Lenny's Podcast: Product | Career | Growth
00:12:49 · Brian Balfour
[00:12:49] S1: Yeah. And I'll give some examples of this, but let me explain the four, the first four step, the four steps of the cycle first, and then we'll go through a bunch of examples of all those individual steps. So the the four steps are essentially... One is like I call a step zero. It's it's the the conditions of the market have been met. Step one is about a moat. Step two is about a platform opening, and step three is about, the platform closing for control and monetization. So let me kind of briefly explain each one. Step zero is about the competitive market being, met, the conditions being met. And there's a few part piece of this. One is that typically what happens is that a... There is consensus that there is going to be this new huge category. Right? Think social, think mobile, like all those types of things. And in this case, right, these AI, like chat platforms, like a ChatGPT or a Claude. So there's consensus about that, but there's no clear winner yet. And you typically have somewhere between five to seven, you know, major players really battling it out. Right? So... And they're all kind of looking for what is the edge? What is the thing that is gonna... That is going to to help me win? Because all of these dynamics, you... In in all the history, they either end up in monopolies or duopolies. Right? And so the the stakes are really large, and so the competition is fierce. So that's kind of step zero. And I I think we could all agree that we are in that mode, you know, right now. We've got we've got OpenAI battling with Claude, battling with Gemini, and Google with whatever Meta comes out with new... Their new team, you know, so on and so forth. Like... And there's huge amounts of capital. There's consensus, like, all the types. They are in a fierce composition. So that's step zero. Step one is then, these players, somebody essentially identifies whatever the moat is, the thing that is going to help build them defensibility and help them hit escape velocity and become that monopoly or duopoly in that, single category. And once they figure out what that moat is, then they need to press the advantage. Right? They need to figure out how to gather that moat as fast as humanly possible. And it tends to be that you can't do that by yourself.
00:15:09 · Brian Balfour
And so you kinda need the help of an ecosystem in order to gather more of that moat, and that typically comes down to third party content creators or app developers and other businesses. And so they all establish, like, a third party platform, right, that has some incentives built in. And usually, the value exchange is, hey. You develop on top of my platform. Right? You add more use cases, you know, more engagement, like, all of these things to my platform. And in Exchange, I'm gonna give you something in return. And usually that thing that's in Exchange is I'm gonna give you some new form of distribution for your application and for your business. But what essentially happens as we go over time is that we go into step three, which is the closing period, which is at some point, all of these companies end up starting to lock down the platform. And this tends to happen for reasons of monetization and growth. Right? They either competitively don't want somebody to use their own you know, platform to disrupt themselves. Like, we saw that in the early Twitter days with things like Vine and Periscope. Right? Like, shutting those things down unceremoniously. Right? Or they need to find ways to monetize at a deeper and deeper level because all these companies, like, they have to grow. And, you know, Google's the classic example here of just more and more real estate has either been taken up by either ads or their own, you know, first party applications. And so that's the key is, like, they close it down by doing one of two... By one of a few things. They either shut it down entirely. Two, they develop their own first party applications to absorb the the highest use cases. Or three, they artificially depress the organic distribution that they gave you in the step prior to push you towards paid mechanisms in order to monetize. And so I think we should go through, like, multiple examples here, but that's kind of, like, the core essence of of the four steps, and so I'll I'll pause there.
00:17:12 · Lenny Rachitsky
[00:17:12] S0: Awesome. So it's essentially figure out what's gonna make... Create defensibility long term. What's your moat? Bring everyone in. Hey, everyone. Welcome to to Facebook. Everyone joins Facebook and then, okay. And all the developers build on Facebook to bring in more people on Facebook, and then they're like, okay, now you gotta pay. There's a toll. And... But you love this so much and you're so hooked. All your friends are here. You may as well stick around. That's right. Amazing. Okay. So, yeah, a few examples would be great.
00:17:38 · Brian Balfour
[00:17:38] S1: Yeah. So you you just hit on the first one. The fur... This is the first one that I always think about because this is where I learned about this cycle very early in my career. Like, one of my first companies was during the whole, the Facebook platform boom, you know, social gaming, all of those applications. And I lived the full cycle. In a very short period, I lived the the glory days and the... Just the absolute horror days, and and it was very painful. But this is exactly what happened. So let's go through the four steps. So step zero. Facebook was in a brutal battle with MySpace, Friendster, and a few others. People forget this. People forget that there was actually, like, a bunch of competitors at that time. And in fact, those competitors were bigger than Facebook at the time. They had more users back in 2007 when Facebook launched their third party platform. But one of the key things is that Facebook was very early to the insight about the direct network effects and that there's going to create real lock in that. The more friends, the more of the global network that was on there, the more that it was just gonna feed and and hit this escape velocity. And so at the time they launched their platform, I think they were maybe like one fourth, one fifth, the the size of, you know, something like me... MySpace or even Friendster Orkut. Like, some of these are some of the names at that time. But they opened up their third party platform. And what was the value exchange? They went to third party developers, they said, okay. We've created this canvas. They used to call it the canvas. And they were like, you could put anything in the canvas that you want, an app, a game, whatever. You can monetize in any way you want. We just want this sidebar real estate on the ads. That's that's what we're really interested in. And so there is this mass... Mad gold rush on that Facebook. Oh, sorry. The other part of that was not only will you put it there, we're gonna give you access to all of these notification channels and feed to get distribution for your application. That was that was the other piece of it. And so you had this mad rush of developers coming in, and you had this huge, like, social application, social gaming boom. People just grew incredibly virally very fast.
00:19:45 · Brian Balfour
But eventually, essentially, what happened over time is they kept peeling back that value exchange. They first were like, ah, actually, you know, that... Those dollars that you're you're making inside that canvas area, well, we want a percentage of that. Right? And so they changed that. And then they figured out their ad, like, their ad systems, and then they started peeling back. You know, they started suppressing access to all of the organic channels that they had. Eventually, they went all the way towards absorbing the highest, you know, use case into their own first party platform, things like, first party applications, things like events, photos, all those types of things, and basically shut down the platform, for dead. And these companies that have basically built on top of this platform, know, the other thing is by the time they started closing all those things down, all those competitors that we talked about, they were so far ahead at that point because they had built off the back of all these developers coming, adding use cases, bringing more users onto the platform, like identifying that mode. They were so far ahead, it didn't matter. It didn't matter what the other folks did at that point. That's what kind of really gives you confidence to start closing down. But there's so many other examples of this, right, if if we go through it. Right? So
00:21:02 · Lenny Rachitsky
[00:21:02] S0: Before you get other examples, just something I'll highlight here. One is the moat they they identified in theory was the friend graph, I imagine. Just like once we have all your friends, you're not gonna wanna go anywhere. I imagine it's also important to note, you may not... This is kind of like a natural thing that would happen if you build the thing and it grows and you're like, oh, maybe we should change strategy. I imagine not everyone even knows this is what will happen and they kind of organically evolve their strategy? Or do you think everyone's just like, this is our gonna be our plan step one, two, three, four?