Category Archives: Information Economics

A Measured Approach to Regulating Tech

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Today for Harvard Business Review, Larry cautions regulators of potentially transformative technologies to consider likely benefits as well as potential costs, and try to find a balance between the two. With so much of the tech-related news focused on harms, many of them unquantified or carefully studied, we risk losing out on some of the most important breakthroughs still to come from the digital revolution.

How to win the streaming wars

This week in Harvard Business Review, I have a long analysis of the so-called “streaming wars” that are disrupting the media industries. Incumbent producers and distributors, tech companies, and consumers themselves are all creating vast amounts of new content, experimenting with a wide variety of ways to distribute and monetize it.

From Disney+ to YouTube, from Peacock to Snap Chat, from DirectTV Now to Instagram, it’s an abundant if confusing time for consumers!

Who will win, or at least last long enough to make a profit? The article suggests, based on extensive research, that different age groups are gravitating towards different models for producing, consuming, and paying for video content. Would-be winners of the streaming wars would do well to understand the characteristics of each, so much the better for balancing offerings so as to appeal to each.

The risks here are enormous. Give away too much to younger audiences, and risk cannibalizing existing bundled PayTV subscriptions that pay for the innovation. Offer a one-size-fits-all service that compromises too much, and you muddle the message.

One thing is for sure: the platinum age of low-cost or even free content can’t last forever, or even much longer. A reckoning is coming, sooner rather than later.

As with all industry disruptions, the Big Bang is followed by the Big Crunch.

See “For Streaming Services, Navigating Generational Differences is Key.”

Debating tech regulation, this week in The Economist

All this week, Larry is participating in a spirited on-line debate for The Economist, taking the “no” side of the question “Should the tech giants be more heavily regulated?”  Taking “yes” is author Andrew Keen, whose new book, “How to Fix the Future,” Larry reviewed earlier for The Washington Post.

Voting, which has so far heavily favored the “yes” side, continues through May 6th.

Four Design Imperative for the Internet of Things

For my Innovations column in The Washington Post this week, I noted four critical issues holding back consumer adoption of the Internet of Things.

As Paul Nunes and I explain in Big Bang Disruption, transformative technologies must not only be better and cheaper than the products and services they replace, but also need to overcome consumer inertia.  That’s particularly so when the disruptor affects many industries, or when the worse and more expensive products are so familiar to consumers that they won’t replace them even for a better and cheaper alternative, at least not without strong incentives to do so.

Those incentives include life-changing new applications of the products.  In other words, the disruptor, to reach the rapid take off we refer to as the Big Bang, must do more than just replace existing and still-working products.  It must do so in a way that adds new functions and new applications that the existing technology can’t possibly duplicate.

Each of these characteristics is present in the emerging market for an Internet of Things, where everyday objects will be enhanced with some measure of computing power–processing, memory, and the ability to communicate over the Internet with other devices, sending and receiving data (often very small amounts of data) through the cloud.  When fully realized, the IoT has the potential to dramatically remake the supply chains for many consumer and industrial goods, revolutionizing every step from design to sourcing to manufacturing, distribution, retailing, and service.

And it will do so across industries, affecting financial services, manufacturing, energy, consumer goods, agriculture, and more.

But so far, the IoT has made only incremental progress.  What’s holding back the Big Bang?

In the Post article, I identify four obstacles–some technical, some legal–that are keeping consumers from jumping fully on-board with connected, smart homes, wearable health and fitness, and other high-potential IoT applications.   If developers and their investors want to see big returns and jump-start the connected device revolution, they’ll first have to design solutions for each:

