Tuesday, May 27, 2014

Fractalization (and trivialization) of technological innovation

My friend Frank Piller this morning shared a witty story from last week’s New Yorker. The title and subtitle say it all:

“Let’s, Like, Demolish Laundry”
Silicon Valley is in a bubbly race to wash your clothes better, faster, and cooler. This is not a metaphor. Unless, you know, it is.
The story about IT-enabled laundry delivery services focuses on Washio, a LA-based seed-funded startup. The three founders cruise along confident in the brilliance of their idea until they run across three Bay Area rivals (Laundry Locker, Prim, Rinse) — one incubated by Y Combinator — and eventually five more from NYC and two from Chicago.

Author Jessica Pressler makes only a feeble effort to restrain her sarcasm. In commenting why so many other tech entrepreneurs are addressing the same need:
In reality, when people in a privileged society look deep within themselves to find what is missing, a streamlined clothes-cleaning experience comes up a lot. More often than not, the people who come up with ways of lessening this burden on mankind are dudes, or duos of dudes, who have only recently experienced the crushing realization that their laundry is now their own responsibility, forever. Paradoxically, many of these dudes start companies that make laundry the central focus of their lives.
But even in this segment, “new innovations are dying from the day they are born… There’s a term for this. It’s called the hedonic treadmill.”

Some of it has an anthropologist-visits-the-strange-tribe-of-Silicon-Valley feel. Even though their main office is in Santa Monica, Washio has the same (post-Amazon) disrupting of the physical world that brought us Pets.com and Uber. Their goal is to be “the Uber of laundry," and their share a common seed stage investor.

But early on, Pressler raises a more fundamental question:
We are living in a time of Great Change, and also a time of Not-So-Great Change. The tidal wave of innovation that has swept out from Silicon Valley, transforming the way we communicate, read, shop, and travel, has carried along with it an epic shit-ton of digital flotsam. Looking around at the newly minted billionaires behind the enjoyable but wholly unnecessary Facebook and WhatsApp, Uber and Nest, the brightest minds of a generation, the high test-scorers and mathematically inclined, have taken the knowledge acquired at our most august institutions and applied themselves to solving increasingly minor First World problems.
Certainly Amazon and Google and Facebook (mostly) allow us to do things we did before, just more quickly and cheaply and conveniently. Yesterday, my sister-in-law could have mailed pictures of her daughter’s graduation to her friends and relatives, but instead she posted them on Facebook and they were instantly available.

Like Pressler, many of these activities seem trivial when I compare this to other “big” innovations, like trying to get mankind back into space or provide enough food and energy to bring 5 billion of the world’s 7 billion people up to developed world living standards. After changing jobs three years ago, life at my new employer reminds me that the life sciences have many important unsolved problems, whether it be preventing deaths from malaria and tuberculosis in sub-Saharan Africa or finding a cure for cancer.

But on another level, Pressler’s article would come as no surprise to my innovation strategy students of the past eight years (whether at KGI, UCI or SJSU). The pattern is straight out of Dealing with Darwin, the grand unified theory of innovation by Geoff Moore (best known for Crossing the Chasm).

One reason I use the book is that it offers a cogent explanation of the role of innovation in mature industries. He subdivides such innovation into two categories, operational excellence (cheaper) and customer intimacy (better). For the latter, he uses the metaphor of “fractalization”, as illustrated by this diagram from Chapter 6:
As Moore explains (p. 111-112)
Figures 1 through 3 represent the early, middle, and late stages of a growth market. ... As the figures indicate, the driving dynamic at this point is a single-minded attempt to acquire new customers and claim market share.

By the time we hit figure 3, however, the market for the basic offering has become saturated. One can no longer grow simply by adding new customers to the category because the bulk of them have already been added. After virtually every home has a phone, every garage a car, every child a personal sound system, what do you do next?

Thus, from the mass-market Model T car, for example, the automotive industry first generated line extensions: a sedan, a station wagon, a truck, a couple, a limousine.

Increasingly fine-grained fractalization can and will continue as long as there are discretionary dollars to spend in the system and the category as a whole has not become obsolete.
We do need to recognize the contributions of the laundry app innovators (even if they go the way of the sock puppet). By moving the realm of innovation from the physical world to the digital world, they are enabling new form of experimentation and innovation — as happened in retail, communications, advertising, journalism and other established industries.

Pressler makes clear that the laundry apps still depend heavily on their contract laundry suppliers who do all the work. But if such apps catch on, it would seem obvious that the laundry market will be rapidly consolidated, with the tiny corner dry cleaners replaced by a handful of regional factories. One would expect (as with Web 1.0 and 2.0) the adoption will be most rapid in Silicon Valley, with the shops in Palo Alto or SoMa served by ecofriendly delivery trucks driving from large plants in Morgan Hill or Livermore.

