Innovation Tribune eng

Technological , economical and usage breakthroughs ; the VCR case

If you ask someone about the origins of the video tape recorder you will in most cases get answers around JVC, Panasonic and the VHS standard. An older audience would probably remind of Sony and the Betamax. This selective memory is quite consistent with Michael Shrage theory about innovation : "innovation isn't what innovators do ; it's what customers and clients adopt" (our January 19th post : "Innovation diffusion"). A variation could read : "People don't remember the invention, they remember when the invention became adopted by the public"

So those who remember JVC and those who remember Sony as inventors of the video tape recorder are both wrong. The whole story is worth telling because it provides a good illustration of the different breakthroughs which go along with an innovation.

In 1951, Charles Ginsburg, a studio and transmitter engineer at a San Francisco area radio station received a call from Alexander M. Poniatoff, founder and president of the Ampex Corporation in Redwood City, California. Mr. Poniatoff believed Ginsburg could help him with an important project. Ginsburg mission was to develop the first broadcast-quality videotape recorder (VTR), which he did : the Ampex VRX-1000 (later renamed the Mark IV) videotape recorder was introduced on March 1956. The machine sold for $50,000 (approximatly the equivalent of today $424000...). It was on that year that the video tape recorder became a reality ; the technological breakthrough happened more than 50 years ago.

The video tape recorder would remain a purely professional machine for the next two decades.

In October 1969, Sony introduced its "Color Videoplayer", which can be considered as the prototype for the U-matic format, introduced in Japan in September 1971. The two initial U-matic products were a video cassette player, the VP-1100, which had a price tag of 238,000 yen (approximatly the equivalent of today $2900), and a video cassette recorder (the first VCR) the VO-1700, priced at 358,000 yen (approximatly today $4400). Not exactly mass market products.

The Betamax format was announced by Sony on April 16th 1975. The first Betamax product was the SL-7200, a VCR combined with a TV set for a price tag of $1295 (approximatly today $4200). Less than one year after, the VHS (Video Home System) format was launched by JVC. Sony's philosophy was focused on quality, whereas JVC was focused on lowering the price. The first JVC machine, the HR-3300, was priced at the equivalent of today $3100. I won't expand here on the "format war" (VHS versus Betamax) as a lot has already been written on the topic, but it might be worth noticing that Betamax cassettes were limited to one hour versus four hours for the VHS format (in the US, enough for an entire football game). In October 1977, RCA launched the VHS Selecta Vision VCR in the US with a $4 million advertising campaign. By the summer of 1979, VHS was already outselling Betamax by a margin of two to one in the US.

The economic breakthrough came at the beginning of the 80s. From an average US price of $800 in 1978 (today $2100), VCR prices went down to $426 in 1987 (today $660) ; the actualised price had been slashed by almost 70% ! It is quite interesting to notice that it took 30 years for the concept of video tape recorder to shift from technological breakthrough to economical breakthough.

Not surprinsingly, the usage breakthrough came along the price fall : In 1980 less than one percent of all U.S. households owned a VCR ; by 1987, this number had raised to 50%.

VCR life span as a mass market product has been lasting for approximatly 25 years, but its days are over. In November 2004, Dixons retailer announced it would stop selling VRC because of the ever greater success of DVD readers and recorders.

For a trip at the origins of VCR, and for the fun, visit "Total Rewind", the virtual museum of vintage VCRs, at : http://www.totalrewind.org.

AT&T, an American icon which saw its own end come

So it's over ; the American icon has fallen. The subsidiary of Bell Telephone Company, child of Graham Bell, the 120 year-old AT&T has been sold to SBC Communications. It's still a family story, as SBC Communications started in the mid-eighties as the smallest of the seven "baby bells", the companies created after the regulator ordered the AT&T break-up. But what a story !

AT&T introduced many innovations, and not small ones : first commercial radio (1922), first television transmission (1927), first mobile phone (1946 !), first transistor (1947), first telecom satellite (1962). AT&T has long been a giant of the economic landscape : one million employees at the beginning of the 80s and not so long ago, a market value of $180 billions (1999).

The last numbers were much smaller : 60000 employees and a market value down to $16 billions. Of course, you can blame it all on the settlement of the antitrust case again AT&T by the Departement of Justice in 1982, which was followed by the 1984 break-up ; seven "baby bells" for local telephone services whereas AT&T kept long-distance services.

But the end of the AT&T icon is probably more related to the inability to cope with breakthroughs than pure regulatory matters, and it's been the place for a quite unusual story : the ODD group.

