In The Gorilla Game, Geoffrey Moore explores market power, the ability of a vendor to affect its competitors' and customers' behaviors.  With market power, a vendor's actions can freeze markets, drive standards, and change the rules of competition.  Nice work if you can get it.

But like Ricky Gervais in Extras, entrepreneurs are wondering exactly how to get that work.  They want to be lead actors, rather than be one of the cast of thousands.  Without market power, editors won't call you back and reporters will take a collective yawn over your product launch.  Hell, even bloggers won't write about you.

How do you get market power?  How do you amplify it? 
How do you keep it?

Market Power

We all know market power when we see it:  some big company is able to throw its weight around, make highly visible pronouncements, and win competitive and press battles.  Even if a vendor with market power makes a mistake, the error becomes embedded in industry practice from there forward.  There isn't a CEO, VP of Sales, or CMO in high tech who doesn't want market power... or overestimate the amount they have of it.

Market power is amplified in markets where products or services are highly interdependent and cause winner-take-all end-games (sustained market share over 60%).  High tech and internet web services often exhibit this characteristic.

But not all large companies have market power, and it's not forever.  In the IT industry, IBM used to be more influential than any set of government regulations -- it literally defined the environment within which all other players operated.  Same with AT&T in telephony and RCA in radio and television.  Today, each of these firms has all but spent its market power:  they are still large, but they don't have unfair advantage.

Can small companies have market power?  Only under special circumstances.  Generally speaking, small vendors can have market power only over customers that are smaller than they are.  For a small company to be truly setting the marketplace rules, they must have proprietary control over some key architectural or marketplace asset.  Think of how Intel and Microsoft used their positions in the early 80s to wrest control of the computer market away from IBM.  Think of how Apple used its lead in MP4 and product design, plus the proprietary innovations of iTunes, to redefine the music business in the early 2000s.  Watch how Google uses its technical and audience domination to destroy the conventional advertising business.

Small high-tech companies often try to control their part of the industry by creating an infrastructure control point -- a bottleneck.  However, large companies listen to the Gartner Group, which advises that nobody should buy infrastructure from a vendor with revenues below $1 B.  Small vendors are too risky for companies over the long term, no matter what the price and feature advantages of the infrastructure.  So small vendors are rarely able to get the market to come through their bottleneck.  The strategy available to small software vendors is to open source their infrastructure elements (to make them pervasive and safe for customers) and/or recast their value-added as a vertical application that acts as a Trojan horse for their infrastructure play.

If a small vendor does not have a technological lynch-pin to act as a control point, the other mechanism is (semi-)exclusive access to a large audience (whether the vendor community or customers/prospects).  This strategy manifests itself in open source markets, and in conventional markets you see it as viral marketing and exclusive contracts.
 

Measuring Market Power

For publicly-traded companies, Geoffrey Moore came up with a terrific definition:  it's the market capitalization of your stock that is in excess of the projected value of your corporation's DFCF and brand equity (I don't have space to explain all this here...but check out this story).  In other words, if other businesses in your industry with a profitability and growth profile like yours have a market value of $10 B and your company has a market value of $25 B, the $15 B difference is attributed to your brand equity and market power. 

The stock market gives high valuations to companies with market power because they have an unfair advantage and can extract more future profits from their business.  Think about Google:  they're valued at $140 B because the consensus of the market is that they'll produce so much more profits over time than Yahoo.  In contrast, look at Chrysler (which will be sold soon for less than $7 B.  Chrysler has no market power, so the market -- the "wisdom" of the biggest crowd of smart people in the world -- expects Chrysler to have substandard profitability vs Ford and GM.

