The Hypothesis: Recent Episodes
Rohit Kaul
Hi there,
I assure you that there is no violence in this post. At least not the type its title suggest.
On Thursday, August 19, Revue, a newsletter service owned by Twitter, announced it is testing a feature that allows people to subscribe to a Revue newsletter directly from the Twitter profile of its creator. This feature is available to all Revue users immediately, but it is being rolled out slowly on Twitter.
A tight integration like this was expected once Twitter acquired Revue in January 2021. This feature adds to a growing creator-focused feature suite on Twitter that lets creators monetize their content, including:
Super Follows that allows creators to charge users for accessing additional content on Twitter (Similar to Patreon)
Tip Jar that lets users make one-off payments to the creator (much like buy me a coffee)
Ticketed Spaces where users can buy tickets to any workshop or conversation hosted by a creator on Twitter Spaces (a clubhouse competitor)
This latest salvo is different from the existing features in one crucial way. All the existing features allow creators to monetize the content they create on Twitter itself. This move is a distribution play as it gives Revue (and by that logic, the creators on Revue) access to Twitter’s distribution by taking away significant friction from newsletter signups. But this works only for Revue newsletters (for now), and one could argue that by introducing newsletter signup natively in creator profile, Twitter is trying to expand Revue as a newsletter platform and in the process, capture more value from the creator ecosystem.
Currently, Twitter is the proverbial Top-Of-The-Funnel for newsletter discovery. Creators will put links in their bio, create pinned tweets, tweet threads, etc., to drive their followers to their newsletter.
However, the sign-ups happen outside Twitter, and the economic value created in the subscription transaction is captured by the newsletter platform (such as Substack) and the creator. The newsletter platform also gets Network Effects value as the subscriber's card is on the file, and her taste in newsletters is understood. It can now be used to signup for other newsletters without friction.
In this scenario, Twitter at best gets the digital exhaust of user’s interest data which it can use for fine-tuning its ad targeting, but overall it loses significant value.
One way Twitter can get out of this losing proposition is to integrate Revue into the Twitter platform deeply. This can make Revue more attractive to newsletter creators and significantly increase the number of newsletter creators on Revue. This means that the number of paid newsletters will also increase, and as Revue takes a 5% margin on subscription fees, Twitter captures the value that it was otherwise losing. Of course, just a profile page integration will not accomplish this, but I am certain that there are more feature releases on the way to make this integration deeper.
The assumptions of growth
There are two key assumptions in Twitter’s move.
Twitter believes that if it can make a deep multi-feature integration between Twitter and Revue, the latter’s growth will explode, allowing Twitter to unlock significant value.
Twitter believes that driving Revue’s growth is the best way to capture value in the long-form creator economy.
Let's unpack these further.
The issues with the first assumption are twofold: risk-reward asymmetry and switching costs.
Risk-reward asymmetry
If you are a creator with thousands of followers on Substack, making more than thousands of dollars monthly, the risk-reward for moving to a new platform doesn’t match. Even if Revue gives you a concierge migration, there is still a huge operational risk in moving an engaged subscriber base to a new platform with the reward of saving at best 5% in platform fees (Susbtack charges 10%, revue 5%, Ghost does not charge any platform fees).
Switching cost
For creators who are still paddling hard in the water to figure out how to grow (like me), the risk of moving to a new platform is not monetary. But any switch is going to cause pain. It could be a feature they use (for instance, I use Susbtack's native podcast feature a lot), or they may not like Revue's profile page or signup process. There could be several reasons that can make the switch painful even for emerging creators.
That said, if Twitter continues to add features to Revue integration, the dynamics may change. I can think of features such as
Reading Revue newsletters on Twitter
Paying for subscription inside Twitter
A feed of newsletter issues like a Twitter feed
I would still argue that none of these features will provide long-lasting power to Twitter in the true Hamiltonian sense. These are like wedges (as explained by Nathan Baschez here). Twitter is providing a wedge of distribution to Revue, and it is not very strong right now.
Capturing value in the content economy
The 2nd assumption needs a more serious deep-dive.
Platforms such as Patreon and Substack make money by charging a fee (as a percentage of revenue) from creators for providing them tools to publish content. Another group of platforms charges creators for distribution, such as YouTube and App Store (distribution-focused platforms).
One could argue that Twitter and Revue combination is at the sweet spot in this mix, with Revue providing tools and Twitter providing distribution. But if you look closely at the other distribution-based platforms, they don't care what tool you have used to come to their platform. You can make videos in Adobe or Canva, YouTube doesn't care. Similarly, you can create your iOS app in React Native or Swift, Apple doesn't care, as long as it meets the app store requirements.
