The Strategic Logic that Led to a $3 Billion, 9-Person Company

A couple of years ago I wrote one of my most popular blogs. This morning I realized its logic proved entirely wrong!

You see, I was grabbing a coffee at a convenience store on the way to my office, after dropping my kids off at school. The point-of-sale counter was cluttered, as usual, with unnecessary impulse goods. If you have kids and live in the US, you know that the “fidget spinner” has become an epidemic of national proportions. It’s come out of nowhere to become the must-have fad of kids 15 years and younger. It’s been written up in The New York Times, The Wall Street Journal, and countless other periodicals.

I was not surprised to see a display case packed with fidget spinner knock-offs. What I was surprised by was that the display cases were branded “LOGIC” – the once-leading electronic cigarette brand. See my photo of the display.

LOGIC Fidget Spinner Display

In that popular blog I wrote a few years ago, I laid out LOGIC’s CEO’s strategic rationale and titled the post “LOGIC’s Logic.” The CEO argued that they were buying up real estate at the point of sale, giving convenience store operators displays at a better price than competitors so that they would have guaranteed real estate on which to always display their wares. As other brands caught up, the logic went, LOGIC would have already locked in a position in the front of customers’ eyes.

This is the same basis on which Pepsi and Coke used to compete. They would give coolers to retailers emblazoned with their logos to guarantee floor space.

The strategic principle at play here is “preferential access to resources,” or what academics call the “Resource-Based View.” The idea is that competitive advantage comes from owning some critical input – diamond mines, oil reserves, brand, channel, shelf space, point-of-sale space, etc. Apple locked up flash drives when it launched the iPad. Microsoft owned the desktop for decades and because its MSDOS operating system was on every desktop enjoyed an advantage selling Excel, Word, and other software.

The thing is, it’s easy to overestimate the level at which what you think you can lock up will actually prove valuable. For something to provide a sustainable advantage, what you lock up should be (a) valuable to buyers, (b) hard to replicate, (c) hard to substitute, and (d) easy to protect.

LOGIC’s logic failed, it appears, because their source of advantage – owning the POS display – proved hard to protect. Convenience store owners have been able to use those displays to promote other goods.

Contrast that with Straight Path Communications, a telecom company that Verizon just agreed to purchase for $3 billion.

Straight Path has no operating business or cash flow to speak of and has only nine employees, yet was deemed worth $3 billion. Their value and strategy rested on the same premise.

The founder of Straight Path, David Jonas, previously founded and sold Net2Phone, the fourth-largest Voice over IP (VoIP) provider, which he sold to AT&T in 1996 for $1.2 billion. He understands the “lock up resources” strategy.

He began buying high-frequency wavelength bandwidth, betting that this bandwidth would eventually prove valuable to telephone companies when they began developing 5G phone networks. He knew his purchases would be hard to replicate and easy to protect because bandwidth is regulated by the government. He essentially acquired monopolies for the bandwidth in the regions that he purchased. Most importantly, he purchased the bandwidth before it was deemed very valuable. You see, the kind of bandwidth he purchased can only travel short distances and has difficulty getting through walls.

He brought Straight Path public. He indicated he would be building an operating company to commercialize the bandwidth. But he took a long time to build an operating company and was criticized for essentially sitting on bandwidth without turning it into a business.

In the last few years, as telecom companies began looking to develop the next generation of mobile networks – 5G as people call it – his type of bandwidth became an important piece of their puzzle.

When AT&T offered to acquire the company in 2017 at a valuation of $1.6 billion, the competition took notice and a bidding war broke out. Verizon won that war, offering the company $3 billion.

Straight Path’s core strategic concept is clearly articulated on its website: We believe that intangible assets are a low-risk, high-reward asset class when thoughtfully employed. We avoid heavy capital and operating expenses by entering into partnerships that guard our downside exposure, while maintaining healthy upside potential.

If this simple logic can enable nine people to build a $3 billion business, what could it do for you?

What key input (raw material, IP, brand, real estate, legal rights, access, etc.) is currently considered low value but will become valuable in the future?

If you gained control of this input, would this control be hard to replicate, hard to substitute, and easy to protect?

If so, what would it take to acquire a stake in or access to this input?

Leave a Reply

Your email address will not be published. Required fields are marked *