Tuesday, May 13, 2014

Why some fear Google -- and others should, too

Excerpts from a 4,000 word letter by the CEO of a leading German publisher to the company that once promised “don’t be evil”:

An open letter to Eric Schmidt
Why we fear Google
17.04.2014, von MATHIAS DÖPFNER
Frankfurter Allgemeine
Dear Eric Schmidt,

In your text “Die Chancen des Wachstums” (English Version: “A Chance for Growth”) in the Frankfurter Allgemeine Zeitung, you reply to an article which this newspaper had published a few days earlier under the title “Angst for Google” (“Fear of Google”). You repeatedly mention the Axel Springer publishing house. In the spirit of transparency I would like to reply with an open letter to highlight a couple of things from our point of view.

Google doesn’t need us. But we need Google
Google’s employees are always extremely friendly to us and to other publishing houses, but we are not communicating with each other on equal terms. How could we? Google doesn’t need us. But we need Google. And we are also worlds apart economically. At fourteen billion dollars, Google’s annual profit is about twenty times that of Axel Springer. The one generates more profit per quarter than the revenues of the other in a whole year. Our business relationship is that of the Goliath of Google to the David of Axel Springer. When Google changed an algorithm, one of our subsidiaries lost 70 percent of its traffic within a few days. The fact that this subsidiary is a competitor of Google’s is certainly a coincidence.

Not only economic, but also political

We are afraid of Google. I must state this very clearly and frankly, because few of my colleagues dare do so publicly. And as the biggest among the small, perhaps it is also up to us to be the first to speak out in this debate. You wrote it yourself in your book: “We believe that modern technology platforms, such as Google, Facebook, Amazon and Apple, are even more powerful than most people realize (...), and what gives them power is their ability to grow – specifically, their speed to scale. Almost nothing, short of a biological virus, can scale as quickly, efficiently or aggressively as these technology platforms and this makes the people who build, control, and use them powerful too.”

The discussion about Google’s power is therefore not a conspiracy theory propagated by old-school diehards. You yourself speak of the new power of the creators, owners, and users. In the long term I’m not so sure about the users. Power is soon followed by powerlessness. And this is precisely the reason why we now need to have this discussion in the interests of the long-term integrity of the digital economy’s ecosystem. This applies to competition, not only economic, but also political. It concerns our values, our understanding of the nature of humanity, our worldwide social order and, from our own perspective, the future of Europe.

The greatest opportunity in the last few decades

As the situation stands, your company will play a leading role in the various areas of our professional and private lives – in the house, in the car, in healthcare, in robotronics. This is a huge opportunity and a no less serious threat. I am afraid that it is simply not enough to state, as you do, that you want to make the world a “better place.”

You say in your article that those who criticize Google are “ultimately criticizing the Internet as such and the opportunity for everyone to be able to access information from wherever they happen to be.” The opposite is true. Those who criticize Google are not criticizing the Internet. Those who are interested in having an intact Internet – these are the ones who need to criticize Google.

Google is to the Internet what the Deutsche Post was to mail delivery or Deutsche Telekom to telephone calls. In those days there were national state monopolies. Today there is a global network monopoly. This is why it is of paramount importance that there be transparent and fair criteria for Google’s search results.

However, these fair criteria are not in place. Google lists its own products, from e-commerce to pages from its own Google+ network, higher than those of its competitors, even if these are sometimes of less value for consumers and should not be displayed in accordance with the Google algorithm. It is not even clearly pointed out to the user that these search results are the result of self-advertising. Even when a Google service has fewer visitors than that of a competitor, it appears higher up the page until it eventually also receives more visitors. This is called the abuse of a market-dominating position. And everyone expected the European antitrust authorities to prohibit this practice. It does not look like it will.

Is it really smart to wait?
Historically, monopolies have never survived in the long term. Either they have failed as a result of their complacency, which breeds its own success, or they have been weakened by competition – both unlikely scenarios in Google’s case. Or they have been restricted by political initiatives. IBM and Microsoft are the most recent examples.

Another way would be voluntary self-restraint on the part of the winner. Is it really smart to wait until the first serious politician demands the breakup of Google? Or even worse – until the people refuse to follow? While they still can? We most definitely no longer can.

