When I was in business school I remember a class where a partner from a big consulting firm was talking about how they had done extensive research and concluded that broadband would never gain significant traction in the US without government subsidies. His primary evidence was a survey of consumers they had done asking them if they were willing to pay for broadband access at various price points.
Of course the flaw in this reasoning is that, at the time, there weren’t many websites or apps that made good use of broadband. This was 2002 – before YouTube, Skype, Ajax-enabled web apps and so on. In the language of economics, broadband and broadband apps are complementary goods – the existence of one makes the other more valuable. Broadband didn’t have complements yet so it wasn’t that valuable.
Complement effects are one of the main reasons that technology adoption is non-linear. There are other reasons, including network effects, viral product features, and plain old faddishness.
Twitter has network effects – it is more valuable to me when more people use it. By opening up the API they also gained complement effects – there are tons of interesting Twitter-related products that make it more useful. Facebook also has network effects and with its app program and Facebook Connect gets complement effects.
You can understand a large portion of technology business strategy by understanding strategies around complements. One major point: companies generally try to reduce the price of their products complements (Joel Spolsky has an excellent discussion of the topic here). If you think of the consumer as having a willingness to pay a fixed N for product A plus complementary product B, then each side is fighting for a bigger piece of the pie. This is why, for example, cable companies and content companies are constantly battling. It is also why Google wants open source operating systems to win, and for broadband to be cheap and ubiquitous.
Clay Christensen has a really interesting theory about how technology “value chains” evolve over time. Basically they typically start out with a single company creating the whole thing, or most of it. (Think of mobile phones or the PC). This is because early products require tight integration to squeeze out maximum performance and usability. Over time, standard “APIs” start to develop between layers, and the whole product gains performance/usability to spare. Thus the chain begins to stratify and adjacent sections start fighting to commoditize one another. In the early days it’s not at all obvious which segments of the chain will win. That is why, for example, IBM let Microsoft own DOS. They bet on the hardware. One of Christensen’s interesting observations is, in the steady state, you usually end up with alternating commoditized and non-commoditized segments of the chain.
Microsoft Windows & Office was the big non-commoditized winner of the PC. Dell did very well precisely because they saw early on that hardware was becoming commodotized. In a commoditized market you can still make money but your strategy should be based on lowering costs.
Be wary of analysts and consultants who draw lines to extrapolate technology trends. You are much better off thinking about complements, network effects, and studying how technology markets have evolved in the past.
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The broadband comment's a great example. It also reminds me of the apocryphal quote from Thomas Watson about the world market for computers being about five. And I believe one of the top consultancies advised AT&T to get out of the mobile phone business back in the 80's because the market was too small / not growing.
I wonder which other products currently considered niche are going to be ubiquitous once the right complements are in place. The writing is already on the wall for genetic screening, although medical knowledge (the complement) has a long way to go to make it useful for your average person. Super-computers? Carbon nano-tubes? Fusion reactors? Oh wait, those don't really exist yet.
Here is some real data from the mobile world –
Early 1990s
Pure product companies – None
Integrated product companies with in-house communication technology – Moto, Nokia, Philips, Qualcomm, Siemens, Erricson
Communication technology providers – TI, Qualcomm, Moto, Philips
Early 2000s
Pure product companies – Sony Ericsson, Samsung, Siemens, Motorola, Chinese OEMs/ODMs
Integrated product companies with in-house communication technology – Only One (Nokia)
Communication technology providers – TI, Qualcomm, Moto, Philips, FreeScale, Infineon, Ericsson Mobile Phones
Late 2000s-
Nokia's advantage in the connectivity layer was gone – Apple took advantage of the communication technology commoditization.
Fantastic post. Also loved the Joel Spolsky linked post, especially where it describes the issues this presented for Sun and how prescient that turned out to be in 2002.
That's the billion dollar question.
[...] Non-linearity of technology adoption. [cdixon.org] Great piece about complement effects and technology adoption by Chris Dixon. I’ve learned more about business, investing, and entrepreneurship from VC bloggers than perhaps I could have from any MBA program. Okay that’s a stretch, but I heave learned a great deal from investors like Chris Dixon, Fred Wilson, and Brad Feld. And if you want to throw in the kitchen sink (as I did) check out Larry Cheng’s Global VC Blog Directory. [...]
