Law, Order, & Chaos transcript

Laws, Order and Chaos on the Web Transcript

Paul: “Good Evening. I'm Paul Farris. Phil: “And I’m Phil Pfeifer Paul: “The session we're going to do is . . . " 1. Laws, Order, and Chaos on the Web Paul Farris & Phil Pfeifer The Darden School

2. Table of Contents: • Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness and Reach • Deconstruction, disintermediation • If you really believe…Internet Speed Paul: "The ideas in this presentation come from lots of sources. We're not going to take the time to give you the individual citations, but here at a glance are some of the books we've found useful . . ." 3. [Book jackets] Paul: "If we had to recommend one and just one alone, it might be "Blown To Bits" by Evans & Wurster." Phil: "Before we begin . . . might it be that all this talk about e-business is something of a fad? 4. Is it a fad? • “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 "In a sense. E-business will soon become business. It has the potential to change everything. Don't believe us, take a look at these words from Jack Welsh . . . " Paul: "One of the things that's driving Jack Welsh & everyone else is Moore’s Law."

5. Moore's Law (Contents slide redux; Moore's Law highlghted) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness or Reach • Deconstruction, disintermediation "Moore’s Law: Computing power doubles every 18 months while costs remain constant . . ." 6. [Graph: Transistor per chip, 1970 - 2020] Phil: "An example of Moore's law, to make things really vivid: Think back to 1978; the most powerful computer in the world at that time, the Cray computer. It could process 160 million instructions per second . . ."

7. Moore’s Law in Action (bullets display progressively) • 1978 - Cray I : 160 million instructions per second, $20 million Paul: "Now, in 1995, already, the Sony Playstation . . . " • 1995 - Sony Playstation: 500 million instructions per second, $299.99, ToysRUs Phil: "So as computing power gets cheaper and cheaper, what that means is that computing is going to get substituted for other things. Things that are now atoms are going to be blown to bits . . ."

8. [Eight images of things being "blown to bits" as described] Paul: "Already we're seeing magazines and the publishing industry blown to bits and transmitted over the internet." Magazines Casinos

Money Design/Art

Music Prices Comm'n/Travel

Teaching

9. Metcalf's law (Contents slide redux; Metcalf's law highlighted) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies

• Richness AND Reach • Deconstruction, disintermediation

10. (slide w/ graph) 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 Phil: [Example: fax machines]

11.

Implications of Metcalfe’s Law (bullets progressively displayed) • 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? Paul: "Instead of diminishing returns, networks yield increasing returns. Additional members increases overall value by a power function." Phil: "Another implication: Winner take all battles. Metcalfe's law says one combined network is always more valuable than two separate networks, which says we're going to see one network survive." Paul: "And if you're in the number 2 position, maybe you better find a partner to put yourself into a leading position, even if it means combining with someone else" Phil: "And with all the hype over internet startups, I find it helpful to ask 'Are they in a hurry to create a Metcalfe Network?' What is the network we're talking about? Is there going to be value created to increase the size of the network? Paul: "It's never clear just what the network is, and we'll talk about that a little bit more in this section on standards."

12. Standards War, Path Dependence [bullets display progressively] • 4’8.5” or 5’ railroad tracks • Standard enables the network Paul: "Standards enable the network. As an example of that, think about railroads as a network that enabled trains to travel from one corner of the US to the other corner. Before the Civil War, the N & S had different standards, and for a while trains had two sets of wheels so they could switch over from one standard to the other. But that didn't last. We settled on one standard, and that was needed for the network."

Phil: "This example shows that standard is arbitrary. Value is in that it creates a single network." • Qwerty or Dvorak? • Inferior standards hard to replace? Phil: "The second example shows that if we start with inferior standards, it can be very hard to replace. QWERTY . . . layout . . . designed to slow typists down. Because it got adopted it remains a standard even though . . . its an inferior standard." • VHS or Beta Paul: "Another example . . . VHS vs. Beta. Once equal . . . suddenly market tipped." Phil: "So if one standard gets ahead, starts to build a bigger network, then as Metcalf's Law would predict, they would win the standards battle." • Netscape vs. Explorer Phil: "Here's an example that proves the opposite. Netscape had the lead, but IE was able to overcome Netscape . . . because MS owned an even bigger network -- the OS network, and used that power to win the browser wars." Paul: "So by bundling the browser with the word processor and the spreadsheet we got a larger network and that's what we meant when we said that sometimes it's difficult to decide exactly what the network is." [image of book jacket scales up on right – Winners, Losers, and Microsoft] Paul: "Not everyone agrees with all the ideas of networked economies and increasing returns, so if you want another point of view you might want to read this book "Winners, Losers, and Microsoft." Phil: "Now that we've learned about Moore's Law -- the fact that computers are getting cheaper and faster -- and also Metcalfe's law that illustrates the power of the network, use these two ideas to think about the internet. 13. WWW = Moore’s Law * Metcalfe’s Law + Industry Standard combine Moore's Law with Metcalfe's law and contemplate the value of connecting every computer in the world TCP/IP standard. Phil: "After all, what is the internet but a network of all the computers in the world. And not just all the computers, but everything that's going to have computing power in the future. Wow. Think of the value that this internet has created. And if you think in terms of the standards, was there a big standards

war? No. TCP/IP was adopted years ago as the standard to allow this huge network to be created."