ODD stood for "Opportunity Discovery Department", and it was the 1995 brainchild of eight scientists within the famous Bell's Labs, in Murray Hill, New Jersey. They were acutly aware of breakthoughs which obviously threaneted AT&T strategic position, and they wanted these issues to trigger a strategic dialogue. To make things worse, AT&T strategy at the time was totally focused on incremental marketing targets ; the linear extrapolation of previous years curves (nowadays hopefully, there's not a single company which operates that way...;-). But ODD scientists became aware that AT&T future would not always look like the past, and they decided to communicate about what they saw, using an ODD vocabulary.

Among the concepts they created, was the "freight train" ; a trend that is going to flatten a company unless it changes its strategy. ODDsters though the concept was especially relevant to the price of long-distance calls ; starting around $100/minute in 1915, it fell to $10 in 1945, $1 in 1970 and 10 cents in 1996. A case study of predictability of economic breakthroughs ! AT&T is gone, but freight trains are still around (talked Peer-to-Peer with a music major lately ?...)

Another striking concept was the "data bomb". ODDsters favorite example was : "AT&T took 75 years to acquire 50 million customers; AOL took 2,5 years to acquire 50 million chat users".

Life of ODDsters was not easy. They wanted to save the company, but AT&T didn't like what they had to say. It became especially obvious when an unscrupulous journalist published an ODDster (David Isenberg) internal memo in Computer Telephony in August 1997. It was called "The rise of the Stupid Network" and it was meant to get the attention of AT&T management on the following mecanism : intelligent networks with stupid peripherical devices (such as telephones) were being replaced by stupid networks with intelligent devices (such as computers). Here's an extract : "A rudimentary form of the Stupid Network - the Internet - is here today. The telephone companies are beginning to realise this. Fearing erosion of their control and, more importantly, their revenue stream, they have been quick to call for the banning of Internet Telephony, quick to call for the federal imposition of charges on Internet access, and slow to implement widely available, reasonably priced broadband services. To counter the threat of the Stupid Network, the telephone companies are now speeding deployment of the Intelligent Network services, much like sailing merchants responded to the threat of steam by inventing faster sailing ships in the mid 1800s... Instead, telephone companies should cannibalize their own products."

David Isenberg had to leave AT&T by the end of 1997. On July 1998, the ODD group disappeared. Another perfect example of how easy it is to see breakthroughs, but how difficult it is to get companies to react in an appropriate way.

The detailed ODD story has been written by one of its former members (Amy Muller) and Liisa Välikangas (Strategos). It can be read at: http://www.strategos.com/articles/ODD_StrategyCreation.PDF

Why FireFox stands no chance against Explorer

Let's make a prediction; this is not so common in management, even less in innovation management where 99% of the work is post-mortem analysis, with 20/20 hindsight. There's been a lot of talk recently, including on this blog, about the FireFox phenomenon; FireFox is the open source Internet browser developed by the Mozilla foundation, recently reborn. It is a direct challenger to Microsoft's Internet Explorer, which until recently had more than 97% market share.

There is no objective reason to switch from Explorer to FireFox. Of course, you will be told that FireFox is faster, easier to use thanks to a good design, and, last but not least in the times of fear and uncertainty, that it is more secure and less prone to attacks by viruses and other Trojan horses. But these advantage are quite meager. I have been using FireFox for several weeks now, and frankly, I don't see much difference with Explorer. Only marginally, except of course that several important Web sites do not support FireFox, which is obviously annoying: what is more annoying in fact for a FireFox crusader than having to launch Explorer in parallel regularly in order to visit some Web sites and do real business? Based on this, I venture to predict FireFox's failure to dislodge Explorer.

In fact, FireFox is what Innovation guru Clayton Christensen calls an incremental innovation compared to Explorer. It doesn't fundamentally change things, it only improves some features, sometimes modestly so. In fact, on can say that the only advantage of FireFox is that it is not Explorer. That shows how the adoption of FireFox has more to do with faith and militancy than with rational choice based on product specs.

And there lies the danger. Not only are militant actions, running contrary to rational choice, fragile, but Christensen tells us that attacking a dominant incumbant on a market with an incremental innovation is doomed to failure. In his best seller "Innovator's dilemma", Christensen shows how incremental innovation always favor incumbents, while it takes a disruptive innovation for new entrants to succeed. This suggests that FireFox stands no chance against Explorer.
Of course, each half-percent of market share gained by FireFox is immediately put forward by triumphant open source advocates and Redmond ennemies, but it should be a sobering fact to realize that Explorer still has more than 92% of the market.

