Paul Sanders on Hyper-competition

Richard Kramer: Welcome to Bubble Trouble, conversations between the economist and author Will Page, and me, independent analyst Richard Kramer, where we lay out some inconvenient truths about how financial markets really work. Today we're in conversation with a special guest, Paul Sanders, the man responsible for coining the term, hyper competition, a point where quantity goes up, and quality goes down. More in a moment.

Will Page: Welcome back to Bubble Trouble. Now, we've discussed hyper competition in the past, the seven word summary of hyper competition, where quantity goes up, quality goes down. And we're gonna discuss that in the present with the person who coined the term. So firstly let's welcome along my co-host Richard Kramer. Richard, welcome back.

Richard Kramer: Hey, Will.

Will Page: And secondly, let's welcome to the stage Paul Sanders, from Stake 51. Paul, thank you so much for giving us your time today.

Paul Sanders: Will, thank you for asking me. It's a great privilege.

Will Page: We wanna dive in, because now I'll give credit to Richard Kramer for this, which is, when we stumbled on this term hyper competition, we really felt we have a theme here, which is, as long as a long tail, meaning we've been debating the long tail since that famous Wired article in 2004, so that's what, 15, 16 years ago? We'll be debating hyper competition for the next 15, 16 years to come. That's our thesis. Uh, we are honored and grateful that you could come onto the podcast today, to take us through the origins.

So let me dive in with the first question, and I'll toss the mic over to Richard to quiz you some more. But I think the first thing I wanna do is, get to you and how you think, and what you've done in your career, but get to that ah-hah moment when you stumbled on hyper competition. So a little bit of history about you Paul. It's fair to say that you were doing Spotify before Spotify.

Paul Sanders: The curse of being early in a mail kit. I started the business in 1991, yeah. That was before even the web, and I think we probably sold our first download at something like '97.

Will Page: Wow.

Paul Sanders: You know, around the turn of the century I was thinking, it seemed to me that the, um, broadband ISPs and content were a natural bundle. It just didn't seem reasonable to me that everyone would want a whole load of subscriptions on top, and the fallow sharing had proved that you could actually deliver a, an incredibly compelling service, no friction. Consumer satisfaction could be incredibly high. The only trouble was, the content creators weren't getting paid, and no one knew how to charge for it. Play Louder MST was an attempt to create a bundle of broadband, you know, at the time it was ADSL, and music on one single subscription, and solve those two friction points.

Will Page: Very important in the context of this conversation, 'cause you really did get there first. You were there first with bundle subscription pricing long before Spotify got started, long before Rhapsody got its 9.99 price tag in 2002, te-, 20 years of 9.99 pricing.

Paul Sanders: Well Rhapsody was making waves for experimenting with a 49 cent download price if you remember, when the, when Apple had set the standard download price at 99 cents.

Will Page: So arguably we can say you got there first with music streaming, but you've also got there first with this term, hyper competition. So let's get into it. What I wanna understand is, the ah-hah moment. Like, when in that brain of yours, and you know, if you're not offended by the term, people often call you the David Hume of music philosophy, 'cause your brain works far faster than anyone else I know. But when in that moment of that Paul Sander's brain ticking over did you stumble on this term, hyper competition? Especially seeing it as a cause for concern as opposed to a cause for celebration. We often hear people saying, there's so much choice, and we've democratized access, and everybody can get to market. But you came at this term, hyper competition, when quantity goes up, quality goes down. You came at it from a perspective of concern, not celebration. I wanna hear how you got into it before I hand over to Richard.

Paul Sanders: Right, so we had had a few years as you know, from the inventory in, you know, the, the digital music changed the way the music industry, recorded music industry worked, because there were no deletions anymore. The industry used to take product out of the market before putting new product into the market.

Will Page: Yeah, if you couldn't rent your space on the shelf, you were taken off, and somebody who could rent the space on the shelf was put on.

Paul Sanders: Yeah, exactly. And that was done at an individual artist level. You'd delete an old album because you wanted to get focus on the new album. So we kind of accommodated ourselves to the notion that today's content in the download world competes with yesterday's content, and that the inventory will be ever expanding. Then streaming arrived, and there was an acceleration. It turned the market into zero sum. So every accounting period becomes a zero sum game for attention during that accounting period, and all the new content competes will all the historical content in that accounting period.

