A start-up with connections

What do Hulu and Orbitz have in common? These are two great companies that started with backing from super powers in an oligopolistic industry. Orbitz is an online travel agency that was started by five major airlines in 2000 to compete against Travelocity (a Sabre reservation service venture gaining dominance in the consumer travel industry) and Expedia (founded by Microsoft). Orbitz was a very timely move by the airlines to play their role in the growing online travel agencies business and an attempt to reduce the Global Distribution System (GDS) fee.

Hulu is an online video streaming company founded by Disney, NBC Universal and News Corp to compete against YouTube, iTunes and a slew of other online streaming services. This was a very sensible move on part of the networks. Online video streaming was catching up and instead of getting cannibalized by someone else, they entered the space without losing much of the focus on their core business.

It is interesting to look at the strategy adopted by these big companies (airlines and networks in case of Orbitz and Hulu respectively) in an oligopolistic industry. Why do they help start a new company to do something like this? Why not do it in-house? There are a few good reasons behind this strategy. First, cross-platform integration is very important. A customer wants a flight ticket or want to watch a television show. They care less as to which airlines (in most cases) they are flying or the television network the show is on. They tend to go to one stop shop where they can get it all. Second critical reason is that a start-up has no baggage or legacy to support. They can start fresh and focus on what’s latest and run with time. Another important thing is the coolness factor. Start-ups can do something innovative without a lot of bureaucracy. They can hire great talent and be nimble. This, irrespective of whatever a CEO sitting in an ivory tower says, is very hard for a big corporation.

Starting a new venture in oligopolistic industries has its positives and negatives for entrepreneurs. On one hand you are dependent on long-term support of your parent super powers for survival and success, but on the other hand you get a head start, security and an excellent opportunity to hedge risks. All in all, it’s great to build a start-up with connections if you can get it right!