Chapter 84 Section 1 70-20-10 law

In the chapter that introduced venture capital, we introduced how a technology company was born from nothing.In this chapter, we introduce the transition process of a technology company after it matures. The original Apple CEO Scully (the CEO who drove Jobs away from Apple) wrote a book "Odyssey: From Pepsi to Apple" after leaving Apple in failure, summarizing his experience and lessons at Apple.In the book, he casually expresses many views on business competition.Although corporate competition is very different from natural competition, Scully uses natural competition as a metaphor for commercial competition, making it easier for people unfamiliar with business to understand it.Although I don't quite agree with him equating social phenomena with natural phenomena, but I agree with one of his views, and I will further expand it into the 70-20-10 law.

Let's follow Scully's thinking and look at some commonalities between the information technology field and the natural world: when a certain field matures (rather than when a group of heroes compete for hegemony), there is generally no room for more than three major competitors in the world.There must be a boss in this industry, and Scully compared it to a monkey king, who is the leader of this industry.Undoubtedly, although it wants to rule the entire industry smoothly, just like the monkey king wants the monkeys to submit forever, but it will definitely meet one or two main challengers, that is, the second child (and maybe the second child). a third child).What's left is a horde of small businesses, like a horde of monkeys.The boss is the leader in this field, not only occupying more than half, usually 60 to 70 percent of the market, but also formulating the rules of the game in this field.The second child has its own stable market share of 20 to 30%, and sometimes challenges the boss and gives the boss some color, but generally speaking, he spends a lot of time being bullied by the boss.Although the remaining group of monkeys is large in number, they can only account for 10% or even less of the market. They basically follow the boss' lead.The first one is always watching the second one closely, and suppresses it from time to time to prevent it from getting bigger.The boss and the second child usually don't care too much about the remaining small businesses, so that this group of small businesses can earn some small money.The percentage figures of 70, 20 and 10 are added by me, because the market share among major companies in the information industry is roughly the same.

In the field of microcomputers that we are familiar with, Microsoft is undoubtedly the leader, and Apple is the second (of course, Apple is now different from Scully’s era, and it is no longer a computer company).Microsoft controls the operating system of microcomputers, so almost all software and hardware developers must follow Microsoft to develop application products, so Microsoft's status is equivalent to the monkey king.Apple can sometimes challenge Microsoft and increase its market share by a percentage point or two, but generally speaking, it has been suppressed by Microsoft in the field of microcomputers.The remaining companies are not only difficult to challenge Microsoft’s dominance, but also far from Apple, so they either make money for Microsoft, such as various small compatible machine companies; or avoid Microsoft to make their own small money, such as Application software developers Adobe, Intuit and Symantec, among others, are also getting by.

In the field of microcomputer processors, Intel is the leader. The former No. 2 Motorola has been expelled from the microcomputer processor industry by Intel, and now AMD is in second place.Although AMD can occasionally grab some market share from Intel, it basically develops in Intel's shadow, and its products must be compatible with Intel.This is the main reason why Wall Street is not optimistic about AMD in general.Since a company in this field must have enough sales to gain a foothold, there is not even a third company that makes processors. A group of small semiconductor companies are revolving around Intel, making various products in microcomputers. other chips.In this field, Intel is the maker of the rules of the game, and no company can do something else without Intel, otherwise it will kill itself.

In other areas, the situation is similar.In the field of network routers, Cisco is the leader, and Juniper is the second; in the Internet field, Google is the leader, and Yahoo is the second.In the field of IT services, IBM is the leader, HP and Sun are the second and third.Although the market share of the leader in each field varies, it usually has more than all other companies combined. When a market is still competing for hegemony, a company whose business model is suitable for this market and has comprehensive advantages in technology, management and market is undoubtedly the most likely to become the final winner of the competition and become the leader of the industry sheep.Once a new monkey king is born in the market, it will become the maker and interpreter of the market rules, and at this time, the market will irreversibly develop in a direction favorable to this dominant player.Even if other companies have a little advantage in technology, management or other aspects, it is not enough to offset the dominant player's advantages in rule formulation and interpretation.By formulating and explaining the rules, in a short period of time this king has occupied most of the market in this field in the world.

