Substitutes and Complements

All this talk of platforms and products reminded me of [[substitutes and complements]]. [[Joel Spolsky]] explains here, that substitutes are replacable products (think beef vs chicken), while complements are products used in tandem, increasing the value of each other (think gas and cars). Substitutes and complements are important because "All else being equal, demand for a product increases when the price of its complement decreases." This simple rule reigns great power, especially tech.

For example, this idea partially explains the incentives for big companies to contribute to [[opensource]] projects. As much as they would like us to think they're doing it because it's a good thing, they are reducing cost or increasing revenue [[Don't Call Yourself A Programmer, And Other Career Advice]]. Also, open source has many more benefits than just commoditization of software, like better code, easier recruiting, more contributors (The Cathedral and Bazaar has a the thorough breakdown), but it is important to remember companies are acting in their own economic best interest, even when they are contributing to open source, which just so happens to be a cool thing to do as well.

If big companies can commoditize their complement, then demand for their product increases. This is why [[Microsoft]] worked so hard to commoditize personal computers. Commoditizing personal computers skyrocketed demand for operating systems, and as Joel says, "that’s why Bill Gates can buy Sweden and you can’t."

Platforms and products reminded me of this because the same economics apply to platform and product combinations. If a platform is commoditized, say by releasing software for free, then demand for products built on the platform increases. These economics are part of the reason facebook is so succesful. They built a free platform that allowed users to create new spaces, like Farmville and Mafia Wars, which in turn led to more and more ways for people to come spend time on their site, which gave them an avenue to more and more advertising revenue.

The same principles apply to [[aws]], and explain by they have a big incentive to contribute to [[open source]]. If they help commoditize open source software, then the demand for services to host that software increases.

In What I learned from looking at 200 machine learning tools, Chip Huyen has a great figure showing the number of AI tools created each year, by category. Data pipelines and model training are the first two spikes on the graph. Data pipelines and trained ML models are becoming more commoditized, in the sense that there are more people in the field and the tools they use are becoming more mature. This leads to higher demand for the complement - serving those newly developed models in production, which is a much less mature space. The graph shows that this complement service is on the rise next.

Substitutes and complements apply to all industries, but is particularly relevant in tech because software is one of the easiest products to commoditize. It is important for software companies to be cognizant of this, to ensure their product benefits from it, and does not become the commodity.



My Linked Notes

  • brain
  • 2020-10-31

    All this talk of platforms and products reminded me of [[substitutes and complements]]. [[Joel Spolsky]] explains here, that substitutes are replacable products (think beef vs chicken), while complements are products used in tandem, increasing the value of each other (think gas and cars). Substitutes and complements are important because "All else being equal, demand for a product increases when the price of its complement decreases." This simple rule reigns great power, especially tech.

  • 2020-11-01
    • [[2020-10-31]] [[substitutes and complements]]
      • A very useful micro-economic principle which illuminates why platforms can be so powerful. When done right, platforms catapult demand for complementing products, which can just so happen to be sold by the the same company building the platform.
      • [[aws]] has been so successful with this because every new team or product they built is externally programmable by design.
  • 2020-11-01
    • [[2020-10-31]] [[substitutes and complements]]
      • A very useful micro-economic principle which illuminates why platforms can be so powerful. When done right, platforms catapult demand for complementing products, which can just so happen to be sold by the the same company building the platform.
      • [[aws]] has been so successful with this because every new team or product they built is externally programmable by design.
  • trailheads

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