[ChuckMcM]

An interesting brick and mortar example in the Bay Area was Fry's electronics. When they started, they grossly undercut all of the electronics brick and mortar stores and priced more like the distributors did rather than the stores.

As a result their business grew quickly and the other stores were unable to compete and went out of business. Then with the market to themselves they raised their prices to increase their margins. They also used access to adjacent markets (TVs, PCs, Radios, Appliances, Office Supplies) to supplement their margin which specialty retailers like Quement or Jade did not.

Their strategy was essentially to lose money on something that brought in customers, and to make extra money on other things once the customer had been acquired and was in the store.

The "grow fast at any cost" mentality is predicated on the understanding that the most difficult step of any new business is to change consumer behavior such that they go to the new business first. Once they have established that pattern they can then manipulate the pricing of their offerings in order to achieve the highest sustainable level of margin before they lose customers.

[irq11]

Agreed, but phrasing it in the “here’s what changed that most people don’t understand” language that VCs love:

“in the age of cheap money, scale is not a defensive moat”

When Fry’s was founded, it was so prohibitively difficult to get the funding to scale to their size, that competition was thwarted by lack of investment. Now? The trick is public knowledge; the funds are cheaply available to anyone able to scale a competitor. So the critical step two —- raise prices —- is impossible. Your margin is my opportunity, as they say.

What worked in 1985 when interest rates were ~8% doesn’t work when the great global pool of money is sloshing around, desperately seeking returns.

I think the actual investment dynamics are more nuanced (i.e. investors aren’t completely naive), but it’s still true that this get-a-monopoly-and-raise-prices approach is a business strategy from a very different era.

[nostrademons]

The trick still works (and is quite common), because investors apply that reasoning to the upstart, not the established business. If you go to a bunch of VCs and pitch them "Comcast is making a ton of money because they own a monopoly and steadily raise prices. Their margin is our opportunity. Give us $20B so we can build out a national 1G fiber network and take all their customers", their response will be "What's to stop Comcast from dropping their prices and increasing their bandwidth once you've spent all this money building your competing market?"

Knowing that you're the attacker and they're the defender and that most consumer markets favor the incumbent, the investor won't hand over their capital unless you can show that you've already started to take their market. And then once you have shown that you're taking a fat incumbent's market, they're happy to fork over tons because they know that every other investor's reasoning will be the same, and nobody will want to attack an incumbent that can just drop prices to fend off a challenger.

BTW, Google decided to buck the outside investors in exactly this example, funding GFiber internally. It played out basically exactly as the scenario above - the incumbents rolled out gigabit cable/fiber at competitive prices in precisely those markets GFiber was threatening, preventing them from making serious inroads. There were a bunch of other factors (like regulatory issues and the difficulty of scaling last-mile telecom), but after recent examples like that investors would rather find virgin territory rather than fight price wars in large existing markets.

(IMHO, this is one thing wrong with American capitalism today, as our system relies on cutthroat competition and aggressive risk-taking behavior by investors to get good deals to consumers.)