Making By Taking: Shrinking Markets

March 18, 2007

This was a very clear and concise post by Josh Kopelman of Redeye VC that just made me think “Wow, what a great post” after I read it so I figured I’d share. He’s talking about creating asymmetrical competition and “shrinking” a market (and justifying FRC’s investment in Jingle Networks by doing so).

Some excerpts:

On the First Round Capital website we write that: “We love investing in technologies and business models that are able to shrink existing markets. If your company can take $5 of revenue from a competitor for every $1 you earn – let’s talk!” I’ve often been asked what we mean by that – so I thought it would be a good topic for a blog post.

This is the reason why I’m so excited about our recent investment in Jingle Networks. Jingle is the owner of 1-800-FREE411 – the country’s first nationwide provider of free directory assistance. Launched late last year, the 1-800-FREE411 service offers consumers a free alternative to the high cost of 411 service provided by traditional carriers. By including a ten-second advertisement before giving out a phone number, 1-800-FREE411 saves consumers on average $1.25 each time they look for a phone number from their telephone. Since American consumers use traditional 411 services 6 billion times a year, 1-800-FREE411 has the potential to shrink an $8 billion market. I believe (and hope) that as consumers shift to ad-supported directory assistance, we will take a significant share away from the entrenched carriers.

The greeting card industry could use some shrinkage as well. They pull in over $7B each year on nearly as many cards sold. And that’s just in the United States. Unfortunately, eCards tainted the whole concept of a legitimate online greeting card, but I have faith that a new breed of online greetings will eventually prove popular and shrink that market as developers embrace the power of Flash and broadband connections. Smilebox is pioneering this movement (and evidently quite succesfully) by targetting middle-aged women with young children. However, their solution is a desktop-based platform which I don’t think will reach ubiquity as fast as a web-based system could, but we’ll see.

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