By G. Pascal Zachary
Technologies are protean, so the technology journalist is always re-defining what he covers. Specific gadgets and gizmos come and go. Ten years ago, the world new nothing of Twitter, Facebook and the Iphone; today these are staples of the journalism about information technology. Change is constant. Entire “platforms” – the cable set-top box, the mobile phone, even the car dashboard – undergo revolutions. Wholly new “technological systems” emerge.
While technologies constantly change, essential business and economic concepts endure. These concepts illuminate the technological landscape for the journalist. Most innovations survive because they win in the economic marketplace; few depend decisively on government support. To understand These 12 concepts below apply across types of technologies and industries:
Successful innovations generally need a way of paying for themselves. The term “business model” refers to the manner in which a technology gets paid for. The most common model is the sale of individual products to large numbers of people. Another model involves “subscriptions.” The cable company Comcast doesn’t try to sell you its service each month, but rather for a long time. This model involves making it costly for the consumer to switch. A third model calls for giving away a basic product for free, then selling add-ons.
Creative destruction” and “disruptive technologiesIn practice, even successful technologies can lack a business model, calling their future into doubt. Youtube, for example, is wildly popular, but attracts little advertising and scant revenue. Youtube may be an example of innovation that’s socially successful but economically a failure. Or perhaps the company will learn through trial-and-error what business model is “right” for it.
New technologies often succeed by destroying existing ones, and “disrupting” businesses, forcing them to adapt or die. Often, even entrenched technologies succumb to the forces of “creative destruction.” The term was coined by an Austrian economist, Joseph Schumpeter, who argued that the birth and death of industries was an inevitable consequence of technological innovation.
Ideas and knowledge – about design and processes especially – are critical to creating value from innovation. The real value of an Iphone, for instance, lies in the “intellectual property” – the copyrights, patents and trade secrets – that animate the design and manufacture of the device. The value of ideas – and the need to protect that value – unites technology companies around a new business model that depends on profiting from the “marginal costs” of copying ideas easily and quickly.
Momentum or path dependence
Why do some technologies persist, even after new ones become common? Examples of “old tech” surviving are legion. Television didn’t kill radio. Bicycles survived the advent of cars. Even the pencil, a celebrated breakthrough from the 19th century, survived the arrival of the pen. One reason is what the historian of technology Thomas Hughes calls “momentum,” or what the economist Paul David calls “path dependence.”
The gist of this powerful concept is that old habits are hard to break; having started down a path, society often sticks with a technology because the costs of changing are too great.
“Path dependence” is thus the flip side of “creative destruction.” Not everything gives way and sometimes tradition wins, sometimes because old technologies get reinvented. The gas-powered car gets new life from n electric battery. The radio, which people once listened to in their living rooms, becomes portable, and gains new uses. New manufacturing techniques make glass lighter and stronger. In explaining the persistence of mature technologies, British historian Harold Edgerton refers to “the shock of the old.”
Gordon Moore, cofounder of Intel, some 40 years ago came up with a simple trajectory: the cost effectiveness of electronic devices double every 18 months. “Moore’s law” is more of a marketing reality than a physical law. In the case of computer-data storage, price-performance improvement have come even more rapidly. Falling prices for electronic gear have the effect of making possible the unimaginable: movies played on iPhones, entire music libraries stores on devices the size of a quarter, and digital cameras with all the bells and whistles of analog cameras from a decade ago (and sold for a fraction of the price). One looming specter over the entire technology scene is whether “Moore’s law” can continue indefinitely into the future.
Platform or Standards
Technologies have to work with other technologies, and when they do, they form a “platform” built around a set of “standards” that companies agree to follow or, in some cases, the government imposes on suppliers. The DVD player is a typical platform; every DVD shares a certain technical standard that enables all DVD players to play all DVDs interchangeably. Windows is another platform or standard; creators of code write to a set of specifications that define the Windows standard and insure, basically, that all Windows programs will work on all Windows computers. Standards offer new companies an easy way to piggyback on an existing market. But standards also limit innovation.
Open platforms versus closed platforms
When creating new technology, perhaps the most important business decision is whether to be “open” or “closed.” Most new mobile phones are open, meaning they work with any cellular network; these phones also are “open” for any applications written to their specifications. By contrast, Apple’s iPhone originally worked only with one mobile network (AT&T) and all Iphone applications required the approval of Apple itself.