Will Page: Fascinating.

Paul Sanders: So that's the change of the game. Um, at the same time, there was this democratization, and I'm a great fan of it. That, I think opened markets are a, a great blessing. Um, to all of us, and fantastic for music, which does have barriers. Um, I don't buy the idea that the old music industry was somehow undemocratic, because it found ways of letting people in from all walks of life. But it didn't let many in, so I think there's something that maybe we'll touch on later, where you can really examine the notion that more open markets democratize production, democratize access.

Will Page: You've got my head spinning already. It's like, was there more inequality under communism than there was capitalism? I love those types of debates, it's turning on its head.

Paul Sanders: Yes, exactly. And I think the way I think is, is often dialectic. It's, you know, I've got a synthetic kind of approach to these things. So we've got a market that has evolved to bring in just about anyone who wants to make music, and, and the DIY services were already very well established. A couple of players in the market, and the orchid set the paradigm with an open access fiscal distribution model. A lot of people forget that. CD Baby followed that up by a CD store where anyone could put five CDs on the shelf, and then when collectively we broke the door down and, and got into vending content onto iTunes. CD Baby was one of the first with digital. Tune Call followed up CD Baby by cutting out the inconvenience of the CD part of it, and made a much simpler product. You know, a simpler product appeals to a very much broader, um, set of producers.

So we've got this evolution, you've got significant players already in the market, as ditto, you mentioned Emu Bands I think elsewhere. There was no crisis of distribution that anyone need to, to solve. And then, as the pandemic sort of bit, and we all went into lockdown, it's a, it's an obvious thing for people to do. People who felt that they had an album inside them, um, suddenly had a lot of time to sit in front of a computer. At the same time, Spotify, which is the biggest, um, recorded music consumer platform, made a strategic investment in a, in a start up called Distrokid.

You know, why at that point did Spotify feel that they needed to expand the supply side? There was no crisis. Every DIY musician had you know, six or seven really very good choices. So that was a question that was in my head, and then the trigger point, it really was a trigger point, was the Uber ruling in the Supreme Court in the UK. Where the judge said that Uber drivers were not independent business, they were employees. Uber was selling the ride to the rider, to the, um, the selling the taxi service. And the Uber driver was employed by Uber to do the ride. And I thought, there's a connection.

I couldn't quite work out what the connection was, but that was really the trigger point, because it seemed to me that the musician had kind of moved into the same kind of relationship with the platform.

Will Page: Well, I know Richard's gonna be salivating like a Pavlovian dog when you mentioned Uber. So let's bring Kramer in here to interrogate further.

Richard Kramer: Yeah, look, just to, to focus this, I mean, that Uber ruling was very specific in saying, you can't call the driver an independent contractor, because you are directing their work. You are setting the price for their work, and they have effectively no agency on their own. And I guess, when I'm looking at the music example, I, I'm struggling to see equally, and I, I would agree with you, that where the independent artist has any agency on their own. They, they're not in a position to tell any of the large distribution platforms what to sell their music for, and they are beholden to those platforms for distribution, can't really affect it that much.

Paul Sanders: They can't negotiate. They, they can't really withdraw, they can't withhold.

Richard Kramer: Yes, they have no agency.

Paul Sanders: They have no agency, exactly.

Richard Kramer: I guess I'd like to shift and talk a little bit about hyper competition, because it's a phrase we use ourselves in looking at the markets. And how much do you think this notion of hyper competition is aided or abetted by just avalanches of cheap capital, that have been out there, and this sort of land grab mentality to establish a early, however you wanna call it, a, a first mover advantage? I hate that term, but the idea that you, you have to get in first, uh, before anybody else, and there's no downside cost to failing.

Paul Sanders: Absolutely, and it was, you know, it was quite interesting when you, when you compare other markets. I, I think it was, um, Professor Scott Galloway who made the point that when Amazon put out a press release about getting into healthcare, its share price went up by more than the amount it announced it was going to invest.

Will Page: Wow [laughs].

Paul Sanders: So in fact, it's, it's, you know, the name of in constant capital was, was negative.

Richard Kramer: No actually, I, I think Scott's point was more that the value transfer from the rest of the healthcare industry and their lost market value was greater, far greater than the amount that Amazon benefited by.