Distribution-focused platforms commoditize the tools creators use to create content for posting on the platforms (more on commoditizing the complement here). The implication for Twitter is to let creators using any content publishing tool such as Revue, Substack, Ghost, WordPress, etc., become tightly integrated with Twitter's distribution. This allows it to capture value from the entire universe of long-form content, rather than just taking a slice of the pie through Revue.
Through APIs, Twitter can enable one-click payment, one-click subscription, subscription payments, newsletter preview, newsletters in DM, etc. Such API-based integrations would not be too complex for a company of the size of Twitter to execute.
This allows Twitter to capture value in three ways.
Twitter can build a payment layer on top of one tap subscription and charge a cut, similar to the fee charged by App Store. As most newsletter subscriptions work on a monthly payment, this provides Twitter a monthly recurring revenue that compounds (it has the card on file, so the 2nd subscription will always be more seamless)
It can ink page -views-based deals with business publishers (such as Vox Media, Vice, etc.) for the newsletters read inside the Twitter app.
It can also capture value by enabling content creators to be easily discovered by potential readers by showing ads. The one-tap newsletter subscription feature can be integrated with ads making the click to sign-up process almost seamless.
This also provides Twitter a route to achieving the power of switching costs. By adding the payment + consumption + discovery layer on top of the distribution layer, Twitter can create a strong lock-in for the content creators on any newsletter platform, provided it moves aggressively and onboards the newsletter creators quickly. This is a reasonable assumption as many (if not all) newsletter creators are already using Twitter for driving traffic.
But for this, Twitter will need to open up its platform to all newsletter platforms (and not just Revue), which brings us to the post's title - Twitter will need to kill its darling to capture a bigger chunk of value in the long-form content economy.
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Cheers
Rohit
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Hey,
Welcome to a new edition of The Hypothesis.
Today, I present a different take on how Amazon built a moat using third-party or 3P sellers business and pocketed the lion's share from the value created. You can also listen to the full article if you want, using the audio player above.
Amazon launched the Marketplace in 2000, allowing 3P sellers to sell their products on its website. Since then,, the marketplace has grown to over 6 Mn listed sellers and 1.5 Mn active sellers. In 2007 it contributed to only 13% of total units sold on Amazon, which has snowballed to 56% in 2021.
Amazon Marketplace is perhaps the single biggest move that converted Amazon from an e-commerce player to a retail juggernaut and became its biggest cash cow. It is also the part of Amazon that gets frequent attention from lawmakers such as Senator Elizabeth Warren as the two screengrabs show (from her Presidential run-up).
But you already know this. And what does this have to do with commoditizing the complement,, and what exactly is a complement? Let me unpack this further.
A complement is a product that you buy along with another product. Car and gas are complementary to each other. Smartphones and mobile data plans are complementary. House and furniture are complementary. Cigarettes and lighters are complementary.
An interesting characteristic of complementary products is that if the demand for one product increases, the demand for its complement also shoots up. If more people are buying new houses, the demand for its complement furniture goes up.
Smart companies have used this dynamic to build near-monopolistic businesses by commoditizing the complement of their products, thereby ushering in explosive demand for their products. Such companies undertake one or both of these two approaches. They drive down the price of complements to the marginal cost of production. They make the complements undifferentiated to capture the lion's share of the value created.
Let’s look at an example - car and gas. People don't buy cars because of high running costs, with the cost of gas being a major contributor. If a car company acquires a gas distribution company and makes gas free or near free, it will commoditize gas as a product. This reduces the running cost of cars and will drive demand for cars. Thus without doing anything in its own layer (cars), by commoditizing the complement (gas), a car company can increase its sales.
On the other hand, if a gas distribution company forward integrates and acquires a car company, it can make the cars available at cost. This means more people will buy cars and thus the demand for gas will also increase, again displaying the principle of commoditizing the complement.
Though, both of these strategies would be economically untenable.
That doesn't mean that commoditizing the complement is just a theoretical principle. Let's look at a real-life example. Computers and OS are complementary. When Microsoft launched Windows, it coded it to run on any hardware that met its standard, unlike macOS by Apple, which ran only on proprietary hardware.
Microsoft then licensed Windows to all PC OEMs such as HP, Compaq, IBM, and Dell, fostering a competition to make PCs that met the Windows specification requirement. Over a period, Microsoft carved out a dominant share of the value created while PC business became a commodity with low margins as PC OEM competed with each other. One should remember how IBM sold its PCs business to Lenovo, and Compaq merged with HP to save itself.
The strategy of commoditizing the complement has been played out numerous times in the tech industry: Facebook and news publishers, Microsoft and Internet Explorer, Google and Images. It gives us a new strategic lens to evaluate the rise of Amazon's marketplace.