Let's take a look at the role of regulation through the examples of Microsoft and Apple.When Microsoft occupies 95% of the microcomputer operating system market share, what does it mean for software developers to develop Apple software exclusively?Means designing and producing a car that can only run on 5% of the roads.A few days ago I was discussing information security with a professor at the University of California, San Diego who studies computer security.When we talked about the previous operating systems based on the Unix kernel, such as Apple's OS, which are usually more secure than Microsoft's, he introduced to me that the new Microsoft operating system, Vista, is now much more secure than Apple's operating system and Linux ( I'm somewhat surprised).However, Microsoft's Vista is still more vulnerable than Apple's operating system, because the latter's number (or market share) is so small that people who create computer viruses and spyware (Spyware) are "too lazy" to attack Apple's operating system. computer.This is sad and good news for Apple and Apple users. It shows how strong Microsoft's dominance in the operating system is, and even poison makers must create Microsoft's poison.In fact, Apple has always advertised that its products are superior to Microsoft's in terms of technology and performance in the early days, and now even it itself does not think this is a selling point, and has found another way to pursue coolness.

When the entire industry began to abide by the rules set by Microsoft, all kinds of people who depended on Microsoft appeared in the whole society.There are people who write, translate, publish, and sell Windows programming books (just go to the counters of various bookstores to see how many such books there are), and there are also people who are engaged in various Microsoft software training or Microsoft certificate exams. "Experts" for review (just see how many of these are advertised in the media).You can give many similar examples.Changing the rules of the microcomputer industry means that these practitioners will lose their jobs, and they will be the first to jump out against the new rules and support Microsoft.In this way, Microsoft's throne in the field of microcomputers has become almost unshakable, at least not technically.In the same way, Google also feeds countless people who do website optimization-these people optimize various websites into the most suitable rankings for Google.If a new search engine comes out overnight to challenge Google, no matter whether it is better than Google or not, these people will immediately come out against it.Even a company like Cisco that doesn't deal directly with end users can have far more impact on society than simply selling some network routers.When a Cisco certificate becomes a stepping stone to job hunting, practitioners in the entire industry must inevitably master its related technologies, and you can imagine that Cisco's position will be as stable as Mount Tai.Oracle's situation is similar to Cisco's.

In the field of communications, rules are more conducive to a company's occupation of the market than technology.With the convening of the Olympic Games and the launch of Apple's second-generation iPhone, the third-generation mobile phone has become a hot topic again.The company that dominates the third-generation mobile phone technology is not the popular iPhone maker Apple, nor is it Nokia, the largest mobile phone maker today, but the less exposed Qualcomm (Qual Comm).It is no exaggeration to say that Qualcomm is the rule-maker for third-generation mobile phones and wireless communications.Although CDMA, the third-generation wireless communication technology, was used by the US military as early as the Vietnam War, and many people around the world have mastered this technology, the earliest solution (CDMA2000) to use CDMA for mobile phone communication was proposed by Qualcomm. CDMA2000 quickly became an international standard.Through patent protection, Qualcomm has almost blocked any solutions that bypass its patents, and thus achieved the goal of dominating the 3G mobile phone market.Qualcomm has always been very domineering, and its patent fees are extremely expensive. It charges four to eight dollars for each mobile phone, which exceeds the profit that all chips in a mobile phone can bring.This forced Japan, Europe and China to come up with their own CDMA standards WCDMA (Japan and Europe) and TD-SCDMA (China) (later the United States added a WiMax, so there are four standards in the world, but now Most people think that WiMax belongs to the standard of the fourth generation 4G).These later standards technically surpassed Qualcomm's CDMA2000 solution.However, the entire 3G market is still seized by Qualcomm.On the one hand, Qualcomm's CDMA2000 is developing at twice the speed of WCDMA. On the other hand, Qualcomm has seized about 30% of the total patents in WCDMA, and it is the most critical patent (the specific number is not very accurate, roughly in this range) .The European industry led by Nokia also owns a large number of WCDMA patents, and they have joined forces with Qualcomm's competitor, Broadcom, to try to challenge Qualcomm's authority.Qualcomm used the method of catching the thief and capturing the king to first control Nokia, and has fought patent lawsuits with the latter for many years.Finally, Qualcomm threatened to stop making WCDMA chips, so that it would prevent Nokia from entering the 3G market as a net owner of WCDMA patents.This is a lose-lose approach, but Qualcomm can afford to lose because it already has a large 3G market, and Nokia can neither enter the 3G market by bypassing Qualcomm's patents nor give up the emerging 3G market. I can't afford to lose at all.As a result, Nokia had to bow its head. On July 25 this year, the two companies reached a settlement, and Qualcomm lowered the patent fee.Even after the reduction, Nokia will still pay Qualcomm a huge amount of patent fees (details have not been announced, it is estimated that Nokia will still pay Qualcomm a few dollars for each mobile phone in the next fifteen years), and Qualcomm will play a leading role in the WCDMA market from now on .That day was originally the day when Qualcomm announced its results. Qualcomm temporarily notified the media that the announcement of the results would be delayed for a few hours. Sensitive Wall Street already felt that Qualcomm was likely to handle Nokia, and the stock price rose sharply after the market.Sure enough, Qualcomm announced the good news when it reported earnings a few hours later, sending shares up nearly 20%.The stock price of its rival Broadcom has plummeted, marking the failure of the entire industry to challenge Qualcomm.Although in Europe, Japan and China, their respective mobile phone manufacturers and operators have inherent advantages, their 3G wireless communications are still operating in the shadow of Qualcomm, because the latter's standards have become the industry's generally followed rules.The Chinese government has poured hundreds of billions of yuan into promoting its own standards, but the chances of stopping Qualcomm from dominating the Chinese market now appear slim.Unless the governments of Europe, Japan and China intervene forcibly, the rules of the game set by Qualcomm for 3G will become more and more intensified.

