Buy or Build?

March 14, 2007 on 9:11 am | In Business, Insider View, Musings by Josh Jones |

Buy or Build?

There comes a time in every young man’s life (and I’m sure it happens to you too, young women), where you’ve asked yourself the age-old question, “Josh, should I buy myself a new Gulfstream G550… or just build it?“

Now that may seem like a ridiculous question to some of you… but it’s not.

It’s a very undiculous question.

Clearly, a Gulfstream G550 is too expensive to buy. So, that kind of narrows it down!

Of course it’d be cheaper for you to build your own, right? I mean, I assume these guys aren’t just making private jets as a way to burn through their trust funds. They must be charging more than it costs them to make… so let’s save some money and build one ourselves! I’m so sure we could build one measly jet for less than $60,000,000!

Buy or Build?

Now, where do we start?

I guess, we call up a, um, wing store? And maybe a propellor factory? Some kind of fuselage shop? A hot tub manufacturer?

Then, we hire some cheap Chinese/Indian/Mexican/Canadian labor to piece it all together, and whammo, we should have our very own ultra-lux jet for quarters on the dollar!

But quarters on the dollar is not enough! Somebody, somewhere, is clearly still making profit off of us!

Couldn’t we be even cheaper, and build our own wings, too? And our own fuselage? Our own hot tub?

I bet we could! And that’d be even cheaper!

And we could mine our own iron too! And drill for our own oil! And, er, sand our own silicon! And desalinate our own water! And, and, and…

Okay, enough of that. Everybody knows you gotta buy some stuff, sometime… division of labor, specialization, economies of scale, and all that. If it always made sense to build things yourself, why does my wife go shopping so much?

In fact, when you’re just a measly consumer, it pretty much never makes sense to build your own of anything! There’s a reason we’re not called producers.

Buy or Build?

The average consumer has no capital to spend, no expertise to use, and probably only needs one or two of the item in the first place… which all adds up to a pretty heavy bias towards “buy”.

For a company though, the decision is a little harder. Clearly, there are tons of things you need to produce your product or service that just don’t make sense to build. They’re just too difficult to build, or require too big an investment of money/time for how much of them you need.

For example, we don’t build our own servers, we don’t write our own operating system, we don’t run our own international fiber-optic network, we don’t run our own domain registry, we don’t own our own data center, we don’t run our own office building, we don’t handle our own medical insurance, we don’t bake our own pizzas, and we don’t even clean our own toilets.

In fact, even for companies, most of the time you aren’t going to build things yourself. Generally, your whole business is based around providing just one added value. And generally, it works best if you just focus on making that one added value the most efficient, highest quality, and I guess valuable… you can.

If you get distracted by how crappy your vendors are and start thinking “we could do what stupid Xmlyz Corp does, only soooo much better”, you might just find your company turning into a jack-of-all-trades, master-of-none. And nobody goes with the company that does lots of things poorly.. they use the company that does just what they need… the best!

When you buy something, you can always get it cheaper, faster, and better than building it yourself. So, it always makes a lot more sense to buy.

Buy or Build?

Except not always!

There are insidious hidden downsides to buying, ones that will now no longer be so as I illuminate them!

For one, the more you buy, the less you control. If it’s a core part of your business, you probably need to be building it!

You don’t want to be lying asleep at night dreaming, “Hmm, that Ventimaxilator 3000 we bought doesn’t quite work as well as I was expecting. I sure hope I can convince Acme Ventimaxilator, LLC to fix it in the 4000!”

And sure, that software license might be cheap today, but once you’re running your whole business on it, who’s to say the price won’t go up, up, and away next year? NOT YOU.

For two, if you can buy it, your competitors can buy it too, brainiac! What’s your advantage then? Having more money? Spending more on advertising?

Well, your competitors can get loans and spend more on advertising too, baby-genius!

I’m pretty sure these downsides to buying are one of the big reasons open-source software is getting ever more popular, especiallyOSS has the cheaper, faster, and better advantages of buying along with the control and differentiation advantages of building!

But wait, how does it have the differentiation advantage? Can’t your competitors use the same open-source software you use?

Buy or Build?

Yah, yah, yah. True dat.

But at least with open-source you can make your own changes to it. Not to mention, if you have any sort of software expertise, you have a big advantage over other companies trying to use OSS since, unlike much commercial software, OSS is hard to use and has little professional support available!

That’s right. Open-source software’s biggest failings for the consumer market may just be the reason it’s succeeding in business!

I know I at least consider the fact that we use all open-source software, plus our own custom billing, provisioning, and management software one of our greatest advantages through the years.

Oh yeah, and this awesome blog.

25 Responses to “Buy or Build?”

  1. markus Says:
    March 14th, 2007 at 10:33 am

    I’d *buy* your flying hot tub anytime, though.

    According to your point, if OSS gets easy to use, you go bankrupt? Naaaaah.. :D

  2. BUGabundo Says:
    March 14th, 2007 at 10:40 am

    Is the real Josh (again) on vacation, and some else writing in is place??

  3. Pete Says:
    March 14th, 2007 at 12:10 pm

    Was this entry just a giant excuse to take a cheap shot at Canadians?

  4. T00rd Says:
    March 14th, 2007 at 12:25 pm

    Yeah…

    What’s the thesis statement of this entry, again? And how does it relate to DH and its customers?

