How to Own a Commodity
18 Aug 2025Everyone says not to start a commodity business. But the truth is, the best businesses are commodity businesses that really own the commodity. The trick is to build a structural cost advantage in production, or differentiate the product enough for customers to no longer view it as a commodity.
Why build a vertically integrated business
The magic of vertical integration is that it takes something perfectly fungible — aluminum, oil, electrons — and makes it yours. That’s how you turn a commodity into an empire.
The prize is clear: a large, durable business with 5+ of Hamilton Helmer’s ‘7 Powers” of businesses with a long term competitive advantage.
✅ Scale Economies
✅ Cornered Resource
✅ Network Economies
✅ Process Power
✅ Branding
🤔 Counter-Positioning (maybe to get there)
🤔 Switching Costs (if your customers bought infrastructure that only works with you)
#Opportunities for integration
Opportunities to start an integrated business are a subset of the circumstance that enable any new business.
New technology
Netflix: Streaming was only viable once broadband became cheap.
Alcoa: Aluminum was more expense than gold until the Hall-Héroult smelting process industrialized production.
New demand curve
Amazon Retail: Bezos started Amazon because the internet was growing 2,300% / year
FedEx: Globalization made overnight shipping essential.
Standard Oil: Industrialization, later automobiles.
Certainty (safety, scarcity, reliability)
Standard Oil: Low quality kerosene killed people. Standard was just that.
Meter: WiFi always fails at the worst time. Meter guarantees reliability.
Moderna / mRNA vaccines: First COVID vaccine candidate created in two days.
Distribution / logistics
Coca Cola: Global bottling and distribution enabled the same drink to be served everywhere.
Walmart: global distribution enabled cheap imported goods everywhere
Amazon Retail (internet)
Structurally lower cost basis (control of inputs)
Saudi Aramco: Controls the world’s cheapest oil to produce.
SpaceX: Made their own engines (Elon tried to buy a Russian ICBM first).
Alcoa (owned electrical generation in Tennessee and Quebec Canada)
Regulatory or institutional openings
19th Century Railroads: Granted right-of ways, eminent domain by the government and owned all the land on their routes.
Electric utilities: Traditionally owned generation and delivery to customers.
Half baked integration
Most companies that fail to vertically integrate do so because they can’t reach the scale they need to realize the benefits of integration, don’t integrate the things that accrue the most value, or are in a market that commodifies faster than they can become dominant.
Integration without scale
Not enough scale
GoPro: Tried to launch a a video ecosystem but had too small of a user base.
Rent the Backyard (my previous company): We solved scarcity but priced it like a commodity before reaching scale.
Industry commodifies before you reach scale
SunRun / Solar City: Responsible for solar panels on roofs across America by creating the “solar lease” funded with government incentives. SolarCity tried to go into the solar panel market in 2016 but the product was undifferentiated and Chinese manufacturers were dominant.
Uber: Divested self driving team in 2020. Now, you can book a Waymo via the Uber app in Atlanta and Austin but Waymo has its own app with >25% market share in San Francisco…
Integration in the wrong place
WeWork: Financing innovation turned out to be raising money to burn on riskier than expected leases. Owning buildings wasn’t the bottleneck.
BlueApron: Unit economics were so broken vertical integration of food prep couldn’t help.
Integration with distraction
Juicero: Integrated hardware + proprietary juice packs + logistics. Not enough product differentiation.
Lyft Bike: Doesn’t lead to more Lyft rides. Now Waymo has more market share in San Francisco.
How to integrate
Vertical integration is easy to romanticize or dismiss, but its logic is surgical: it only works when you own a step of the value chain that captures an outsized share of value, or when you change the terms of competition.
Find the bottleneck
Scarce input, distribution channel, reliability guarantee, etc.
Control it
Integrate upstream or downstream to surround that choke point.
Decide how to compete
Option A: Develop a lower cost basis
When everyone gets the same price for a product, the only way to win is to offer your product on a lower cost basis. Economies of scale are most straightforward, but technology or process advantages can get you there too.
Option B: Break the commodity perception
If customers don’t view you as a commodity, you having pricing power. This can mean wrapping your product in a brand that signals trust, engineering reliability guarantees others can’t match, or building an ecosystem that locks in demand.
Follow where value accrues
Early on, this usually means chasing fat margins around scarcity, reliability, or a new technology. As the product commodifies, margins move downstream toward distribution, logistics, and trust, or upstream into scarce inputs and capital intensity.
Owning the commodity
Owning a commodity isn’t about fighting commodification, it’s about bending it to your advantage. The world’s great industrial empires didn’t escape commodity markets; they mastered them by grabbing the choke points where value accumulated, then relentlessly scaling or differentiating themselves.
Standing invitation (inspired by Patio11 who also has some good tips on how to approach this): if you want to talk about hard tech or systems, I want to talk to you.
My email is my full name at gmail.com.
- I read every email and will almost always reply.
- I like reading things you’ve written.
- I go to conferences to meet people like you.
- Meetings outside of conferences are tougher to fit with my schedule - let’s chat over email first. Specificity and being concise makes it easy for me to reply :)