with @skominers @smc90 

A deep dive and tour through key business concepts -- from competitive advantage and Porter's Five Forces, to network effects and moats -- as builders of all kinds navigate business strategy in open source, and especially web3. How does one compete when you're building (and competing) in the open?

As part of our ongoing series of sharing podcasts you might like, especially since the best way to discover podcasts is to find out about them on other podcasts, I wanted to tell you about WIRED's new podcast, Have a Nice Future.

It's from my former alma mater WIRED Magazine and hosted by my friends Gideon Litchfield, Wired's global editorial director, and senior writer, Lauren Good.

Each week, they speak with top technologists and thinkers, asking guests the same question.

Recent episodes cover the future development of cities and the role of parking, to how people form communities and the future of the digital public square, to how to stop AI from taking your job, to how to get your privacy back.

So be sure to find and follow Have a Nice Future wherever you get your podcasts.

In every episode of Me, Myself, and AI, my co-host Shervin Khodabandeh and I talk to AI leaders from organizations like Walmart, The Lego Group, Expedia, and Amnesty International.

Whether you're an executive, an AI practitioner, or a curious individual, Me, Myself, and AI delivers actionable insights for building value, Plus gives the backstory on the people making the technology work.

Me, myself and AI is a collaboration between MIT Sloan Management Review and Boston Consulting Group.

The podcast is available on all major platforms.

Welcome to Web3 with A6NZ, our show about building the next generation of the internet.

And while this show is for anyone working on or interested in blockchains and crypto, whether entrepreneur or creator or policymaker, today's all new episode is also relevant to all kinds of technology businesses, because it's a deep dive on the business strategy behind competitive advantage, network effects, moats and more, covering both basic foundations, as well as the tricky nuances in a new world of open source, including Web3.

As a reminder, none of the following is investment, business, legal, or tax advice.

Please see asixtency.com slash disclosures for more important information, including a link to a list of our investments.

Our expert guest today is Asics and Zcrypto research partner Scott Commeners, who is also a professor at Harvard Business School, a faculty affiliate in Harvard's Department of Economics, and advises several companies on marketplace development, incentive design, and more, as well as advises and is directly involved in several NFT communities.

Scott teaches on these topics, both at Harvard and also recently at our Crypto Startup School.

So be sure to subscribe to our playlist for those talks on YouTube under Asics and Zcrypto to get updates as we release more videos.

In the first half of this discussion, we cover foundational business concepts and questions, such as the nature of competition and how it really changes in web 3, as well as how network effects really work.

And then in the second half, in case you want to skip ahead, we cover mindsets and general guidance for builders.

So Scott, the focus of this episode is all about business strategy for Web3.

Now that is a meaty topic and that's a lot to cover, but this episode is really meant to be both for existing business leaders seeking to understand new strategies and where the future is going, as well as people who are already in Web3 and trying to figure things out.

To start things off, what would you give us as a framing mindset for how to think about business strategy for Web3?

So almost every Web3 business is an example of a platform.

And I use a very broad general definition of platform.

So a platform isn't just a two-sided marketplace where there are sellers on 1 side and buyers on the other, and the platform is mediating between them.

Rather, platforms are any context in which a business is engaged in enabling people to interact with each other, but it's characterized by network effects.

The more people on the, or users on the platform, the more powerful and higher quality the average interaction is.

And I should emphasize that platforms are not a novel business model to the internet.

You know, the more people have a credit card, the more firms want to use it and vice versa.

The more firms will accept a credit card, the more people want to use it.

And it's very broadly, Bitcoin is a platform.

It's a network for sending, you know, for, for sending value for 1 person or entity to another.

You know, an NFT project like the Borde Biat Club is a platform, right?

It's a brand as a platform, a way to connect people with a similar aesthetic and shared interests and enthusiasm with each other.

The more awesome people are in an NFT community, the more valuable it is to be in that community.

So all of these businesses, virtually all of them are in fact platforms.

And a lot of classical platforms have managed network effects by creating walled gardens.

Web3 platforms operate on blockchains which are public and according to technology standards which are interoperable.

So if you create content on your platform, it can typically be seen on the blockchain by anyone and then, you know, transferred or utilized or referenced by other platforms.

Yeah, it is the opposite of a walled garden.

It's actually like trying to be as open as possible.

Wow, I don't think that I've ever heard that term in reference there, but we should totally use it.

The opposite of a walled garden is a public garden.

Well, it's dangerous though, because it has allusions to like the whole history and origin of the tragedy of commons work back in the day in Central Park.

