The Prevailing View

Talk to the management at leading technology firms in the same market, and the similarities in opinions are striking. Most hold roughly the same set of opinions, beliefs, and ideas about how specific actions lead to successful business outcomes. For lack of a better phrase, I call this the “prevailing view.”

The prevailing view is an important aspect of every market. It can persist for a long time, and it can change, sometimes slowly and other times quickly. In common speech, momentous changes define the divide between one era and the next.

Where does the prevailing view come from, and how does it shape economic outcomes? That is this column’s topic.

Encyclopedia Britannica folds its hand with class

Encyclopedia Britannica recently announced that it will cease publication of its books. This kicked up a range of sentimental reactions from those who grew up with the books. I would prefer to accentuate the positive: we are watching the end of a rather civilized economic transformation. This transformation is notable for the degree of civility embedded within it, an aspect rare in today’s high tech world.

This requires a short explanation.

Let’s understand what Encyclopedia Britannica actually said and what they did not say. They said they will cease publishing their encyclopedia as a set of books, not that they will cease to be a commercial organization. They can still cover the operational expense of their non-book businesses. In other words, their announcement actually means something rather straightforward: their business will be conducted around two principal products, an online service and DVD.

That announcement is the end of a long transformation. The sales of those books began to decline many moons ago, first in North America during the recession of the early 1990s. It got worse after the introduction of Encarta in 1993 and 1994, which was (a) rather cool for its time; and (b) much cheaper.

I have written about this elsewhere, particularly in my business school case about EB, but EB was also a highly leveraged organization. It sold books with door to door salesmen. This was an expensive way to distribute a product, and it did not, could not, last under assault from the PC and the Encarta.

More to the point, the management of the organization was forward looking. They has sponsored a set of projects for DVDs and online experiments. The latter eventually went online in January 1994 with an html version. Its descendants still generate licensing revenue for the organization.

Then Wikipedia came along and ate everyone’s lunch in the reference section, that is, everyone who made DVDs and books. Encarta had to close its doors a couple years ago. It was simply not getting enough sales any longer for Microsoft to find any reason to keep it going.

Here is my point. Notice what happened as the market evolved. The once leading firm changed its organizational form. It adopted a new form too, both DVD and online licensing. It still survives today with the latter, albeit, at a much smaller scale than during its peak.

In short, this transformation came about in a rather civilized way. Do you hear any whining or fussing from EB about unfair trade practices, as so many firms have done? Do you see EB suing anybody for patent infringement, as seems so common today in high tech? No, in the last decade EB did the classy thing, restructuring as best they could to make due in the new world.

Other firms should pay heed to that example. This is how it is supposed to happen, as one new market replaces an old. This is how markets should evolve. Let’s hear it for Encyclopedia Britannica, for evolving with a sense of class, and for moving along with everyone else as we all move along into the new age.

The Wi-Fi Journey

Behind every successful technology lie many quirky stories showing how it grew like a teenager or barely averted disaster. With the passage of time, most of those stories fade into obscurity or, at best, become parts of verbal explanations accompanying countless resumes. The few events that find their way into public discourse, if any do at all, normally get stripped of context and nuance, losing the contours that actually mattered to those who participated.

Perhaps that’s why those who developed Wi-Fi decided to write a collective memoir, bringing much to the fore that would otherwise fade. What the world today calls Wi-Fi began as experiments with wireless LANs, and became embedded in IEEE Standard 802.11, and only then did it explode into a plethora of products and services. Every stage involved numerous quirky events and lessons.

The resulting book, The Innovation Journey of Wi-Fi: The Road to Global Success (Cambridge University Press, 2010), involves almost a score of contributors, including many influential voices in the Wi-Fi world. For a certain kind of reader, this is a great book. Are you that kind of reader? Let’s find out.

Smartphone patents and platform wars

Firms in the smartphone market have been suing one another over patent violations. I cannot recall any other platform war that involved as many intellectual property disputes.

Look, society grants patents as part of trade-off. A patent enhances the incentives to generate new invention by giving the inventor a temporary monopoly. That trade-off should never be far from the top of the discussion. Let me say that another way: Artificial monopolies are clearly bad for the economy. There is no reason to grant them unless society gets something in return, such as more invention.

It is easy to speculate that something is amiss. Was society still on the good side of this trade-off when a non-practicing entity sued RIM-Blackberry for hundreds of millions of dollars, even though the dispute involved patents invented by someone who never got close to putting them into a viable business? Was society on the right side of this trade-off when a consortium spent four billion dollars for patents in bankruptcy court from Nortel, a firm that made some very bad bets during the dot-com boom and had run itself into the ground? Was society on the same side of the trade-off when Google felt so cornered that it bought Motorola for its patents, and, after it was announced, very few analysts saw any reason to point that Google also received tens of thousands of talented engineers as part of the deal?

This is a way of introducing a recent article, “Owning the stack: The legal war to control the smartphone platform.” I recommend it. It appeared in Ars Technica. It brought considerable clarity to events by explaining the actions and motives of various players in the recent patent wars involving smartphones. It was written by James Gimmelman at NYU law school, and recommended to me by David Laskowski, a student from a prior class at Kellogg (Thanks David!).

