19 Apr

The ATS market is an interesting MBA thesis on the power (or lack of) of barriers to entry. Why is it that there are so many ATSs but so few companies in other tech industries?Why are there 200+ ATSs with new ones appearing every year yet no one has laid a glove on Google in the search market, Microsoft in the software market or Facebook in social media.

Reason 1: start up costs are low
It’s actually relatively easy to build an ATS. It may shock a few people (particularly companies who use an ATS and are paying a ton of money each month) but a team of 3 developers and a designer could build a pretty decent ATS in 6 months. Outsource it to a team in India or low cost country and you’d easily have change from $80k.
Ok so it won’t have all the bells and whistles of some of the bigger systems but most SMEs hiring less than 100 people a year don’t really need those. So that’s an obvious starting point: unlike massively capital intensive industries (think cars and oil and gas production) there is no huge financial barrier to entry.

Reason 2: maintenance costs are low
Imagine if the product or service you offered had massive ongoing costs regardless of whether you were very busy or doing very little business. A company with a large manufacturing facility or large network of distribution hubs, planes etc etc these companies are highly operationally geared meaning that they still have to spend a ton of money even they are literally doing 0 business (a fact many have found out to their cost during the difficult shutdown we have all gone/going through). An ATS? Not so much.You can freelance large numbers of staff so costs can be scaled up or down as required to match demand and the only ‘major’ non staff cost would be a decent server infrastructure. With server costs falling year after year, even a fairly large ATS could operate for less than a couple of thousand $$s a month if they really wanted to.
So it’s not difficult to explain why there are so many ATSs: they require very little cash to make them run. Even during a pandemic, most can survive. If it’s easy to enter the market and relatively difficult to go bust, that makes for a lot of companies jostling for position.

Reason 3: Big profit margins
Saas products (whether an ATS or any other type) typically earn large profit margins and as Adam Smith would happily have told you 3 centuries ago, big profit attracts big competition.Saas products require low levels of initial cash to get the product to market and crucially, have virtually $0 marginal cost. The old rule of profits being maximised where marginal cost = marginal revenue is thrown out the window with an ATS or any other Saas system because once the product is built it can be used by almost an unlimited number of clients at no incremental cost to the ATS supplier itself. There are no raw materials going into the product that is made since it already exists and has a theoretical infinite supply curve.
Look at any profitable Saas or platform as a service type company and operating margins in excess are the norm. GM is lucky if it reaches 5%.

Reason 4: ease of swapping
It wasn’t so easy a few years ago but now it is relatively easy to parse data from 1 system to another. If it was hellishly difficult to move your data to another system, that would be a stickiness point making it more difficult for a new entrant to gain market share. Compare that to a retailer that has signed up long term leases to the most footfall dominant positions in all the major cities and you can see how much more difficult it would be to compete against them.

Reason 5: commoditized product
Let’s be brutally honest here: 1 ATS in terms of what it actually does is largely the same as another, certainly at the top end, they all do the same stuff. Not only that, the stuff they do can easily be copied, even with a patent. There is no magic ingredient or secret sauce, no IP so unique it can’t be easily rolled out either identically or with a marginally different spin by a competitor. Produce a product that can be easily copied and surprise surprise, it will be.
This inability to differentiate one ATS from another may be weakening a little as data analytics companies are being bolted on to ATSs. The black box algorithms they create are less easy to copy because you can’t actually see how it is built. Want to copy someone’s interface, dead easy. Want to build a predictive algorithm for who is going to be the best applicant for the job…...not so easy. You don’t have the billions of data points they have analysed or the brilliant, experienced brains that do the analysing so data, the so called new oil of the 21st century, may offer a defensible moat for an ATS at the very top end making it more difficult to compete against. Maybe that’s why the ATSs are all buying these niche data providers rather than developing themselves. Simply put, they can’t, so have no choice but to buy the expertise lock stock by swallowing a whole company, but buying companies whole is expensive and only the biggest ATSs able to raise large amounts of VC cash are going to be able to do this.

Reason 6: rate of market adoption
An awful lot of companies took a long time to actually adopt an ATS, often incorrectly assuming they take forever to implement (top tip: they don’t….about 10 minutes is all you need) and an awful lot of SMEs hiring less than 100 people a year still don’t. This relatively slow adoption (web based ATSs have been operating for over 20 years) means that there is still plenty of fish to be caught even for new entrants in the market. It doesn’t mean a new entrant will win many new clients (particularly ones with an existing ATS) but as Google showed when it came into the market 4 years ago, with a half decent product, and a bit of market awareness, a new ATS can establish itself.
Not only that, all the new start ups appearing every year increasingly need an ATS to help them manage their growth so every year there is a fresh supply of ‘fish’ for ATSs to go after.

Facebook averages over 40% operating margin. 92% of the world’s search queries are done on Google. Ever used a non Apple phone not running on Android? Nope, me neither.
So why is it that these companies have a virtual monopoly or at worst a duopoly and there are 200+ ATSs? Well if you look at the 6 points raised above, the answer is simply the reverse of each one. Think about Facebook. Love it or loathe it (increasingly the latter it would appear), it’s hard to get away from it. Now imagine you tried to compete against Facebook (Google tried and even with their firepower Google+ was consigned to the ever growing list of Google products launched and then quietly shelved) how exactly would you do it?
Is it a relatively untapped market characterised by slow adoption? Hardly. ⅓ of the planet uses a Facebook product of some kind. The other 2/3rds use an alternative to Facebook.
Is it easy to copy? Yes, it probably is relatively easy to copy but you would need a serious amount of developers to match the functionality Facebook offers. Good developers cost a lot of money.
What about some secret sauce? Some IP, a patent or 2 or just the accumulated genius/expertise of the staff Facebook have? Can you out think them? Probably not. They have so much data and so much experience of what works/doesn’t work that it would be well nigh impossible to compete against them. Quite simply, they know social media better than you do.
Low start up costs? Theoretically the start up costs would be much lower than a capital intensive business (think how much money Tesla has had to tap investors for and they still don’t make an operational profit). Perhaps you could operate without an office but as a minimum you’d need 20+ powerful servers so expect a $30,000 a month bill from your server hosting company. VC money can cover that so the question is not that you couldn’t actually build a competitor to Facebook, the question is could you make it as good as Facebook? You would need an army of brilliant developers, data scientists and probably quite a tasty size legal team if Facebook’s current legal dogfights are anything to go by.Unless you are spectacularly rich, there is no way you could afford to do this, even with the funding assistance of friends, fools and family. Quite simply you would need a massive (really massive) injection of VC funding and which VC would give you $1 let alone $100 million to take on a company as dominant as Facebook. Hint: none
But even if you could raise funding, even if you could hire an army of developers, even if they could build a product rivalling the functionality of Facebook you are then going to face the same problem Google did i.e. stickiness. You won’t leave to go to a rival platform unless all your mates and/or family does and that is the real genius behind Facebook. Once your closest friends and family are on, if you cancel your account you miss out on finding out what is going on inside your network unless you can coordinate with everyone you know to all leave at the same time. Fat chance that is going to happen. Remember #deletefacebook?Nope, I didn’t either.

That’s why the ATS market is so fractured. The dynamics of the ATS market are very different to the dynamics of the market Google or Facebook are in. So if you’re thinking of taking on Google or Facebook, don’t. Keep your money. You will lose. Much better to build an ATS. It won’t grow as large as Google or Facebook but it does at least have a chance.

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