  • Interoperability – As is typical with emerging technologies, every Internet of Things vendor hopes to establish itself as the industry standard for interactions with other networks and other products. Competing industry groups have also sprouted up, hoping to eliminate incompatibilities by offering an open, neutral set of communications and data exchange rules anyone can follow. Some Internet of Things vendors are trying to build products that follow everyone’s standards, while others are leaving the problem to third party developers. The standards war will undoubtedly be resolved, but in the interim consumers are understandably hesitant to make big investments in new systems.
  • Mobility – Internet of Things devices may not need to communicate large volumes of data, but the sheer number of connected items and their need for constant interaction can’t be supported even with today’s fastest 4G LTE mobile networks. That’s one reason mobile providers and their partners are investing billions in next-generation 5G networks, which will increase network speed and capacity by orders of magnitude, optimizing performance for both the close quarters of your home and the potential range of autonomous vehicles on the road and in the air.  In the United States, both Verizon and AT&T have already announced tests of 5G technology.  But the new networks require more and different ranges of radio frequencies, which only the FCC can allocate.
  • Invisibility – Sleep Number isn’t actually the first company to offer a smart bed; they’re just the first to build the sensors right into the mattress. Earlier efforts required users to remember to wear separate devices that were uncomfortable to sleep with or extra equipment that had to be installed under an existing “dumb” mattress.  To work for all consumers, technologies that transform markets have to become invisible — just part of the scenery. So Sleep Number’s mainstreaming of the disruptive technology is a necessary condition for mass adoption.  Ironically, the more disruptive the technology is, the sooner it tends to disappear.
  • Security — Already, a few early products with inadequate protection have led to some embarrassing security breaches, including a hacker who gained control over a “smart” baby monitor to talk to the baby. The Federal Trade Commission and other regulators are already circling the emerging industry, threatening pre-emptive action.  But as Kohlenberger points out, a widely-deployed Internet of Things will generate tremendous improvements in health outcomes, traffic fatalities and home security, among others. If lawmakers overreact to the Internet of Things’ growing pains, it may unintentionally delay both the development and adoption of technology that will actually improve the safety and security of activities that today rely on fallible human operators.

As these issues are resolved, the Internet of Things is likely to experience the same kind of dramatic takeoff that followed the introduction a few years ago of smartphones that users actually enjoyed owning.  Once the value proposition and technical obstacles are overcome, if history is any guide, consumer adoption for the Internet of Things will happen on an expedited schedule.

In other words, watch for the bang.

The Four Economic Drivers of Better and Cheaper Innovation, aka Big Bang Disruption

The Nov-Dec issue of The European Business Review features a new article by Larry and co-author Paul Nunes, “What Companies Must Do Now that Better is Also Cheaper.”  The article introduces the four economic drivers that have changed the nature of innovation and redefined the concept of industry disruption, offering readers a starting point to evaluate and respond in their own businesses.

The four drivers are:

  1. Price Deflation – The continuing impact of Moore’s Law well outside of computing and consumer electronics, ushering in the era of combinatorial innovation.
  2. Platform Exploitation – The expansion of global low-cost platforms–based on the Internet, broadband, and cloud computing–for collaboration on everything from R&D to sourcing, manufacturing, distribution, retailing and customer service.
  3. Cross-Subsidization – The use of renewable information assets to seed new markets at the expense of incumbents.
  4. Marginal Cost Elimination – The accelerated shift from physical to software-based distribution, with marginal costs approaching zero.

The combination of these forces has changed the rules of innovation in a growing range of industries.  Incumbents and start-ups alike need to change their strategy to adapt–or disappear.

Happy Birthday to Moore's Law!

(Larry’s April 16th article for The Washington Post last week has been reprinted frequently…including here!)

Few revolutions can be said to have lasted for half a century, or to have wrought disruptive change at a predictable pace.

But that’s exactly the case with the digital revolution, which has seen computing get dramatically faster, cheaper and smaller every few years since the 1950’s.

The remarkable prophecy that anticipated that phenomenon is known as Moore’s Law, which turns 50 on April 19. In a four-page article for Electronics magazine, long-time Intel chief executive Gordon Moore (then head of R&D at Fairchild Semiconductor) made his famous prediction that, for the foreseeable future, the number of components on semiconductors or “chips” would continue to double every twelve to eighteen months even as the cost per chip would hold constant.

Moore originally thought his prediction would hold for a decade, but half a century later it’s still going strong. Computing power — and related components of the digital revolution including memory, displays, sensors, digital cameras, software and communications bandwidth — continue to get faster, cheaper, and smaller roughly at the pace Moore anticipated.

