DO NOT DUPLICATE - Faculty Directory · DO NOT DUPLICATE DO NOT DUPLICATE Moore’s Law Matters...

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Paul Farris and Phil Pfeifer Paul Farris and Phil Pfeifer DO NOT DUPLICATE DO NOT DUPLICATE DO NOT DUPLICATE DO NOT DUPLICATE Laws, Emergent Order, and Chaos on the Web Laws and Order Moore’s Law Metcalfe’s Law Positive feedback Increasing returns Disruptive technologies Richness Reach Deconstruction, disintermediation If you really believe…Internet Speed AND

Transcript of DO NOT DUPLICATE - Faculty Directory · DO NOT DUPLICATE DO NOT DUPLICATE Moore’s Law Matters...

Page 1: DO NOT DUPLICATE - Faculty Directory · DO NOT DUPLICATE DO NOT DUPLICATE Moore’s Law Matters Once Atoms are Blown to Bits 0011100 0011100011 001110001110 10011100 00111 Once Atoms

Paul Farris and Phil Pfeifer

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Laws, Emergent Order, and Chaos on the Web

Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach • Deconstruction, disintermediation• If you really believe…Internet Speed

AND

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When did E-business start?

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Isn’t e-business just a fad?

• TQM - Reengineering - JIT – ETC?• Yes it’s a fad

• E-business will soon become business.

• No, it’s not a fad• It will change everything

Don’t Just Take Our Word..

• “I don’t think there’s been anything more important or more widespread in all my years at GE.”

• Where does the Internet rank in priority? It’s No.1,2,3, and 4.”

• Jack Welch

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Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach • Deconstruction, disintermediation

AND

Moore’ Law(Gordon Moore, Co-founder, Intel)

Source: the killer app, Larry Downes and Chunka Mui, Harvard Business School Press, 1998

• Computing power doubles every 18 months while costs are constant..

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Moore’s Law in Action• 1978 - Cray I : 160 million instructions

per second, $20 million• 1995 - Sony Playstation: 500 million

instructions per second, $299.99, ToysRUs

Storage has followed the same law!

Bandwidth too!

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Moore’s Law Matters Once Atoms are Blown to Bits

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10011100 00111

Once Atoms Have Been Blown to Bits:We can take advantage of Moore’s Law

• Unlike Atoms, we can send bits at the speed of light, make unlimited, perfect copies, at very low cost!

• Atoms (“Things”) cost money to make, ship, store, maintain, exist in locations—to be taxed and regulated

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00111

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Encyclopedia Britannica:On-line and Free

• ''Purchasing the Encyclopaedia Britannica was once a major milestone in a family's life.”Yannias, CEO.

• But giving up its prime asset for free -- bound volumes still go for about $1,250 a set -- shows the straits into which the 231-year-old company has fallen.

• Encyclopaedia Britannica had revenue of $650 million and a sales force of 2,300 at its peak in 1989. Revenue estimates are no longer available from the privately held company, where the work force is thought to number about 350.

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Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach • Deconstruction, disintermediation

AND

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Metcalfe’s Law(Robert Metcalfe, Inventor of Ethernet)

• The value of a network is proportional to the number of members SQUARED• Telephones, faxes,

postal service

Utility

Utility = Users2

UsersSource: the killer app, Larry Downes and Chunka Mui, Harvard Business School Press, 1998

The Value of a Communications Network Is Proportional to n2

• For each individual, the value of the network is proportional to the number of other individuals on the network.

Vi = k × (n-1)• Since there are n members of the

network, the TOTAL value is: n × k × (n-1) = k × n ×(n-1) ≈ k × n2

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Implications of Metcalfe’s Law• Increasing Returns.

• The value of each additional member INCREASES with the size of the network.

• Winner-take-all Battles• Incentives to partner.

• Combining an n and m-member network

• Framework for evaluation---what is the network?

Standards War, Path Dependence4’ 8.5” versus 5’

Rutsin theRoad

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• TheSRBs had to be shipped by train from the factory to the launch site.

• Space Shuttles have two solid rocket boosters (SRBs) made by Thiokol in Utah.

• The SRBs had to fit through a train tunnel that is slightly wider than a railroad track.

Standards Wars, Path Dependence

• 4’8.5” or 5’ railroad tracks• Standard enables the network

• Qwerty or Dvorak?• Inferior standards hard to replace?

• VHS or Beta• Critical points, market can tip

• Explorer versus Netscape• #2 can catch up

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Early-Mover Advantage?• Not if you’re too early

• Hand held computers• Go, Apple Newton, Palm Pilot

• Not if later entrants make it more cheaply• Calculators

• Bowmar Brain, TI• Not of you’re up against a more powerful

network• Electronic Spreadsheets

• Visi-calc, Lotus 123, Excel• Browsers

• Netscape, Internet Explorer

The First-Mover Myth, The Industry Standard, September 27, 1999

WWW = Moore’s Law * Metcalfe’s Law + Industry Standard

Combine Moore’s Law with Metcalfe’s Law and contemplate the value of a network connecting every computer in the world.

