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Archive for April 13th, 2010

Apple, Adobe, Punctuated Equilibrium, and Commoditization

Posted by Bob Warfield on April 13, 2010

Lots of kerfluffle around Apple’s refusal and downright blocking of Flash on its platforms.  Developers like John Gruber are stating the obvious in explaining why Apple is behaving this way.  Techcrunch is piling on, since Steve Jobs is referring people to Gruber. 

BFD, I explained all this years ago and in more than one post.  It really is extremely obvious what’s going on.  The more interesting question is, “Where will it lead?”

I’ve written also about how platform vendors should behave like Switzerland.  Apple most assuredly is not behaving like Switzerland.  Under the banner of making insanely great products, they’re doing the equivalent of being a Swiss bank that makes you agree to terms that effectively lets them own all of your customers and tax all of your revenues.  Evil?  Probably.  Yes, let’s make no mistake, there is Evil here in the sense that Google used to proclaim they would not do.  Apple wants to lock up customers and tax them for every cent of revenue they possibly can.

For the time being, this strategy will work great, but Apple should be aware that they are using artificial scarcity to drive demand.  The user experience offered by the iPhone and iPad are sublime, and there are no good enough alternatives yet.  Hence the artificial scarcity.  But it is artificial in the sense that sooner or later someone will produce a good enough alternative, at which point we get commoditization.  I’ve written about the parallels of evolutionary biology and business quite a lot.  Apple’s case is no different. The “i” products have created a punctuated equilibrium.  This is a fundamental change that gives those organisms a tremendous advantage.  They rapidly gain share in the ecosystem as a result.  However, Nature abhors such ownership, and so do the markets.  Other organisms will copy the traits that made the upstarts successful.  They will blunt these advantages and slow their growth.  There are too many dollars at stake driving that desire.

Can it happen? 

Well, it’s getting harder.  Apple has the full benefit of network effects.  Consider the online auction space.  Once upon a time there were a huge number of auction houses.  Today, there is largely only eBay.  A network effect happens when each new member of the network brings even more value than the previous joiner brought.  It is an exponential growth in value, and hence switching costs.  At some point, it is too hard for new players to show value.  The danger in Apple’s products is therefore not the compelling UI’s, but the switching costs.  Take my Kindle.  In a very short time I have put several hundred books on it.  Would I switch over to Apple’s formats?  No.  I’d lose my several hundred books, or at the least, I would have to fool around trying to remember which format and reader I need to use to access a particular book.  That’s a network effect.  Cell phone companies do the same with their contracts.  Ironically, I want to upgrade my iPhone and give it to my son so he gets a hand-me-down upgrade.  I couldn’t until recently because my AT&T contract wouldn’t let me.  Apple is doing the same around apps and media with the iPhone and iPad.  Facebook and Twitter, BTW, are huge because of network effects, and it will be hard to ever unplug that advantage now that it is built.

Several things need to happen very quickly in order to thwart Apple’s growing network effects.  First, people need to be aware that this is what’s happening.  Make sure you understand the network effects and lock-in that you’re becoming a participant of.  Be careful, because there are even stronger variants than what Apple is offering.  I have argued in the past with Fred Wilson about streaming media.  Get roped into allowing your media to be strictly streamed by a few providers and you are well and truly locked in.  Second, Microsoft, Google, and whoever else needs to wake up.  You have a major problem with your Product Management and Strategy people.  Why are you unable to successfully copy Apple’s products to produce a “good enough” alternative?   Microsoft, in particular, you did it before with Windows and Mac.  Your new Kin phone seems to be a flop from the get go.  Did you forget that your role is to commoditize other people’s ideas?  Sounds tawdry, and it has certainly been proclaimed as Evil, but looked at in this kind of light it really isn’t.  It’s about providing alternatives.  Google, your Android is much better, but geez, it needs to get better a lot faster.  Time is running out as Apple builds network effects.

Where are the Open Source community and standards making bodies in all this?  Open formats and digital rights management that transfers across devices is critical.  Portability and interconnection rule when defusing network effects.  Even if big third parties like Microsoft and Google are just sailing under the Open Banner to make money, it’s doing a service by blunting a growing monopoly.  Media owners, do you want to be marginalized by Apple?  That’s what will happen.  You backed Amazon down on Kindle (first on text to speech and then on pricing) before it was too late because you were afraid.  What are you doing with Apple?  Alternate content distribution channel owns (pretty clearly I am talking to you, Netflix, and you, Amazon–maybe you two should merge), what is your plan to navigate these waters?

