Saturday, July 30, 2011

Bridganomics: Build a River, and They Will Build a Bridge (Or how companies destroy their business and create their successors)

I've been watching with a mix of grim fascination and alarm as both cable and phone companies, for somewhat different reasons, have been doing away with unlimited data plans, "throttling" heavy users, and finding other ways of either preventing heavy data usage, or making it prohibitively expensive.

This bothers me because I think it's bad for most everybody.  It's bad for consumers because -- hey -- paying more, getting less.  It's bad for innovation, since many new internet products depend on plentiful and cheap internet bandwidth.  It's bad for the economy, since the internet is where consumer business is done these days.  It's the engine of economy, and internet providers literally want to throttle it back.  It's bad for my country (the U.S. of A.) because we already lag behind most of the rest of the world in terms of cellular and internet service, and further restrictions push us more in the direction of becoming a second (maybe third) rate technological and economic power.

In fact, it would seem that it's bad for everyone except cable and cell phone companies.

But the one thing about this that gives me hope is that I know this last statement is absolutely not true.  These attempts to limit data usage will help them in the very short term, by increasing revenue and reducing the cost and necessity of network upgrades.  But in the long term it will hurt them.  In fact, in the long term, it will quite probably destroy them.  And moreover, it's going to help create the very companies and technologies that are going to plow them under.

How do I know this?  Well, it isn't because I'm an economist.  I've never had a class in economics in my life.  But I've been a keen observer of technology and the businesses that go with them for a lot of years now, and I happened to have lived long enough, and seen enough transitions (both of technologies, and of dominant companies in those technologies) to see certain clear patterns develop.  And one of those patterns I call "Bridganomics."  Simply stated, it means that if you build a river, and consumers want to cross it, then someone else will come along and build a bridge.  Making the river deeper, faster, wider, doesn't help, and often only increases the demand for the bridge.

Now, like I said, no economics education here, so there's a fair chance here I'm only reinventing the wheel and applying a new name to a well known economic principle.  But even if it is well known to economists, it clearly is not well known to those running American businesses, or if so, they're simply choosing to ignore it.  There's simply no other explanation for the way they keep shooting themselves in the foot over and over.

So I'm giving it a sexy, marketable, name, the kind that could go on the cover of a New York Times best-selling book (if only I had an economics degree and a lot of questionable friends in high places) in the hopes that it might catch on.

Fundamentally, bridganomics means that in the marketplace, you can't build an impermeable barrier in the way of any consumer desire or trend.  Any attempt to do so will be only temporarily successful at best, and will fuel the creation of bypass services, companies, or technologies that will render your business model (and possibly your business) obsolete.  And it doesn't matter how dominant your company may seem, or how firm a grip you have on  your monopoly, that dominance, that control, is only another part of the restriction to the market.  In bridganomics, we call this the "river," but if it's easier for your mind to wrap around, think of it as a fence, or a wall, or a trench.  Same thing.

Examples?  I've got plenty.

The most applicable to the current internet provider situation is the AT&T breakup of the 1980s.  Most people think of this in terms of the breakup of the phone company itself, and of access to a lower-cost and more competitive marketplace for phones, phone services, and accessories such as answering machines.  That's true, but there was a smaller, yet ultimately more important, aspect of it dealing with data access and the creation of the internet as-we-know-it-today, and I was on the front-lines of that battle.

Along about the time of the antitrust action that broke up AT&T, the telephone modem came along; a device that allowed computers to trade data remotely over phone lines.  Actually, modems had been around for quite a while, but what was happening then was that modems were finding their way into the hands of consumers, who were hooking them up to their residential phone lines and finding new ways to use them.

Keep in mind that there was no publicly accessable internet back then.  If you wanted to share date between two computers, they had to call each other directly, using modems over a telephone line, and trade data.  Or, they had to call an intermediary computer or computer network, again with a telephone line and modem, that would act as a middle-man and pass the data along.