Paul Sanders: Is, exactly, is, there were two points. One that Amazon's share price went up, the other that the, um, the competition's share price went down by more than, you know, Amazon's benefit, exactly. I think the point there is, that can be very healthy, because if a competitor comes in and reduces the cost of doing business in a particular field, then the consumer should benefit. But what I'm suggesting with hyper competition, is that the play here is not reducing the cost to the consumer, and we've just had a, a round of price rises from the music consumer, you know, the consumer music services.

The play here is a significant intervention in the supply side. Not just to in-, you know, as a, as a market share land grab, but to increase, an intervention to increase the supply, um, beyond the ability of the market to support the supplier. And I think that's the, the distinctive thing about what I'm thinking of as hyper competition. So, a couple of points of comparison. The demand for, you know, takeaway food is relatively fixed. The takeaway food platforms are talking about 21 meal opportunities a week.

Um, in order to get that food to you, in a, you know, reasonable condition, fast and hot, they need to make sure that there is plenty of, you know, plenty of logistics capability. So they probably need more riders waiting outside the restaurant than can make a living from being riders. So there are significant areas where the platform needs to increase supply beyond the ability of the market to reward the provider of that service.

Will Page: It's, it reminds me of that famous Barry Schwarz quote about choice, which is, some choice is better than none. Nobody's advocating communism, but it doesn't necessarily follow that more is better than some. Now, you can swap the word choice with the word supplies. Some supply is better than none, we need supply chains. That doesn't necessarily follow that more supply is better than some. There are limits, there are constraints to what an optimal market should function, and your delivery drivers are a beautiful example of, there's just way too many mopeds outside that restaurant.

Paul Sanders: When demand goes down, they start fighting. The unlocking happened in, in London after the, you know, the last wave. The police had a significant problem with, um, deliver riders fighting for the best slot. And it just took me back to freakonomics. It's like, why does the drug dealer live, live with his mom? If you remember that, that wonderful essay.

Richard Kramer: I guess just to, to wrap this first half up, I mean, isn't this simply a function of in so many of these areas, the barriers to entry having fallen so low that look, anybody can be a Deliveroo driver, and it, or rider. And there is just simply no limit to the supply you can throw into the market, because you don't bear the cost directly. Either because you push those costs out into the future, or push them onto investors to subsidize them, or because you just imagine that there's an endless pool of people willing to drive for Uber or, or write songs to put up on platforms like Spotify.

Paul Sanders: Yeah, if, if you look at it from one perspective, increasing the supply is just a natural, you know, thing that happens when, you know, there's a lot of capital available of those kind of business.

Richard Kramer: Mm-hmm [affirmative].

Paul Sanders: But I think the, what turns it from the unlocking of otherwise unused assets, or just efficiency in markets, is when the welfare is almost entirely captured by the platform owner. So the consumer doesn't significantly benefit. The increase in supply does not benefit the producer, doesn't benefit the consumer. Who does it benefit? It then becomes, as you know, I suspect it then becomes an issue for government and public policy.

Will Page: Well, in part two, I wanna get into lemons, but let me close off part one by talking about orange juice. Because what this is making me think about is the story of the supermarket. Everyone knows that everything else is inferior to Tropicana orange juice, but the supermarkets often in America will have an entire aisle dedicated to orange juice, to offer so many different choices of orange juice as opposed to Tropicana, to curb the power of the wholesale provider of Tropicana orange juice, to curb their pricing power, 'cause they've got all this choice. Well that's fine, that makes business sense. You're up against a tough negotiation, so introduce choice to market to make you the price maker, and then the price taker. But then I guess what you're making me think about is, is that the optimal layout of a supermarket to there, to keep so much shelf space to inferior product orange juice? That's orange juice, we're gonna be back in part two to talk about lemons. Back in a moment.

Richard Kramer: Welcome back to Bubble Trouble, with me, Richard Kramer, and the economist and author, Will Page. And we're here with our first ever guest, Paul Sanders, talking about the concept of hyper competition. And Paul, I guess my question is, does this mean everyone has no fear of entering a new market? That competition is the normal state of affairs, and then some, or have we just forgotten about the downside risk or fear of failing? Our podcasts, and the four million titles, and the two new episodes, or two new programs that get launched every minute is it Will? Is that a good example of how normal competition has gone into hyper competition? So maybe Paul if you wanna start off with that as an example, are podcasts showing us what hyper competition can do?

