Crossing the technology chasm — rebuild or perish
A Google search for “what is technology” says this — technology is the application of scientific knowledge for practical purposes, especially in industry.
The definitions highlights the challenge of being a corporation today — to continuously apply scientific knowledge. How do you make sense of all the innovation we’ve seen in the past 2 decades and actually use it for practical purposes? And, how do you manage this in industries that aren’t “high tech?”
But, before we go there, let’s take a step back and, in Notes by Ada tradition, start with a look at foundational technologies.
Progress, however, is never evenly distributed. For example, enterprise technologies tend to be well behind consumer technologies. An example I like to use is Whatsapp versus Slack — both companies that focus on messaging and conversations. Whatsapp was founded in 2009, focused on consumers, and sold to Facebook in 2014 for 19 billion dollars. Slack, on the other hand, focused on enterprises and was considered early after its public launch in 2014. Microsoft has, for example, launched a formidable competitor in 2017 and is still not seen as being a particularly late entrant in the enterprise messaging market.
Why? There are 2 factors at play —
1. Enterprise adoption is always much slower than consumer adoption
2. B2B technology maturity is always slower than B2C
But, these factors and examples work when you’re confined to what we define as the “technology” industry.
So, what is the technology industry? It isn’t clear anymore. In the early iterations of his fantastic presentation, “Mobile is eating the world,” a16z’s Benedict Evans used to use the phrase “Tech is outgrowing tech.”
Let’s consider the top 5 US listed companies by market cap. As Ben Evans demonstrates, things have changed from the Microsoft + Intel (Wintel) era in the 1990s when these “technology” companies were a smaller part of the overall ecosystem.
Today, however, Google, Apple, Facebook, Amazon and Microsoft dominate the landscape.
Let’s take a second to look at their revenue streams, thanks to Business Insider.
Here are the major industries dominated (or created) by these giants -
- Retail: Amazon is one of the world’s dominant retailers in a fragmented landscape. And, yet, it is a small (and growing) proportion of global retail.
- Phones: Apple dominates via the iPhone. Google is the world’s largest phone operating system owner.
- Media: Google and Facebook are the largest media owners on the planet and accounted for 20% of the entire planet’s advertising spend in 2016.
- Productivity: Microsoft invented this and dominate. Apple plays here via devices and services. Google plays here via cloud services.
- Cloud services: Amazon’s AWS effectively re-created this market (VMWare et al were probably the real creator). Google and Microsoft have since followed.
- Gaming: Microsoft is a major player. Amazon plays in eSports.
Of course, this doesn’t even begin to consider the many other bets these companies have made. These companies have reaped rewards from dominating the foundational technology waves (PC -> Microsoft, Web -> Google, Amazon, Mobile -> Apple, Facebook). But, what makes these giants a scary proposition is the speed with which they’ve moved to disrupt themselves and catch the next wave. As a result, if you consider the wave we’re in and the likely next wave -
- Artificial Intelligence: While naturally suited to Google’s strengths, Amazon and Microsoft have formidable AI expertise.
- Augmented Reality/Virtual Reality: Facebook moved quickly to invest in both AR (thanks to Snap) and VR (via Oculus. But, creating user friendly technology has always been Apple’s sweet spot. So, it wasn’t surprising to anyone when Apple nailed the launch of “ARKit” at WWDC. Finally, Microsoft has been a strong contender with HoloLens.
This is a scary proposition if you are an “old world” company — an intentionally provocative term — in another industry because you are faced with the chasm.
The (growing) chasm
The chasm is the growing gap between an “old world” company in most other industries and the leading technology companies of today.
While old world companies are still figuring out the cloud and trying to understand what to do with all their data, their big 5 competitors are flexing the artificial intelligence and mixed reality muscles.
Why the growing chasm? I think it is because the first foundational technology wave was the easiest to adopt for “old world” companies. Personal Computers made computing cheaper and easily accessible. There were a whole host of benefits of using computers — lesser grunt work, better reporting, better data storage and sharing, etc.
Crucially, however, computers did not force companies to overhaul business models. In many ways, computers were just vastly more powerful calculators in isolation.
