Distribution Is King

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Let me tell you about the smartest quote I’ve heard in the last year: “Content innovation grows audiences, and distribution innovation creates enterprise value.”

What does that mean? It’s tempting to think that the stuff we make, the products and content we spend our days delivering, is what makes a company valuable. There’s a reason that "content is king" has been a defining mantra of the past decade. Surely, if you make the coolest product, you’ll produce the most valuable company. But this isn’t as true as you might think. Long-term enterprise value—that is, building a big-ass business—is only possible by having a differentiated way of getting that great product to a customer. The channel through which users receive and access content matters most.

This argument comes from investor and former Benchmark Capital partner Mitch Lasky, and it’s been ping-ponging through my mind for months. Every financial document I read, every analysis I write, Lasky is in my head reminding me about why a company becomes valuable. It’s distribution, stupid.

Lasky is one of the greatest consumer investors of all time with a portfolio that includes Discord, Riot Games, and Snap. Much of his career was focused on video games, a submarket of the tech industry that I’ve found often precipitates broader trends. Nearly every consumer innovation you come in contact with, in one way or another, owes its lineage to some video game company’s innovation in content, pricing, or go-to-market strategy. Nvidia built graphics chips for video game rendering, Slack started as a video game chat system, and that 30 percent fee that Apple takes from developers partially stems from mid-1980s agreements between Nintendo and Pac-Man creator Namco. 

Lasky teamed up with fellow investor Blake Robbins to host a podcast called GameCraft, which takes distribution innovation as its core idea and shows its efficacy at driving the last 40 years of gaming. This piece mostly draws from episode 14, “Distribution.”

His thesis was good enough that I think it can be applied to all bits companies: software, content, marketplaces—all of them mirror video games. If you want to know how to make your startup valuable, you should learn and apply the lessons of the video game industry.

Mind the toll

Lasky argues that distribution means “the totality of costs that exist in between getting the finished product in the hands of the developer and the playable product in the hands of the consumer.” Distribution is not just a marketing cost; it is a series of choices around pricing, packaging, and a myriad of other things that interconnect on how you get your product in the hands of customers.

He uses a metaphor of a network of roads connecting developers and consumers:

“As content moves along a particular pathway through that network, that movement has an associated cost. There may not be an explicit toll, like, for example, distributing through the iOS App Store, where you know going in that you're going to pay 30 percent. But, regardless of what pathway you take, there's always going to be a cost.“

For founders, it is tempting to assign distribution as the purview of a company’s “growth” department. After all, sales and marketing generate the demand—that’s their job! It is especially tempting because that is how financial documents are designed. Marketing costs are legible, platform fees are obvious. A CFO prepares a spreadsheet each month where you can see how much you spent on ads. But this bucketed thinking is a disease.

To make matters worse, investors are super-spreaders of this ideology. They also perpetuate this fallacy by simplifying your business into ratios like LTV/CAC. Metrics are important and useful signals. However, by assuming that the payback period for acquisition costs are all you have to account for to grow a company, you forget the whole point of a startup, which is to make something people want.

There’s a better way to think about distribution. Novel product usage patterns? That’s distribution. New pricing models? Also distribution. Building social sharing into the core workflow loop of your app? Distribution. Expanding the capabilities you put into the distribution capability bucket allows for founders to be more innovative.

This is also true for costs. Distribution isn’t simply what you pay Meta for ads; it is the opportunity cost that comes from picking a certain channel:

“It's not only the value in monetary terms for cost. Sure, it’s the 30 percent of revenue that you have to pay to Apple. But when you go on [the video game platform] Steam, you're making a choice about your control over the customer, your access to certain kinds of information, and your ability to communicate directly with the customer.”

Digital media companies have been learning this ugly lesson for the past four years. Firms like BuzzFeed chose to build distribution mediated through social media platforms. It worked for a while, giving it access to enormous scale quickly. However, its choice to rely on platforms like Facebook also took away crucial forms of customer engagement. In reality, the audience was borrowed from those platforms with relatively little demographic information (hurting its advertising effectiveness), and the company captured few direct lines to its readers, such as email addresses. While BuzzFeed once had a $1.5 billion private valuation, it went public, shut down its news division entirely, and is worth a measly $55 million today.