Amazon and 3P sellers may look like competitors at first glance. But if you see Amazon as a multi-brand retail store (like Walmart), you see that a retail store and products it sells are complements. If demand for products increases, it leads to more footfalls in the store, driving up sales. Thus, Amazon (the website) and 3P sellers are complementary to each other.
Several steps taken by Amazon seem to have commoditized its complement - the 3P sellers. Starting in 2009, Amazon rebuilt 'Seller Central' a portal that allowed sellers to easily manage their products on Amazon, including listing the products, setting prices, and running promotions.
Amazon made it very easy for a seller to signup for the marketplace through Seller Central. In fact, it was so easy that it led to many dubious sellers signing up and selling poor quality products, as long-time Amazon watcher Brad Stone notes in his book Amazon Unbound.
….Amazon Marketplace, where independent sellers hawked their wares on Amazon.com, exploded with a surge of low-priced products (including counterfeits and knockoffs) manufactured in China.
A few early 3P sellers were able to take advantage of the opportunity by designing products loved by customers, manufacturing at low cost in China, and selling it in the US at high mark-ups.
However, as more sellers onboarded due to Amazon's massive seller outreach and ease provided by seller central, this advantage was quickly arbitraged away. Soon there were numerous sellers selling products practically undifferentiated from each other. This allowed Amazon to foster intense competition in the sellers’ layer.
Another move by Amazon further commoditized the sellers layer - Fulfilled by Amazon (FBA). FBA allows sellers to store their inventory at Amazon's warehouses and let it handle the logistics of delivery to customers. While this gives an advantage of standardization to the sellers, it also further commoditizes them.
FBA makes the purchasing experience completely undifferentiated for the customers. A seller could be located one hop away from the customer or 10,000 miles away, FBA arbitrages out the geographical proximity or distance between sellers and customers.
All of these resulted in sellers competing aggressively on price, bringing down the overall prices in the marketplace, aka getting commoditized. This created large fresh demand for the 3P sellers' products, and Amazon captured a large chunk of the value through seller and FBA fees.
Forbes estimates a topline of $ 90-100 Billion for Amazon from seller and FBA fees in 2020. This is almost twice the size of AWS, which is the poster boy of Amazon's growth story. All driven by Amazon's moves to commoditize the sellers to drive up demand.
That’s all ! I hope you liked this essay on how Amazon used the strategic principle of commoditizing the complement to its advantage.
I will now see you in the next issue. Here’s what’s upcoming at The Hypothesis:
The biggest social network you haven't heard about
The most profitable media company in Europe
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Rohit
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Network effects is the property of a network where the value a user gets from a network increases with every new user added to the network, making the network more valuable to everyone with every new user addition.
It has been put to great use by companies like Facebook. Every time your friend joins Facebook, the utility of Facebook increases for you. However, network effects are older than Facebook. Think of the fixed-line phone network from a few decades back.
The utility of the fixed-line phone network only exists because you can talk to other people. Every time a person installs a fixed-line phone, the network becomes more valuable for you, without you doing anything.
These are called same-sided network effects. Another type of network effects is the 2-sided network effects that has a demand-side and a supply-side. Value increases for demand side when more suppliers are added and vice versa. Think Uber - more commuters means more drivers that means more commuters.
But network effects only work at scale and on day 0, a startup has a small number of users. So the startup doesn't have the advantage of network effects to showcase and acquire new users. This becomes a chicken and egg problem for the startup.
As the users don't see the value because network effects are non-existent, they don't join and because they don't join, the app doesn't have the critical mass and the network effects don't kick in.
To solve this, startups need a strong hook that shows enough immediate value to the users to get them through the door and then make them stay long enough to see the value of network effects. This can be done by having an awesome single-player mode in your app.
Single-player mode means that your app provides instant and sufficient value to a user even when she is using it alone before the value from network effects is delivered. That brings us to hooks.
An app can deliver single-player mode by creating a 'hook' that is easy for new users to adopt. Single-player mode can be created as 'come for the hook, stay for the network effects'. Let's see how this works.
There are 3 hooks that can be used in single-player mode.
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Amazing Tool.
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Content.
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Free services.
Let's unpack each one of these.
- Amazing Tool. Instagram started off as an app that allowed users to make their images shine with amazing professional quality filters, much before it became a social network.
Figma too started as an online graphic editing tool that anyone can use without complex installations before it became a place for collaborative editing.
In both of these cases, the single-player mode is 'come for the tool, stay for the network effects.'
