Saturday, April 15, 2006

Innovation: Standards and Ubiquity

I finished Empires of Light the other day. It was an interesting story to me but wasn't particularly well-written. No biographer I have read comes close to Ron Chernow's ability to create biographies that read like novels.

I read this book because I am interested in the dynamics of innovation in general and emerging technologies in particular. One of the questions that I am asking is whether a company that is driven primarily by iterative cycles of innovation can perform financially to similar levels of consistency that commodity manufacturers can. In other words, is there something inherent to the dynamics of an innovative company and its killer app product cycles that tends to result in cycles of revenue swings or can an innovator manage itself so that revenue cycles are smoothed? I have talked about this dynamic indirectly on my blog by comparing the revenue cycles of Dell to those of Apple. Apple, as the innovator, has significant revenue and profitability swings that map to their killer-app cycles. I want to understand if this is normal for innovative companies or if Apple's swings are due to poor management.

Reading Empires of Light was part of my learning curve because Sun Microsystem's Jonathan Schwartz mentioned it in a blog that was a very influential piece for me. Schwartz mentioned the importance of standards in the development of innovative technologies and referred to the battle between Edison and Westinghouse in their attempts to achieve standard dominance during the emergence of electrical power. Edison advocated DC power, which held low-risk to humans but which required massive and repeated power stattions to transmit electricity over large distances. AC power, championed by Westinghouse, had more potential for killing people, but was able to push electricity over massively longer distances without requiring repeated boosts. Westinghouse eventually won the battle but both Edison and Westinghouse lost the war, as JP Morgan the financiers eventually gained total control over Edison's technology (General Electric) and Westinghouse's and Tesla's technology because both men had over-leveraged their companies. When the American economy tanked, they were over-extended and were bought out by the so-called robber baron financiers.

So, here's what I came away with: the degree to which an innovation has success in the marketplace is a function of a). the market's ability to perceive value in the innovation, b). the infrastructure and standards on which the innovation depends and c). the ability of any given technology to achieve ubiquity.

The AC/DC battle was really about standards. The standards battle is driven by at least two forces: companies that seek to make money off the acceptance of their standards and the market's willingness to embrace a standard. Proprietary standards hold more revenue potential but also hold more resistance from the marketplace because of the possibility of one company holding power over the technology through the standard. Open standards are more readily received but hold less potential for companies to make money off them. AC and DC are open standards but Edison and Westinghouse had proprietary stakes in each standard not because they "owned" AC or DC (for these are simply physical characteristics of electricity's behavior in certain mechanisms) but because they had designed their equipment around exclusively each standard. Implicit in each firm's technology was the factor in the cost of the underlying infrastructure needed to enable ubiquity for the technology. DC's infrastructure was inherently and significantly more expensive than AC's.

The question of whether the marketplace desired electrical lighting was moot: it was very clearly desired because the advantages of electrical light over gas lighting or arc lighting were immediately apparent when electrical lighting was piloted before small crowds. Consequently, the battle between Edison and Westinghouse was about which technology would gain enough market traction to achieve ubiquity.

Ubiquity is a highly important milestone for a new technology to achieve. I think the pathway to ubiquity is interesting: it requires early adopters, close followers and evangelists to create desire among the mass of users necessary to achieve ubiquity. Or in the case of Bill Gates and Microsoft, it requires phenomenal and prescient vision, combined with shrewd business sense. In most cases, though, ubiquity follows a path of adoption.

In the case of electricity, JP Morgan was an early adopter: it cost him serious cash to have one of Edison's DC powerplants running electricity in his house. It cost him the loss of some of the aesthetics of his house because he had wires all over the place as Edison refined the technology. Chicago was the close follower for electricity as they chose Westinghouse's AC solution for lighting the World Fair. Interestingly, Westinghouse brought electrical lighting to the fair somewhat cheaply. This was done strategically to establish AC as the standard of preference. He did this because he understood that market demand was the key to ubiquity and if he could demonstrate to municipalities that AC was a better phase for distributing electricity over distances than DC, then he would have the approval of people who made community capital decisions. The fair was great to demonstrate what light could do because it aroused demand for electrical lighting. This meant that people would go home from the fair and tell their mayors and councils to get electricity.

I'm still toying with the interplay between innovation, ubiquity, standards and market demand. I don't yet have a firm opinion on whether innovative companies are inherently cyclical in their financial performance but I am asking the question of whether expectations for the financial performance of innovative companies should be different from expectations for commodity producers.