TCP/IP Standard

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Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach • Deconstruction, disintermediation

AND

Positive Feedback & Increasing Returns: Brian Arthur

• Old economic model: diminishing returns, negative feedback, equilibrium

• New economic model: positive feedback, increasing returns.• Up-front fixed costs (sunk costs)• Network effects (Metcalfe’s law)• User groove-in (learning)

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Winner-Take-All Economy

• “For every 20 or 30 entrants, there will be two or three winners.” Brian Arthur

BrandsCustomers .

Investors

Sales

Credib.

Adv$

Second Order Benefits of Leading

• Leaders recruit best talent• Leaders get first choice of

partners• Leaders can cut off funding

to followers by merely existing.

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Evolutionary Path

• Bifurcation points, critical points where a little leverage goes a long way down the evolutionary path.

VHS BETA

Only the Paranoid Survive

A

C

B

E

F

G

H

I

J

K

L

M

N

Who knows?Anythinggoes?

On the Trainor on the Track

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Metcalfe’s Law Extended!

• “A new discovery is seldom fully effective for practical purposes till many minor improvements and subsidiary discoveries have gathered themselves around it.” Alfred Marshall

• Automobile, electricity, printing,..

• You could trace downloadable media back to 1987, Graunhofer Institut Integrierte Schaltungen & Deiter Seitzer, Motion Picture Experts Groups approved technology in 1992..

• But, MP3 didn’t wreak havoc until 56K modems and 300 MHz processors, and college student web sites posted song collections.

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MP3

Real A

udio

WW

W

Technology the Disrupter

• Sandpile theory:

• As the gap widens, so does the potential for discontinuous, disruptive change.

Technology changes exponentially whereas social, political, and economic systems change incrementally.

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Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach• Deconstruction, disintermediation

AND

Two Properties of Information

Quality of Information

•Bandwidth•Customization•Interactivity•Reliability•Security•Currency

Number of peopleexchanging information

Richness: Reach:

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Richness or ReachAND

Traditional trade-off

•Connectivity•Common standards

Richness

Reach

Eliminating the trade-off between Richness and Reach

• Melts informational glue that bonds business relationships

• Leads to deconstruction ofØValue chainsØOrganizationsØSupply chainsØConsumer franchises

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DO NOT DUPLICATEDO NOT DUPLICATE

Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach • Deconstruction, disintermediation

AND

Deconstruction• The connection between information and things is

weakening:• Musician, player piano, wax cylinders, vinyl, 8-

tracks, cassettes, CDs, MP3.• You no longer have to go to a bank to shop for

a loan. • You no longer need a newspaper to search the

classifieds.• You no longer have to visit a car dealership to

compare car models.

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Deconstruction• The economics of information is

fundamentally different from the economics of things (just ask Encyclopedia Britannica)

• Once something is sold, the seller no longer owns it.• Things are costly to manufacture.• Things wear out with use.• Things exists in a location—to be taxed and regulated.• Perfect competition (helps) determines the price of

things.

DeconstructionMost businesses are bundle of information and physical things.

TRADITIONAL BOOK STORE

Books as information about the book

Books as inventory

Unbundling the information from the physical things allows each to operate according to its own distinctive economics.

AMAZON.COM

Website with information about the books

Warehouse delivery of physical books

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DeconstructionMost businesses are bundle of information and physical things.

AUTO DEALERSHIP

Product Information

Financing

Used car market

Inventory/Delivery

Maintenance/repair

Test Drives

Unbundling the information from the physical things allows each to operate according to its own distinctive economics.

Mfg websites/Infomediaries

Financial Institutions/Manufacturer

CarMax

Regional centers or build to order

Neighborhood shops

Hertz?

Deconstruction

• Deconstruction will strike where the incumbent can least afford it.• Newspapers’ classified ads• Groceries’ prescription drug sales

• The insurgent’s greatest advantage is the unwillingness of the incumbent to fight on a deconstructed definition of the business.

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Deconstruction: Who will go first?

• Information and service business, such as dealers agents and brokers, will be the first to go as the Internet can better do what they do.

• Mature and regulated industries are also vulnerable as they’ve been protected from competition and hence have high costs.

Laws and Order

• Moore’s Law• Metcalfe’s Law• Positive feedback

• Increasing returns• Disruptive technologies

• Richness or Reach • Deconstruction, disintermediation• If you really believe…Internet Speed

AND

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Be first – go fast – don’t stop

• Cannibalize yourself before they get to you…be ready to scale up fast

• “It’s no longer about the big beating the small, it’s about the fast beating the slow.” Larry Carter, CFO, Cisco

• Manage innovation as a portfolio of options – place many bets (use real option theory)

Evolve or Die

In any moment of decision the best thing you can do is the right thing,

the next best thing is the wrong thing,

and the worst thing you can do is nothing.