Wednesday, January 29, 2014

Early Indications January 2014: The Incumbent’s Challenge (with apologies to Clayton Christensen)

For all the attention paid to the secrets-of-success business book genre (see last October’s newsletter), very few U.S. companies that win one round of a competition can dominate a second time. Whether or not they are built to last, big winners rarely dominate twice:

-Sports Illustrated did not found ESPN.

-Coke did not invent, or dominate, energy drinks, or bottled water for that matter.

-IBM has yet to rule any market of the many it competes in the way it dominated mainframes. For many years, the U.S. government considered breaking IBM into smaller businesses, so substantial was its market power. Yet as of 1993, the company nearly failed and posted the largest loss ($8 billion) in U.S. corporate history.

-Microsoft did not dominate search, or social software, or mobile computing in the decade after the U.S. Department of Justice won a case ordering Microsoft to be broken up. (President Bush's Attorney General ordered the case closed upon taking office.)

-The Pennsylvania Railroad became irrelevant shortly after reaching its peak passenger load during World War II: the 6th largest company in the nation became the largest-ever bankruptcy.

-Neither Macy’s nor Sears is faring very well in the Wal-Mart/Target axis.

-It’s hard to remember when Digital Equipment Corporation employed 140,000 people and sold more minicomputers (mostly VAXes) than anyone else. Innovation was not the problem: at the very end of its commercial life DEC had built the fastest processor in its market (the Alpha), an early and credible search engine (AltaVista), and one of the first webpages in commercial history.

-After 45 years, Ford, GM, and Chrysler have yet to make a small-to-medium car as successful as the Japanese. Some efforts — notably the Pinto — are still laughingstocks.

2013 automobile estimated sales by model (excluding pickup trucks and SUVs), rounded to nearest thousand (source: via

Toyota Camry           408,000
Honda Accord          366,000
Honda Civic              336,000
Nissan Altima           321,000
Toyota Corolla          302,000
Ford Fusion              295,000
Chevrolet Cruze       248,000
Hyundai Elantra        248,000
Chevrolet Equinox    238,000
Ford Focus               234,000
Toyota Prius              234,000

There are many reasons for this state of affairs, some enumerated in The Innovator’s Dilemma: managers in charge of current market-leading products get to direct R&D and ad spend, so funding is generally not channeled in the direction of new products. In the tech sector particularly, winning the next market often means switching business models: think how differently Microsoft circa 1996, Google in 2005, Apple as of 2010, and Facebook today generate revenues. Finally, many if not all of the lessons learned in winning one round of competition are not useful going forward, and usually hamper the cognitive awareness of those trying to understand emerging regimes.

Unlike automobiles or soft drinks, moreover, tech markets tend to extreme oligopoly (SAP and Oracle; Dell and HP on the desktop; iOS and Android) or monopoly (Microsoft, Intel, Qualcomm, Google, Facebook). Thus the stakes are higher than in more competitive markets where 45% share can be a position of strength.

All of this setup brings us to a straightforward question for January 2014: how will Google handle its new acquisitions? The search giant has been acquiring an impressing stable of both visible and stealth-mode companies in the fields of robotics (Boston Dynamics), home automation (Nest), and artificial intelligence (DeepMind). When I saw the Boston Dynamics news, I thought immediately of the scenario if Microsoft had bought Google in 1998 rather than the companies it actually did target: WebTV ($425 million in 1997), Hotmail ($500 million in 1997), or Visio ($1.375 billion in 2000). That is, what if the leader in desktop computing had acquired the “next Microsoft” in its infancy? Given corporate politics in general and not any special Microsoft gift for killing good ideas, it’s impossible to believe ad-powered search would have become its own industry.

Google’s track record in acquisitions outside advertising (DoubleClick being a bright exception) is not encouraging: GrandCentral became Google Voice and was orphaned. Dodgeball was orphaned, so its founders started over and maintained the playground naming scheme with Foursquare. Pyra (Blogger), Keyhole (Google Earth), and Picasa (photo sharing) all remain visible, but none has busted out into prominence. YouTube is plenty prominent, but doesn’t generate much apparent revenue.

Let’s assume for the moment that the internet of things and robotics will be foundations in the next generation of computing. Let’s further assume that Google has acquired sufficient talent in these domains to be a credible competitor. There’s one question outstanding: does Google follow its ancient history (in core search), or its post-IPO history?

That is, will great technologies be allowed to mature without viable business models, as was the case with search before ad placement was hit upon as the revenue generator? Or will the current owners of the revenue stream — the ad folks — attempt to turn the Nest, the self-driving car, the Android platform writ large, and people’s wide variety of Google-owned data streams (including Waze, Google Wallet, and the coercive Google+) into ad-related revenue through more precise targeting?

Just as Microsoft was immersed in the desktop metaphor at the time it didn’t buy Google and thus could not have foreseen the rise of ad-supported software, will Google now be blinded to new revenue models for social computing, for way finding, for home automation, and for both humanoid and vehicular robotics? Is Google, as one Twitter post wondered, now a “machine learning” company? Is it, as a former student opined, a de facto ETF for emerging technologies? Most critically, can Google win in a new market, one removed from its glory days in desktop search? Google missed social networking, as Orkut can testify, and CEO Larry Page sounds determined not to make that mistake again. It will bear watching to see if this company, nearly alone in business history, can capture lightning in a bottle more than once to the point where it can dominate two distinct chapters in the history of information technology.