So we can get into some weedy areas if we go too far down the analogy.

But it works for the purpose of just like, you know, what we're trying to say here, which is great.

I mean, this necessitates a very different thinking about what your platform is and how it's going to work, right?

You typically can't maintain network effects by locking in users if most of your platform data is stored publicly and the users have control over their data assets and can just take them from 1 platform to another.

And so on 1 hand, almost every Web3 business is fundamentally building a platform.

On the other hand, we're in an environment where maintaining platform dominance has gotten much harder.

And so you have to think very carefully about what your strategy for value creation is, and then also how you manage value capture.

How do you actually get value out of your business in the end?

Great, so before we dive into specific nuances of network effects in crypto, and I do wanna go into that for sure, I also wanna talk about some other classic models and contrast them to Web3.

So 1 great example is the classic, I mean, you know, you're a professor at Harvard Business School, like of all people, you should know all about, you know, Michael Porter's 5 forces, but that is a common, another mental model that comes up often in thinking about strategy in any business action.

Because what I wanna do is set up a lot of the frameworks that are kind of common foundational thinking and how they contrast in web 2 and web 3.

And then we can dive into others more deeply.

Yeah, so Michael Porter's 5 Forces is 1 of the most influential business frameworks, a condensed way of thinking about how do you find and maintain a competitive advantage?

And competitive advantage is a term that gets thrown around casually a lot, right?

People say like, oh, this is my competitive advantage.

But first let's just be like really clear about what it means.

In Porter's view of the world, Competitive advantage is a distinction of your firm relative to others, and it's measured in terms of value creation.

Competitive advantage isn't like saying, I'm really good at software engineering.

Because the question isn't like, are you good at this thing?

But rather, how does it map into the output?

Like, does the fact that you are good at software engineering enable your firm to deliver a superior product or a lower cost product or both?

Have you expanded the value that is created by your business operation?

It's not like just, are you good at this thing?

But rather, how does that affect your performance and enable you to outperform your competitors in some way?

And secondarily, it's key that it's relative.

It depends on who else is in the market, who is competing with you, and what their relative expertise and abilities are.

Which means it could change depending on which categories you're stacking up, which competitors against or if you're a business that has multiple categories or it can change obviously as a market changes, et cetera.

And then what are the nuances when it comes to thinking about a model like Porter's 5 forces and, you know, sources of competitive advantage and where platforms come in to web 3?

Okay, so from competitive advantage, what are the 5 forces?

So the 5 forces shape competition in that industry and affect how easy it is to attain competitive advantage.

So first of all, there's just like general competition among your rivals, right?

So there's sort of the static state of like, What are all the businesses building similar products, competing for the same users?

Oh, and I should say, this is usually represented with a circle in the center, which is competition among current rivals.

And then, the other 4 forces are usually oriented around it, like a compass rose, I guess, northeast, southwest, you get the idea.

So the circle in the center is the current competitive landscape.

And then on 1 side of that is new entrance.

So if this is a particularly valuable market, or if someone invents a new technology that enables them to enter, they might show up and become a new competitor.

The new entrance is West and East is substitute products.

So not someone who does what you do, but someone who does something that the customers want just sort of as a replacement.

So think about this with the social media wars.

1 ongoing threat to the competitive advantage of any social media company is the possibility, Not that like somebody new will come and compete with them directly.

It's proven in many contexts to be very hard to compete with the dominant social media platform with a given function because the network effects are so strong.

But new functions evolved, competing for the usage share of social media.

To me, the best example of this is Facebook as a social network versus Instagram.

It's a substitute and they could see people engaging actively there in a very different way.

Another example might be like cable and you could have new entrants in the form of more cable providers, but then you have a threat of a substitute like on demand.

So then North and South, think about like a supply chain.

So above there's the bargaining power of your suppliers and below there's the bargaining power of your customers.

And so if something happens that gives the customers more bargaining power, could be a change in law, could be like a change in the demand structure.

Like maybe the customer's bargaining power could go down, right?

If they discover they really like absolutely need it, something that was previously social becomes a critical work function.

The other forces that shape competition are these relative levels of bargaining power.

It's like how well can you bargain relative to your suppliers to whom you're paying and your customers who are paying you.

And they're called forces because each of these forces exert pressure onto that industry.

So blockchain based platforms store their, you know, store their data in public, which means that a new platform can leverage a lot of that data.

By the way, this is an oversimplification, right?

A lot of platforms store some of their data in public and some of it in private, but a lot of their critical information, right?

