There’s been a bunch of recent criticism of new web businesses focusing on low barriers to entry.
The arguments go that if others are able to easily enter the same busniess and if the business is not protected by intellectual property, then it is flawed, unworthy of a high valuation and will ultimately fail.
The complaint with Groupon ($GRPN) is that anyone including Google ($GOOG) or Amazon ($AMZN) can enter the space, deploy quickly with scale and drive competition up and margins down. In fact, there are already a ton of new entrants in the crowdsourced coupon space and no end of competition. This means little. All that matters is if Groupon can continue to execute and advance product in new and delightful ways.
Critics are writing similar things about Pandora ($P). And the same applies there too. Pandora will survive and thrive if they keep innovating and giving users reasons to be happy to pay. Pretty simple.
I remember similar low barriers to entry criticism aimed at Amazon after Wal-Mart ($WMT) launched its online store. “Wal-Mart is already huge, wildly profitable and controls wholesalers due to their massive order size. They will squash Amazon or whatever.” Meanwhile, all Bezos and company did was keep there head down, evolve their singular vision and make it ever easier and cheaper for people to buy books and then anything online.
Shorts have been saying the same thing about Netflix ($NFLX) for more than 100 points in the stock. That game is over. Even if $NFLX continues to fall after Tuesday’s earnings miss, it doesnt matter. The argument was made, $AMZN will crush them, $AAPL will crush them, $GOOG will crush them, it doesn’t matter. The bet is over, the shorts from 100 or 200 already got creamed.
At the end of the day, the only barrier to entry is execution. If you are a young company, smaller but out in front, and all you do is improve everyday, make the product better and work smarter, you have a great opportunity no matter who can or does come after your business
On the other hand, if you slip up, get lazy or dumb, you will get beat, even if you began small and nimble and even if you created the space.
The risk to Pandora, Groupon, LinkedIn ($LNKD) and the rest of them is execution risk and the low barrier to entry argument is a just a red herring.
One last point to add here – even if your business is protected to some degree by intellectual property, barriers to entry are low if you are not executing. Someone will eventually come along and apply a totally novel and better way of doing something that is not protected and they will snack on your sandwich.
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