out there, companies like Anthropic and Notion, to handle billions in revenue for them.
We know everyone has their eye on efficiency goals right now, and AnRock is a great way to do that. They help eliminate the hidden costs of manual tax compliance.
They're offering a free study on your tax nexus for acquired listeners, which is typically a $7,000 cost to see your current sales tax exposure. So if you're scaling a company and you want to see how modern businesses are protecting their revenue against sales tax risk, head on over to anrock.com slash acquired.
That's A-N-R-O-K dot com slash acquired, or click the link in the show notes. Without further ado, this show is not investment advice.
David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. Hamilton and Chen Yi, 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 that 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 normal 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, Silicon Valley is a center for that.
So the thing that really interested me was, can I contribute to that in any way? 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 cue 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 a calculator? Right. So that's the first handheld calculator in the United States, Bomar.
And so here's the issue, is that here are these two devices. They were wildly successful to begin with.
Incredible product market fit. Bomar went from maybe $3 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, you know, the Japanese calculator, Busycom, was sort of what started the whole CPU revolution. And so tremendously successful.
And you all know the story of the iPod. That was the beginning of Apple as an 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've never heard of it. So that dates me and you.
So you might be saying that innovation is not sufficient. Yeah, innovation or disruptive technology is not sufficient.
It was very disruptive. If you're 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 it 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 Bomar-ish, right? But the problem with that is that the nature, as the two of you know from your acquired site, as well as all the other things you've done, the nature of developing business is adaptive and evolutionary.
It's not like you sit a bunch of bright people in the room and you

figure out the strategy and say, okay, we're just going to 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 Jin Yi 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 Bomar-ish. That kind of metal 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 situations you face. In 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. It was a tremendous contribution, but it's not insufficient.
If you're in an attractive industry, it doesn't get you the kind of security that an iPod 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 buttressing that point more generally, that industry attractiveness doesn't explain a lot of firm differences in profitability. Another one was Christensen's work on disruptive technologies, which is just phenomenally interesting and highly erudite.
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 incumbent.
It disrupts it. So very interesting in that not for the bonner ipod problem and 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 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, what'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. We don't know 10 years from now, and that's what we're going to get into on this episode, but we know a year from now.
Bezos 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 he says that this quarter is baked also sort of tells you about something about the business model in 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, it's usually a smaller subset of that.
And 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 Beaumar-ish. 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's some complexities in that statement. And I'll tell you something, Ben and David, that has occurred to Chen Yi and myself over the last year, which is a little bit different maybe than what's 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. You 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 genotypes of power are simple. There are only seven.
My partner Bill says that it turns strategy from an essay question into a multiple choice question, although I don't know with chat GPT the difference anymore. But the phenotypes, that is the exact granular way in which they are articulated and carried forward, are complicated.
Jenny and I, yeah, we might struggle for weeks trying to figure out whether something has power or not. I'll give you an example of how the idea of power is so important.
So, you know, I'm sort of a sports car nut and I used to drive too fast. And Porsche is a great example here, which is, 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 needs.

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 911 in 1964 and a 911 today they kind of look the same yeah you know and 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, you know, faster than a Jaguar XKE right back in my day. And then there've been all kinds of parallel developments and other aspects, brakes, sound dead, 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 needed all those things, right? And consequently, they end up with this incredibly durable business model, by far the most profitable automobile wheel 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 hits-driven business? It wasn't, do people like this design or not? Exactly.
God, why are you interviewing me? Well, you do the hard part. 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 to meet the grade? I mean, think of the Toyota 2000 or an early version of Alfa Romeo 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 chutzpah to say, we're going to sell a million of these things, then you can't make the investments you need to.
Right. And so Porsche 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, now the creator of that. So one thing that struck me as the most useful way to apply the power framework is really 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's going to hit the market,

but it kind of tells you

what's the right strategy question to focus on.

I think the way I put it is,

what is not important is as important as what's important.

