Monthly Archives: August 2011

Kicking and Screaming: Steve Jobs and Disruption

A big topic on this blog is disruptive innovation, and prior posts have discussed how disruption works in the theories of Clayton Christensen.

Steve Jobs is the Babe Ruth of disruption of our times, getting difficulty points for overturning insular industries like music and publishing and wireless service, industries which resist disruption with every last effort.  His efforts are educational, in showing how disruptive companies can win over the target industry’s customers, using them to pull through changes disruptive to industry incumbents.  This article in this weekend’s New York Times, gives some indication of how the process of disruption worked with Jobs, through a process of winning over his consumers — also the consumers of media — forcing the media industries to follow and participate in disrupting themselves.  Because his devices were so “sexy and irresistible,” attracting scores of consumers, there was no choice for the disrupted industries but to bend to his wishes on how industry assumptions had to change:

So what secret tunnel did he use to bypass and overcome traditional media businesses? One carved by consumers. By placing sexy, irresistible devices in the hands of the public, he reverse-engineered the business model of the industries that produce the content for Apple’s gorgeous hardware.

When the iPod and iTunes were unveiled in 2001, the music industry was under siege from piracy, with services like Napster thriving on the free use of its content. Mr. Jobs’s take-it-or-leave-it deal gave Apple control over pricing, data, distribution and platform, a proposal of towering hubris. But the industry, kicking and screaming all the way, eventually went along, and 10 billion song downloads later, digital revenue is a fundamental part of the business.

In the process, Apple brought a practical end to the album format — allowing people to buy individual songs and create their own playlists.

ITunes not only supplied a legitimate, easy-to-use alternative to piracy, it created a runway for services like Pandora and Spotify.

And the more the content became available to his devices, the more “sexy and irresistible” the devices became:

Along the way, he changed the vocabulary of media. Songs became files, subscriptions became apps — and media became just one more way to make that thing in your hands appear all the more magical.

Designing Magic

Perhaps, designing magical products, similar to creating compelling arguments, is a process as follows.  Put all the critical functionality you have on the table that solves the customer problem.  Then stop and work more intensely stripping it down and re-imagining it from the user perspective to create something simple, intuitive, elegant, obsessive, and magical from the perspective of the fresh eyes of a user. At the end of the process, the test is: did you end up with a product and a headline of “simple essential truths” that the user cannot get out of his or her head? Is it magic to the user?

Another quote from Steve Jobs that explains this eloquently:

Look at the design of a lot of consumer products — they’re really complicated surfaces. We tried to make something much more holistic and simple. When you first start off trying to solve a problem, the first solutions you come up with are very complex, and most people stop there. But if you keep going, and live with the problem and peel more layers of the onion off, you can often times arrive at some very elegant and simple solutions. Most people just don’t put in the time or energy to get there. We believe that customers are smart, and want objects which are well thought through.

Through the Eyes of Steve Jobs (Or You)

From “What Makes Steve Jobs So Great” in Fast Company’s Co.Design:

So what gives his plain-speaking such force? He always talks about how wonderous it will be to use something, to actually live with it and hold it in your hands. If you listen to Steve Jobs’s presentations over the years, he comes across not as the creator of a product so much as its very first fan–the first person to digest its possibilities.

………………….

It’s almost certain that Jobs has killed far more great ideas than he ever let live–there are 313 patents under his name covering everything from packaging to user interfaces. But those that survived outweighed all the rest. And these ideas outweighed all the rest simply because his focus was, continually, on what it would be like to come at some new product raw, with no coaching or presentation but simply as a dumb, weird new thing that someone you know might have said was “pretty cool.” Again, that’s ability to see past internal debates, and to look at a potential product with the fresh eyes of a user rather than a creator.

Distinguishing Building Versus Burning

The quote below says a lot about the sputtering nature of today’s American economy. Roger McNamee says of Steve Jobs:

Steve’s the last of the great builders…What makes him different is that he’s creating jobs and economic activity out of thin air while just about every other CEO in America is working out ways to cut costs and lay people off.

We don’t make enough of a distinction between those who build and those who burn.  There is a profound difference between building Rome and sacking it (even when it’s in the name of saving it), and we have to be more particular in what we reward and who we venerate. Before shareholders write them big checks or the public gives business “wise men” its attention, we should ask whether they are builders or burners.

Steve

The news is so sad.