Quantifying market power of private companies is a little harder, but you can get clear yes/no signals pretty quickly by answering these questions:

• Is your company name, main product, or flagship technology searched for more than 1000 times a day across Google, Yahoo, and LiveSearch?  (There are several tools to measure this quite accurately.)
• Do you have 10 times the links pointing in to your web sites than you have pointing out? (Use Google's advanced syntax to measure this.)
• Is the average size of your customers (expressed as either revenues or employees) ten times larger than your firm?  (Get this from Hoovers and your SFA system.)
• Does your company appear in the top half of a Gartner Group Magic Quadrant?  (GG's vertical axis is labeled "ability to execute," but it really means "market power and ability to close million-dollar deals.")
• Are reporters and editors curious about your company, and do they want to write about your company or technology?  (Most of the time, the press only wants to write about your customers and may neglect to mention your name in articles.)  Are there "gossip" articles about your firm or its technology directions? 
• Would a senior editor return your CEO's call within an hour?
• Would a senior executive at a prospect take a call from your CEO within a couple of hours?
• Are you the head of any standards committee or industry association?
• Do bloggers spontaneously write about your company or its products/services?
• Do other companies seek you out for partnerships?
• Do other companies want quotes from your executives in their press releases?
• Do you have a web audience in the 100,000s (this number needs to be in the millions if you're going after consumers or media)?
• Do you have fully granted patents on which other companies infringe?  Are your patents strong enough to get an injunction against other companies?
• Are new VCs pestering you with offers of more capital?
• Are companies trying to build their market power by trying to buy you?  (This is the acid test.)

To boil it down, the root of market power is a vendor's size and the size of its customer base.  Market power cannot come directly from technology advantages, vision, prowess, desire, effort, or bravado.

Most companies will discover that they don't really have market power.  That's to be expected, and as long as you don't delude yourself you'll be OK.  It's simply an asset you don't have yet.
 

Increasing Market Power

Thanks to the internet and global competition, it's the customer who has the power, not the vendor.  There's still money to be made even if you can't freeze markets, be in the Wall Street Journal, and be the default customer choice.  Your head of sales and CEO need to get over it.

But there are things you can do to develop market power, even in the face of 800 lb gorillas. Here are some powerful examples from the IT industry:

• If you have a disruptive business model, disrupt the leaders.  As the old saying goes, products win battles, but business models win wars.  It really helps if you have a cost advantage that makes others not want to follow your lead.  The obvious current example is recurring revenue, linked to the hosted model of deployment (SaaS).

• Open source something important, something that people really are willing to pay for.  This takes a while, but even Microsoft is nervous about OpenOffice, MySQL, SugarCRM, and all flavors of Linux.

• Give something cool away, particularly if it's viral.  This can be a product (Google Desktop or Yahoo widgets), a service (Skype or Flickr), or a social network (LinkedIN or MySpace).

• If you have exclusive access to a channel or an audience, leverage it.  This can be an exclusive distribution network, exclusive licensing to an arena or audience, or a trusted-advisor relationship with a class of important customers.

• Focus on something very narrow, and be the go-to company for domain expertise, best practices, and solutions.  By specializing, you can develop best-in-the-world status -- become the big fish in the small pond.  Just make sure you don't over-specialize, or get really good at something that's unprofitable.

• License your technology profusely, get it to be the de facto standard.  This can take some time, but it's a good way to become important.  However, this strategy has been tried many times, so OEMs and other vendors are pretty wary of it.

• Create a series of products that are so good everyone imitates them.  Think iPod here.

• If you have really strong patents, go sue somebody important.  Think NTP here.

• If you have a following of enthusiasts, rally the troops and set the agenda for a new range of technologies.  This is what Netscape did when it was small.  And WebLogic when it was small.  And WebMethods when it was small.  Lots of Web 2.0 companies are trying to do this now.  Watch out, though, for pre-announcing a ton of sexy technology that you won't have the resources to deliver...because one of your nearby 800 lb gorillas will eventually do so, stealing your thunder as you get exhausted.

If you pull off one or more of these strategies, it can be a wild ride.  Do it right, and you'll create one of your own tornados (as in, "Inside the...")

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The Question of Positioning  -- coming in May

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