But, the internet/the web changed all that. The web brought the connection economy with it — at once, a global network that allowed for easy exchange of data. This changed things. Consider what the connection economy does.
First, it shuns middle people and enables reduction of consumer cost.
This image can be applied across multiple industries — travel, advertising, banking, among others.
Second, it enables the creation of digital human connection via social networks.
Third, it enables people to collaborate across the network to work on all sorts of creative (blogs), non-profit (wikipedia) and for profit endeavors (global internet companies with distributed workforces).
Thanks to simplified payment infrastructure, the web began to support 4 core business models. But, of all 4, ads and subscriptions were the dominant business models.
Then, mobile came along and hastened progress toward these business models. Mobile’s killer apps turned out to be messaging, locations and photos. So, this led to massive social networks built around these killer apps.
In addition, this combination of web and mobile led to massive platform businesses that were built on the “tax” model. Mobile operating systems were the first battleground — Apple and Google won. The prize was a tax on apps sold via their app stores. Subsequent app platforms followed across various categories with the most famous examples being Uber and Lyft in ride sharing, AirBnB in short term rentals.
Mobile also helped accelerate the growth of businesses who’d done well on the web thanks to the sheer scale of adoption. Amazon, Google, Facebook benefited — among many others.
Both these revolutions gave these technology firms vast amounts of user data. And, while “big data” became one of the most talked about ideas as a way to “mine” insights from data, the coming of age of deep learning changed the game. Every major tech company has invested heavily in machine learning since and they’ve also approached this era in a creative way — by open sourcing the technology. Deep learning algorithms and techniques are, thus, largely commoditized. It is data that is the differentiation. The more, better data you have, the better these deep learning models perform. So, each of these 5 firms have been doubling down on investments in areas such as health and wellness, self driving cars and trucks, and smarter productivity tools among many others aided by deep learning and the vast amounts of user data at their disposal.
Of course, it helps they’re not just waiting on their research teams. Their pace of acquisition matches the size of their ambitions. This list is AI acquisitions by major technology companies between 2013–16 alone, thanks to CB Insights.
Old world companies, on the other hand, are stuck with some very basic questions —
1. How do we make sure all our data is making its way into the cloud?
2. How can we make sure all our data from across the organization talks to each other?
3. How can we mine these insights to improve our business?
There is one big problem — these are the wrong questions.
Making your way up the adoption curve — How not to adapt to technology
Most old world companies are working on solving technology by slowly making their way up the adoption curve. However, aside from the fact that they are a decade behind their new competitors, the rules have completely changed. Most old world companies are built around assumptions of scarcity (e.g. newspapers with an inventory constrained front page, brick-and-mortar retailers with limited shelf space) while technology companies are built on assumptions of abundance.
So, the questions to ask are -
- Are we operating in a business model that will be relevant in 5 years? If not, what do we need to move toward?
- What data and expertise do we need to get there?
These are hard questions for any business to ask. And, Google and Facebook aside, the other tech giants were not immune to these questions as well. Their current business models (think: Office 365, Amazon prime, Apple iCloud, Adobe creative Cloud, App stores, etc.) have evolved from older models that were based on “one shot purchases.”
My view here is that no industry is immune. Tech has far outgrown tech and is now foundational to how the world works. Sure, this future isn’t evenly distributed but we’re on our way there.
And, as a result, I think there are two ways to approach this if you’re an old world company — create an innovator wing/skunkworks project or rebuild from within.
Rebuilding from within
While skunk work projects are always cool, they have rarely worked. Disruptors, like Tesla, rarely come from within the industry. The incentives are just not aligned. Amazon is a notable exception with Lab 126. But, for the purposes of this discussion, we’re better off considering Amazon as an exception to most things. :-)
Incentives are also why internal rebuilding efforts never go anywhere. “Disrupt yourself” is definitely easier said than done. In a telling anecdote in an interview with Marc Andreessen, Netflix CEO Reed Hastings admitted to removing the executives leading Netflix’s DVD business from his executive team meetings once they’d decided to go all in on streaming. This was at a time when streaming was ~100% of Netflix’s revenue.