Paul Sanders: Well, you can see in music that the new wave of creator tools is intended to make it possible for anyone who has no knowledge at all about music, and has never even expressed an interest in music, has learnt nothing about music, to say one Sunday afternoon when it's raining, maybe I'll be a musician. All I have to do is download an app and click a button, and then I click another button and I'm on Spotify. So it's, it's that kind of intervention where being a producer becomes a very casual thing. There's another thing I think we need to look out for, particularly in cultural goods, which is that the ratio between success and failure goes off the scale. So you know, the old record label model in the, in the major labels, it was like, I think about one in every 13 projects you got a return on. In the indie world, one in every eight, but only because they spent less.

I suspect that ratio for success, the contention for success in, in that digital world, in streaming, is probably more like one in every, uh, 100000. Or one in every 200000.

Will Page: The long tail got longer, and the long tail got skinnier.

Paul Sanders: Yes, exactly. So you've got an interesting dynamic there, which is that the head of the market functions just as it always did. It's, it's got a lot of investment, very high production values. The top end studios are still book solid, and still a very vibrant market for very high end production and skills. But the rest of the market starts to look starved, because instead of being, um, you know, the, the intermediaries, instead of being investors in new production and new creativity, they find that they have to start charging for services.

So when you've got that inversion, so all the record labels started describing themselves as artist and label services companies. Music managers who used to live off a percentage of earnings, are now charging a monthly fee. So you've got this inversion that's the, of the relationship from investor to service provider.

Will Page: Principal agent, again.

Paul Sanders: That is a, a smoke signal. And I think it's a serious one to deal with, because what it means is, you're, you're gutting the market. You're hollowing out the skills base.

Will Page: Let me switch from music for a second here. I closed out the first part with oranges, how the supermarket will offer a ridiculous amount of choice for orange juice, just to curb the market power of the one that you really wanted, Tropicana. And is that a good thing for the supermarket to have so many bad varieties of orange juice on, on the shelf? Just for its own self interest? Where do the benefits of that accrue? Let's go from orange juice to lemons, and I, a question for both of you. There's a, a famous Nobel Prize winning paper by George Akerlof called A Market for Lemons, which essentially says, in the second hand car market where there's a high degree of risk and uncertainty, if you've got a few bad actors in that market, it could collapse the whole market through the perceived value of the second hand car.

It's why second hand car sellers are so keen to tell you, listen, we had [inaudible 00:19:43], it's a little granny, drove it to the shops, the car's fine. Trust me, the car is fine. Richard first, do you think there is a market for lemons emerging through hyper competition?

Richard Kramer: Well I guess, you know, rather than, than us pontificating, I'd throw it back to Paul, in raising this principal agent problem. But the reality is, we have so many more principals than we ever did before, and Will, you're a recent author of a, of a book, Tarzan Economics. But you mentioned to me that there'll be a million titles published this year, and so-

Will Page: Mm-hmm [affirmative], yeah.

Richard Kramer: ... how does one sift through the million titles to find the Tropicana among all the other varieties of orange juice? How does, how do you rise to the top in a world of hyper competition and overproduction, where the principals are so many, and the agents, or the distribution platforms are so few?

Will Page: And Paul, you'll love this. When my book finally went into production, I called Adrian Furnam, an esteemed professor of psychology at University College, London. Author of 55 books himself, and told him, that's it. Adrian, I'm in production, the book is ready to go on the first of April. I can say to my mom and dad, I'm a published author. Said, well done Will, the book will be a huge success. Now sit back, and contemplate what it feels to be a sperm donor, 'cause that's all you actually are.

Paul Sanders: [laughs].

Will Page: You think it's all about what you've produced? You're just one sperm on a Petri dish with many others, and somebody's gonna find that egg.

Paul Sanders: Wow, yeah, that's, that's, that's quite a thing to think. It's [laughs]... oh, I'm glad he wasn't my tutor. So the sifting again, is interesting, because you know, I, I suspect that what happens when there's, there's too much choice. You know, I, I'm uh, being slightly provocative with the term too much. I suspect what happens is the consumer becomes conservative. What I mean by that is, is that they, you know, they don't start foaming at the m-, mouth and becoming antivaxxers. They just retreat to what they're comfortable with, and then they probably become a bit more comfortable with things that are, you know, concepts that are well known to them.