What will happen then? Caught sleeping - Explorer hasn't been improved in years - Microsoft will react in a totally predictable way: the next version 7 will be an orgy of innovations, in user interface, in security and other stuff, so much so that FireFox will rapidly look like an antic piece of software. All rational reason, if there's ever been one, to switch from Explorer to FireFox will disappear. All will remain will be faith and militancy, and a few niches (Apple, Linux) which will help Bill Gates claim he has no monopoly. Explorer's market share will stabilize, even go back up a bit, and voila.
It's not very pleasant, but, as Jim Collins says, we have to confront the brutal fact: it is not with FireFox that Microsoft will be successfully challenged. Get it!
I'm impatient to see the results of the fight...

Google: an innovator in danger?

Not a week passes without an article celebrating Google's success, the poster child of the post-bubble Internet economy, the one that has survived. In a previous post, we were discussing how Googles poses a threat to mighty Microsoft with its new generation mail and search engine. In fact, Google is now much more than a superbe search engine and a very smart mail service. Google, in fact, is now a "Web system", ie a set of services designed to work together and leverage each other.

It is in the design of this "system" that Google's strength lies, not so much in each service's quality, even thoug these are real. Let's take a few examples. Based on its search engine, Google developed a service called AdWords. It is an automatic advertising service that works this way: you register to the service for free, you create your banner and define the keywords that will trigger the display of the banner. When a user seraches on one of these keywords, your banner is displayed and if the user click on it, Google bills you. It is a remarkably effective and cheap system to generate contacts for a business. It is also a license to print money for Google. It is a good illustration of how Google leverage each service's strength to make money. The system works the other way: if you manage a Web site, you can outsource some space to Google to display Ads. If a visitor of your site clicks on a banner, you will get paid by Google. Of course, the ads displayed are automatically selected by Google's serach engine based on the content of your site so that they are relevant.

This "Web system" is very powerful, and new services are added regularly. It proves Google's thorough understanding of the Web, and the company's creativity. Does Google, however, create a lasting competitive position on the Web? Not really.
As we have seen, Google's strength lies in the synergy between all its services, but it really is based on the leadership of its search engine, which is both the technological basis and the "loss leader" of the system. The problem is that, after several years of near-total domination, the search engine is now under attack, by non other than Yahoo, and... Microsoft.

Having been initially overwhelmed by the Google tornado (Bill Gates admitted in Davos that Google had kicked Microsoft's butt), Yahoo and Microsoft have since reacted and caught up by introducing vastly improved seearch engines. As a result, and even if Google remains clearly superior, the gap is narrowing. But Google absolutely needs to maintain this gap: there is no switching cost from one serach engine to another: as we have all dumped Alta Vista for Google a few years ago, we could dump Google for MSN Search as easily, should it become better. If that happens, Google's Web system crumbles. Today, because it is so dominating, you have to advertise on Google if you advertise on the Net. If tomorrow, however, the market fragments, advertisers will have more choice, and each engine will have less impact. But Google will be hit harder, because this monopoly is the cornerstone of its system.

In conclusion, Google's system is brilliant, but it is does not lock the customer, the way MS-DOS has done for instance, unless one consider the lock at each of the system's services level. This is not to say that Google is a house of cards, but its domination  will continue only if it keeps adding new services that each creates a micro-lock.

The right candidates to wound a group with $ 64 billion pile of cash ? A start-up and a living-dead…

A giant with a war chest of $64.4 billion (as of September 30^th 2004, but still growing at a $1 billion/month rate)... there's only one, and it's obviously Microsoft.

The identity of the challengers is more unexpected…

Six years ago, Google was just an idea growing in the brain of two Stanford PhD students. Six years is young compared with what is now a respectable age for Microsoft : 29 years. I won't mention the well-known battle which opposes the two competitors regarding search engines. Google is leading the market, with 60% of search-generated traffic, against MSN's 7%. The battlefield where Google is going to have Microsoft suffer is e-mail. GoogleMail (GMail for close friends) is spreading at an astonishing speed, thanks to a "for guests only" beta-version trick (a deliberate marketing policy to create scarcity ; much more efficient than public opening). But GMail is not just about marketing, it's a product which has been completely redesigned, without complex : a 1Gb free storage capacity, e-mails put together as "conversations", a label system which turns obsolete the old folder approach… If you think of the beginnings of the original Google search engine, and if the same results happen again, Microsoft's war treasure won't be of much help to stop the GMail wave.