Sincerely Yours
Mathias Döpfner
Via John Paczkowski at re/code

Sunday, May 11, 2014

Apple's curious acquisition

Apple’s reported efforts to buy Beats Electronics for $3.2 billion have been the subject of endless speculation since it was first reported Thursday. We don’t know Apple’s actual reason for interest — or even if the deal will happen — since Apple has yet to make any official announcement. (As with all such leaks, this leak seems intended to influence the deal — presumably by the sellers to force Apple to follow through.)

Certainly this is out of character for Apple, since its largest previous deal was $0.4 billion to buy NeXT, the basis of its OS X. But the press frenzy about how precedented the deal is seems a bit exaggerated. After all, there’s always a first time for anything, including its successful acquisitions such as the purchase of NeXT, PA Semi, and Siri. (Google got a lot of flack in 2006 for spending $1.65 billion to buy YouTube).

Is the acquisition a good idea? When we (i.e. strategy professors) teach related diversification by acquisition, there is a standard list of pros and cons.

On the pro side, an acquisition is usually about time to market — accomplishing something more quickly than you could do on your own. It can acquire technology, customers, distribution, products and people. For the latter, Silicon Valley normally thinks in terms of engineers. However, an acquisition can also bring new executives: the NeXT purchase brought in the new management team of Apple — not only Steve Jobs, but essentially it’s entire management team other than the CFO that Gil Amelio installed (Fred Anderson) and the COO Jobs stole from Compaq (Tim Cook).

Finally, there is the opportunity for the newly acquired company to be more successful under its new owner than as a stand-alone company. This might be due to better management, better distribution or more available capital. For example, in our recently completed business plan competition at KGI, most of the proposed startups would sell out to a large pharma or biotech company before bringing products to market, rather than build a global retail sales force from scratch.

On the con side, there is the question of strategic fit: do the new assets fit with the organization, how will the products, people and culture be integrated — and are the business models compatible? The post-acquisition integration can be a huge distraction (but usually when buying a larger company, as with Microsoft-Nokia, Oracle-Sun or HP-Compaq).

And with any acquisition, there’s always the risk of over-paying. Perhaps the assets are valuable, but CEOs have a tendency to overpay — whether to put their mark on their company, grab the headlines or just to run a larger company.

In Beats Electronics, Apple is buying two lines of business. One is Beats by Dre, the headphones division that has nearly two-thirds (61.7%) of the US premium headphone market — nearly 3x that of Bose, which created the segment.

It’s a monstrously successful brand, but there’s little technology there. The two music industry execs who formed Beats outsourced their initial headset design to the father-son team that runs Monster Cable Products (which, lacking negotiating savvy, failed to get an equity stake in the venture they helped create). The success of the company (even more so than for Bose) is based on marketing rather than technology:

"They certainly don’t need the headphone company, which makes second rate headphones based on marketing," says music industry analyst Bob Lefsetz. He thinks Apple would be a lot more interested in Beats’ music streaming service. Steve Jobs famously opposed the subscription music model and, instead, championed iTunes' current model, where you buy a song outright.
This points to its other line of business. The nascent Beats Music steaming service leverages the value of the Beats brand with teens, but (like Apple and Amazon) is far behind market leader Spotify.

By one standard, Apple is certainly overpaying. The company’s exponential growth is not sustainable and its revenues are less than $2 billion. As a company with little technology and strong emphasis on style and brand, Beats is essentially a fashion company. Any fashion acquisition is a risky acquisition.

Will Beats by Apple seem as authentic or appealing to teens as Beats by Dre (when Dre was still the owner)? For that matter, how many fashion companies are able to sustain their position of a period of decades? In my adult lifetime, I can only think of one firm that has been successful: Nike.

Which brings us to the final possible value of Beats. The company has shown it has been able to understand teen fashion and create markets that didn’t exist. Is that because of the cofounders, Dr. Dre (aka Andre Romelle Young) and music mogul Jimmy Iovine? Or is there a depth of marketing — both market sensing and market creating — within Beats that could help Apple better sell unnecessary luxuries to middle class teens and college students?

Although it’s a large deal for Apple, it’s essentially a minor bet — hardly on the scale of Google buying YouTube or WhatsApp, let alone Microsoft’s purchase of Nokia.. Apple has more than $150 billion in cash (mostly offshore), and has few other options to create meaningful growth. With annual revenues of more than $170 billion, the Beats sales would not be material to Apple any time in the near future — if ever.

So if Apple gains an additional window into the soul of the 13-25 year-old set — or rebuilds its foothold in the music industry — then the deal could prove to be a shrewd one. As it is, it’s a gamble — but Apple didn’t get to where it is without taking gambles (such as the iPhone). It may be Tim Cook’s largest gamble to date, but it won’t be the last one he takes as CEO.