Sunday Reads #151: How Microsoft became a multi-trillion dollar company.
How BigCos win, and keep winning.
Sorry I missed last week’s email. I landed in Ho Chi Minh City on Saturday, and realized that my hotel didn’t have good internet.
On the plus side, happy to be able to travel again!
I’m back in Singapore now, so on to this week’s newsletter. Let’s talk about Microsoft. The company that everyone wrote off in the 2000s, but which just crossed $2 trillion in market cap in 2021.
1. So you think elephants can’t dance?
We've all seen this graph of the meteoric rise of Microsoft Teams.
And we've all dismissed it with disdain. "Yeah, they're dumping a Teams account on every Office user without their knowledge."
But what if I told you this is not one-off? That this is not a flash in the pan? That Microsoft keeps doing this?
Microsoft Azure is a great example. Amazon’s AWS was the fastest company to USD 10B in revenue. And Azure grew faster than that. Faster than Amazon!
What, is Microsoft now bundling free servers with Office??
No, it isn't. It has another trick up its sleeve. Well, it's a trick, but it's not exactly a secret. It's been the standard strategy of big companies over the last several decades.
Not only do elephants dance, they all have the same moves.
The "Product to Distribution" Playbook.
In a 2018 interview, Marc Andreessen explained the playbook for big tech companies (BigCos):
The general model for successful tech companies, contrary to myth and legend, is that they become distribution-centric rather than product-centric.
They become a distribution channel, so they can get to the world. And then they put many new products through that distribution channel.
Peter Thiel reinforces this, in Zero to One:
Superior sales and distribution by itself can create a monopoly, even with no product differentiation.
The converse is not true. No matter how strong your product, you must still support it with a strong distribution plan.
If you can get even a single distribution channel to work, you have a great business. If you try several but don’t nail one, you’re finished.
See this "Product to Distribution" approach once, and you start seeing it everywhere.
Microsoft is the OG of this approach, of course. Word, PowerPoint, Excel, Internet Explorer, ... It keeps building / buying new products, and dropping them down the giant Windows distribution chute.
And this approach has increasing returns over time, if MSFT’s market cap is any indication:
Google isn’t far behind. It first focused on building distribution for search. And then used this base to bootstrap and distribute other products. Maps, Gmail, Chrome, Google Docs, etc.
And the list goes on. Facebook cloning Snapchat shamelessly. Netflix expanding into original content. Spotify extending into podcasts. etcetera etcetera.
Lest you think this is tech-only phenomenon, this is exactly how global CPG majors like P&G and Unilever innovate.
They identify new segments that are growing fast. And then they build (Unilever jumping on the Ayurveda bandwagon in India with Lever Ayush) or buy (Kellogg buying RXBar for $600M) to compete. Younger upstarts just can’t compete with their distribution muscle.
Elad Gil talks about this in at length, in Product To Distribution.
Since focusing on product is what caused initial success, founders of breakout companies often think product development is their primary competency and asset.
In reality, the distribution channel and customer base derived from their first product is now one of the biggest go-forward advantages and differentiators the company has.
This pattern of distribution as moat and competitive advantage was used ruthlessly by the prior generation of technology companies
In all cases, the steps to success have been:
→ Build a product so good that customers will use you over an incumbent. Build a large userbase on the back of this first product.
→ Be aggressive versus complacent about customer growth early.
→ Realize your customer channels are a primary asset of the company. Build new products or buy companies and push them down your sales channel
→ Realize that your company will not be able to build everything itself. Buy more companies and push them down the channel.
Now you might think, that's great for those big companies. But I run a startup. How is this useful to me?
This mental model of "product to distribution" has three lessons for early stage companies.
Three Lessons for Startups.
Lesson 1: Solve for distribution. Earlier than you think.
The way Elad tells it, it's a good old bait and switch that happens after you've found initial success.
You think you've built a great product. And you probably have.
But far more important - even though you don't realize it - you've built a great distribution channel. A giant funnel straight from you to your users. A funnel that you can plonk your product - or ANY product - into, and boom, it reaches your consumers and they buy it.
Knowing that this will happen eventually, why not start thinking about it from the start?
As I said in Can you sell a dollar for 80 cents?
Distribution becomes the critical bottleneck, far earlier than you think.
Any work on the product beyond a basic level is an illusion, if you don't have distribution...
You may offer a free lunch. But what if no one shows up to eat?
I experienced this with my startup too.
We got to 20K users, and after that, no matter how much we innovated on the product, the needle didn't move.
Until we solved for distribution. 👇
Your product doesn't need to be stellar to start with. It only needs to be better than average.
After you get the product to that level, you need to switch focus to distribution.
As you sell to more and more people, you get more money that you can invest in your product.
Yup, you’ve got yourself a flywheel.
Lesson 2: Optimize for shipping.