[...] cdixon.org / Non-linearity of technology adoption Complement effects are one of the main reasons that technology adoption is non-linear. (tags: economics strategy future startup) [...]
I've been a fan of Christensen since the Innovators Dilemma … a book that helped us develop market evolution and value models within my team at Cisco in the late 90's and early 2000's when the giants of communications were Lucent and Nortel, and Cisco's ecosystem was in its infancy. Where the biggest companies and analysts miss again and again is in the area of downward vision and mobility … and thus the disruptive technologies were typically more about serving a new market than out classing an R&D team.
You mentioned Google's interest in the open source movement. I believe there is an interesting wave forming around Creative Commons content. For example there are now well over 100 million creative commons images on Flickr, and Google recently announced its support and API for Creative Commons for its massive Google images application.
Our startup team at Mashup Arts is betting on the trend for individuals to share and use creative commons photo's, videos, and music while doing much more online collaboration and using much more video generated by low cost Flip and iPhone like devices going forward.
Amen. I keep telling people this, Which is more valuable: The idea of the plow or the plow itself?
That being said, the flip side is not just creative commons work, is also how to keep the very bespoke and private, very bespoke and private. What's interesting is that work is also often made in a common, albeit in a very cordoned off one.
A) Beautiful post.
B) I was thinking about this today. We want to, we need to draw out technology trends. The interesting thing about technology is that as toolmakers and as beings who act on our environments, our technology shapes us as much as we shape it. Extrapolating trends is difficult, for how do you extrapolate something that you are shaping while it is shaping you until it matures out of its radicalness?
I guess that is why I agree with you about looking at old tech. I just would say- look at really old tech. Such as the Gutenberg Bible. And think deeply on it's radicalness. We're used to it. In fact, it's first encounter must have been extremely odd. it's history of our encounter with it probably is really telling.
a) thanks
b) i'm a big believer in looking at history to predict the future. doesn't matter how old it is. the same patterns repeat.
[...] Non-linearity of technology adoption from cdixon.org by Chris Dixon [...]
[...] From cdixon.org [...]
[...] There is inherent tension between complements. If a customer is willing to pay $2 for a hotdog plus bun, the hotdog maker wants buns to be cheaper so he can capture more of the $2, or lower the price of the bundle and thereby increase demand. (For a great primer on competition between complements, I highly recommend this Joel Spolsky post. I’ve also been writing about complements, here and here). [...]
Good thoughts. On a related note, the internal conflict of interest Google has is pretty severe. As organic results become better, the role of sponsored listings decreases. With limited relevant competition, there is nothing to stop them from optimizing organic search to insure that the results of paid search are still valuable to the user. Hence their focus on quality score in SEM.
Dig your history point Shana. The value acceptance curve explodes when a segment of our society get's over the radical, frightened of the unknown feeling and begins using the new technology.
Wrong thread… brb.
[...] This post was mentioned on Twitter by dgnorton, sikerr. sikerr said: tip @Techmeme http://cdixon.org/2009/09/10/non-linearity-of-technology-adoption/ Non-linearity of technology adoption [...]
Dig your history point Shana. The value acceptance curve explodes when a segment of our society get's over the radical, frightened of the unknown feeling and begins using the new technology.
Broadband is interesting in the notion of a tethered or fixed mobile mindset vs. a nomadic anywhere anytime mode. Carriers are too fixated on dwindling ARPU for the known product set. I have high hopes for white spaces and non-location specific modes of access.
We're in the infancy of M2M even as we experiment with the current crop of socially oriented network toys. The full impact of having your toaster set status to “it's complicated” is still a few years away.
[...] up and some areas in stacks turn out to be particularly valuable and others do not (Christensen argues compellingly that they tend to have alternating layers of commodity and [...]
[...] from the bottom up and some layers turn out to be valuable and others do not (Christensen argues compellingly that stacks tend to alternate between commodity and non-commodity [...]
[...] from the bottom up and some layers turn out to be valuable and others do not (Christensen argues compellingly that stacks tend to alternate between commodity and non-commodity [...]