What can Apple to if it senses a revolt?  Lots of things.  It’s being extremely heavy handed at the moment.  I never heard anyone accuse Apple of humility, after all.  Totally blocking Flash is not necessary to preserve lock-in.  One could argue there is enough valuable Flash content that it is slightly counter-productive, in fact.  Apple is simply having trouble dealing with the meta-nature of computers.  It is hard to define a Turing platform like Flash in such a way that it can’t become a Trojan horse.  In fact, it may be impossible.  Instead, it is necessary to individually vet each Flash application and have the flexibility to revoke the authorization of that app if it misbehaves.  For Adobe’s part (and any other would-be platform developer), they should facilitate allowing this kind of control.  It is better to have more Flash applications than fewer, even if they must operate in shackles in the Apple world.  Apple knows how to peacefully coexist.  Their PC business flourishes after they finally adopted Intel chips and allow virtual machines to run Windows.

I give this another 2-3 years before it becomes impossible to change the page.  If that happens, we’re stuck with the monopoly until there is another punctuated equilibrium.  That happened with Microsoft, and it took years and the Internet to get there.  It happened with Intel’s microprocessor dominance.  In both cases, the resultant products were inferior even to many peers during their time, but the network effects were too strong and the better peers didn’t get in position soon enough.  A failure to stop one of these snowballs is how monopolies are built, and they’re extremely lucrative.  Each day you wait it becomes a little bit harder.  That’s the nature of network effects.

Posted in apple, business, flex, Marketing, Open Source, platforms, strategy | 5 Comments »

Startups Need Starters

Posted by Bob Warfield on April 13, 2010

Just a short post for my Helpstream Learnings series today:

Reading 37Signals latest book, “Rework“, has crystalized a few thoughts I’d been having since Helpstream.  It’s a great read, BTW, if you haven’t already checked it out.

This particular post is about Starters.  The authors of Rework want to drop the term “entrepreneur” and switch to “Starter”, but I think Starter needs an even broader meaning to fit an even more important role.  Sure, every startup will have its designated entrepreneur in the form of its founder(s) and hopefully its leadership.  The thing is, everyone needs to be a Starter in a startup.   Starters are people who can get something done without other people.  They’re the leaves of the value creation tree.   It sounds funny to think of it that way, and many will ask, “Don’t you just mean employees?”  The answer is, “No, I don’t just mean employees, and that’s the essential point.”

Traditional business, particularly large organizations, often think of employees and managers.  The employees do the work and the managers manage the employees.  But a startup can’t afford this luxury.  Managers need to be able to do work too.   A manager that can get something done without other people is a Starter, and these are the types of managers you want in your startup.  That’s not to say they can’t manage.  Startups are tough environments.  You want the people who can do it all.  I’m convinced this is one of the big problems with hiring Big Company people into Startups.  They’re probably excellent managers, perhaps better than the average Startup manager.  But very often they are not startups.  Take away their staff and consultants and they don’t get anything done.

Look at span of control.  A good manager can optimally handle 7 to 9 reports, and a great manager can handle more.  But a startup may consist of only 15 people in its early stages.  The CEO should have more reports than anyone, and even then it won’t amount 9 if they have very many VP’s.  The VP’s may have 2 or 3.  A pure manager with 2 reports can’t accomplish much.  Instead of charging that overhead against 7 to 9, it is charged against 2 or 3.  Suddenly that is a very expensive executive indeed.  And what if a VP has no reports and isn’t a Starter?  Do they just not get anything done?  Startups never have enough people, money or other resources.  You need all the Starters you can get, and you need to minimize the overhead of professional managers until you can get big enough to have something for them to do.

Hire Starters who are great Managers.  Whatever it is they manage, make sure they can contribute something more that doesn’t require other people.  Make sure it is something important.  Can your VP of Sales manage your CRM system and run all the reports?  Can they make all the sales calls until you’re big enough to keep a full-time Account Executive fed?  Can your VP of Marketing write the marketing content?  Can they blog, write ads, do copy for the web site, and email blasts for Marketo?  Ours could at Helpstream, and it made a huge difference.  We ran leaner, we got more done, and we were better aligned in our purpose.

Posted in strategy, venture | 9 Comments »

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