A folly of 1996-2000, which still doesn’t seem to be going away

Today, Red Herring’s “Catch of the Day” missive observed its latest trend. The main headline proclaims:

The once-hyped ASP business is wearing out its welcome, and may be in for a rough 2001.

It’s probably accurate. Which is pretty pathetic, since there’s no such thing as “ASP Business.” But Red Herring seems to think there is, and the professional investment community happily agrees. Three years ago, B2C was sexy. Then it was B2B. Next it was ASP(1).

But these will all fail for the same reason: they aren’t businesses. They aren’t business structures, nor are they even business models! They just describe a distribution channel. Do businesses that share a distribution channel have much in common? Fine diamonds and toilet paper both distribute through BJ’s Wholesale Club (a discount club), but few investors would consider them the same kind of business. It just doesn’t make sense.

When talking about groups like ”the B2B companies,” the group members need enough in common that we’d expect them to behave the same way. Think Biotech. Now that’s a real industry. Different biotech companies have similar characteristics. They sell to similar customer bases, they have similar business characteristics—including huge up-front R&D investment, FDA approval process, patent-protected monopoly for 17 years for successful drugs, the need for extreme chemical expertise, etc. There’s a case that there is a real sector there.

If you want to lump businesses together, many times you can group them sensibly: Lump businesses by customer base. Then the businesses will share the common problems of that customer base. Or group them by business model; the businesses will share financial characteristics over time. Or lump by the organizational capabilities they need—companies that all require top engineering talent will all be affected by talent availability.

But let me suggest a shocking idea: resist the urge to lump! That’s right, don’t lump. Learn about each business individually. Consider it on its own merits. Research its market and product. Does it have a product that its market wants that creates value well over the cost to deliver the product? Will the business model produce high profits that can be reinvested in the business? Is it backed by a management team that can successfully build an organization to deliver to that market? Does the company have patents or other barriers that make competition difficult? If the answers are “Yes,” it’s probably a business worth starting. So start it. Or invest in it. Or write about it. Because it’s a real business. And it doesn’t matter if it’s B2C, B2B, or ASP. What matters is the one thing it won’t end up being—an IOU.

(1) See asp-flame.htm for an April 2000 essay I wrote noting that ASPs were less than revolutionary. Maybe I should become a pundit. If I had $10,000,000 for every time I’ve predicted a trend correctly, I’d be rich! back

Don't Judge a Business by its Distribution

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