Naturally, as founder and operators,

you will 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, now that I've kind of had the chance to work on the theory myself, it's actually amazing how it's not done yet. Now, I've been in Hamilton's class, you know, seven, eight years ago at Stanford.
Now, I've been working with him for the past couple of years. And, you know, 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.
You know, we talked about platform last

year, and we're going to talk about transforming now. It's about sort of 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 defensible 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? And 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 demythologizing, 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 Chen Yi 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, I can give you a little data on that. So I did a study once of the S&P 100, the largest market cap companies in the world, and looked at if you pulled apart their value and looked 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 just prior to the financial crisis.
So it was 2007. David, what was your guess? My guess was 80%.
Knowing that timeframe, I'd maybe dial 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%. Huh? 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? They're in memories.
Certainly the lion's share of Apple's revenue is not. Right, the iPhone, they were not in that business before.
Google into Android. Microsoft into operating systems and applications.
They were originally a language company. But as both of you said, sometimes not.
Dr. Robert 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 flags you.
And 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 Chen Yi will talk about some of the common business nostrums that sort of fall apart in this. On the motivation side, I'll just mention that from a founder point of view, they just founded something that works, and 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 force.
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's skill and the percentage that luck. 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 a dissonance, which is that if you think of the VC community, the business model and VCs 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 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.
And the fundamental economics haven't really asserted themselves. And so the only thing left is kind of how the top line is doing.
So are you growing like crazy? And so when you hear VCs sometimes complain that people waited too long to IPO, what that message really means is that all of a sudden people's perception of the company changed from the top line to the bottom line and they missed 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 marketer 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 actually understanding power tells you some interesting stuff about transforming.
So three things. It's important.
It's hard to get right. And power matters.
All right, listeners, it is time to talk about one of our favorite companies, Statsig. It's funny, David, Statsig has gone from this little startup when we first started working with them a couple years ago to this total powerhouse now.
I know it's wild. I was looking it up and they have added all these customers since we started working together.
OpenAI, Figma, Atlassian, Vercel, Notion, tons more. At this point, if there's a growth stage tech company out there, there's pretty good chance they're using Statsig.
Yep. So listeners, if you are unfamiliar with Statsig, they basically took what was the standard product infrastructure at every big tech company, and they built it as a standalone company.
This includes advanced experimentation tools, A-B testing, feature flags, product analytics, session replays, and more. So if you're building the next great software company, this sort of infrastructure is essential because it allows your product and engineering teams to release things quickly, measure the impact of them, and track progress over time.
Totally. So, I mean, as we've talked about on the show forever at companies like Facebook or Netflix, data was just a part of how everything was built, which contributed to all the crazy bottoms-up organic growth that they had.
Now with Statsig, you can get that from day one at your startup. And today, they're not only trusted by startups, but also by more mature enterprises like Bloomberg and Microsoft and Electronic Arts.
Turns out that a single system for data-driven product decisions is useful at any scale. Yeah.
And by the way, the scale they're operating at is completely insane. They process over 2 trillion events per day now.
By the way, David, this is updated. The last I checked it was was one trillion.
And then this morning I pulled it up two trillion and they handle releases to billions of end users. If you're listening to this podcast and you've used software in the last few years, there is a very good chance you've been a part of many experiments orchestrated by Statsig.
Yeah, it's just awesome. And as they've gone upmarket, they've also started to offer some interesting deployment models, like being able to run the whole thing natively inside your existing data warehouse or just using Statsig's fully hosted solution.
If you want to leverage Statsig to grow your business, there are a bunch of great ways to get started. Statsig has a very generous free tier for small companies, a startup program with a billion free events that's $50,000 in value and significant discounts for enterprise customers.

To get started, go to statsig.com slash acquired

and just tell them that Ben and David sent you.

Thank you, Statsig.

Something 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 brute 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 Powers, but he's going to take over strategy capital. I think that job falls to 10 you.
So we're sort of constrained about talking about our investment stuff 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, that 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 are 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 thinking 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 a thing called 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 start 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 your 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 TAM expansion, you know, expand geographically, go different segments, or, you know, fuller core competence, et cetera.
And as we look through this, I think one issue we found is they 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, right? Like for example, there's this whole school of thought around marketing myopia that says you should define your industry definition widely, right? The reason why railroad industry goes into decline is not because people don't have demand for transportation, but 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, just speaks to the popularity of it.
So the question we will ask is, does companies that follow Marketing by Alpia all tend to be successful? Does that give us a way to predict success? And 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 on mobility, right? It was not just about cars.
You know, if you still remember the scooters, buses, yeah, bikes, and they were serious about flying cars at one point, the down in helicopters. Oh, that's right.
Yeah. Right.
But 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 to success, which means we don't have a theory behind it, right? So that sort of states 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.
State, in other words, they tell you about value creation, but not value capture. And state, in other words, we're basically saying product market fit is not power.
Yeah. Coming back to the very first conversation about why we did this in the first place is that the point Chen Yi 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, and 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 slice in 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 idea generators.
They tell you where to look for the next product market fit out there. And 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 ethereal concept before, business definition. So it's rather important.
So if you think about Uber versus Netflix, where they go next, right? Uber, 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.
And Netflix thinking about going international, thinking that if they started streaming in Korea, that that would make a lot of sense. And are you considering the international a separate business or are 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 an established business, is the drivers of power in that extensible to that additional segment you're considering, whether it's 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 onto 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, it built on, so you're saying you can share content across countries, right? It built in the same fixed cost economics of content development and worked. Ubers, 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 Didi or something, they don't have any advantage at all. And so it doesn't work.
Right. They get to bring their technology platform over.
So they're amortizing all the engineering design product management cost, but they have to go reacquire both sides of the marketplace in full and create that density, which is actually the expensive part of the business. And if it turned out that the engineering part was 75% of the cost structure, I mean, content for Netflix is 50%, 75%, 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 Porsche wants to sell cars in China as opposed to selling them in the U.S., no brainer.
Right. Still all the same unbelievably hard engineering problems that went into creating the car you're selling in the U.S.
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 and 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, a 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 and yeah.
Yeah. And so they used to be compensated by the shares and I don't know what their shares are worth now.
So anyway, so that's the 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, you know, 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 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 about 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.
But it was a very difficult. And now it's, of course, 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 Chen Yi, can we ask you, what are the most common power types in 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.