  5. sal Says:
    March 14th, 2007 at 12:46 pm

    I am glad you have a good life, but you just lost me as a customer this week. Tell your damn tech support people to do their jobs

  6. Justin Says:
    March 14th, 2007 at 2:37 pm

    Look @ Google, they do everything and master everything.

  7. rlparker Says:
    March 14th, 2007 at 3:17 pm

    Bye Sal! We’ll miss ya!

    DH tech support generally rocks! Like in any other organization, there will be mistakes now and then, but as a rule, the DH tech folks are *far* superior to the “average” tech support staffer you are likely to find these days.

  8. Sean Says:
    March 14th, 2007 at 4:49 pm

    Just build the darned data center and be done with it. Sublet to others equally fed up with your current site.

  9. Shak Says:
    March 14th, 2007 at 5:00 pm
  10. Simon Jessey Says:
    March 14th, 2007 at 6:33 pm

    All that would make more sense if DreamHost was like a Gulfstream G550, but it isn’t. That’s pretty much Lego compared to the DreamHost Space Shuttle - punching it’s way into orbit on a pillar of flame, and then gliding back to Earth on a wing and a prayer.

  11. Toord Says:
    March 14th, 2007 at 8:15 pm

    Simon,

    I concur. I think it’s a bit ludicrous Josh proclaiming to have some sort of competitive advantage by not owning a data center and further DH being the “best.” Not to be rude…but this ain’t exactly what I would call reliable hosting :/

  12. Justin Says:
    March 14th, 2007 at 8:19 pm

    Toord, I disagree with you, Them not owning a datacenter is probably a good thing, they are being supported by a reliable building, in theory, a building that would take care of all ELECTRICAL needs.. ideally..

  13. Me Says:
    March 14th, 2007 at 9:36 pm

    @Justin:
    Google buys a lot of their products instead of building the products themselves.

    Google Earth? Google didn’t build it, they bought a company and product called Keyhole. Google Documents and Spreadsheets? They bought Writely. Picasa? They bought it. Google Analytics? They bought Urchin. Blogger? They bought it from Pyra Labs. They bought YouTube, etc, etc.

  14. Kit Says:
    March 14th, 2007 at 9:58 pm

    DH rocks in Malaysia!

  15. Build for Flexibility, Buy for Economy | HostingFu Says:
    March 14th, 2007 at 11:15 pm

    [...] I was writing this, Josh Jones of DreamHost posted a new blog post — Buy or Build, which makes much more sense from an enterprise point of view. For a company though, the decision [...]

  16. Mike Says:
    March 14th, 2007 at 11:19 pm

    I thought this was going to be a “We’re building (or buying) our OWN data center!” post.

    Or are you going to go ahead and build the plane, then if that turns out okay, try building a data center? Good plan!

    You could just build the plane, then sell it and use the profit to buy a data center. That’s like getting a free data center!

  17. David Says:
    March 15th, 2007 at 4:45 am

    Sorry Josh, you over did the waffling this time, I lost track half way through this post and found something else to do.

  18. 时尚广场 Says:
    March 15th, 2007 at 5:32 am

    非常得不错!

  19. Kevin Says:
    March 15th, 2007 at 6:46 am

    Boring.

  20. DC Says:
    March 15th, 2007 at 7:11 am

    sonogram = classic

  21. John Knowles Says:
    March 15th, 2007 at 8:40 am

    Again Josh your logic is flawless.

    The only bad thing I have to say about dreamhost is they have a hell of a lot of customers who are completely clueless about business or hosting.

    having a data center would be pointless and cost DH more than what it would ever be worth. lets break it down:

    data center construction -> huge cost
    more staff to manage and keep it running -> increase in cost
    power, air conditioning, UPS systems, Connection to back bone -> huge monthly outgo

    increase in customer base from having their own data center -> virtually nothing

  22. Mike Says:
    March 15th, 2007 at 12:48 pm

    Except that some of the biggest problems they’ve had have been blamed on the data center and were out of their control.

    Also, you deduct their current costs from the huge cost you mention, as it’s not exactly free to be where they are now.

    It could also be looked at as a real estate investment.

    They could also make money back if they offered colo, just like their current data center is making money from them.

  23. Dallas Says:
    March 15th, 2007 at 5:13 pm

    Few companies of any size actually OWN data centers, let alone entire buildings. It just doesn’t make much sense for all but the largest of companies. The building our data center is in is home to several data centers, some housing only a single organization’s equipment, and others housing equipment for several organizations. Some of the largest websites out there are housed in this building, or have been in the past, and that recent planned power outage (we agree that’s essentially an oxymoron when it comes to data centers!) took all of it down.

    The building is a premier data center class structure and is generally sound in that regard. Something somewhere does seem to have gone awry with the management of the building at some point in time, however. They are not living up to their end of the deal. Some of the other data centers in the building are run by other web hosts, and they also went down along with us. Running your own data center is no guarantee that outside forces won’t come into play. This is not an attempt to push off blame, in any way. The fault for any problem with a service we provide is entirely on our shoulders.

    All that aside, nothing I saw in this blog post said anything about our future plans. It only discussed the economic basis for the decisions we have made up to this point. As our own situation changes, the economics also change.

  24. Brandon Says:
    March 16th, 2007 at 12:01 am

    Interesting and practical application of economics. DreamHost Economics 101.

  25. DreamHost Blog » Build or Buy? Says:
    April 13th, 2007 at 5:47 pm

    [...] some of you already surmised from this old post, what I was really talking about here is pretty [...]

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