June 28, 1999
The Outlook
NEW YORK
Back in 1995, Robert H. Frank cowrote a book called "The Winner Take All
Society," in which the Cornell University economics professor argued that the
very best performers in their fields -- even if just marginally better than their
competitors -- were enjoying a huge and widening gap in financial rewards.
The book got some attention, but these days, the argument is starting to look
more convincing all the time. Across a variety of markets, the No. 1 player
has left its rivals in the dust in the 1990s, and reaped hugely disproportionate
returns in stock-market valuations, often giving it the means to consolidate its
position through acquisitions. Cisco Systems trounced Bay Networks, General
Electric did the same to both United Technologies and CBS/Westinghouse.
Gap Inc.'s market capitalization soared past that of rival Limited Inc.
This phenomenon is taking place so often that the consultants at
Mercer Management Consulting, New York, have coined a term
for it: the plight of the silver medalist.
Nowhere is the gap between the gold medalist and the rest of the field more
stark, perhaps, than in Internet-based competition. When Prof. Frank's book
was published, the Internet was just emerging as a business phenomenon.
Today, it's axiomatic in Silicon Valley that the Internet is a "land grab" where
the early dominant player walks off with most of the booty. Many
Internet-based start-ups spend enormous amounts of marketing money to
generate brand recognition, "buzz" and market dominance as fast as possible.
They want to be the Yahoo!-like category killer.
Hard evidence is starting to support the "winner take all" nature of Internet
competition. A recently published study of Web traffic by Bernardo
Huberman and a colleague at Xerox Corp.'s Palo Alto, Calif., research facility
shows a tremendous concentration of traffic at a relatively few Web sites. Of
more than 120,000 sites examined, just 119 of them captured 32% of all
Internet traffic during the study period, December 1997. The top 5% of all
sites garnered more than 74% of such traffic. Web portal Yahoo was the No.
1 destination.
Some thinkers are convinced that the rise of networks, especially e-commerce
networks linking buyers and sellers, will strengthen the market's tendency to
reward one big winner. "It's complicated because the Web cuts both ways.
Small players can potentially reach people from all over the world," says
Prof. Frank, "but you want to stand back and look at the big picture. It's all
going one way; it's all about being the lead player, and success breeds
success."
Prof. Frank's favorite example is Internet auctioneer eBay. If you want to buy
a Heriz Oriental rug or some Rookwood pottery, he says, you want to browse
the site with the best selection. You choose eBay. If you are selling, you want
the site with the most customer traffic. Again, that's eBay. This process is
self-reinforcing, so the strong get stronger. Prof. Frank, for one, thinks that
even such heavyweight rivals as Amazon.com will have trouble wresting the
No. 1 position away from the leading electronic auctioneer.
Beyond the rise of networks, though, emergence of a free-agent
labor market may also be driving the winner-take-all results. As
talent becomes ever more footloose, the theory goes, the best
people will jump to the best ship. This tends to weaken the
laggards while concentrating the best talent at the winning
organizations.
Secondly, in a world of almost limitless choice, the company that achieves
brand recognition in a crowded market can rise above the pack and keep
soaring.
This is pretty much what the Mercer Management analysts see, again and
again, in corporate competition in the 1990s. Often, two companies were
locked in head-to-head struggle, roughly even in the marketplace -- and
roughly even in stock-market valuations. Often, a company didn't dominate its
market, but that company "got it," in terms of a superior business idea. In
running shoes, it was outsourcing and celebrity endorsements, which Nike
pioneered, ahead of Reebok International.
"The competitor begins to compete intensely for mindshare of customers,
investors and talent. The result is that momentum builds for the competitor
that 'got it' first, and its market value explodes," says Adrian Slywotzky, a
Mercer vice president, in a recent book called "Profit Patterns."
Indeed, the lopsided returns to investors between the No. 1 player
and the rest of the pack is the final and maybe the most important
aspect of these winner-take-all fights. During the athletic-shoe
wars of the early 1990s, Nike's market capitalization was roughly
$4 billion, vs. $3 billion at Reebok. By 1998, Nike's market cap
had risen to more than $10 billion, while Reebok sank to about $2
billion. And soaring stock prices have enabled winners to
consolidate by acquiring rivals.
Of course, plenty of industries remain multicompany battlegrounds, including
autos, airlines, banking and much of the energy industry. Nobody knows if
some megabrand will emerge in Internet banking, for instance.
However, if there's one last lesson of the '90s, it's that the toughest rivals
often come from unexpected quarters. Amazon.com came seemingly out of
nowhere to challenge traditional booksellers. In the next round, Amazon's
toughest competition may come from a company with a gold medal in another
field: Wal-Mart Stores.
--Bernard Wysocki Jr. |