Well, it's actually often common that you'll have counter-positioning because that's how

Thank you. common power types that you will find are scale economies, network economies, and switching costs.
Well, it's actually often common that you'll 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 sort of the more mature phase of the business.
And that's laid out in the book, like process power or brand power. You really need to develop them after years and years of experience, you know, 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, which is probably the most common that we'd 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 here a sec. I agree with her sort of leaving it 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, but it doesn't work against wannabes 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 Bulmar, 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 power is 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 in the 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 economies, 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, right? Because you're just spreading that fixed cost over more geographies and you're 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 country, even new city you go into is 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 here in Seattle. If I was operating an Uber-like service, I have this power, 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 jurists owe out whether ride sharing and food delivery belongs to the same business. Maybe they do.

But it's more plausible than different geographies.

This is one of these things where it seems obvious on the surface, and then when you

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 drives, 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 quite a lot of nuance in your understanding of whether you have power to begin with. And of course, for Uber, it gets into the nature of platforms and exclusiveness of the sets that occupy either side of the platform and whether they overlap and all that kind of stuff.
And so without that nuance, 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.
Can 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, chatync 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 of 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 how the Nintendo one worked. And because of that, Microsoft's network scope basically extends to whatever demand my user side would have without incurring more cost on their end, without they don't have to do another procurement cycle maybe, or do 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 the 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 is operating in. They create issues, you know, competitively.
So where we're heading in this conversation is 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. And 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, you have this 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 ask the question, could you generalize at all about that? I'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.
And rarely does that work. That's a very high risk proposition.
You're basically creating a 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 having 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 than 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. It does happen.
I mean, Netflix into streaming is reinvention. It can happen.
It's hard to do. You're usually counterpositioned because you've got a whole group of people that wants to do it the old way.
And they have a lot of power in a company typically because they've got the P&L. It requires sort of the founder sponsor to go pursue it.

Yep.

That's very insightful.

It's exactly right.

Otherwise, you get swamped 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 that accounts, I don't know 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, right? Ah, 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 discussion. 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 that actually that aligns with power automatically, but that's very rare. I mean, I'd say like Corning and 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 not fully developed theoretically. There are all kinds of nichey, idiosyncratic aspects to it.
And so they were able to invent stuff. So if you think of post-it notes, right, that was a not-so-sticky glue, right? And 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'd never really thought about that.
I mean,

it's a famous story, but objectively it was a really crappy product that they made. And then

they turned that crappiness into a feature. Well, 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 but like 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, 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. There'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 the- 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.
And nothing very complicated about it, but I think data bears that out. I 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. They used the term distinctive competencies, which is exactly what you're getting at.
And I would say that that was probably true of coring 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 it led to a good product, then oh boy, that's great. But it's hard.
That's not common. And so if you're in this place where you can't build on your current power, you just have to realize, as you were saying before, Ben, you're back in invent space.
And yeah, you can build on current capabilities, but that's sort of table stakes. You're into that level of risk.
And like all those things, it's adaptive. You sort of try 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.
Did you write that down, Cheney? I think we should remember all that. Yeah.
I mean, ventures just help us produce theory. Right, 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 it 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 then CDs and then electronics, etc. It's a natural extension that not just leverages 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. They figured out a new thing that the market wants.
But as successful as they are in AWS, they also flopped 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. But if you do have to go there, coaction is the most possible place for success.
Thank God these things are power law 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 pulled 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 risks and have some failures, right? Absolutely.
And so when Chen Yi 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 got out of a problem is, oh, we have a really defined process for innovation here. And there is a 17-step process, and 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 corporately, which means the market has to be certain size. Oh, this was Microsoft.
I mean, it was like, oh, unless you're going to go create a billion dollar revenue product, I'm not greenlighting your document. Right.
And usually if it's already a billion dollar market, you're too late. But this is just a highlight that invention is 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 are significant benefit to you? Where would you put the iPhone in this framework? Oh, iPhone and the iPod are straight up coaction. 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 right of their sort of like the existing products of the company, but different

