Being bigger is better. We’re seeing this in the tech world right now, where companies like Facebook, Uber, Amazon and Google have reached scale and are dominating all their competitors. The gist of this is that companies can reach a certain critical size and get advantages of scale in experience, purchasing, marketing, manufacturing, administration, research, logistics, distribution, etc. Expenses can be spread out over larger amounts of volume, lowering average costs. These advantages often permit greater specialization, making people better at what they do. Munger Explains:
In some businesses, the very nature of things is to sort of cascade towards the overwhelming dominance of one firm. The most obvious one is daily newspapers. There’s practically no city left in the U.S., aside from a few very big ones, where there’s more than one daily newspaper…. Once I get most of the circulation, I get most of the advertising. And once I get most of the advertising and circulation, why would anyone want the thinner paper with less information in it? So it tends to cascade to a winner-take-all situation.
We can also think of social networks like this. Facebook certainly can be thought of as a modern newspaper, or television station. Everyone is there, so they get all the advertising dollars. If your business revolves around data, and the sale or application of data, then economies of scale is incredibly important to your business. At JUMO, we build credit scoring off of our customers mobile data. The more they interact with the product, and the more people that use the product, the better insight we get into what drives better take up and repayments. This is a significant competitive advantage over our competitors, and one we are trying to run with right now. We are trying to reach a scale where we have more information than all the competition.