Moore’s Law is driven, as Moore explained, largely by economies of scale in producing chips, improvements in design, and the relentless miniaturization of component parts.  The smaller the chip, the cheaper the raw materials. Transistors, the building blocks for chips, have fallen in price from $30 each 50 years ago to a nanodollar today—roughly $0.000000000001.

That low price encourages more uses, which raises production and lowers costs in a virtuous cycle. Miniaturization also means a shorter distance that electricity has to travel to activate software instructions. Smaller, denser chips are consequently not only cheaper to make, they use less power and perform better. Much better. With each cycle of Moore’s Law, computing power doubles, even as price holds constant.

It is the prime example of what Paul Nunes of Accenture and I call an “exponential technology.” It’s hard to get your head around the impact of a core commodity whose price and performance have improved by a factor of two every two years for half a century.  (Compare that to commodities such as oil or meat, which get worse and more expensive.) One example I use is to help make Moore’s Law concrete is to compare the performance, cost and size of the Univac I, sold in the mid-1950’s, with devices available now.

Today’s home video game consoles, for example, have roughly the same processing power of one billion Univac I’s. Even without adjusting for inflation, the cost of a billion Univacs in 1950’s dollars would still exceed the entire money supply of the world today.  And had it been possible to buy that many computers in the 1950’s, you would have needed an area about the size of Iceland just to store them. But the consoles cost about $400, and fit comfortably on a shelf. And they are marketed not to the world’s largest enterprises but to children — who probably have a much better idea how to use a billion Univacs anyway.

There are few if any examples of basic commodities improving on so many dimensions at once, and certainly not at such a rapid and predictable pace.  As Moore reflected recently in an interview with IEEE Spectrum, “The semiconductor technology has some unique characteristics that I don’t see duplicated many other places. By making things smaller, everything gets better. The performance of devices improves; the amount of power dissipated decreases; the reliability increases as we put more stuff on a single chip. It’s a marvelous deal.” A marvelous deal, that is, for consumers. Every few years, the capabilities of our growing number of electronic devices — smartphones, TVs, game consoles and other consumer electronics — doubles, while the price for the previous generation collapses.

Thanks to Moore’s Law, tomorrow’s digital products are certain to be better and cheaper. Your newest phone does far more than your last one.  It has a better display, more memory, longer-lasting battery and more sensors for tracking you and your environment. The price for 12 megapixel digital cameras has fallen from $24,000 in 1995 to a few hundred dollars today. Mobile broadband networks, built of electronic components, have advanced steadily from 2G to 3G to 4G and beyond, even as unit costs for data transmission plummet.

Last year, a writer for The Huffington Post found a 1991 newspaper ad for Radio Shack and calculated the cost of 15 devices listed would have been, back then, over $3,000.  Today, all 15 — including a camcorder, a CD player and a cellular phone — have been replaced by superior equivalents on smartphones costing, unlocked, about $600.  And the smartphone does far more, in a single, smaller, integrated device.

Economists call this phenomenon “consumer surplus” — the excess value of a good beyond the actual price a consumer pays; what you would have been willing to pay, in other words, if you had to.  The difference between the price for the phone and $3,000 represents one estimate — and a conservative one — of the consumer surplus created by the deflationary effects of Moore’s Law.

Our expectation of increasing consumer surplus, however, generates a tremendous disruptive force for computer-related businesses.  We’ve now been trained to anticipate computing’s relentless drive into the realm of the better, cheaper and smaller.  That puts profound pressure on the makers of most consumer electronics to deliver new and innovative products every year or two — or else.

And while both manufacturers and the consumer benefit from the falling cost of digital components, in most cases consumers are keeping the lion’s share of the savings.

As a result, businesses in the most digital industries, including communications, electronics, software and digital entertainment, long ago stopped worrying about what their competitors are going to do next, but rather what the technology is going to make possible. Put another way, they all share the same competitor — Moore’s Law.

Over the last few decades, that phenomenon has expanded.  With the advent of cloud computing and the global Internet, most information-intensive industries have also been subjected to radical and continuous transformation, or what we have called “Big Bang Disruption.”

As the cost of collecting, storing, processing and displaying information falls, the supply chains associated with these businesses are being rebuilt on digital platforms. Think of financial services, newspapers and magazines, music and film, health care, education and even government services, where both the threats and opportunities seem to multiply overnight.