While “disrupters” get misty-eyed and choked up, I imagine that those remaining captains of fat, stagnant industries in content, communications, and computing exhaled slightly, taking comfort in the news that their chief scalper could “no longer meet [his] duties and expectations as Apple’s CEO and was stepping down.”

We can only hope his days of adding to his many “dings” in the universe are not yet over.

Medical School, Facebook, and the Future of “Real Names”

There has been some debate recently on the relative value of real names versus pseudonyms on the Internet.  See, e.g., Fred Wilson.

One observation. Take this for what its worth; I am not sure what if any conclusions to draw.

In talking to some younger relatives, all applying to or recently enrolled in medical school, I learned that the common practice today is for applicants to disguise their Facebook identities before applying through a variety of techniques (by using middle names, permutation of real names, nicknames, etc.) to ward off unwelcome visits by medical school admissions people.  I assume applicants to undergrad or other grad schools are doing the same.  Those putting on these disguises are the first generation of Facebook users — those who were most comfortable with putting their lives online — who have years of status updates, photos, and other things who now must navigate a world of non-Facebook generation gatekeepers. It will interesting to see how this perceived need to disguise oneself evolves over time: do users switch back to their identities after they get into the schools or does the caution carry over; will this even be necessary when the Facebook generation also are the gatekeepers, etc.

The Rarefied Air of Bezos and Jobs

Steve Jobs occupies rarefied air on any ranking of entrepreneurs, having shaken up the computer, movies, music, tablet, and phone industries.  The only other person breathing the same molecules is Jeff Bezos. From my perspective, this is somewhat forgotten because he is outside of Silicon Valley, but the case is obvious.  Starting with books, Amazon has grown to revolutionize numerous retail markets.  But, like Jobs, what is most impressive is Bezos’s ability to create new markets, disregarding the limiting management notion of sticking to your “core competency.”

Of course, there is the Kindle.  A hardware business, completely different than the shipping of books, that Amazon now has mastered, even withstanding the tablet assault.  In creating the beloved Kindle, it has accelerated the digitalization of books, making it happen despite the foot-dragging of the publishing industry.  Two other examples come to mind today.

First, on Amazon’s website today, a note explains the increased content on its video streaming service, which comes bundled with Amazon Prime.  Streaming provides a big additional reason for consumers to pay that $79 for the Amazon Prime expedited shipping service, and consequently for those consumers to transfer more of their retail spend online, having paid the fee.  For consumers who see the fee as substituting for a Netflix screaming subscription, it helps overcome whatever hesitation there is to spend $79 for shipping upfront.  So, in addition to jumping into the streaming business in a big way, Amazon is also bolstering its retail business.

Second, is Amazon’s cloud service.  As part of Marc Andressen’s WSJ essay on software today he notes that:

On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries—without the need to invest in new infrastructure and train new employees. In 2000, when my partner Ben Horowitz was CEO of the first cloud computing company, Loudcloud, the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon’s cloud costs about $1,500 a month.

To put a number on it, what Amazon has done is help cut the cost of launching an application by 99%.  Not only is Amazon’s cloud services an amazing business for it, Amazon,along with others surely, but with significant credit due to it, has made the world an innovation platform, enabling the low-cost, lean, prototyping innovation culture of today.  For this, and his willingness to jump into completely different businesses, Bezos, like Jobs, deserves to be recognized as occupying another plane among innovators.

The Antitrust of Internet Platforms and Open-Source Innovation Part II: Enforcing Speeding Laws on Innovation Racetracks

Following up on my last post, I noted that as a factual matter, the new economy had an antitrust vulnerability because of the fact patterns created by platform innovation including platform companies “enlisting” platform partners for innovation, colliding business models of platform and partners, and the need of the platform to adjust the level of openness or otherwise control its platform to meet the needs of developing a business model, leading to disputes with its partners and others who want access.

The question for this post is whether underlying these fact patterns are legitimate antitrust worries or whether rules are being applied in situations not relevant to the concern behind the rules.

The short answer is that from all appearances, there is the potential for serious misapplication of the antitrust laws.  New economy innovation is a different model of innovation, and old antitrust doctrine clashes with the heart of the process that is driving new economy innovation.  This innovation is something that antitrust needs to acknowledge: in fact, just because a platform opens itself up, does not mean it should be forced to stay open or have its openness regulated.

