Why Blitzscaling is overrated

I believe that the blitzscaling strategy has lost a large part of its effective and is a convenient way for growth companies to obscure profitability problems.

Firstly, switching costs for most applications today are overstated and valuations are hence over-estimated. The notion behind switching costs is best exemplified by Microsoft, which has built a durable competitive moat. The inability to communicate documents by using a rival platform that few others use is a strong deterrent to using that rival platform in the first place. However, a key component to Microsoft’s success has been the high cost of owning multiple subscriptions to services, which incentivises consumers to only retain one: The incumbent. Super-apps such as Grab and Gojek lack this particular feature and many consumers download apps to use in parallel, based on which offer the best services at the lowest cost. Even on the producer side of the market (delivery drivers), many tend to straddle multiple platforms. This suggests that the network effects will be weaker in consolidating market share towards a single winter of the industry. It is often no longer sufficient to just be first. This forces apps to continually compete based on price instead of fully leveraging a competitive position using network effects, which depresses margins.

Secondly, regulatory requirements have increased the limit to which companies can grow. From China to the USA, antitrust has consistently been applied to companies if they succeeded in blitzscaling. This creates a guarantee for a gap where new entrants may seek to exploit, limiting the monopoly rents the incumbent can reap. Even in the absence of breakups, geographic tensions between USA and China prevents dominant players from spreading to the other country. It is inconceivable to think of Alibaba holding the same position in the US market as Amazon does today, and vice versa. However, this also creates a potential competitor that governments can unleash on their own incumbents if the incumbents start to abuse their monopoly position and regulators are unable to effectively break up the company.

Riding on the hype, companies have recently started entering the public markets while still unprofitable. This is a divergence from the playbooks of Google and Facebook, which had attained profitability before going public. While this increases the access of businesses to further capital raises from a disparate group of retail investors instead of having to continually pitch for expensive venture capital, this also allows founders to exit the business partially without having created value for other shareholders and forms a moral hazard problem. The allure of such far off promises is fading, with Paytm the latest example of an IPO that has faltered.

Blitzscaling is not without merits, but such a strategy should be backed by a plan to monetise its dominant position instead of having investors automatically assume that profit margins will rise in the future when market share is secured. A competitive advantage backed by high switching costs from network effects and unthreatened by regulatory action would be a stronger assurance.