Category Archives: Information Economics

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.

 

Larry's Congressional testimony and hearing video on the future of the Internet

Larry testified on Feb. 25th before the House Energy and Commerce Committee on the future of the Internet and on proposed legislation that would limit the ability of ISPs to manage network traffic in ways that would harm consumers.

A video of the hearing is available, along with Larry’s written testimony.

 

Announcing "VC/DC," a new webcast series for Forbes

 

This week, Forbes Senior Online Editor Kashmir Hill and I launched a new video series, “VC/DC,” where we review the latest developments at the accident-prone intersection of technology and policy. The first two episodes are embedded below.

We’ve envisioned the series as a regular look at the policy issues technology companies and investors should be paying attention to but probably aren’t.

Kashmir and I each bring a unique perspective to technology and policy. A former D.C. resident, Kashmir relocated to the Bay Area a few years ago to cover privacy, security, digital currency and other cutting edge topics.

As a Silicon Valley veteran who now spends nearly half my time in Washington at the Georgetown Center for Business and Public Policy, on the other hand, I am working to bridge the gap between disruptive innovations and the regulators who sometimes love them to death.

The program will cover a wide range of topics, and won’t be limited just to developments inside the beltway. As our inaugural episodes makes clear, we’re also looking closely at how technology businesses are affected by local and international laws, as well as developments in the courts and the legal system overall.

I hope you like the series and find it interesting enough to subscribe.  We’d be grateful for your feedback in any case, as well as suggestions for future episodes.

 

Episode 1:  “The Accident-Prone Intersection of Innovation and Policy”

 

Episode 2:  “Security Standards and the Patent Crisis”

Larry Appears on C-SPAN's "The Communicators"

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Larry is the guest this week on C-SPAN’s long-running program “The Communicators,” talking with host Peter Slen about the research behind “Big Bang Disruption.”  The program covers a wide range of topics, including the impact of exponential technologies, the fate of incumbents, and the role of regulators in impeding or encouraging disruptive innovation.

How Should Governments Approach Technology Policy? Modestly.

Earlier this week, I spoke in San Francisco at an event co-sponsored by the Reason Foundation, TechFreedom, and the Koch Institute.  Hosted by my CNET colleague Declan McCullagh, the topic was “DC vs. SF:  A Clash of Visions for Tech Policy.”

The discussion ranged widely, from copyrights and patents to NSA surveillance to the failure of the government’s Healthcare.gov website.  Although panelists from the political left and right disagreed on some issues, there was as usual widespread consensus that from the standpoint of entrepreneurs and engineers, the core problem in technology policy is that the pace of change for innovation continues to accelerate while the pace of government, at best, remains constant.  Moore’s Law, increasingly, trumps legislated law, often unintentionally, and often with unintended negative consequences.

At the same time, as I emphasized, the shift in commerce, social life, civil life and nearly everything else from offline to online media means that future collisions at the intersection of innovation and regulation are inevitable and, indeed, certain to increase in both frequency and the degree of collateral damage.  Governments claim a monopoly on regulating much of this activity, after all, and like any institution that believes in its own mission is unlikely to let itself go quietly out of business as its markets change.

Governments rely for revenue on taxes. As more traditionally taxable activity migrates online, lawmakers are certain to follow. That’s been true in the development of any frontier, physical or virtual.

The longstanding Silicon Valley approach of ignoring Washington in hopes lawmakers won’t notice what we’re doing was always a dangerous policy, and has now become downright reckless.  So how should innovators engage with regulators?

Watch the video below to find out!

DC v. SF: A Clash of Visions for Tech Policy from Charles Koch Institute on FORA.tv