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SMART Letter #10 - August 12, 1998
For Friends and Enemies of the Stupid Network
Copyright 1998 by David S. Isenberg
This document may be redistributed provided that
the 11 lines containing this notice accompany it.
isen@isen.com -- http://www.isen.com/ -- 1-888-isen-com
It takes SMART people to design a Stupid Network
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ANNOUNCEMENT: America's Network http://www.americasnetwork.com/,
will be carrying my monthly column entitled, "Intelligence at
the Edge," beginning September 1. Despite the magazine's name,
it is a pretty good rag, with a healthily skeptical attitude
befitting the journalistic ethic. Since I don't have *that* many
good ideas, much of the material will be redundant with the SMART
Letter, but SMART people may find something new, or even some
value in the *rest* of the mag, and most should qualify for the
free subscription.
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BETWEEN THE HORNS OF PLENTY: A book review of
"The Innovator's Dilemma: When New Technologies Cause
Great Firms to Fail" by Clayton Christensen.
225 pp. Boston MA USA.
Harvard Business School Press, 1997.
Incumbent companies, even well managed ones, rarely bring
new, discontinuous technology to market because . . . they
are good at listening to their customers. This is the
grist of "The Innovator's Dilemma." The book's spine is the
distinction between *sustaining* technologies and
*disruptive* ones. Sustaining technologies give us
better-faster-cheaper in an established marketplace.
Disruptive technologies open new markets, and deflate or
even destroy old ones. Christensen's book develops a strong
body of evidence that incumbent companies almost always lead
sustaining technology to market, but virtually never lead
in markets opened by disruptive technologies.
It works like this: Suppose you owned a desktop PC in the
years before laptops were very good or popular. Now suppose
a salesman said to you, "I have this fantastic new disk
drive. It holds half as much data, it costs twice as much,
and it is SIX OUNCES LIGHTER!"
Desktop PC users don't carry their machines around. They
don't need a six-ounce lighter computer. The weight
reduction isn't "value-added" to them, and they certainly
won't pay more for it. They have a different set of
problems. They want MORE storage, even if it makes their
machine heavier. The six-ounce advantage is useful in
another, discontinuous market space - laptops.
Discontinuous markets start small. They aren't cash cows
in their first years. More importantly, their initial
customers don't share key values of established-market
customers. Portability does not matter in the value matrix
defined by the established desktop PC market.
An incumbent firm, playing in an established market, must
listen to its established customers. At every budget
cycle, it needs to decide whether to allocate resources to
the mainstream business (and profit stream) or to a
marginal, often money-losing "long shot." Usually, it's a
no-brainer.
New, disruptive technologies become dangerous to incumbents
when their performance expands into the value matrix
occupied by the old market. For example, Christensen
explains how the 3.5 inch disk, which was a critical
component of the mid-1980s portable market, gained storage
capacity to become valued by - and successfully compete in
- the older, incumbent desktop market. And how it was the
death knell for the 5.25 inch drive. And how incumbent
market leaders like Seagate and Miniscribe were replaced by
upstarts like Conner and Rodime. (Seagate actually
started, and then killed a 3.5 inch drive effort. The
market for 5.25 was robust. Why change?)
Christensen maps disruptive technologies, and the markets
they created and served, and the companies that they built
and destroyed, through several transitions. The disk drive
market is his forte. He maps the disruptive change from
14-inch disk to 8, from 8 to 5.25, from 5.25 to 3.5-inch
technology, and from 2.5 to 1.8. (Curiously, the
transition from 3.5 to 2.5 was NOT disruptive. This
exception actually adds explanatory power to the theory -
2.5 inch technology, he explains, was fully compatible with
existing market values.) To generalize his observations,
he digs into the mechanical excavator market, mapping the
transition from cable controls to hydraulic. And he casts
the discontinuous history of the steel industry in terms of
the emergence of mini-mills, and the subsequent death of
giants like Bethlehem and U.S. Steel. And he shops for
supporting evidence at Sears, examining the disruptive
emergence of discount retailers.
He debunks the notion that incumbents fail because they are
bloated, bureaucratic, and lazy. The emergence of thin-film
disk coatings, a sustaining technology, was a heroic 8-
year, US$50M effort, led by incumbents like IBM and DEC.
Incumbents were also the prime beneficiaries, because the
new technology was sustaining to the old value matrix.
He also explains the inadequacy of so-called S-Curve
theory, which sprang from Joseph Schumpeter's notion of
creative destruction, to explain the emergence of new
disruptive technology based markets. The problem is that
the Y-axis, the measure of value in the space in which the
"S" is drawn, is simply different on the other side of a
disruption. For example, the Y-axis could represent
storage capacity per dollar or storage capacity per ounce.
The first would map desktop value, while the second would
be more relevant to laptops.
It's hard to tell what will be valued in the next market
discontinuity. In 1992, the year before Mosaic appeared in
public, the demand for web browsers was undetectable. Yet,
8 years later, they are indispensable to millions of users.
The book takes a few swags at what might be coming next -
electric cars to replace internal-combustion based
vehicles, flash memory to replace disks - but every book
has its limits. Not every revolutionary technology defines
a new market space (e.g., video telephony). And it is just
not possible to predict with accuracy what a nonexistent
marketplace will value.
For disruptive technologies that have already established a
foothold, the book provides a powerful analysis. Take the
Internet. The modal phone customer values very different
properties than the modal Internet user. Phone companies
didn't "get" the Internet until Internet Telephony. But
since Internet Telephony, IP is hot in the telephone
industry, especially the equipment sector. Why? Perhaps
because they see Internet Telephony as *sustaining* their
old value matrix. In some respects it is cheaper. Might
better and faster be just around the corner?