The only alternatives in those days were physical delivery of a floppy disk (no thumb-drives, and CDs were in their infancy), or putting both computers in one place and connecting them with a cable.

Yet, despite these limitations, consumer services started showing up.

Initially, there were computer bulletin boards: small and simple store-and-forward messaging and discussion services.  Often these ran on a single personal computer and phone line.  One user would call in to read and post messages while on line.  Anyone trying to connect while they were on would get a busy signal and have to try back later.  Eventually they would finish and hang up, opening the phone line and the host computer for the next user.

You may be shaking your head at the crudity of it all, and the difficulty of use.  And I haven't even mentioned that a computer could easily cost you $3000 in pre-inflation 1980s dollars, and the modem would cost you $2-300 more (that's a loaded iPad with app-money left over, kids), or that your current internet connection is almost certainly over a thousand (possibly several thousand) times faster than those old modems.  Why would anyone possibly use such a thing?

Simple answer: Because there was nothing like it that was better.

Not that we didn't want better, even from the very beginning.  We wanted multitasking host computers that would eliminate the busy signals.  We always wanted faster modems.  And over time, we got those things.  Bridganomics applies to natural rivers as well as ones created by misguided CEOs.  The desire was there, and the limitations of the technology caused bridges to be built.  Multitasking operating systems for PCs.  Faster modems. Mainframe-based dial-up information services like CompuServe, GEnie, and AOL.  Dial-up internet.  Broadband.  The-Internet-as-We-Know-It.

From that dial-up 300-baud trickle a million companies were made, a million fortunate.  Without it, there is no Amazon, no Google, no FaceBook, no Twitter, no Dot Coms, and ultimately no iPhone or iPad or Android.

So what was AT&T's role in this economic revolution?

They tried to stop it.

To their corporate eyes, those pesky phone modems were, at best an annoyance, and at worst a threat.  They worked on ways to prohibit them, or simply price them out of existence.

There were proposals to put filters on residential lines that would simply render modems inoperative.  There were plans to charge residential customers for locals calls by the minute, or to cap usage.

There were plans to require modem users to install a separate and much more expensive business line for data calls, since there was no legitimate use for a modem other than business.

Some of these plans even went into effect in various localities and among the various "baby-Bells" that came from the breakup of AT&T.  Most met with protest and outrage, and none of them ever gained traction.

Various arguments for these restrictions and pricing models were used, may of which will be familiar to those who have been following the current "open internet" debate.

The phone system was designed for voice, not data.  Simply because it's possible to use it for other things (data) does not mean it should be.

Our multiplexers, used to compress voice traffic over long-distance lines, are designed for voice, and won't work as well for modems.  Our network capacity will be overwhelmed

We will be forced to make expensive upgrades to our network to accommodate this new activity, and we will need to pay for it.

Only a tiny percentage of our customers use modems and will be significantly impacted by these new rates and terms.  Why should all be charged more to pay for the needs of a few?  The rates for our "average" customer will actually go down under our new plans!

Didn't I read all this in a Verizon Wireless press release just a couple weeks ago?

We all know how this went down for AT&T.  Even as they were being broken up and losing their dominance over the voice telephone market, they had a golden opportunity to build a bridge to a new world of digital communications and data services.  Instead, it happened in spite of them.  For a few years, their networks carried most data traffic, despite their objections and foot-dragging.  Modems got faster and faster, and as prices for phone services dropped, people started ordering more phone lines to support their modems, fax-machines, and increasingly connected families.

But this was all short term gain.  The phone system was still the river, not the bridge.  By the time phone companies woke up and started rolling out their long-promised DSL broadband services, it was too late.  They'd been out-performed and under-priced by cable and fiberoptic companies.  Some phone companies are fighting to gain back that market, but they're trying to recover something that could have owned if they'd been the bridge, and not the river.

This mistake didn't destroy the phone companies (or at least, it hasn't yet).  They had a more diverse business model, and were able to enter new areas such as cell-phone service and providing infrastructure for the internet, and so were able to survive.  But they gave away one of the biggest business opportunities of all time in a simple moment of greed and ignorance.