This post passes on that recommendation and offers a few comments.

Two graphs show newspaper revenue decline

What happened to newspaper revenue? This short post contains an answer in two graphs. The graphs show the growth and decline in aggregate newspaper revenue.

More to the point, the graphs illustrate the timing of the decline in revenue and also the acceleration in decline. The graphs provide useful information about changes in the composition of revenue, which helps explain why revenue declined.

The graphs come to this space from my esteemed colleague, Tom Hubbard, who is the John L and Helen Kellogg Professor of Management & Strategy. Tom teaches a class on advanced strategy for MBAs, and had compiled the data for a module in the class.

In brief, Tom read a previous post in this space about the decline in newspaper revenue, and we got to talking about how a small amount of well chosen data can illustrate insightful analysis.  He showed me what he had collected and I was impressed. He graciously offered the graphs as additional evidence for the conversation.

Another venerable establishment surrenders to Wikipedia

I never cease to be amazed by the capacity of the New York Times <slogan: not dead yet> to find an interesting story in an obscure event, especially one involving the Web. More to the point,  the Art and Design Section does not usually serve as the home for features discussing Wikipedia.

In case you did miss the article about the British Museum and Wikipedia, let me provide a synopsis: The war is over. Wikipedia won. The establishment has surrendered to the rebels. Everyone is behaving in quite a civilized way.

Let me say that another way. Some wars end in dramatic ceremonies, often with grand public humiliations of the losing side. Some end through revolutionary coups, peasants triumphantly and coarsely sitting on — and spitting at — the king’s throne.  A rare number of wars end through gradual assimilation of the vanquished, in quiet fashion and with less overt celebration.

Without ever saying so, this New York Times article shows that Wikipedia has won (yet another) war with established sources of information. More to the point, while there are elements of the peasants sitting at the king’s throne, the group seems to be avoiding the worse symptoms of triumphant behavior. Instead, it is using quiet assimilation, and, I might add, to good effect.

This last observation deserves a comment. That is the point of this post.

Bleeding Edge Mass Market Standards

To have a large impact, bleeding-edge mass market standards must do two things: diffuse widely and provide new functionality. Curiously, however, while these standards often get built from very advanced technologies, they cannot deploy on a wide scale without building upon other widely deployed routines or less-advanced processes.

Successful deployment of a bleeding-edge mass market standard can bring about enormous change. Consider what happened after the design of USB2 became available. Interested parties monitored the upgrade to USB, understanding that their near rivals did the same. All these parties subsequently made products compatible with USB2 and differentiated along the dimensions in which they had competitive advantage. Consequently, a range of innovative products emerged—storage devices, printers, cameras, keyboards, … you name it.

There is something paradoxical about this pattern: A standard at one layer enables more novelty on another. And a change to the standard—upon which many others build—can enable an even wider range of innovative services.

This issue’s column discusses the determination of new standards in mass markets, an event that shapes such paradoxical outcomes and hence market structure and firm strategy. It is worthwhile to take a moment and examine the patterns.

The evolution of value in smart phones, or “Why does my iPhone drop so many calls?”

Randall Stross writes the Digital Domain in the Sunday New York Times. In a recent column he discusses the quality of iPhones and AT&T’s network. His point is obvious from the title of the column: “AT&T Takes the Blame, Even for the iPhone’s Faults.”

Much to Stross’ credit, he investigated common misconceptions about the quality of AT&T’s network. He concludes that AT&T’s network has done reasonably well with the  growth of traffic generated by the iPhone.

More to the point, Stross concludes that popular perceptions about AT&T’s network miss the mark, as do Verizon’s commercials.

I recommend this piece even though I thought it was incomplete.

Let me say that more sympathetically. Stross gets only 800 words, which allows for only one major point. It is no surprise that Stross does not say many things.

Specifically, he does not say that the iPhone’s success foreshadows a large transformation in the flow of value within the market for mobile handsets. He does not say that this transformation coincides with an irreversible change from old rules and new rules in the structure of the value chain supporting the cellular phone market.

But if he had had more space he could have said it.

So let me be blunt. I think I understand the rules of the old game and the rules of the new. I think I understand what game Apple is playing. If I had to bet, I also would bet against AT&T.

These are the points of this post.

A Window on the Aging of Windows

How has MS Windows changed over time? Here is a visual display of that, put together by some clever folks at the BBC.

Well, so what? Why would you care? To be sure, looking at old software generates a certain sentimental reaction among those with technical backgrounds and a sense of history. But surely that is not most of us.

The evolution of Windows actually illustrates something deeper about design of software. I will save that until the end.

Can a government encourage economic experiments?

Can the US government adopt a policy that encourages innovation in the Internet? I think so. Recently, I got to say so in a public hearing at the Federal Communications Commission. As part of its Congressional assignment to write a broadband plan the FCC has held these hearings. The first half of this post summarizes my views about encouraging economic experiments in the broadband ecosystem, and the second half summarized my response to an interesting email from a listener about whether the government should fund experiments with municipal wifi.