The Bifurcation of Industries

In an article on the Andreesen Horowitz blog, Scott Kupor describes the structural changes occurring in the venture capital industry:

“A ‘death of the middle’ occurs over time as service industries bifurcate into a smaller number of large, fully integrated, full-service institutions on one end and a larger number of smaller, niche-oriented institutions (with a focus on stage, industry, or specialized skillset) on the other.”

Kupor goes on to explain how this polarisation is not unique to VC:

“Look no further than investment banks, law firms, accounting firms, advertising agencies, buyout firms, talent agencies, and recruiting firms to see how this phenomenon has played out in mature services-based business. Interestingly, we are witnessing this right now in a non-services business as well: the U.S. retail market. Long-dominant department stores such as J.C. Penney and Sears are giving way to big-box retailers and etailers (Amazon, Best Buy, Target) at the large end complemented by large numbers of specialty, boutique stores at the smaller end.”

Did you notice “advertising agencies” amongst that list? In an interview with Dave Birss on the Future of Advertising podcast, ex-Saatchi and Saatchi creative director Jeff Stark, explains the shift in respect to the ad industry:

“What has happened in my time, in the last 20 years, is it’s become more fractured. You’ve got these little [agencies] that do digital and whatever you like. And it’s gonna get more fractured I would say. And more specialised. It’ll go two ways. There’ll be the big multi-national agencies and there will be lots and lots of fractured agencies below that. There will be a dozen big, multi-national agencies. Or less than a dozen. Six, maybe, big multi-national agencies with worldwide accounts. And the rest will be much more fractured and clients buying much more adhoc, much more brasserie style.”

Ben Thompson, of Stratechery, has picked up on the same thing in other industries:

“The same thing is playing out in the app store. Similarly, there are a few big winners when it comes to journalism and attention, with many medium-sized players fighting for survival. In music, stars like Beyoncé are richer and more powerful than ever before, while many smaller acts are struggling to survive.”

So what is causing this?

The internet particularly, and technology in general, has dramatically reduced the cost of entry in many industries. To publish articles online has far lower costs (and a far greater audience) than those of the pre-internet newspaper business. The cost of distributing an app are far lower than distributing software on physical media. The internet saves costs throughout manufacturing, packaging, stock keeping, distribution, sales staff and retail units.

With less barriers to entry there are naturally more entrants. With more entrants there is more competition. This creates the crowded bottom end, with each company searching for a specialised niché to fill. In any industry where this is the case, it takes more and more money to stand out from the crowd. I think this is why P&G are culling half of their brands. They are ditching the smaller, fragmented, brands with huge amount of competition and reappropriating funds to their big profit makers.

Wherever it takes more money to stand out, big business thrive and the middle gets chocked.

And all that’s left is the top and the bottom.

Hey. I’m Alex Murrell. I'm a Planner at Epoch Design in Bristol where I help deliver highly creative, innovative and effective pack, instore and online communications for some of the world’s biggest FMCG brands. Want to know more? You can find me on Twitter or LinkedIn.

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