The “closed” iPhone has the benefit of greater consistency but generally higher cost because closed systems are mini-monopolies. Makers of new technologies often talk about openness but in practice the benefits of being partly closed are so great that they stop shorting of being totally open. Ink-jet printers are an excellent. Hewlett-Packard’s printers work with every computer and so they qualify as open. Yet the ink-cartridges are closed; the only source is HP. Thus, partly open systems are common because – like Gillette and its razor blades – they enable a company to sell a platform inexpensively and then recoup their profits by selling essential parts. Printers, for instance, are often sold very cheaply because the manufacturer expects to earn handsome profits on ink.
Technologies that are free to the public, and freely modified, are known as open-source. Some of the most popular software programs, such as the Linux operating system or the Firefox browser, aren’t owned by anyone. These “open source” technologies compete against one another and against “proprietary” products based around “intellectual property” vigorously defended by owners. Not all free tools, however, are open source. Google’s search services are free, but users cannot modify them or make them their own.
Platforms and standards are linked to one of the most important aims of any successful technology: gaining and keeping market share. Market share is always important to businesses, but probably even more to technology businesses because of a process called “network effects.”
The principle is simple to grasp but hard to carry out: the more people who use a network, the greater the network’s value. Thus, Google gives away its search service because it can sell advertising to those who use it; the more users, the higher the advertising rates. For some technology companies gaining market share is more important than profits; there entire business resembles a “loss leader.” The goal is to gain enough followers that their “network” reaches a “tipping point,” suddenly becoming valuable.
The web-TV service, Hulu, illustrates the process. Hulu began giving viewers for free the chance to watch television programs whenever they wanted. Once enough viewers got accustomed to visiting Hulu, the company began finding ways to sell them entertainment.
Even hardware companies sometimes pursue market share over profits for essentially same reason: the original decision to, say adopt an Intel microprocessor, “locks in” a consumer; switching becomes too costly, enabling Intel to increase profits once its “installed base” is large enough. Cable companies work on the same principle. Getting customers can be costly, but if you keep them, they are akin to annuity.
New technologies often can be declared dead on arrival if they fail to take advantage of an existing technological system. Imagine for instance the fate of a new airplane that can travel faster and less expensively than existing planes and can even be built for less. But the plane requires extra-long runways that make landing in existing airports impossible. In short, the plane is terrific but requires every airport in America to be rebuilt. Can this airplane succeed commercially? Not likely – because air travel is a technological system that demands each piece to work in concert. Purely electric cars face the problem: no charging stations. The lack of a technological system to support a new innovation isn’t always lethal. Technological systems cane be constructed around great new technologies. But that takes time and often demands that society gains tremendously from the change. And that rarely happens.
Technologies get popular for reasons inventors didn’t anticipate. The telephone was conceived by its inventor, Alexander Graham Bell, as a way to broadcast music and news – as a kind of radio. He never imagined that the technology’s chief use would be for two individuals to talk to each other over a single line.
Similarly, the leading computer designer of the 1950s predicted that the a mere dozen computers could satisfy the demand for computation in the entire U.S!
Conversely, technologies sometimes “bite back,” as Edward Tenner has noted, harming society in unanticipated ways. No one, for instance, ever anticipated that one effect of the iPhone would be “distracted” drivers. Because new technologies have “unintended consequences,” monitoring how society adapts them – and is changed by them – is an important part of technology journalism.
The best technology didn’t win out
Scientists and engineers often embrace technological “determinism,” insisting without much reflection that the best technology ought to win out. But for a variety of reasons, commercial success in technology isn’t a science experiment.
Many times, the winning technology standard is demonstrably weaker than competing standards. And to supplant an existing technology, an improved one cannot be only slightly better. The replacement usually must be an “order of magnitude” – more than ten times – better than what’s existing. Improvements on such a scale often do occur, thanks to “Moore’s law,” but advances by themselves don’t insure success in the market either.
Sometimes inventors and entrepreneurs who are “fast followers” – skilled at packaging breakthroughs made by others – end up gaining commercial advantage. “Fast followers” take advantage of the reality that technology leaders often release products before the market can absorb them. The failures of trailblazers often set the stage for success by others who took the trouble to learn more completely the valuable lessons from the introduction of a novel product. The iPod is a great example of this tendency. Apple wasn’t the first maker of an MP3 player – not nearly – but the companies who pioneered the technology failed to grasp what consumers wanted. Apple combined slick industrial design and ease of use with an underlying technology first developed by others. “Fast following,” rather than being first, often defines success.
G. Pascal Zachary reported on Silicon Valley and business technology for the San Jose Mercury and The Wall Street Journal (1987-1995). He’s been an innovation columnist for Technology Review, Spectrum, and The New York Times. He is the author of two books on technology: “Showstopper” about the making of a software program at Microsoft; and “Endless Frontier: Vannevar Bush, Engineer of the American Century.”
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