Skip to content

Size Matters in Tech

For decades in tech the following was a verity: Small = nimble. Large = vulnerable. So the optimal funding process matched this — get aboard a lot of small companies: Y Combinator and Ron Conway were central.

Christopher Mims wrote last month in the Wall Street Journal that “IT intensity” (defined: the largest firms have the highest percentage of workers devoted to IT) suggests size is an advantage. There is no good test to see if the companies mentioned succeeded in spite of their IT intensity or because of it.

Today’s big winners went all in, says James Bessen… Tech companies such as Google, Facebook, Amazon and Apple—as well as other giants including General Motors and Nissan in the automotive sector, and Pfizer and Roche in pharmaceuticals—built their own software and even their own hardware, inventing and perfecting their own processes instead of aligning their business model with some outside developer’s idea of it.

Mims linked to Bessen’s research on AI and not this paper, which I think is what he was referring to. His paper is “focus[ed] is not on general spending on information technology, but specifically on the role of proprietary mission-critical IT systems.”  from which the thesis is: “IT use leads to greater productivity dispersion, it will also lead to greater industry concentration”

Industry concentration is happening. Erin Griffith writes today in the New York Times that $100 million funding rounds are now common for startups. No doubt a lot of that will go to new IT workers, and with the exception of Uber and Lyft there don’t come to mind multiple startups in the same industry getting these sorts of rounds. Further, none of those funding rounds are for startups going after web search, social networking or generalized ecommerce!

Large companies such as Amazon, Google, and Facebook have the unusual quality of still having founder CEOs who have the authority to “move fast and break things [natch.]” The exception is Microsoft whose founder is gone but had the authority to push Microsoft to the web in 1995, 20 years after founding, someone else may not have had. They also move fast and buy things – any threat to their ecosystem lock-in. For Facebook, that was most notable with Instagram and WhatsApp. Google bought the possibly smoldering cauldron of liabilities that was YouTube at the time. (Both probably tried seriously to buy Snap aka Snapchat.)

So is this a cost of being being or the cause of it. Is some of this IT expenditure a function of having to do very large integrations of code and people? A cost of integration to maintain network effect advantages? Precision in the data set is very hard to get to study this question. I’m not sure.


Published inBusinessInvesting

Be First to Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.