Meanwhile, the initially disruptive Internet is expanding
into all kinds of established value spaces. In addition to
telephony, these include retail, news, investment, postal
service, advertising, gambling, radio, et cetera.
Initially, incumbents in each sector will (a) listen to
their mainstream customers, and (b) treat the new
technology as if it were sustaining. My prediction, after
reading "The Innovator's Dilemma," is that they will miss
most of the new value that the Internet creates, and that
new companies will emerge to dominate these new markets.
In the case of two-way, real-time voice, formerly known as
telephony, I believe that the value will extend far beyond
telephony, until voice is just a seamless piece of a
communications mix that does not resemble telephony as we
know it today.
What should an incumbent to do when challenged by
disruptive technology? Depends on which horn of the
dilemma it chooses to ride. Christensen addresses this,
but this reviewer will let his readers discover these
delights on their own. "The Innovator's Dilemma" twisted
my neck to a new angle. It also threw a few last straws on
the back of my 12 year AT&T career. It remains useful as I
think about strategy with clients. I believe that its most
provocative point - that there are structural reasons why
incumbent companies don't lead technology revolutions - will
stand the test of time.
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THE STUPID BACKLASH!
Two articles, one in ACMnetWorker and one in Communications
Week International, attack the Stupid Network concept!
In the first, AT&T Executive Vice President Dado Vrsalovic
(ACM netWorker 2.2, April/May 1998, p. 44-47.) treats the
networking business as if all customer needs are known and
all technological improvements are "sustaining."
He keeps coming back to "the kind of network we *really* want"
-- you know, secure, reliable, (yawn) monthly bills. He says,
"Intelligence, to me, denotes an ability to react and adapt."
How about the ability to discover and create? He never addresses
the undiscovered need, the innovative process, the new business
idea, the disruptive effects of technologies upon markets. OK,
so maybe "react and adapt" is the kind of intelligence they
want in an AT&T EVP.
The second article, "Why Stupid Networks need a little
intelligence," by Ericsson VP Per Jomer (CWI 208, 20 July 1998,
p. 9 or http://www.totaltele.com/cwi/208/208news16.html)
is a briefer, but more satisfying discussion. He gets that the
separation of "the communication layer" from the user and "the
service layer" will facilitate innovation. He believes that
Ericsson will be able to provide significant value at "the
service layer." Maybe he's right, maybe there is some
"sustaining" juice to be squeezed from the combination of
IN and SN, but if Christensen is right, they'll miss the big
action.
Jomer opens by calling "The Stupid Network" a buzzword.
I chuckle at how what was once a modest essay with a goofy title,
became a "cult classic," a new career, and an industry buzzword.
Long and strange, indeed.
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YEAR 2000 STORY: A few weeks ago I was talking to a ship's captain on a major, passenger-carrying boatline. He is a computer hobbyist. In fact, he is the first person who ever showed me Microsoft Flight Simulator. So I was surprised to hear him opine that the Y2K Problem could be "cleared up with 16 lines of assembly code." I asked him how many microprocessors were on the ship he captained. He said, "Oh, fourteen, maybe sixteen." I asked if that included the engine room, and he said that there were "a lot more down there." I asked who made them and he said, "Uh . . . Motorola . . . .and . . . . " I am happy to report that he "got it" and I can't wait to hear how he's following up! ------- YEAR 2000 SCENARIOS: The Year 2000 Scenarios that I generated last fall and wrote up in SMART Letter #7 (http://www.isen.com/archives/980515.html) still seem robust! Despite the scenarist's efforts to project today's driving forces out into vastly divergent futures, events can rule out one or more scenarios surprisingly quickly, often in a matter of weeks, or sometimes even hours (e.g., the final report on a Mexican scenario project was sent to the client the day before the Colosio assassination). Yet all four of my Y2K scenarios still stand, even at this late date. (T-minus-500-days is August 19.) Where are the definitive leading indicators? This lack of knowledge is itself a property of the Year 2000 Problem. ------- ON MY CALENDAR: + August 17-20, 1998 -- INTEGRATED BROADBAND NETWORKS '98 Hyatt Regency, O'Hare, Chicago 212-983-3500. + September 1-3, 1998: Mondo mongo Telecom Business at the Javits Convention Center, NYC. I'll be talking at 4PM on Sept 2. http://www.telecombusiness.com/conference/ + September 14-17, 1998, Washington DC: Jeff Pulver's Voice on the Net. THE event on the IP-PSTN synergy scene. I'm talking at VON on Monday http://www.pulver.com/ then boarding the evening flight to Reno for . . . + September 15-17, 1998, Lake Tahoe NV: George Gilder's TELECOSM. Where disruptive people discover disruptive technologies. A new addition to my "Former AT&T People With Itchy Feet" panel is Bob Bailey, formerly of AT&T Microelectronics, now the CEO of PMC-Sierra, which is shaping up to be the Intel of communications chips. http://www.gildertech.com/ + October 14-15, 1998, Toronto ON: IP Telephony and Voice/Data Convergence. A distinctly Canadian view. In many respects Canada is showing the way to the rest of us (e.g., CANARIE, the Canadian national optical network initiative). http://www.mondaq.com/ or 416-927-7936. + October 26-29, 1998, Cannes, France: ISP Forum! IIR, Communications Week International and Total Telecom are organizing this most awesome event. www.totaltele.com/iir-conferences/ispf/ ------- [to subscribe to the SMART list, please send a brief, personal statement to isen@isen.com (put "SMART" in the Subject field) saying who you are, what you do, and why you are interested in joining the SMART List.] [to unsubscribe to the SMART List, send a brief unsubscribe message to isen@isen.com] [for past SMART Letters, see http://www.isen.com/archives/index.html] -------
Date last modified: 10 Oct 98