Although Microsoft's dominance in the operating system market and Qualcomm's monopoly in the 3G market are extreme examples, even in general, a company with a dominant position in a mature market can still monopolize 60-70% of the market.In the processor market, Intel has sales of nearly 40 billion a year, while the second place AMD is only 6 billion.In the network equipment market, Cisco's sales are as high as 40 billion, three times that of its rivals Huawei (10 billion) and Juniper (4 billion). This unique phenomenon in the IT field is difficult to see in traditional industries.In the oil field, although Exxon Mobil (Exxon Mobil) has an annual turnover of up to 400 billion U.S. dollars and a similarly high market value, it does not even account for 10% of the world oil market.In the automobile industry, whether it is the former overlord General Motors or the new champion Toyota Motor, they have never occupied 20% of the world market in the past three decades.The same is true in many fields such as finance, daily necessities, and retail.Therefore, there is no dominant company in these fields, and it should be said that each competitor has its own strengths.

Why is it easier for companies in the information industry to form a dominant advantage than those in traditional industries?There are two key reasons for this.The first is that the proportions of different costs in the two industries are too different.R&D costs in traditional industries are low, but various manufacturing costs and sales costs are very high.R&D costs can be offset by economies of scale, while manufacturing costs cannot.Expanding business by a thousand times in traditional industries usually means increasing costs by hundreds of times at the same time.Taking the oil industry as an example, the most important cost is the cost of acquiring oil fields.Due to the influence of geopolitics, the cost of the American company ExxonMobil to obtain the right to exploit Russian oil fields is much higher than that of BP and Shell.Therefore, the cost of further expansion after ExxonMobil reaches a certain scale is very high.In the auto industry, manufacturing costs (not including R&D, marketing, and sales) account for more than half of a car's selling price, and even doubling sales won't improve profit margins much.Generally speaking, for an automobile company to double its turnover, it basically means doubling the size of the company, building a factory twice as large, and employing twice as many people.At this time, the company cannot be as efficient as it was when it was small, and the profit margin may even decline.So it will slow down after it expands to a certain scale.

