Does Protectionism Protect?

ProtectionismA couple of recent events have made evident that the cause/effect relationship between protectionism and its ominous consequences is still often painfully misunderstood, or what’s even worse, forgotten. The cumulative, collective knowledge process is the universally known pattern of how we humans advance our knowledge through time. However universal and unequivocal this concept is, there are no shortage of examples showing a relatively frequent utter lack of an understanding of basic, fundamental historical lessons as to merit comment and analysis.

After the US markets’ closing bell on February 19, Facebook announced its agreement with WhatsApp to acquire it for a staggering US $19 billion. The price tag will be the largest-ever paid for a venture-backed startup company (WhatsApp was founded in 2009, still an unlisted company). The transaction is subject to regulatory approval.

By far, WhatsApp is the leading instant messaging system on earth, recently boasting 450 million subscribers worldwide, with new subscribers piling up at about one million per day. WhatsApp is also the world leader in transmitting images between users, above Facebook and Instagram combined.

Beyond the merits of the transaction, it is both appropriate and timely to make a quick recap of the evolution of the text message industry in recent years, in order to remind us of a great historical lesson that should have been fully in command of key players, but wasn’t.  

In addition to the typical service provided by all mobile carriers throughout the world (known as SMS), up to now there have been only a couple of memorable experiences of specialized companies in this utmost important market. Up until about late 2011 the Blackberry Messenger (bbm) was comfortably the clear market leader. A combination of becoming a lagging brand in innovation plus the fact that back then bbm was a service provided exclusively to blackberry users, caused the loss of leadership of Blackberry’s bbm, in favor of the then emerging WhatsApp. The precipitous loss of market leadership in favor of WhatsApp eventually forced Blackberry to rectify, opening up its service to all mobile platforms. Recent statistics place WhatsApp in the #1 spot with the 450 million registered users previously mentioned; Blackberry is a distant second with about 80 million users.

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It is evident that Blackberry’s top management did not have an adequate idea about the great value of its leadership —namely opportunities and risks inherent to that leadership— in the short messages market, when they had it. Or, to put it in another way, Blackberry’s management naively thought that the best way to preserve their market leadership was by going solo, keeping the exclusivity of their service to blackberry users. Otherwise, Blackberry would have opened its service to all mobile platforms early in its extraordinary success, a few years ago. Unfortunately, Blackberry didn’t realize it in time. When Blackberry  finally reacted to correct its major blunder it was too late, since WhatsApp was already the worldwide leader, miles ahead of Blackberry.

WhatsApp was born out of an evident desire to replicate the great success bbm had had within the blackberry ecosystem, targeting the immense market vacuum left by Blackberry’s closed system. WhatsApp originally targeted the iPhone market with great success. Immediately after that, WhatsApp went after the Android market. The rest is history.

Nature abhors vacuums. Hence, the marked propensity for vacuums to be filled. This is more so, when dealing with a market vacuum with great appeal, a potential market worth millions —or in this case, billions— of dollars.

In retrospect, it is very easy to perceive the great fault of Blackberry’s management: blindness in regard to the rest of the market. So, the million dollar question —or in this case $19 billion— to ask is… If Blackberry had such a great product and sat on the throne as market leader, why in the world didn’t they open bbm to the rest of the mobile operating systems in time? It is a classic case of not learning from others. With the benefit of hindsight, that mistake has an approximate present value of US $19 billions.

Going back in history, Blackberry’s management committed the same mistake that Apple made in the early 80s by not licensing its operating system to other platforms, before Microsoft took off. The WhatsApp/Blackberry case is a virtual carbon copy of the Apple/Microsoft experience —with the difference that Apple was not only able to bounce back after that, but by 2012 it became the company with the largest market cap in the world. A few years earlier, Sony had made exactly the same mistake with Betamax, in favor of the VHS video-home system format.

Anyway we approach the previous failed business strategy cases, the major objective behind it is to protect a very valuable asset with the intention to preserve leadership in the long-run. Thus, the main intention is protection. The key element here is a functional definition of protection within this context.

Ironically, quite often the best way to protect a valuable product, or a nation’s wellbeing, is by opening up, not by closing down.

Although, in principle a traditional protectionist strategy —closing up the market to other formats— makes intuitive sense, that  strategy has proved to be deeply flawed, since it ironically yields exactly the opposite results. History shows it in an unmistakable way, case after case, with no exceptions, be it at the individual, organizational, or national level. The lessons are there  to be learned, as a cumulative, collective knowledge of mankind.

Unsurprisingly, the same cause/effect relationship also applies to nations. In fact, the protectionism cases are amply documented regarding nations. A case in point is the recent result of the Swiss referendum of February 9th on immigration policy (The Limitations of Democracy).

As previously stated, the cause/effect relationship between protectionism and its ominous consequences is still often painfully misunderstood, and sometimes even forgotten. The examples cited from the business world are an unobjectable evidence in this direction.

In summary, there is no way to overstate the importance of truly learning from others as an indispensable way of avoiding making monumental mistakes, as the corporate cases mentioned clearly demonstrate.

History shows that national —or regional— protectionism yield exactly the same results for similar reasons. Logically, this isn’t a coincidence, but the manifestation of the same nature of things at different levels of the human experience —individual, organizational, national.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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  1. […] Plenty of mirages and delusions behind most separationist movements surface once a careful analysis is made. The economy, the world, and even psychology do behave in a certain given way. Experience and history unequivocally show it. Hence, a personal perspective, if is not rooted in reality is doomed to failure. The different separationist movements in different parts of  the world are not rooted in a clear understanding of how society and the economy work. Not coincidentally most separationist movements have a profound resemblance to the relatively recent vote in Switzerland whereby severe restrictions to the inflow and long-stay residence of foreigners is going to be limited (see related Post, Does Protectionism Protect?). […]

  2. […] Insulation and protectionism are terrible malaisses. They have never conducted to prosperity; quite the contrary. (read our article, Does protectionism Protect?) […]

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