This sort of things happens over and over again.  Where businesses and industries build rivers instead of bridges, they kill the golden goose over-and-over again.  For example, through high rates and poor service, dial-up ISPs (with plenty of help from the phone companies themselves) gave way to broadband providers.

When hotels and models started gouging business travelers through high room-phone charges, it helped fuel the establishment and growth of cell phones.

When hotels and motels again started gouging customers with high in-room internet charges, they fueled the development of wireless internet services.

When Blockbuster developed a dominance of video rentals and started taking their customers for granted with poor service and high late-fees, it opened the door for Netflix to slip in with an entirely new business model.

When the music industry kept gouging consumers with ever higher-prices on ever cheaper to produce product, enacted draconian anti-piracy measures, and showed general contempt for their customers, they fueled first mass-scale music piracy, and then lower price (and for them, lower profit) music download services such as iTunes and Amazon.

The pattern is pretty clear.  So, how does one go about building a bridge?  How does one go about not building a river?  Some rules of thumb.

Build a Bridge

Follow consumer desire, don't resist it, even if that desire seems to be contrary to your immediate benefit.

When people want things, make it easier for them to find them.  (Google)

When people want things, make it easier for them to find them.  (Amazon, Netflix, iTunes)

When people want to meet and gather, give them a place to do so.  (FaceBook, Twitter)

When people want to do things, make it easier and more fun for them to do them.  (Apple)

Build a River

Take your dominance of an industry, technology, or market category for granted.

Take your customer base for granted.

Create bad-will through poor customer service.

When you sense consumer desire outside your current business model, attempt to squelch it, block it, or it price it out of existence.

Raise prices indiscriminately.  Consumers will tolerate high prices so long as they judge them to be fair.  A customer perception that your pricing structure is unfair immediately transforms even a bridge into a river.

Respond to competition not by competing with it, but by eliminating it through buy-outs, protective laws, and unfair trade practices.

And finally, there's the one way to build a bridge and a river at the same time:

Build a Bridge and a River

Build a bridge over yourself:  While attempting to hold onto your current business model and core technology, build the Next-Great-Thing that will move beyond them.

The clear example here is Apple, which while it had never achieved dominance in the desktop computer market, had established itself as the clear, premium alternative to leader (and river) Microsoft, and there it could have been content to cost for years, if not forever.  Instead, Apple built the iPhone (creating the smart-phone market) and the iPad (creating the pad market, and a clear alternative to the desktop computer for many of its most common uses).  They're still the clear premium alternative to Microsoft in the PC market, but they've created a whole new market in which they are dominate, and their competitors (old and new) are all playing catch-up.  That's smart business.

That's Bridganomics.  Ignore it at your peril.

The lessons to be learned here are simple and obvious, and apply to a range of businesses and technolgies, from space flight, to fast-food, to the print-publishing industry to which I am intimately connected.

And if wireless internet is going to be restricted and over-priced for very long, then the river is there, and somebody will bridge it (and is probably already hard at work doing it).

Cell phone companies, you've got a very limited window to reverse course on this, maybe a year or two, tops.  What will replace you?  I don't know.  Maybe a distributed frequency satellite system like Lightsquared.  Maybe tennis-shoes with wireless routers in the heel.  Maybe a plan to distribute data through drinking-water pipes.  Maybe just a better business model using the same-old technologies (ala discount airlines).

Who knows?  But if the river is there, and the people certainly want to cross it, then it will be crossed.

AT&T Wireless?  Verizon Wireless?  Sprint Nextel?  T-Mobile?  The rest of you guys?  Let me know how this works out for you...

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1 comment:

  1. I only briefly mentioned publishing when I wrote this, but the more I think about it, the more it directly applies to the current changes in the publishing industry. I'll do a follow-up post to discuss this, and possibly expand on my theory a bit in doing so...