The Washington Post story
A recent example that showed how an internal rebuild can be done came from an NPR article on The Washington Post. Before 2013, the Post was losing revenue and its losses were widening, as it struggled to find income to replace its decline in print ads. The Post’s revenues and profits are up thanks to subscriber growth as well as higher digital ad revenues thanks to double digit growth every year. Comscore confirms that monthly web traffic is up 56% in the last 2 years.
This is at a time when publishers are struggling across the board. Time Inc. just announced it is laying 4% of its workforce. And, it is one among many.
What changed with The Washington Post? They made a critical decision in 2013 — to build their own software. Here are 3 excerpts from the NPR article.
Creating its own technology, in turn, gave the Post more control over things like load speeds and reliability, as well as deep visibility into its users — which stories they read, how far they scrolled, which headlines drew more traffic, and whether each reader has a preference for videos or photo presentations. That information could be fed back to the newsroom in real time, enabling them to, for example, beta-test headlines and optimize photos suited to different models of phones.
Its software is so successful, in fact, the Post has sold it to 22 other publishers, including the Los Angeles Times, Toronto’s The Globe and Mail, and Chicago Tribune. Selling its technology is a new business line.
“I wouldn’t want to insult anyone in the newsroom, and our journalism is absolutely amazing, but we are 100 percent now, when it comes to competitiveness in the market, a technology company.”
I have buried the lead of course. These changes happened following a change in ownership in 2013 — WaPo, as many of you know, is owned by Jeff Bezos. So, yes, I may be cheating a bit here with this. But, this is a textbook example of how to rebuild from within.
With new assumptions, you either rebuild or perish
We’ve been witness to the challenges faced by travel agents and newspapers. Media companies all over the world are fretting about the dominance of the likes of Facebook and Google. Retail is clearly in disarray.
Old world assumptions of scarcity just don’t work.
Wal-Mart, for its part, has demonstrated a tremendous appetite for an internal rebuild. The company has been on an acquisition spree since installing Jet.com founder Marc Lore as the head of its e-commerce business. It has since been on an acquisition spree including Hayneedle, ModCloth and, as of this week, Bonobos. They are also reportedly using store workers for e-commerce delivery. They understand that the threat is existential.
Even a brand at the scale of Whole Foods was seeing headwinds and saw fit to accept Amazon’s acquisition offer. It is again telling that most commentators focused on Whole Foods upscale clientele and locations rather than its massive brand.
Brands, after all, count for little if the business model doesn’t work.
The Economist Joseph Schumpeter popularized the idea of creative destruction — “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
In some ways, today’s note is all about this term and why any company that isn’t a technology company needs to live by it. The term “technology company” is, in itself, flawed. In a past interview, Daniel Ha, the founder of Disqus, shared a simple but powerful idea — In the early 19th century, companies that used electricity were called electrical companies. Every technology firm uses electricity. But, electricity has become foundational. Soon, technology will be too.
That is undoubtedly the case. And, every company that isn’t a technology company will need to embrace creative destruction to make the transition work — or perish.
Finally, as a life learning geek, the ideas in today’s note are very applicable to our own lives as well. It is important we take invest, from time to time, in creative destruction in our own lives. The habits and processes that made us successful in the past are rarely those that will help us in the future. Throwing the same answers at changing questions isn’t a winning strategy.
Or, differently put, both in our organizations and in our lives, what got us here won’t get us there.
Links for additional reading
- Washington Post is a technology company — on NPR
- Reed Hastings interviewed by Marc Andreessen — on a16z
- Faceless publishers — what the new business model for content may look like — on Stratechery
- Time Inc. cuts 300 jobs — on CNN
- Amazon acquires Whole Foods — on CNBC
- Wal-Mart acquires Bonobos — on Recode
- Wal-mart plans to use store workers as delivery labor — on LinkedIn
- Anti trust is antiquated. We need a reboot based on data — on The Economist
This is an edition of a weekly technology newsletter called Notes by Ada. If you like this and would like free weekly notes via email, please just subscribe here.