As Moore’s Law enters its second half-century, the echoes of that disruptive tsunami have now reached the shores of even the most non-digital businesses. In the next phase of the digital revolution, manufacturing is about to be upended by 3D printing and nanotechnology.  Agriculture is deconstructing in response to better and cheaper sensors, while transportation is girding itself for revolutionary change from autonomous vehicles, smart roads and drones.

And every dumb item in commerce, from individual light bulbs to your refrigerator, is now getting low-cost computing intelligence and network connectivity, a phenomenon known as the Internet of Things.

Just law month, Amazon introduced the Dash, a system of free WiFi-connected buttons that users can attach to everyday items such as razor blades and laundry detergent.  When it’s time to replace the item, you simply press the button to order it.

Over time, of course, the computing and communications intelligence will be built in, along with the ability for the item to monitor and report on its own condition.  You’ll be able to track electricity and water usage, be alerted when something needs maintenance, and authorize the things in your life to automatically reorder themselves when needed.

As trillions of items communicate their status up the supply chain, meanwhile, every step from design to production, distribution, marketing and sales will be reinvented to become vastly more efficient, generating still more consumer surplus.

In every one of these examples, Moore’s Law is the life-blood of the innovators.  It’s the uber-disruptor.

So even as the better and cheaper revolution is a boon to consumers, it’s causing increased anxiety for businesses, especially those just now starting to feel its full effect.  Every industry must learn to keep pace with exponential improvements in core commodities, and to respond to increasingly demanding and influential consumers.

For executives trained to manage to incremental improvement — the guiding principle of the industrial revolution — exponential innovation presents both a profound opportunity and an existential threat.  Gordon Moore used to say that if the auto industry had been built on exponential technologies, today’s cars would get a million miles per gallon of fuel and travel several hundred thousand mph.  The cost of a new Rolls-Royce would be cheaper than the cost of parking it overnight.  (It would also be only 2 inches long.)

That’s kind of change is not for the timid.  In a world dominated by Moore’s Law, many businesses don’t respond in time, instead going down with the ship.  Entrepreneurs thrive while managers retire.

Consider some of the many goods and services — some digital, some physical — already displaced by your smartphone, including address books, transistor radios, remote controls, taxicab dispatchers and maps.

Not only have these staple items gone completely obsolete, but so have the businesses that made, sold, advertised and serviced them.  Look down the main shopping street where you live, and you’ll see empty storefronts that used to house office supply stores, movie theaters, camera shops, bookstores, travel agents, currency exchanges and more.  Big box retailers and shopping malls have been marginalized; even electronics retailer Radio Shack finally succumbed to digital alternatives built from the components the stores sold.

And in the next generation of digital disruption, that list may be supplemented by post offices, ATMs, locksmiths, real estate agents and rent-a-car offices.

Some enterprises are flexible enough to make the transformation, and do so elegantly.  Philips Lighting, for example, anticipated the exponential power of LED lighting far enough in advance to get out of the incandescent business it both created and dominated for over a century, becoming a different company in the process.

Kodak, on the other hand, which held some of the best patents for digital photography, still couldn’t bring itself to commit to a future without film and chemicals, and wound up going from industry leader to bankruptcy in just a few years.

In that sense, Moore’s Law has acted as a kind of accelerant to economist Joseph Schumpeter’s often-quoted observation that capitalism proceeds in “perennial gales of creative destruction.” As every business becomes digital, the storms become that much more frequent and that much more intense.

This “new normal” for business won’t be ending any time soon.  Despite regular predictions of the end of Moore’s Law, the engineers just keep finding new ways to keep it going, using new materials, improved manufacturing techniques, and ever-greater economies of scale.

Gordon Moore, for one, is confident.  When asked about the rule he initially predicted would stay in force for a decade, Moore recently said. “I have never quite predicted the end of it. I’ve said I could never see more than the next couple of generations, and after that it looked like [we’d] hit some kind of wall. But those walls keep receding.”

As consumers, we’ll happily walk through each wall as it fades away, revealing the next great innovation.

But businesses will have to learn to jump.