User identity, reputation, the stuff that we think of as most valuable is often stored in the public on the blockchain, because that's a lot of the advantage that the blockchain is giving Web3, right?

It creates this ledger upon which many different things can build and interact.

But that, of course, means that it becomes easier for an entrant to show up because they can build on the code base that's available, they can build on all the content networks.

And so, you know, that West, you know, point on the compass rose is getting more intense, right?

Meanwhile, on East, that was our availability of substitutes.

So suddenly now with decentralized protocols, there's often an immediate substitute available, which is just a fork of the original protocol.

Yeah, that's true in any open source, right?

And then meanwhile, on bargaining power and both the buy and sell side, 1 thing that we're seeing is that because users of the platform, a lot of the critical data and information is stored in their crypto wallet and under their control, they have more ability to move from place to place.

They can freely pick up all of their data assets and just move them to another platform simply by connecting their crypto wallet.

And so there's more of a threat that people will leave.

And so in both sides, North and South, the bargaining power of your users is often getting stronger.

Right, because they have more direct control.

And then finally, that circle in the center, right?

Because the users can get up and leave, we're seeing lots of strategies whereby platforms try and incentivize users to switch.

And so there's been more intense competition for users because of this relative low switching cost like flexibility of moving across platforms.

And so on every 1 of these dimensions, there's at least 1 pressure that makes the competitive forces stronger.

In web theories, it sounds kind of bleak, but, but, yeah, right?

2 really important things to keep in mind.

First of all, on the customer and supplier side, there is something really good going on too, which is that you have this opportunity to create what my co-author, actually several co-authors, John Isbren and I have written about this, Christian Catalini and I have written about this, we call community cohesion.

There's an opportunity when convert your users into people who have a true preference for your platform.

They actually want to use your platform over competitors.

And ironically, that comes through the same thing that creates this lack of switching costs, right?

The giving users a slice of digital ownership, you know, sort of, you know, controlling assets that come from their interaction with the platform and often give them some degree of governance or advanced user privileges or whatever, that causes people to want to participate in a given platform.

It's not that we've somehow locked the users in, but we've actually given them a preference for staying with the platform through shared ownership.

That's the thing that we didn't have a way to do previously, at least not at the scale that we're talking about in Web

But remember I said there were 2 saving graces.

1 of them is that there is this completely new way to maintain your network, in fact, which is maintaining a network of personally invested users.

And the second thing is, while competition is maybe getting more intense in a lot of dimensions, those personally invested users also have, you know, a strong incentive to create a lot of value.

The ideal of Web3 is not that you sort of have these platforms that have locked in a bunch of users and are just extracting value from them.

To the contrary, you have engaged users who are sort of in a real sense, like part of the platform, like sort of often literally, right?

Like they're making governance decisions for the platform.

And that doesn't just make them want to stay with your platform, but actually make them want to help it succeed.

And so there's this possibility of like growing the pie far, far larger than classical platform design, because now you have this like highly engaged user base, everyone who wants to the platform to succeed because they succeed along with it.

But to take a step back and just kind of pulse check where we are in all this in this broader context of business strategy for Web 3.

What I'm really hearing you say is it's hard.

It's a feature and a bug in some ways, but you have a greater potential for a lot of these other things and we'll dive deeper into what builders can do.

So now let me dive deep on some of these questions.

And I kind of want to push a little harder on this idea of competition.

And to be clear, I'm hopeful just as you are, that this is just the beginning and we're going to see a lot of experiments play out and then see what happens.

But in terms of the value capture piece of it, the value creation, I have no doubt about that is actually the easy half of the equation.

But the value capture part, however, I have to ask, is there really such thing as competition in this world?

Like I know that sounds like a really basic question, but is it gonna be some kind of co-optetition or like some kind of cross-pollination or whatever, insert whatever other kind of buzzy word there.

I just wonder if there really is such thing as quote competition.

Okay, first of all, it's important to note as we talk about value capture, that value capture is also to some degree about value creation, right?

If there's no way to capture value, then people are actually not going to invest in doing the value creating activities.

So it's not like we're focusing here just on the part, how do you extract value from the ecosystem?

It's actually more, it's like, no one's going to build the ecosystem if they can't extract at least enough value to keep running.

That's actually a really important point because that is actually a fundamental mindset shift from Web 2 and Web 3 for sure.

Like that doesn't happen in Web 2 as easily because you have no rights to the value you create for the platforms at all.

You're just, you're kind of like captured.

There's that line that if it's free, you're the product.

