Is Technology A Zero-Sum Game?

Editor's note: Contributor Ashkan Karbasfrooshan is the founder and CEO of WatchMojo, he hosts a show on business and has published books on success.  Follow him on Twitter @ashkan.

In last week's Get Rich or Die Trying article, I mentioned that "tech is a zero-sum, winner takes all game".  A reader objected, arguing: "I think that may be an inappropriate use of the term 'zero-sum' – one company's increase in profits (or revenue) does not mean a competitor must see declining profits (or revenue)".

History suggests that Jack Welch's philosophy that "a company should be #1 or #2 in a particular industry or else leave it completely" is even more applicable to the tech industry, where the top player can build a sustainable and ever-growing business but everyone else is practically better off getting out.

Examples of market dominance by the #1 that come to mind include:

-          Google in search,
-          Facebook in social networking,
-          Groupon in daily deals, and
-          Amazon in e-Commerce.

This doesn't mean that the:

-          #1 player isn't susceptible to the Innovator's Dilemma, or
-          #2 competitor can't build a massive business.

Indeed, Microsoft's Bing or LivingSocial are meaningful #2's in search and daily deals respectively, but clearly the network effects and economies of scale that come with market share dominance make it nearly impossible for challengers to remain relevant over-time. Monopolies are nothing new and come and go: Google is the evolution of Standard Oil, AT&T and Microsoft in search, you can argue that Apple is next in line in mobile.

What is Zero-Sum Game Anyway?

First, the definition:

"In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero."

Indeed, while the tech sector is huge, within each segment, you see a zero-sum game from each individual purchasing decision out.  For example,

-          a consumer will buy a Mac or PC; an iPhone or Android device, etc.
-          a business will adopt a solution from Oracle or Siebel, for example,

But it's rare for a consumer to buy or a company to adopt both.

If you repeat this binary-like decision process throughout the industry and economy, you get a zero-sum situation where one competitor's gains come at the expense of others' in the industry: Apple's iPhone sales obviously put a dent in the Blackberry; and its iPads are evidently going to affect PC sales – no matter how much some want to deny it.

It's Like This in Most Industries, The Only Difference Is Severity

I run an online video content company and categorize video companies into four quadrants:

-          Content (creators),
-          Distribution (search, distribution),
-          Technology (content management systems, content delivery networks), and
-          Advertising (ad networks, servers)

Clearly there's a lot of overlap and how those four interact with one another merits an article in of itself (or hundreds).  While technology (with a lower case) enables Content companies, it increasingly underpins Distribution, Technology and Advertising companies.

As such, I see this zero-sum phenomenon every day with the latter three.  When TechCrunch's parent AOL bought 5Min for example, it was a matter of time before AOL stopped licensing Brightcove's Online Video Platform and instead use 5Min's player.  Seeing how AOL and 5Min were my distribution partners, I kept that thought to myself, but it was a matter of time.  Today AOL's main platform for video is indeed 5Min (note: I am not an AOL/5Min employee).

Content Isn't a Zero-Sum Game: "I'm Your Pusher"

In content, it's not really like that. ABC, CBS, FOX, NBC all have meaningful franchises.  Sure, if you watch FOX on Sunday at 6pm then you may not watch ABC at that time, increasingly with cord-cutting and time shifting that isn't the case anymore.  In fact, content is so not a zero-sum game that a company like Viacom has multiple brands to address that reality.

Indeed, if you want to travel to Barcelona, you won't watch one video or read an article, you will read/watch many and I'd argue that content consumption – like a drug – just creates more demand.

But if you want to book a ticket to Barcelona, you will either use Travelocity or Expedia, for example.

Place Your Bets

That makes content a less-risky endeavor, and, with digital media and digital distribution reducing the marginal cost of production and distribution, then content has become a better risk-adjusted bet, though arguably not as scalable and certainly not a winner-takes-all gamble.

It will take an entire generation before investors realize this; though some argue that it's already started. According to media guru Jack Myers, "VC funds are being redirected away from tech and toward content. Technology-based venture opportunities in the media and advertising space have been largely played out. Bottom line, venture capital funds will be shifting from technology to content, context, commerce and research."

I'm not holding my breath, even though digital content is effectively the new software.

In Tech, Competition Becomes Blurry Over Time

The same way that the Internet has changed content, it has also changed technology.  For one, with consumer-focused technology companies being free, advertising-supported businesses, the prevailing asset isn't necessarily the underlying hardware or software, but rather, the audience.

This is why tech companies are all seemingly fighting one another:

-          Facebook vs Google in search and social networking,
-          Google vs Apple in mobile,
-          Amazon vs Apple in tablets and entertainment,
-          Microsoft vs Google in search.

You get the idea: in tech, everyone morphs into everyone's competitor… and since the main asset – the audience or consumer base – is so fleeting, tech becomes an even riskier bet.

The Four Horsemen

Whereas initially the Web pitted "content vs. tech", as the Web matures, it becomes "tech vs. tech" with Content becoming Switzerland amongst Distribution, Technology and Advertising companies.

In the real world, there is no perfect example of a zero-sum game – granted.  But whereas Jack Welch argued that a business ought to be #1 or #2 or get out, the network effects that the web has unleashed over time force technology (lower case) businesses to either be #1 or get the hell out.