on some key dimensions. Yeah.
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.
It's a good litmus test. You 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.
Okay, listeners, now is a great time to introduce a new friend of the show who many of you will be familiar with, Claude. Claude is an AI assistant built by Anthropic, and it's quickly become an essential tool for us in creating Acquired and the go-to AI for millions of people and businesses around the world.
Yep. We're excited to be partnering with them because Claude represents exactly the kind of step change technology that we love covering here on Acquired.
It's a powerful tool that fundamentally changes how people work. I know, Ben, you have used Claude for some acquired work recently.
Yes. So listeners, I used to take four plus hours the day before recording to take all the dates for my raw notes and put them in a table at the top of my script for recording day.
On the Rolex episode, I actually fed my raw notes into Claude and asked it if it could do that for me, which was amazing. I just got my most important hundred dates for the episode done in like 20 seconds.
You texted me to this table. It was awesome.
Yeah, that freed up an extra half day that I used instead to focus on explaining how a mechanical watch works, which I'm so glad I got to spend the time doing that instead of making the table. Totally.
So cool. I was actually just chatting with Claude to brainstorm ideas for something big that you and I are working on for later this summer, and it was insanely helpful.
Listeners, stay tuned to hear all about that. Yes.
So listeners, by using Claude as your personal or business AI assistant, you'll be in great company. Organizations like Salesforce, Figma, GitLab, Intercom, and Coinbase all use Claude in their products.
So whether you are brainstorming alone or you're building with a team of thousands, Claude is here to help. And if you, your company, or your portfolio companies want to use Claude, head on over to Claude.com, that's C-L-A-U-D-E.com, or click the link in the show notes.
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 AR VR device, same thing.

We'll have to see if it launches here in the next few months.

But 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, several thousand people working on this car now still hasn't launched change strategy five times. They have no confidence.
This is going to be a commercial success. It's a new requirement for customers that 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 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 a hundred percent. 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, 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 of 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 Chen Yi 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.
Does 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 larger 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? Because 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 acquirers kind of break even or whatever, and the seller does very well. And the fact that they figured that out for a large segment of business was genius.
And so that then question of what do you bring, you can imagine how that touches on this subject of business definition and so on. And that's why antitrust authorities get so upset about it.
If you horizontally acquire in something with scale economies, that just makes your advantage that much more. And so people get upset about it and people would love to do it, but you know, Hart, Scott, Rodina, we'll let 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 we can kind of reduce their sort of these cost reduction personnel overlap thing never works because they're diseconomies of being in a large organization as well as economies. And they're sort of awash 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. One of David and my learnings from doing our episode, the 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 that the cost of that revenue is favorable. Right.
So think of Disney. So think of getting Lucas and Cameron stuff and- Marvel.
Wow. Marvel is incredible.
Yeah. Iger 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 was kind of a creative genius, right? And yet Disney could take it and run with it. And so I think it wasn't that you bought revenue that already existed.
It was that you were able to exploit that. I'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, you know, sales forces, call it Microsoft or Oracle or Salesforce or the like, and then they plug it into the Salesforce.
Is that similar to what we're talking about here? Like, it seems very clear to me why XYZ good product that is sold in the same manner that Salesforce sells all of their products would be way more valuable to Salesforce 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.
And 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, 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 understand you, do you want to add to that? Yeah, it actually occurs to me that there might be exactly tied to switching costs. There might be another rationale for buying, which is building takes longer than buying and timing matters, particularly for companies with switching costs.
Now, the interesting about switching costs going back to the power itself is it's non-exclusive, right? So your competitors, if they're 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 a competitor 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, then it's rational to invest up to all of those value in the acquisition phase, 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 switching 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'm thinking, like we talked about earlier, of Slack and Salesforce and Microsoft and Teams right now. And I haven't studied either of the businesses, but I would expect that despite all the ballyhoo about all of it, neither Slack for Salesforce nor, well, maybe Teams for Microsoft is, but are not like huge transformative incremental drivers of profits for those two parent companies.
So I think sort 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 Chen Yi made, which is that expansion into areas where that umbrella extends is radically more attractive than starting something utterly new.
Oh, and I will add to that, that it's not a good to have. If you understand power umbrellas bigger than what you currently offer and you 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 at, for example, of based on scale so point one go to business definition think very hard about where your power umbrella 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 the game, but understand that you're now into invention of a new business and with all the things around it, risk adaptation, you know, everything and entrepreneurs matter. So, Chen Yeo, that was such an important point about how if you miss a business definition, I'm going to ask you for an 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 tend to have survivorship bias. You only remember those companies that made it.
Right, right. Yeah.
Who was that? Balmer never heard of them, right? Or the handful of very few colossal failures that were so unbelievable that, you know, 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 own streaming service, which mostly is because of boardroom blunders, but a failure nonetheless.
My take of Blockbuster is if they'd done a red envelope business a year earlier, Netflix wouldn't have survived. Maybe another example is the credit card industry and how it evolved.
Oh, I love that. Right.
It started basically as branded charge cards for a particular retail store or gas station,

