The economics of the technology field is drastically changing from the past. Businesses that are known for selling physical goods still deal with diminishing returns. By virtue of this very fact they run into their own limitations. Yet the very idea of diminishing returns is taught in both business schools and to many economics majors. (I should know, since economics was a major focus of my undergraduate career and we learned quite a bit about this subject). In many aspects, this idea makes sense. Especially in the commodities business. In fact, most all commodities run into diminishing returns. You can only grow and mine so much of your resources. Remember, I am talking about physical commodities here. But the fact still remains that it has been assumed, especially in the past, that most companies will reach a state of diminishing returns selling their products in the markets.

However, this line of reasoning is dramatically changing as more and more companies are now in the business of collecting/selling data and information. So what is the result we are seeing with this change? Now we are starting to see companies that have increasing returns as the processing of resources turns into the processing of information. What makes the concept of increasing returns interesting is what it enables a company to do if it has them. For starters, those companies with finite resources will compete with one another until the price is pushed down to an equilibrium level. Those companies that go below this level will start losing money and may find it harder to stay in business. On the other hand, those companies with increasing returns will move further and further ahead and have a higher probability of locking in their particular market. Not only does this idea go against the grain of your typical competitive analysis, but it also gives these highly competitive businesses the ability to operate differently in their market.

There are only a few companies (but I am sure there will be plenty more in the future) that are able to operate this way and thus are able to push super far ahead in their markets. One such company that I will briefly analyze is BuzzFeed. This company may not be the first that comes to mind and may even seem a bit silly but hear me out. BuzzFeed, along with Vice, are leading a new wave of media companies into the 21st century. They are long term focused with BuzzFeed's main focus being on social advertising. And Vice is busy changing the rules of the media game with video. In fact they reach a young audience in a way that makes most advertisers drool. 

Back to BuzzFeed, You know you have seen their idea of social advertising. How many times have you been super annoyed by some of your Facebook friends taking all those ridiculous quizzes to see which movie character they are. Or what their real career should be? Those are all paid for social advertisements and they work because most everybody takes a break from their work day and takes one or more. After all, I want to know which super hero I really am. Although it is mostly by luck that there is even a social advertising market in the first place, they lead it with focus, efficiency, and fun. By having the right platform, with the right product, at the right time, they have enjoyed a large amount of increasing returns and become one of the highest valued new media companies right behind Vice. They are enjoying increasing returns not because their process can't be repeated, but because they are already so far ahead of their competition. 

Another such newer company that uses increasing returns in an extremely valuable way is Uber. In fact Uber is changing many rules of the game and if the company is analyzed closely, more people might see just how much change it can bring about. Uber has created a loop that will just continue pushing their returns to astronomical levels. Think about it like this, there is an initial demand for available cars, this creates an increasing demand for more drivers, which increases faster pickups, which leads to a greater demand of available cars. Also, an increasing demand for drivers leads to less downtime for drivers, which means lower prices for customers, which again, leads right back to a higher demand for available cars. Uber has this down to a science. Let's not forget that they are also partnering with smartphone vendors, car manufacturers, credit card companies and insurance companies. Slowly but surely, Uber is making itself the undisputed market leader and the competition will not be able to keep up. There are also other variables that I have not even analyzed here such as car ownership going down, the density of their coverage and how it is growing quickly, the dual rating system (the drivers get to rate the users), and trust. Let's also not forget the damage they are doing to the taxi industry. 

The last company I'm thinking of doesn't need much of an introduction at this point but Google's search functionality enjoys increasing returns by the shear fact of how powerful their market share has gotten. Peter Thiel argues they are a monopoly and how that is good for them. I would argue that they have built a powerful moat around their search and advertising business and it is become incredibly difficult to compete with them in these arenas.  Only time will tell if this thesis is correct or not.

I'm sure there are a few ideas right now that small startups are looking to create a business out of and I'm pretty sure that one or maybe two will enjoy increasing returns to the point of creating a protective moat around their business. In fact, I wouldn't be surprised if it was in the Bitcoin/Altcoin community right now. But as I said earlier, only time will tell.