Why platforms reward hyper-specialization

We explained in our previous post why participating on large platforms (e.g. Alibaba, Amazon.com, Apple’s iOS, Google’s Android, DoorDash, GrubHub, Uber Eats, Only Fans, YouTube, etc.) is a double-edged sword. On the one hand, it allows merchants (sellers, app developers, content providers, etc.) to reach vast numbers of new customers, but on the other hand it runs the risk of hold-up and commoditization by the platform owner. In addition to the tactics described in the previous post for how to limit dependence on the relevant platform, merchants also need to figure out how to build sustainable competitive advantage on that platform.

At a high level, there are two ways for merchants to build competitive advantage and withstand the threat of commoditization. They can go broad by employing a roll-up strategy a la Thrasio– we discussed this strategy here. Or they can go deep, by offering a highly specialized product or service and leveraging the platform’s economies of scale to grow.

The latter option is the topic of this post, and it is relevant to the vast majority of platform participants that cannot afford the more expensive go-broad strategy – and don’t want to sell out to roll-up firms like Thrasio.

Going deep

Specializing in a product or service (in other words, having a clear and narrow focus) has always been a good strategy for achieving competitive advantage. Large digital platforms have taken the logic of specialization and have turbo-charged it when applied to the merchants that operate on them (sellers, app developers, content creators, etc.). Indeed, digital platforms, via their algorithms and rating systems, usually make it much easy for consumers to find their ideal product. And by breaking down geographic barriers and accumulating very large user bases, they greatly increase a seller’s reach. Taken together, those qualities mean that the returns to becoming the highest-quality or the lowest-cost provider in a narrowly defined product or service category are significantly higher for sellers who conduct business on platforms than for those outside platforms.

In other words, platforms reward hyper-specialization through a self-reinforcing cycle. The more a product aligns with what buyers (customers, viewers) are searching for, the higher its ratings will be, increasing the chances that the platform’s algorithms will drive target customers to it. That means more customers will buy and rate the product, further heightening its advantage. Sure, to some extent, this cycle also operates outside platforms (through search results and possibly ratings on various sites), but centralized platforms make it a lot more powerful. This explains why large platforms have enabled extremely narrow product/service/content niches to emerge and thrive, that previously might not have been viable.

Examples

Take Anker, a Chinese company specializing in computer and mobile-phone peripherals such as chargers and power banks. With a market value of about 7 billion (this week), it is one of the most successful third-party sellers on Amazon.com. “Amazon reviews are the single most important input to our new product development process,” founder Steven Yang has said. Initially focused on Amazon, Anker now sells through many channels, including offline ones such as Best Buy, Target, and Walmart.

Examples in other contexts include unique and hyperspecialized content providers on YouTube (such as 5-Minute Crafts, Dude Perfect, and MrBeast), Facebook (Bored Panda), and Instagram (9GAG). The more views and likes these channels obtain, the higher their revenues, which they can invest in producing more and better content, leading to ever-larger audiences.

Contrast these content providers with traditional media companies (e.g. the BBC or the New York Times), which have tended to be generalists, publishing many different types of content (daily news, opinion pieces, in-depth investigative reports, sports, finance etc.). As these companies are increasingly forced to play on social media MSPs (Facebook, Twitter, YouTube), their traditional strategy does not appear to be sustainable in the face of new types of publishers that specialize in one type of content only. Consequently, traditional media companies should arguably narrow their focus to the types of content they have a comparative advantage in. For instance, the New York Times should probably double down on in-depth investigative reports and opinion pieces, rather than continuing to spend resources on covering sports or finance. Likewise, local newspapers may do best focusing on hyper-local issues and events, rather than national or international issues, for which there are many other, better sources, easily accessible through Google or social media.

Concluding thoughts

Hyper-specialization is part of a more general trend that has arisen due to the power and reach of the Internet. It is the reason behind Kevin Kelly’s 1000 true fans concept, that every kind of quirky creator becomes viable because all they need is 1000 true fans somewhere in the world. Thanks to the Internet, it is possible for these fans, wherever they are, to discover the creator and pay for their creations. In Kevin Kelly’s words:

“If you lived in any of the 2 million small towns on Earth you might be the only one in your town to crave death metal music, or get turned on by whispering, or want a left-handed fishing reel. Before the web you’d never be able to satisfy that desire. You’d be alone in your fascination. But now satisfaction is only one click away. Whatever your interests as a creator are, your 1,000 true fans are one click from you. As far as I can tell there is nothing — no product, no idea, no desire — without a fan base on the internet. Every thing made, or thought of, can interest at least one person in a million — it’s a low bar. Yet if even only one out of million people were interested, that’s potentially 7,000 people on the planet. That means that any 1-in-a-million appeal can find 1,000 true fans. The trick is to practically find those fans, or more accurately, to have them find you.”

The point we are adding in this post is that platforms that aggregate users and help with discovery (Amazon, eBay, Esty, Facebook, Instagram, Medium, Only Fans, Patreon, Tiktok, Twitch, YouTube) greatly amplify this process, and as a result increase the rewards to hyper-specialization for their participants.