Differentiated Platforms

Differentiation is a standard concept for analyzing competition. It describes a common situation, where one firm develops the ability to serve one type of customer in a market—say, buyers who will pay a lot to save time—while a competing firm serves another—say, budget-conscious buyers who are patient.

Differentiation can describe common competitive behavior in technology markets. A chip firm might develop particular attributes—say, faster, energy-hungry electronics for a particular purpose—while their rival might specialize in slower chips that use little energy. This differentiation can earn each firm loyalty from buyers with different preferences.

That motivates today’s question: Can platforms differentiate? Platforms have played an increasingly important role in technology markets in the last decade—in mobile devices, in web services, you name it. A mix of standards composes a platform, complementing many other firms who build services upon the standards.

At first blush the answer appears to be yes. Think of attributes associated with common platforms, such as Windows, Android, Linux, Facebook, or the iPhone. These platforms differ from one another in the marketplace and set themselves apart from near rivals, in ways that earn the loyalty of particular users.

That first impression makes it worth a deeper look. There is more here than meets the eye, and smart firms shape their strategies with subtle thoughtfulness.

Gaming Structure

For several years, commentators have forecast that the rise in smartphones and tablets, as well as Facebook, would upend the structure of the gaming market. A variety of novel adroit aliens and irascible animals symbolically represent the new order, while new companies from new genres alter the identities of suppliers. 

Methinks that all the talk of restructuring is exaggerated. The names have changed, but the same factors still matter for market leadership. The old structure had a number of economic determinants that haven’t gone away. For example, ongoing product development by independent firms continues apace, and all parties must manage the unknowable. Today, as in the past, independent firms cooperate with established publishers when it suits both parties.

If you ask me, we’re transitioning to the same structure with (at most) a new set of players. That’s because two factors used to matter most in gaming—uncertainty and market frictions—and they still do.

Managing Complements

Most software companies fall short of perfection, and that’s just the way it goes. It’s routine for most software firms to slap beta on the product and ship.

Most companies aren’t Apple, however. In case you missed it (and if you did, where have you been?), Apple released imperfect mapping software for the latest iPhone. The Washington Monument ended up on the wrong side of the street. Bus routes didn’t appear in many major cities. Mere glitches for most firms, but for Apple it was embarrassing. The firm has not quite learned how to do beta.

Lost in the ensuing brouhaha was a fundamental economic question. To wit: is it best to own a newly invented and complementary piece of software that works with lots of other software? Even Siri doesn’t have an obvious answer to that question. Let’s consider it.

Why large firms can’t innovate: Don’t generalize

Recently Robert Scoble published a provocative essay about why Google has difficulty innovating. His answer was provocative, but unbalanced. His answer stressed that Google, like any large firm, has a problem with innovation linked to small teams. The post raises many interesting points, and I recommend reading it.

Perhaps the best feature of the post is Scoble’s incessant piling on of stories. He brings in a few Microsoft stories to bolster the notion that Google’s problems resemble the problems found at other large software firms who had a history of innovation but lost it.

I will admit that it suckered me in. Comparing Google to Microsoft is a bit of a team sport in high tech blogging these days. I have engaged in it myself in these very pages. That does not make the observation valid, however.

More to the point, Scoble’s observations do not generalize. Large firms have difficulty innovating in some contexts. This should come as no surprise, since, after all, firms are built for some sets of problems and not all problems. Hence, no firm is good at everything. Google is large, so it faces challenges in some contexts. What else is new?

(By similar reasoning, by the way, small firms have a hard time innovating in some contexts too. Nobody ever gets exercised over that. But when a large firm faces problems….oh, what hand wringing!)

So here is the big point. While it is very interesting to hear about one rich firm’s problems competing with start-ups, that observation, by itself, does not give anything like a complete picture. This post will consider in what sense Scoble’s observations were incomplete.

Why care about incomplete analysis? Perhaps you will want to read this before you go and short all your Google stock.

Early Adopter, Enthusiast, or Pioneer? A User’s Guide to Technology Lingo.

My wife glanced at the front page of the Sunday Chicago Tribune. Without looking up she said “Hey, this is what you study.”