The other outsider isn't even a corporation ; it's a non-profit organization registered in California : The Mozilla Foundation. The true story: a group of people who took part to the Netscape venture. In the no-mercy business world, you could almost describe the Mozilla Foundation as a living dead… but their Firefox internet browser has already convinced 10 millions users, and when you see it, you understand it won't stop there ; improved and creative functionalities which might be enough, not necessarily to win the battle over Internet Explorer, but certainly to carve a significant market share to reopen the game.

In 1998, Google didn't exist ; Yahoo and Alta Vista were leading the young search industry, and there was no place for a late comer. By bringing to the market a major innovation (the "page rank" technology), Google put the previous order of competitors upside down. The history is not over ; the two Californian outsiders certainly keep in store other unpleasant surprises for the Redmont giant.

The Millau viaduct : behind the feat, a number of brilliant innovations

The technique of cable-stayed bridges goes back to the 18^th century. But various accidents, usually the breaking of cables following wind-generated oscillations, put this technique in quarantine until the 1960s. A video to watch once again shows it: the collapse of the Tahoma Bridge in the United States in 1940. A few pictures available on http://thefilmvault.com/disasters/tahoma_bridge.html.

The Millau viaduct, opened yesterday, has been praised for a few feats. The height of its pillars for a start ; pillar #3 with 221 meters and pillar #2 with 245 meters (343 meters if you add the pylon holding the cables) shatter the previous record for the category (180 meters). The span between pillars is also remarkable : with 340 meters, the previous record (140 meters) for a metallic bridge almost looks short. But much interest lies in the various innovations generated during this exceptional roadwork.

One of the most important is the simultaneous management of two projects : the pillar building on one side, and the manufacturing and assembling of the parts of the metallic deck. A manager of Eiffage, the company which carried the project, yesterday assessed that this innovation amounted to a 15 month gain compared with a more traditional approach.

To prevent "Tahoma bridge" disasters, all bridges must go through aerodynamic tests. The Millau viaduct complied with this rule, but Meteo France, France's official wether forecast agency, innovated by creating an "hydraulic tunnel": a model (1/3,000) of the valley and the bridge under construction, where engineers had water and micro-balls to understand wind trajectories. A first in France.

A last example : the use of a GPS positioning tool, with a … 1 millimeter accuracy. The result: with only two surveyors for a 500 construction site, the bridge remained within an error margin set at … 5 millimeters !

All these innovations will remain invisible for future drivers on this motorway, but they enabled Eiffage to manage this project within the initial timing (39 months against 40 forecasted) and within budget (399,5 million Euros against ... 400 forecasted).

Innovation Nokia style

How did Nokia become a leader of the mobile phone industry in the 90s ?

It's really hard to see favorable predispositions for a Finish group specialized in mining and forest exploitation, although Nokia already had activities in the radio phones back in the 60s.

It seems that one of the thing which triggered its astonishing success as a mass-market mobile phone producer goes back to a mission carried out by Gary Hamel, the famous strategy guru. To boost the Finish company creativity, Gary Hamel suggested that teams of Nokia engineers be sent in three rather special places : Venice Beach in California, King's Road in London, and the Tokyo night club area…(probably for the greatest delight of the engineers, who we rather think of as more used to the polar circle…). The creative spark is not always hidden in a 250 page Gartner Group report, nor in series of endless internal meetings… Sometimes, it's more productive to live as real customers, in remote places ; the creative spark is there, right under your nose. It's after these "learning expeditions" that Nokia understood that mobile phones had gone beyond their

utilitarian purpose, and that they had become "fashion accessories".

Kodak, a failure to innovate?

It's becoming common to use Kodak as a showcase for failing to innovate: the company is described as having missed the digital revolution because it was focused on protecting its core business, traditional photographic film. The reality is different, though. Kodak is in fact one of the first companies to have worked on digital imaging. In 1992, for one of my clients' projects, we bought a digital camera. It was a Kodak, the DCS 200, and it costed about $200K. Yes, that's two hundred thousand US dollars. One can not say Kodak was ignoring the digital revolution! Today, Kodak is still leading digital imaging, as the company holds many patents in this field that are used in products such as HP printers. The painful Kodak factory closures that one can see nowdays are nothing but the price to pay to transition from one era to the other, from the era when Kodak was a chemist to an era when it is a software company. For all its mistakes, Kodak is doing what few companies have been able to do.
No doubt, Kodak was victim of the innovator's dilemma as described by Christensen: the company tried to "cram" digital photography into traditional photography with the pathetic APS system. But that didn't stop the them from pressing ahead and ending up, today, in the leading group of digital camera manufacturers. Not bad for a chemist! The initial dilemma, however, probably costed them their leadership, maybe forever, as forecasted by Christensen's theory.