There is too much potential for the platform to be branded as anti-competitive as it innovates.  In antitrust the characters are usually a stagnant monopolist crushing an upstart innovator to protect market-share, but platform innovation tends to involve issues that arise between innovators.  This is not the old concern of an entrenched monopolist trying to quash an innovator.  Therefore, the question should be whether the platform is doing what it is doing in order to innovate.  If so, such moves do not harm competition, and antitrust should not become a weapon against innovation — barrel pointed back at itself, instead of against an actual target.  This does not mean that the new economy is immune from antitrust, but instead that there needs to be a recognition that there are common fact patterns that superficially look like antitrust issues, but instead may be the very opposite.

It is said that antitrust laws are flexible enough that they can fit new and modern economic situations. While largely true, there is something fundamentally different in today’s internet industries. Antitrust issues arise from entanglement of competitors, and internet platforms raise potential entanglement issues earlier and more often by orders of magnitude than any other industry in the past. The innovation inherently is powered by the openness of the platform, even before the platform and its business model have been fully fleshed out, while innovation in other contexts typically takes place in a closed room in secret.

Take Twitter for example. It took a fundamentally open approach to hacking together a platform, allowing its users to develop its power through innovation on some fundamental issues. However, at a certain point with more information about potential use cases and revenue opportunities, the innovative platform needs to pivot to build a sustainable business by adjusting its openness.  It should be able to pivot without having to look over its shoulder at the partners who may be hurt, just as a closed innovation system innovating as a single actor would be able to pivot in order to build out a fully functioning and durable platform.  Similarly, Facebook should be able to figure out a revenue model, and Google should be able to enter new business areas even over the screams of existing businesses that claim they are disadvantaged because of reliance on Google as a traffic driver.

Fundamentally, the ability for platforms to pivot is about sustaining the innovation by creating something durable. However, antitrust doctrine was developed in industries where the intent and results of rolling back openness was to squelch competition and innovation. Applying that doctrine today, if antitrust forces the platform to be cautious about pivoting because of potential competitive issues, the result may be that innovative platforms are also gun-shy on how open to make the platforms from the beginning. The resulting circumspection would hamper innovation.

The potential misapplication of antitrust rules to new economy platform innovation is like having a traffic cop applying city driving speeding laws on a NASCAR racetrack. It both misses the spirit of the rules, and it unnecessarily slows down a great race.

The Antitrust of Internet Platforms and Open-Source Innovation: Google, Twitter, Facebook, Apple (Part I)

As I noted in my prior post, the dominant antitrust issue of the times may be the limits on companies — who create value by developing platforms that are open to others — to rein in or step back from that openness as they flush out their business models. This very openness is at the heart of much internet innovation, but it also leads to fact patterns that superficially fit templates for antitrust claims. This post will explore the characteristics of today’s internet business models that make them inherently susceptible to antitrust. Forthcoming posts will explore the consequences of scrutinizing internet platforms in this way.

The Issue

Innovation in platform creation is open-source, happening through collaboration of the platform and partners, rather than closed, happening under a single roof by the platform itself. The openness sets up a common story arc that includes some or all of the following elements:

  • from the very early stages, platforms are open, inviting and relying on heavy interconnection, and this openness and interconnection is central to the platform innovation itself;
  • independent partners, utilizing the open platform, are primary drivers of platform innovation along with the platform creator itself;
  • as platform owners seek out a sustainable business model, platform and partners potentially butt heads as they grow to compete in certain areas;
  • disputes between platforms and partners arise when the platforms adjust their policies, pulling back somewhat from openness and interconnection or expanding in new directions, or when others demand access or access on specific terms.

The open source model of innovation is inherently more susceptible to antitrust, particularly in the early stages of the platform, than the closed source model, because open source means new economic markets have been created; independent companies, who can also be competitors to the platform, have developed; and acts of the platform can disadvantage these partner-competitors.

New Business Models and Platform Innovation

The first characteristic of new business models is their inherent openness. This is marked by companies opening their ecosystems before they are even fully envisioned or developed, utilizing partners to help build and shape the platform through mechanisms like open APIs providing additional features, services, etc. built on top of or as extensions of the platform. The internet’s power – including that of many of its iconic success stories– is built on this openness.

