In my post How Rent-Seeking Will Kill the Hollywood Studios, I stated that the hollywood studios have implemented a strategy of milking their existing markets instead of trying to capture a new market.
I also mentioned that this business strategy would ultimately kill the hollywood studios.
In this post, I’d like to give a thought experiment to justify why retreating up-market cannot sustain a company when new markets undermine their existing business models.
Suppose we have two companies: Company A and Company B.
Suppose Company A has a customer base of 100,000,000 people and Company B has no customer base.
Suppose that some new technology creates market A of 10,000,000 million new customers and that this market has a growth rate of 10% per year. Also, market A undermines market B at a rate of 5% per year.
Suppose that company A captures 10% of market A per year, and still captures 100% of the diminishing market B.
Suppose that company B captures 90% of market A per year, and does not have any investment in market B.
We can model this situation with the following equations.
Company A = 10^8 * (.95)^year + 10^7 * (1.10)^year * 0.10
Company B = 10^7 * (1.10)^year * 0.90
Simply calculating the results by plugging in the year yields the following results
|year||Company A||Company B|
I admit that I’ve created a very simple model.
First, we have no exact number of how much a new market can undermine a business besides the fact that it must do so by a value greater than zero: it could be 0.01% or greater than 10%.
Secondly, there are hundreds of variables working together to determine the growth rate of a specific market. That prevents it from being constant over any length of time.
However, the simulation does show the long-term damage caused by bad business strategy. Any decline in a market can severely damage a company over the long run and make it vulnerable to bankruptcy or acquisition.
Ultimately, market forces will punish any company that fights disruption. If a company fights disruption then they can only delay the inevitable by changing the rate of decline.