The technology sector is quite different, with manufacturing costs accounting for a small percentage of turnover and R&D costs accounting for the majority.For Microsoft and Oracle, the cost of making one copy of software is no different than a million copies.As a result, the two software companies have high gross profit margins of over 80%.Even Cisco and Intel, which are mainly based on hardware sales, have gross profit margins as high as 60% and 50%.In the traditional industry, General Motors' GM's gross profit margin in 2007 was less than 10%, and even Toyota, the most profitable company in the world, was only about 15%.If you only look at gross profit margins, the profit margins of technology companies can be described as "amazing profits."However, the product development costs of technology companies are not low when allocated to each product.If the market can be doubled, the main cost of this part can be reduced by half.At this time, a technology company does not need more employees, the efficiency remains unchanged, and the overall profit margin goes up. Although biopharmaceutical companies have the same characteristics of low manufacturing costs as information technology companies, there is no panacea that can cure all diseases in the world, and there is no one medicine that can cure all people for the same disease. Therefore, There are many large biopharmaceutical companies co-existing.Each of these companies specializes in developing drugs for different diseases.Therefore, the dominant companies mentioned above do not exist in the field of biopharmaceuticals. Secondly, the coupling between all links in the ecological chain of information products is very strong.Once a personal computer user uses Windows, he installs various software on it.Even if a competitor comes out with an operating system that is ten times better, it will be very difficult for him to switch to a new operating system.In the same way, once a large company or government department chooses Microsoft's operating system, it is difficult to give up.When an operating system starts to lead its competitors in the market, there will be more and more buyers for it in the entire ecological chain, and more and more software will be available on its operating system, making it difficult for other competitors who are fighting alone win.Such dominant technology companies quickly occupied the global market.In the ecological chain of traditional industries, this coupling relationship is very weak.A car company chooses Michelin (Michelin) tires this time, and it can choose Firestone (Firestone) tires next time.The same is true for customers. A transportation company bought a batch of Ford cars this time. Next time, if the GM ones are good, they can immediately replace them with GM ones. Thirdly, different users have different tastes in traditional commodities such as cars, and have different performance requirements, making it difficult to achieve winner-take-all.A hundred years ago, Henry Ford tried to unify the market with one car (the Model T), which proved unworkable.Even for groceries, some people like Johnson & Johnson, some people like P&G, because they are not comparable.For technology products, although similar products of different companies may be different, these differences are not enough to influence the choice of mainstream users.For mainstream users, the performance indicators of technology products are rigid, good is good, and bad is not good.Therefore, basic functions, reasonable price and good service are the principles for them to choose a technology product.No one cares about which router looks better, a router from Cisco or a router from Huawei, and not many people know how different Microsoft's tabulation software is from Lotus's.This makes it easy for tech companies to keep getting stronger until the winner takes all. Information technology companies usually use a very short period of time to reach the market size that traditional companies can only achieve in half a century.It took Intel and Microsoft ten years to establish their dominance in the field of microcomputers and reached an output value of tens of billions since their listing, while it took Cisco only about five years to dominate the network hardware market after it went public and reached a value of one billion. million output value. Google even surpassed Yahoo and became the leader of the Internet in the second year of listing, and entered the tens of billions club in the third year. Although theoretically speaking, a company that has achieved market dominance can occupy a market almost 100% through malicious competition and acquisitions, but when it accounts for 60-80% of the market, its expansion basically comes to an end.Of course, there are reasons why the second (and third) company has done better than the leading company in a certain field (Niche Market). For example, Apple’s graphical interface and animation software are far more important to artists than Microsoft’s. The products of the same category are better, and more importantly, the risk control principles that major technology companies consciously abide by and the US federal government's strict restrictions on commercial monopoly behavior. As a technology product company, for example, HP and Dell are Intel's next companies. In order to ensure that their long-term supply will not be monopolized by one company, they usually purchase products from two companies at the same time according to a certain ratio. The condition given by the previous family is better than the other one.As a result, we see companies like HP, Dell, and Lenovo always sell computers with Intel CPUs as well as AMD.Sometimes, a product cannot use devices from two companies at the same time. For example, each generation of Apple's iPhone can only have one processor chip.At this time, the company will choose a certain supplier in this generation of products, and its competitors in the next generation.Most companies and government departments often choose company A (such as Cisco) this time and company B (such as Juniper) next time in the selection of bulk procurement. When a dominant company is so powerful that the above methods cannot prevent its monopoly from forming, competitors have to turn to the US Department of Justice and the EU's Antitrust Committee to solve the problem.Therefore, the smart leader will give up some of the market to the second and third, so as not to get into antitrust trouble.Usually 70% is a magic number.A leader is willing to emphasize that he is an industry leader, which can give confidence to investors and users, but he will always deny that he has a monopoly position, so as not to cause trouble for himself.In their official documents submitted to the China Securities Regulatory Commission and other government departments, they will even list some small competitors that cannot be smaller, saying that they are competing fairly.For example, in the annual report of Microsoft for the 2008 fiscal year, it actually listed Earthlink company (estimated that 99% of Chinese readers have never heard of this small company) with a profit of only 1.2% of its company as its competitor. in a filing with the SEC. In this way, with the help of many aspects, especially the artificial help of the IT industry, a second child (or third child) that can slightly restrict the leading company can be cultivated, and it may even account for 20-30% of the market.The rest of the market will be divided among many small companies. Readers may already be thinking: When a dominant company has been occupying 70% of a certain market share and maintains a certain advantage over the second place, hasn't it turned this market into its eternal foundation?The actual situation is not the case. With the transformation of the industry, it is impossible for a leading company to become a century-old store by relying on its old capital.Of the original thirty companies in the Dow Jones Industrial Average, only five or six are still on today's thirty list.In the field of science and technology industry, some internal laws accelerate its metabolism.