14. Positive Feedback (Contents slide redux; Positive Feedback highlighted) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness AND Reach • Deconstruction, disintermediation

Paul: Now a network gives us positive feedback. Gives us increasing returns and at some point may give us disruptive technology. Let's discuss both of these concepts in a little more detail.

15. Positive Feedback • Implication: Winner take all • "For every 20 - 30 entrants there will be two or three winners" Brian Arthur Paul: In our case on Value America, for example, the CEO argues there's going to be winner take all in this business, for one reason, more advertising $$ attracts more customers; those generate more sales, he attracts more investors which gives him more advertising dollars, and this positive feedback loop results in only a few winners emerging.

16. Evolutionary Path • Bifurcation points, critical points where a little leverage goes a long way down the evolutionary path. Paul: "Another aspect of this positive feedback loop is that there are certain critical points at which a winner is determined. [trough at bottom left] Now economics would differentiate these two concepts in this way. If we drop a ball into a trough we know where that ball's going to come to rest: right at the bottom. [Adds second trough at right] On the other hand if we had a trough shaped like this, its possible that it comes to rest in the middle, but more likely to come to rest on the right or the left. . . VHS or Beta, but not both.

How does this happen? How do we start off with a trough that looks stable and end up with a situation that is unstable? Well, this is basically the logic: We have in the background, for example with MP3, technologies that have been around for a long time." 17. [MP3] • 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. Paul: "In a relatively stable music industry, MP3 did not cause a lot of trouble when it was first invented back in 1987. It wasn't until we had 56k modems and 300MHz processors that college students could create web sites and begin to transfer MP3 songs. 18. [New trough, animated rise in center] Paul: So in this way of thinking, we had an industry that was in equilibrium and all these technological changes happened around it and created the potential for disequilibrium and positive feedback, so that once the market starts to tip toward MP3 or Real Audio, one of these standards will win and networked economies will take over." 18. Richness AND Reach (Contents slide redux; Richness AND Reach highlighted) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness AND Reach • Deconstruction, disintermediation Phil: One of the features of MP3 is that it allows for new levels of richness and reach. 19. Richness & Reach chart Phil: Traditionally a trade-off between R & R. What do we mean by richness? Richness is the quality and depth of the communication. Think of a music store: high richness but low reach; listening, advice from clerks, but limited selection. At other end of trade-off might be a catalog: wide selection, low richness. Now with the internet, with connectivity, common standards, we can have new levels of both richness AND reach. CDNow & Chat Groups. Trade-off between richness and reach have been blown to bits by internet standards.

20. Deconstruction: (Contents slide redux; Deconstruction highlighted) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness AND Reach • Deconstruction, disintermediation Phil: Which leads us to another new concept: Deconstruction. 20. Deconstruction chart (on left) Most businesses are bundles of information and physical things Traditional Bookstore Phil: "Most current business models are bundles -- they're compromises. Deconstruction means that with the internet, upstarts, insurgents, are going to come along and try to deconstruct existing business models. That's the idea behind amazon.com. (on right) Unbundling the information from the physical thing allows each to operate according to its own economics. Amazon.com Phil: compare/contrast traditional bookstore w/amazon.com 21. 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. Paul: All of us should be worried about how our own business models will be deconstructed or blown to bits. What's predictable is that deconstruction will strike where the incumbent can least afford it. Classifieds, drugstores. The insurgents advantages is incumbents own unwillingness to blow our own model to bits. To increase that willingness, we need to think about "Who's going to go first?"

22. 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. Paul: Maybe it's the info & service businesses, maybe those that have been highly regulated, maybe a combination. All of us should be thinking about the canary in the mineshaft: which of the businesses around us is going to give us the early warning that the oxygen our business thrives on is about to be exhausted? 23. If you really believe . . . (Contents slide redux; If you really believe highlighted) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness AND Reach • Deconstruction, disintermediation Phil: So if you really believe that ebusiness the internet is going to change the world, you don't have the luxury to sit back and wait.

24. 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) Phil: Be prepared to move fast. People with exciting ideas are going to come after a piece of your business. So be ready to cannibalize . . . Paul: And a lot of people are saying it's no longer about the big beating the small, it’s the fast beating the slow. Phil: And because we're in uncertain times, hard to predict who's going to win/lose, don't place all you're bets on one scenario. Instead place lots of

bet, ride the scenario that seems to be winning, quickly abandon the ones not working.

25. Evolve or Die • Start with something that works • Then adapt, adapt, adapt. • Be prepared to abandon your old business model.

Paul: so it's not just "place lots of bets," but start with something we think will work, and adapt when it starts not to work. Watchword is no one knows what business model is going to work, therefore be prepared to change. 26. In conclusion . . . (Contents slide redux) Laws and Order • Moore’s Law • Metcalfe’s Law • Positive feedback Increasing returns Disruptive technologies • Richness AND Reach • Deconstruction, disintermediation Paul: In conclusion: we have worked through these six concepts which we think people interested in e-business need to understand as part of their basic vocabulary. Phil: [reiterates concepts] END