and then turned into a diner's club, which is a card for many restaurants. And then very quickly, it turned into universal 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 do either of you have diners clubs cards? I do not.
No. Right.
And so they missed it. Yep.
I mean, it's a great example. They didn't understand that it was, there's actually a platform where you want to cover as many purchases types 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 amazing, actually.
Were they owned by banks? I 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. Talk about bad timing, but didn't matter.
Probably a good time to buy the stock. Yeah.
Seriously. All right, Hamilton and Chenyu, while we have you here, we got to ask you something that David and I were debating on our Nintendo episode, specifically in the 1980s.
So 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 95% market share of people buying video game consoles.

And David and I were really going back and forth. And we were 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 economies of scale. But at the same time, the third-party transactions are a nature of network economies.
Now, some question we may have to analyze there is, is this platform really stable? Which means, is there a really high cost of being attached to this platform? Can you multi-home, etc.? 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 one of them the cause and the other the effect, or are both of them causes for power? Right. I 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 Uber of their modeling and all that kind of stuff. And then there's the network economy aspects of a two-sided platform of 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, then it doesn't matter much.
But I think, Jenny, you got it right. Okay, well, we feel vindicated because that's kind of the conclusion we came to on the episode too 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, you observe 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 cause 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 sort of a 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 you have to introduce time as a variable in this to correctly understand the problem. But I think Chen Yi 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 as scale increases, cost per unit goes down. That's often true of network economies, right? But the structural economic conditions that create it are quite different.
And understanding those if you're a business operator is really important

because then you're less likely to get taken out by your better. Well, I think this is a great place to leave it.
Hamilton Chenyi, 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 de-layer. 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 all should 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.
Yeah, yeah. We've thought about certain white papers and this and that.
I'm pretty lazy. Well, this is the problem.
You need a bundle of skills to be like a Ben 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 turn Acquire 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, and I think probably Chinese sort of aligns for this too, is getting the theory right. It's very satisfying and extremely hard to sort of go through and figure out how this kind of all fits together.
And 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 another book scares the hell out of me.
Yeah, it doesn't help when the theory is never done.

You know, like, it's funny.

I think, David, you mentioned last 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 we realize it's actually vertical integration. We were confused

about the whole skill for a very long time. And they're like, oh, that's what's missing.

And the communication strategy is always a difficult piece as well. I bet the two of you

spend a lot of time on each company that you do an episode on. And it's things like that.

And whenever you want to do an example, you're like, is this really true? Then you have to go dig it all back and be like, am I just misperceiving what this really is about? Yeah. How did you de-layer 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 Brad Stone'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, we're not going to 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 no one story, which 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 is 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, Chen Yi, thank you so much.

Thank you both.

Great. Okay.
Our pleasure.

Thank you.

All right, listeners. Thank you.
Thanks to Hamilton and Chen Yi 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, corporate strategy, Hamilton worked for Bain 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, are you liking that language? I think of Steph Curry every time you say that, cooking in the kitchen. Good, good.
Well, listeners, we have bi-monthly Zoom calls with our LPs, and we just announced that we are asking LPs to help us pick future episodes. So LPs, watch your email for that.
And listeners, you can join at acquired.fm slash LP. You should subscribe to our second show, ACQ2, in any podcast player for expert interviews with founders and investors.
Come join the Slack. There's now over 15,000 smart, members of the acquired community who have joined at

acquired.fm slash slack and for the other 95 of you who listen to the show and haven't joined

we would love to chat with you all right listeners we will see you next time we'll see you next time