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#7 – Michael Mauboussin: The Fascinating World of Increasing Returns
Scaling Theory
Increased Returns Do Not Guarantee Lasting Success
While companies may benefit from increasing returns, this does not ensure they won't eventually face competition or become obsolete. The distribution costs for intangible assets like software can shrink towards zero, leveraging economies of scale and network effects. However, these assets can quickly lose relevance, are vulnerable to theft, and can become subject to changing trends. Historical examples, such as AOL and MySpace, illustrate that firms can thrive on increasing returns but still vanish over time. Thus, understanding whether the benefits of increasing returns outweigh the risks and disadvantages requires careful evaluation, both generally and in specific contexts.
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