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A Report of an Evening with Kinsley, Negroponte, Polese, Bateson, Janney & Lanier at Hartford's Bushnell Memorial

Good News for New Business Models
- Doug Simpson 1/23/99

Forbes, to me, is an invaluable resource, with the media savvy of Wired and the capitalist sense of Investor's Business Daily, twice a month, plus ASAP. The issue for January 25 contains some "Bad News for Old Business Models."

It starts with Rich Karlgaard's column "Maybe Not So Crazy," in which he addresses the phenomena driving the Digital Age: "The exponentially improving capability/cost" of "tiny computers and the Internet" which "makes the Digital Age different from the Industrial Age."  Thirty years ago, Gordon Moore predicted a reality now known as "Moore's Law": that microprocessors would get twice as good every year or so, and drop in cost by 30%. Year after year.  In thirty years, that's produced millionfold improvement.  With no end in sight.

Add to that another stunner:  access to bandwidth (the data speed stuff that turns the "World Wide Wait" into the "World Wide WOW!") is growing about three times faster than the microprocessor curve.  This produces some enormous productivity gains and turns some business models inside out.

Karlgaard points to Amazon.com as one example.  $18 billion market value?  Gotta be crazy, no?  "Maybe not so crazy," says Karlgaard, Publisher of Forbes.  Wal-Mart, another low-margin operation, is worth about 1.5 times sales, so Amazon's value assumes $12 billion in sales, about 25 times last years number.  How fast can Amazon grow?  Karlgaard: 

"Jeff Bezos of Amazon slyly uses his customers' own PCs and Internet connections as a free resource and substitute for the land, buildings, inventory and crack sales-staff expensively assembled by Barnes & Noble into its older version of a bookstore. * * * Amazon can scale worldwide at the pace of the improvement/cost rate of chips and bandwidth—which is to say, very fast! Barnes & Noble (the non-Internet part of it) can scale only at the speed of industrial-era construction crews."

"Amazon has no brakes on its scalability. It can grow without much friction—in theory, at least—far more easily than did Wal-Mart..." 

So, why can't Barnes & Noble or Borders start selling on the Net, too, and keep up with Amazon's "frictionless" scalability?    Which brings us to "Danger: stealth attack" on page 88 of Forbes (or on this link on Forbes Online ), an article about Professor Clayton Christensen's theories laid out in The Innovator's Dilemma:  When New Technologies Cause Great Firms to Fail (Harvard Business School Press; $19.25 at Amazon.com).

Christensen presents example after example of how fatal threats start as low-quality, low-margin products that customers can't use and don't want.  The great firms yawn, and scoff.  Until the new product or service grows in utility until it fills your customers' needs faster, better and cheaper.  Christensen calls a new product sneaking into an established market a "disruptive technology."  Andy Grove, Chairman of Intel, calls it "the Christensen Effect." Forbes calls it the "stealth attack." 

Forbes:  "The Internet is the Godzilla of stealth attacks. Once a cumbersome tool wielded only by academics and nerds, today's Web challenges not just retailers but everyone from venerable Merrill Lynch and Aetna Inc. to high-tech Sony Corp. and Microsoft Corp." 

But don't big, excellent firms have the ability to counter these stealth attacks with their greater resources?  Maybe not.  Forbes:   

"What to do if you're under fire? Christensen contrasts Digital Equipment Corp.'s and IBM's forays into PCs. DEC tried and failed four times, always from within its mainstream organization. It was a halfhearted effort at first, reflecting the early view of DEC founder Kenneth Olson that the PC was just a toy. IBM put its PC unit in Florida, far from its New York base. There the undistracted IBMers could fit their technology and costs to the smaller-margin PC market. They created a smash hit. IBM's share of the PC business later faded, after it linked the PC unit more closely to the rest of IBM. "

Who are the stealth attackers in the traditional business that you know best?  What product or service is someone using to sneak up on the established players in that market?  How good are your field's old-line players at "eating your young," at practicing the culture of Silicon Valley outlined in "Cloning the Best of the Valley" (Business Week, August '97)?

Is it now all about networks, not hierarchy?

Please, let's hear from you. 

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The Net offers tremendous opportunities for those who can appreciate the "increasing returns" economics of networks, the power of community, and its opportunity to eliminate the costs of intermediaries and manual hand-offs in the distribution chain.

This focus page will be archived at nnarc-goodnews.html and may be edited in the future. Check in at Net Nuggets from time to time. The information contained herein is believed to come from reliable sources, but no warranty of accuracy is expressed or implied. The author may own shares of securities mentioned in this focus and that were purchased on the open market. This article is for information only and is neither an offer to buy or sell a security and is not intended to constitute financial or legal advice.

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doug.simpson@snet.net

The Innovator's Dilemma : When New Technologies Cause Great Firms to Fail
by Clayton M. Christensen
Hardcover - 256 pages (June 1997)
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