The headline screamed in black, blue and green “The Early Birds.” Below it a sub-heading asked provocatively, “What is it about the new thing that makes us want it so bad? And why are some people more likely than others to take that first leap?”

This is not the sort of headline or topic one sees in the Chicago Tribune every day, and certainly not on the front page with any regularity. I wondered if the newspaper had been sold to Wired or Techcrunch, and I had just missed the news.

I checked the online edition of the Tribune. It gave the article a headline with more tension, “Me-first Mentality” it screams, followed by “Early Adopters, whether of new smart phones, electric cars or solar panels, help clear a path for mainstream consumers.”

My wife was just looking out for me. She knows that I am always looking for well-written articles for my MBAs. Needless to say, I do not get them from the Tribune often, but I would be perfectly happy to do so. The source does not matter as much as the content. I am happy to show an article to students if the news article illustrates the concepts of the class and illustrate the concepts in real world settings.

So I read the article. Sorry to say, it does not make the cut. It is an entertaining article, but not an informative or enlightening one.

I was going to leave at that, but I could not get the errors out of my head. The errors were so basic, so fundamental, and ultimately so maddening. More concretely, the article does not properly draw sharp differences between an enthusiast, an early adopter, and a pioneer. It also has a side note about technology orphans, but does not label the topic properly.

To be fair to the reporters, it is not as if they could look up the definitions in Websters dictionary. These words are the lingo of technology markets, and that is a specialty, to be sure.

At the same time, I would hate to see the type of mushy definitions found in this news article fall into common use. At the risk of sounding like a pedantic curmudgeon, this post explains where the article went wrong, and why it matters. In brief, getting a few definitions straight helps navigate an otherwise confusing technology landscape.

There is one other reason you might read this post. If you have ever found yourself in the middle of a conversation conducted by technology nerds, you may have noticed these terms. They get thrown around regularly. Perhaps you were too embarrassed to ask for definitions then. Perhaps this post can help you understand what the nerds were talking about.

Mid-course correction and economic experiments

To paraphrase Nathan Rosenberg, Economic experiments occur in settings where firms find it cheaper to learn about their technologies and business through market actions than to learn from experiments in a laboratory.

The high cost of a cheap lesson

Some general business questions require information about idiosyn­cratic circumstances. For example, how much demand exists in a particular locale for municipally sponsored wireless Internet access? Or, how many users want to pay for a new feature in their digital audio player, such as more storage?

To put it blithely, sometimes a marketing survey or lab experiment will not do. To answer some questions, a firm must actually offer a service or product and observe what different customers will pay for.

The anatomy of foresight traps

Most companies generate little drama as they manage the daily tension of their uncertain futures. And they rather like it that way, since forecasting errors can generate bad publicity.

After the fact, it is usually easy to understand why a calculated gamble failed due to a bit of bad luck. It is more difficult to identify a mistake for which management is responsible.

Not a mellifluous march to maturity

A couple years ago, former Hewlett-Packard CEO Carly Fiorina proposed merging Hewlett-Packard and Compaq, even in the face of opposition from the HP heirs. She argued that the maturity of the computer market necessitated such a change. More recently, Oracle CEO Larry Ellison foresaw maturation in his market. It too was justification (in his eyes) for his hostile takeover of PeopleSoft.

In two recent events, executives also raised maturation as an issue to justify their action. IBM’s executives decided to divest the company of its PC division, in this case to Lenovo. Motorola’s executives decided to spin off its IC division, starting a separate company called Freescale.

Creative destruction and deconstruction

Hang out with the chattering philosophers and pundits of high tech and inevitably someone will mention the phrase creative destruction. People apply this phrase, coined by Joseph Schumpeter in 1942, to a broad range of contemporary topics.

Schumpeter’s framework continues to stand as one of the most insightful philosophical tracts written about technical change in 20th century market economies. With good reason, the discussion about creative destruction has displayed an impressive longevity. Schumpeter understood the factors behind competitive behavior in his own time so well that he anticipated patterns of economic activity that emerged decades later.