For example, Facebook and Twitter expose APIs to allow developers to build applications and businesses on top of their platforms to increase engagement with their own platforms. For Facebook, Zynga’s games have been a big driver of usage. For Twitter, developers have built interfaces such as client software or url shortening services to give users desirable ways to post on or read tweets off the service. Apple’s AppStore harnesses the power of developers to build applications that drive sales of iPhone and iPads.

The second characteristic, also inherent in new economy markets, is business models that take shape over time. Subsequent discovery and refinement of a business model often requires that the region occupied by the core ecosystem broadens or narrows as the business model finds its footing. This can mean that the platform finds itself in competition with its partners eventually, as it finds a revenue opportunity or expands to take over a core function of the platform.

There is then a recurrent pattern — initial openness followed by adjustments or “stepping back” as business models evolve. New economy companies have numerous reasons why they must then “manage” the openness. For example, Facebook or Twitter or Apple have an interest in preventing the tarnishing of their platform by malicious apps or in controlling the look and feel by controlling the client software.

Even more importantly, the need to manage openness comes up in the all-important search for a sustainable revenue model. The companies must eventually monetize their platforms, gaining a return for the investment in creating a platform that brings an audience or customer base to the partners. As an example, Facebook takes a revenue share from its apps in the form of Credits and Apple takes a share of AppStore purchases. Or eventually, the platform may discover that it makes sense to monetize the business directly, so for example, Google may want to be more of a travel player as it realizes that its search engine is being used for travel.

Twitter, in particular, recently has had to face these issues, because it was so open to its developers early on, having to prioritize and cede some core functionality to independent developers, later realizing that it must it control more of its own ecosystem to build the service it wants. As one of its employees noted:

“In the early days, all the clients except Twitter.com were built out by ecosystem companies, mainly because Twitter was so focused on keeping the lights on, but we learned that in order for us to really grow, we had to start taking over that core experience.”

(See an article from the NYT here and an interview with Dick Costolo, both touching on this subject here.)

Antitrust and Platform Innovation

These recurring aspects of internet business models – openness to partners, evolving business models that find platforms in competition with their partners, and stepping back from the openness to implement those business models– make internet platforms vulnerable to antitrust. When there is the inevitable dispute between a platform and a partner (whether someone who has been granted access or wants access), this recurring fact pattern means disputes where expectations of partners are unsettled can be framed as antitrust matters. More or less, all the recent new economy antitrust matters whether involving Twitter (and issues with the developer community), Google (and issues with those challenging its rankings), Apple (issues around the AppStore), etc., can be seen through this lens.

To understand why, let’s step back for basic antitrust doctrine and how it corresponds to these recurring aspects of internet business models.

For an antitrust claim, one needs an impact on competition on a market. Having given access to others to build services, the platforms have also created new and separate economic markets. Ironically enough, except for the prior openness, games on the Facebook platform or Apps for iPhones would not even be an independent economic market, but perhaps would have been characterized as a feature of the platform that the platform itself provided.

In addition to separate economic markets, the platform and partner are potentially competitors to provide a specific service on a platform. Where business models are so fluid, and there is trial and error and discovery as a platform figures out how it can make money or provide the best user experience, there is the potential for a situation where the platform merges into the same competitive lanes as someone who has built or promoted a competitive business using the platform. So, in the starkest case, a platform may realize that it should be doing something directly what a partner is doing, e.g., it should sell travel and not just direct its users to other sites, it should market its own games instead of relying on others to do so, or it should create its own interfaces. So, the platform becomes a competitor to certain partners.

The notion that (1) there are new and separate economic markets in which the (2) platform and partner are competitors has important antitrust consequences. Typically, if one invests in and develops some asset, it is under no obligation to allow others to access it to build their own businesses. While the partners couldn’t have forced the platform to open up these markets, in the same way that I cannot force Netflix to carry my home videos, it is harder to put the genie back in the bottle once it has been opened. Now actions in which the platforms manage their openness that disadvantage these independent competitors where there is a competitive business owned by the platform have the possibility of antitrust implication, as disgruntled competitors try to frame the issue of a “monopolist” of the platform extending its market power to the related market (that only exists because of the openness) in which the disgruntled competitor operated. Whether those claims will hold up at the end of the day is not a clear-cut, black and white matter, but the important point is that companies are under at least some threat that they must maintain openness they have granted or alternatively have openness forced upon them.

The next post will explore the important question: whether there are legitimate antitrust worries or this is an unfortunate situation in which antitrust templates happen to superficially fit onto features of internet business models.