The unbundling of scale
The Unbundling of Scale
During the industrial age, economies of scale were a major source of competitive advantage. Many production processes exhibited decreasing unit costs over a very large range of output. Steel was a classic example which resulted in a few very large steel companies dominating the market (at least until the rise of mini mills which made steel from scrap).The defensibility of scale in the information age is a lot less clear. Why? Because there are companies that are providing scale to others. Amazon AWS is a great example. No longer do you need your own data center to have servers anywhere in the world. Cloudflare is another which gives you a global edge network. Twilio connects you with carriers around the world. Sift gives you fraud detection and Firebase data synchronization.I should be quick to point out that network effects (and the related supermodularity of information) may still give large players a big advantage but they should not count on traditional scale economies as being defensible by themselves. These will be available through service providers even to the smallest of startups.It is also useful to think about how this has become possible if it was not possible during the industrial era. In the industrial processes many of the steps had to be tightly coupled. For instance you could not heat up the steel in one place and pour it into a shape in a different one. With information by contrast the cost of transfer and combination is extremely low and so we should expect to see a much finer slicing (something I wrote about nearly 6 years ago in a post titled “Feature vs Company”).