Given the primacy of distribution, do whatever you can to get your product out the door fast. Even if it's vaporware. Even if it's a tiny sliver of the product you want to build.
As I said in How to become stronger (not just at the gym), ship when you're 70% there.
Ship your work early, ship your work fast. Get early feedback, work on it, and improve.
Once you’re at 70%, just do it.
• The book is 70% done? Launch it.
• The project is 70% finished? Ship it.
Over time, you'll find that the score takes care of itself. You don't have to have a Master Plan like Elon Musk.
You build distribution with one product. And then you realize there's another, more lucrative product you can build and sell.
Many networked products / multi-sided marketplaces started this way. Square (payments for small businesses → P2P payments), Zomato (restaurant database → food deliveries), etc.
Sometimes you build a newsletter audience with no particular end-outcome in mind. And then... 😉
Lesson 3: Guard your secret.
The story of Microsoft reminds me of how secretive Amazon was about AWS, for the first several years. And how important that secrecy was, in retrospect.
From Brad Stone's Amazon Unbound (via Cedric Chin's 7 Powers in Practice):
… both (Bezos) and Jassy lobbied to conceal the division’s financial details from public view, even amid the widespread skepticism that throttled the company and its stock price in 2014.
But in 2015, Amazon’s finance department argued that the division’s revenue was approaching 10 percent of Amazon’s overall sales and would eventually trigger reporting requirements under federal law.
“I was not excited about breaking our financials out because they contained useful competitive information,” Jassy admitted.
Nevertheless, that January, Amazon signaled that it would report AWS’s financial results in its quarterly report for the first time, and investors girded in anticipation.
Many analysts predicted that AWS would be revealed as just another Amazon “science project”—a lousy, low-margin business that was sapping energy from the company’s more advanced efforts in retail.
In reality, the opposite was true. That year, AWS had a 70 percent growth rate and 19.2 percent operating margin, compared to the North American retail group’s 25 percent growth rate and 2.2 percent operating margin. AWS was gushing cash, even as it rapidly consumed most of it to build even more computing capacity and keep up with the fast-growing internet companies like Snapchat that were piling onto its servers.
This reporting was a huge surprise for the analysts and investors who monitored and scrutinized Amazon, and likely even a bigger one for Microsoft, Google, and the rest of the enterprise computing world.
Bezos and Jassy knew instinctively that the moment others found out how lucrative cloud services was, they would come rushing in.
Uncertainty is a moat, as Jerry Neumann says in Startups and Uncertainty:
Uncertainty can be seen everywhere in the startup process: in the people, in the technology, in the product, and in the market...
Uncertainty is not just a nuisance startup founders can’t avoid. It is an integral part of what allows startups to be successful.
Startups that aim to create value can’t have a moat when they begin. Uncertainty is what protects them from competition until a proper moat can be built.
Uncertainty becomes their moat.
In short, remember the old chestnut: Get distribution before the incumbent gets product.
Hi, I’m Jitha. Every Sunday I share ONE key learning from my work in business development and with startups; and ONE (or more) golden nuggets. Subscribe (if you haven’t) and try it out for free 👇
2. Golden Nugget of the week.
I love this snapshot of the technological progress we've made in the last 700 years. And it's now accessible to every human on earth.
3. Today I Learned!
You know how they say "History doesn't repeat, but it rhymes"?
Well, then this here is poetry.
8000 years ago:
And today, in the age of Tinder and Bumble:
As @proetrie said on twitter, "90% of women are looking for 6% of the men" 😂
I didn't know about this, but evidently height is a big factor in dating today! (lucky I'm happily married).
But height is another matter. There are fillers for jawlines and there is Botox for foreheads, but height — a major source of anxiety for men — seems unsolvable. The struggles for short men in the dating world are well documented. To improve their odds of matching with people, men have taken to lying about their height on dating apps. This happens so frequently that the dating app Tinder once rolled out an April Fools joke about verifying height, and men got very upset. Just last week, a TikTok went viral for devising a plan to “fact-check” guys who say they’re 6 feet tall.
Well, at least today men have access to technology to increase their height. Yes, dear friends, "limb lengthening" is a thing!
From Limb Lengthening Surgery Is Becoming More Popular:
In this elaborate procedure, a doctor breaks both femurs and inserts a titanium rod that slowly expands inside the patient’s body, making them permanently taller.
Breaks your femurs?? Yikes!
So glad I'm old (not tall though).
4. This made me laugh out loud.
Nigerian Prince: Damn it, too many people are replying to my emails, despite all the spelling mistakes!
Nigerian Prince's Boss: Well then, make the email even more stupid.
(Further reading: How dumb are these Nigerian princes! Or are they?)
Substack is alerting me that I’m near the email length limit, so that’s it for this week.
As always, stay safe, healthy, and sane. I’ll see you next week.