- Content
Barstool sports is probably the best example here. Before it became a thriving community, it produced great content that built its cult following among its users. So, come for the content, stay for the network effects of being part of a like-minded community.
- Free services
Paypal was struggling to get users on its platform because there weren't enough sellers accepting PayPal and there wasn't much incentive for a payer to use Paypal. So they did the ultimate marketing hack.
Paypal credited all user accounts with $10 and added $10 when they referred a new user. This single hack got them millions of new users and saturated the demand side of the network. When sellers saw payers using Paypal in such large numbers, they happily started accepting it.
Another example is substack. They let writers write for free, so anyone can start publishing a newsletter. On the other side, they have millions of readers reading existing newsletters. All Substack needs to do now is to chain the two sides to let the 2-sided network effects flow.
Substack and Paypal are great examples of the hook of 'come for 'free service' stay for network effects.'
So an early-stage startup can use the hooks of 'come for tool or content or free service and stay for network effects' to create a single-player mode that accelerates new user acquisition. Keep in mind the hook has to be easy for new users to adopt.
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Transcript of the Episode
This strategy bytecast is brought to you by The Hypothesis - Exploring the deep end of timeless ideas in strategy.
The biggest moat for content companies over their competitors is scale economies
make large investment in production.
spread the investment over a large number of viewers.
get low per-unit costs.
pass on the low cost to customer as low prices.
Let's take Netflix. Netflix is able to invest Billions of dollars in original content as it can spread its cost over 208 million customers, keeping the per unit cost of original content very low. Let's unpack this further.
If $1 Billion is needed to create a kickass original, Netflix gets to spread it over 208 Million subscribers, significantly bringing down its per unit cost of production. While Hulu allocates same $ 1 Billion over 42 Million subscribers, which means 5 times the unit cost of production
Hulu with its lower subscriber base will always be at a unit cost disadvantage to Netflix making investment in originals very unattractive. But Hulu can also get more subscribers, you say?
How does Hulu gain subscribers? (a) By offering better content than Netflix (b) by offering better price than Netflix. Small subs base makes large investment in original content financially unattractive. So better content is out of play.
Hulu can drop its price below Netflix to attract subscribers. But as Netflix has a unit cost advantage over Hulu, it can match Hulu's lowered price. If Hulu drops its price further Netflix can again match leading to a price war
This can in theory continue to happen till Hulu's price drops to its marginal cost at which point it cannot drop price further without going bankrupt, giving Netflix the upperhand in the price war, all due to its larger subs base and the scale economy working to its advantage.
It is important to note here that I consider Netflix and Hulu as content companies and not as Tech companies. Benedict Evans wrote a stellar piece about how tech companies stop being tech companies and become movie, retail or 'sector' companies as tech is a commodity.
Now onto the creator economy and velvet ropes. Apps like clubhouse created quite a stir by being exclusively on iOS and using an invite-only launch strategy. This is dubbed 'velvet ropes' by james currier from NFX and li jin, like the velvet ropes at the entrance of clubs.
Many other apps have used this model to build hype early on in their journeys but where this model fails is it slows down reaching critical scale if followed for too long. This can allow competitors, in this case Twitter Spaces and Spotify Greenroom to catch-up.
Tech companies like Clubhouse think of themselves as social creator economy companies but fundamentally they are content companies and rules of content companies apply to them as well. I term this as 'creator economy myopia'
This brings us to the point of 'creator economy myopia'. Clubhouse believes that it is solving a creator economy problem (creators get a platform to connect with audience) but what they are really solving is a content problem (people need content to consume).
The use of word myopia in business literature can be traced back to the essay 'Marketing Myopia' by Dr Theodore Levitt who rightly mentioned that railroads companies are not in railroads business but in the business of transportation.
In case of apps like clubhouse, defining their market as social creator economy (and not content) can make their position highly uncompetitive especially when against Spotify and Twitter which are masters of the game of scale.
So if you are a startup where the unit of exchange is a piece of content (image, audio, video, text, whatever!), your first priority has to be to scale at all costs or else get consumed by lookalike apps.
Throw away the velvet ropes as soon as the initial marketing stir is done and get into onboarding users at high velocity to hit critical scale before anyone else does to get the moat of scale economies working for you.
I hope you liked reading this quick byte-sized take on clubhouse, myopia and scale economies. Subscribe to The Hypothesis at www.readthehypothesis.com to get more strategy goodness in your inbox.
The podcast is generated using Speechkit’s AI-based text-to-speech converter.
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Hi there,
This is the audio version of the essay - How can your brand get the moat of soft power. If you prefer the text version, you can check it out here 👇
Rohit
Get full access to The Hypothesis at www.readthehypothesis.com/subscribe