In fact, my coauthor, Steve Kaczynski says in Web1, you were the consumer.

Onto your point though, it's funny because I fell into the web 2 trap right there.

I almost like was like, yeah, we don't have to think about this half of the equation as if it's separate, but A, your point reminding that just in general business strategy, there's obviously a loop between the 2, but the nuance in Web 3 that in fact, the users can also be the owners and are incentivized to do so, et cetera, et cetera, et cetera.

So our colleague, Tim Sullivan frames it as, you know, Web 2 was very much about, you know, the relationship between platforms and users was predominantly extractive.

Whereas in Web 3, value is much more shared, right?

Platforms and users, you know, grow and co-create together and share value together.

And then again, feeding that into this value creation and capture loop, it's especially important if you're relying on your users to like help build your platform with you, that both the platform and the users in the end be able to capture value or else no 1 actually has the incentive to build.

So given that, how would you answer the question?

Yeah, so I think there really is competition.

I think there's a lot more cooperation than there might've been in previous iterations of technology platforms.

There's very much a sense in which it's platforms all the way down.

It's a little bit like turtles all the way down, right?

Every piece of core infrastructure is a platform.

And so, if you think about it, a wallet like MetaMask is of course a platform and an NFT trading platform like OpenSea is a platform.

And Metamask benefits from the existence of these NFT trading platforms and from all the people who are creating NFTs.

The platforms, the NFT creators benefit from the availability of MetaMask.

And users sort of interact with all of these different systems.

And so all of these things are like cross pollinating and cross operating platforms in a way that like is much less centralized.

There's always been some degree of cooperation of this form.

Think about like, you know, payment processing companies, right?

Like the invention of a more efficient web-based payment processor fostered, you know, growth of lots of different types of consumer web platforms that couldn't have happened without payment processing infrastructure and vice versa.

That's kind of like the relationship I've been describing with MetaMask and the NFT platforms and so forth.

It reminds me of the early days of the API economy as well.

And the thesis was that like there would be like all these different companies that have like a specific core competence and they would focus on that core competence and then pull in APIs for everything else, which kind of supersized your powers and to be able to do that.

It was like this interlocking set of like APIs.

But here, the scope of every 1 of these innovations is much broader.

The process of integrating 1 of these platforms into yours or embedding features or something of the sort is much faster and easier.

It's like there's sort of an infinitely public API for most of the core content.

And so in that sense, there's a lot more composition and collaboration among different players in an ecosystem.

You know, so going back to that diagram, as I mentioned on the West and East, it's much easier for new entrants to appear and it's much easier for substitute products to be created in many contexts.

And so, if you build something that works really well, there's a much greater threat in web 3 that like your entire network could just get like moved to a competitor, could even be like a copy.

Some new entrant can try to capture all of that activity by directly incentivizing users to switch.

This is what's referred to colloquially as a vampire attack.

It's a funny name, of course, because vampire attacks are

It's like trying to suck the lifeblood out of your competitor.

And of course, that's good from a competition policy perspective a lot of the time, right?

Like we actually want more competition among platforms.

We'd like users to be less locked in so that competitors can show up.

But of course, a competition policymaker would say, we really want to incentivize more vampires in this market.

You sure you don't mean you want to buy more garlic?

Now, fun little fact that you don't know, Scott, is I'm actually super into vampire lore and fantasy literature, which we both have shared an interest in and talked about.

I admit, I didn't know that specifically, but if you asked me how much money I was willing to bet on that fact, it would have been a very large amount.

You know me well, but basically it's funny because 1 of the things that does come up pretty often in vampire lore is like that nature balances the powers of the vampires and that's why, for instance, they come out at night and you know, that's why Like there's certain things they can't do.

Like there's all these like funny rules of vampire lore that cuts across many, many pieces of vampire literature.

And it's funny because it actually applies here in that if you think about it, like a company can do a vampire attack, but that very thing you described earlier, that there can be community cohesion as a defense, then that is where the nature of Web3 is providing a check and balance in a way.

But I think it's yet to be seen how that plays out just to be very precise here, because I don't want to overstate it.

And I do want to ask you a little bit more about community cohesion, but before we do, you have mentioned now network effects a number of times.

Just to give the listeners context, we have covered network effects a lot at A6NZ Crypto and A6NZ, And I've worked on all of that content in the past.

And in particular, we used to have like a deck that was just explaining network effects because there's actually so much confusion and misconceptions around it.

See all web3 with a16z crypto transcripts on Applepodcasts

Network Effects, Moats, & the Business of web3