Strategies for a discontinuous future.

Thursday, February 17, 2005

Economies of Speed

Economies of speed are kind of a maligned subject in the econ lit. Chandler introduced the notion to account for the advantage that high throughput created in the industrial era (via high capacity utilization leading to lower fixed cost intensity).

What's interesting is that little meaningful work has been done on the concept since Chandler. This is curious, given the fact that speed is considered a crucial variable by the digerati in predicting the success of many digital (and non-digital) businesses.

First, let's critically distinguish the notion of speed economies from first-mover advantage. FMA can be a result of many variables (learning, network fx, etc). Economies of speed, in the Chandlerian formulation, are fundamentally about the speed of production (throughput, how fast a good moves from input to output) - not time-to-market (which refers to how fast you can enter a given market).

Let's attempt a bit of formulation. Economies of speed are important in industries with naturally low entry barriers and high switching costs. In this situation, speed becomes a crucial variable. Even if supplier and buyer power are relatively high, speed gives you a mechanism to co-opt an entire market and exert upstream and downstream monopoly and monopsony power. The 'economy' in economies of speed is that because switching costs are high, faster throughput (think faster tagging rates in del.icio.us vs Flickr) raises your competitors' relative customer acquisition costs, creating a massive cost disadvantage even if their products have the same price/quality ratio as yours.

Where do we see markets like this? Well, leaving aside the obvious example of ecommerce apps, with the advent of Web 2.0, the entire media industry is about to become driven by speed economies, because Web 2.0 creates exactly the conditions described above: low entry barriers (ie amateur media/distributed economies of scale) and high switching costs (ie across various aggregators/distributors).

That's a pretty important implication, and it tells media industries to launch experiments in massive parallel so they can search the Media 2.0 landscape fast, and quickly co-opt entire Media 2.0 markets by discovering and turbocharging the dominant distribution model first. In other words, the implication of speed economies is Media 2.0 plays who can also leverage first-mover advantage will be able to exert massively asymmetrical market power vis a vis their competitors - there will be serious winner-take-all dynamics for Media 2.0 publishers/distributors.

In fact, we can think of iTunes as the first example of just how important speed economies will become - iTunes current market dominance is largely due to it's relative throughput advantage: signing more content faster than competitors at a better price/value ratio.

So, I think there are two strategic questions if you have a (potential) speed advantage: how do I lower entry barriers in my industry, and how, beyond speed economies, do I raise switching costs? If you can do these succesfully, and you've got a speed advantage, you'll crush Media 2.0 markets.

Begs the question - (1900-1970) distributors --> (1970-2000) aggregators --> (2001+) ?? What are the properties of aggregators 2.0?

-- umair // 4:39 PM //



Busy on a new project for a few days...back soon.

Am freelance strat consulting for a month or two - if you'd like to talk to me about possible projects/opps (Europe/USA ok), ping me.

-- umair // 2:45 PM //


Google vs Google

Google Autolinks making waves. Is this 'changing the content of the web'? I haven't used it, but my understanding is that it simply adds links to otherwise dead text, or replaces links only where there are partnerships already in place.

A possibly costly tactic in terms of goodwill, but the gains could be significant. Of course, if there is actual modification happening, my stance would change - that would be a bad, bad move.

-- umair // 12:49 PM //

Tuesday, February 15, 2005

EU farm subsidies

Cool analysis of EU's farm subsidies by an influential Indian agricultural policy analyst, Devinder Sharma.

"..The Duke of Westminster, who owns about 55,000 hectares of farm estates, receives an average subsidy of 300,000 pound sterlings as direct payments, and in addition gets 350,000 pounds a year for the 1,200 dairy cows he owns. Under the CAP reforms, his subsidy entitlement will remain intact except that the subsidy he receives for the cows will now be shifted to the grasslands that he maintains."

Reminds me of the 25000 cotton farmers in the US driving millions in Africa to deprivation, destitution and death due to a similar protectionism by earning about $160,000 per yer per head in farm subsidies.

This is the real scandal of "free" trade today : the vast majority of Ricardian gains are pocketed by a small section of the Western populaiton at the expense of some of the most vulnerable people around the world. Developed nation have consistently used the WTO to push the developing world into reducing trade barriers, but heavily protected their domestic markets against competition. This mockery of "free" trade is nothing but thinly disguised mercantilism, and nowhere is the depredation more apparent than in agriculture where it has resulted in the loss of livelihood for millions of farmers in agrarian nations. However, the developing world seems to be finally waking up to the Western sham of paying lip service to free trade while pursuing mercantilism, and hopefully the G20 will take a lead in aggressively pushing for reforms towards a real free trade regime. As my b-school prof puts it, nobody has a right to deprive others of their comparative advantage. Stand up for Free Trade to End World Hunger : how's that for a modern version of Hasta La Victoria Siempre? :-) :-).

-- Mahashunyam // 10:54 PM //

Monday, February 14, 2005

Stat of the Day

"...During the second half of 2004, more than 91 million digital tracks -- songs downloaded from the Internet -- were sold, compared with 19.2 million in the same period in 2003. That's an increase of 376 percent."

From this Post article, which argues that physical formats have no future in media - 'no format'. OK, a few things to note:

1) Digital media is not 'no format'. MP3, Ogg, etc, are 'formats', just like Redbook (which is what's on the CD's you buy).

2) I don't think physical media have no future. I think the labels are going to try some fairly interesting strategies based around new kinds of physical delivary mechanisms fairly soon, as the economics of chip-based rights management and memory become commodity economics.

3) One could also make an argument that physical formats will simply move up the consumption chain to higher value media (viz Blu Ray etc).

-- umair // 11:50 AM //


Connectivity Wars

Om (I think) had a nice post up a few days back showing a hypothetical bill for triple-play digital media to the home, highlighting how potentially expensive it would be for consumers relative to current levels of consumption.

This simple analysis highlights a simple industry dynamic which is on the cards - the dominant strategy is first-to-scope, which will most likely be achieved by rapid consolidation among service providers. Purely scale-driven acquisitions will most likely crate little value.

-- umair // 11:43 AM //


Internet Time

Ask and ye shall receive - the first (?) AV blogging service. Note the rate of innovation is speeding up again (out of relation to the amount of capital which is attracting it). (Via Unmediated).

-- umair // 11:33 AM //


Sony (Geeks) vs Sony (Droids)

Mike says:

"...they're also going to be releasing videos of some movies for the PSP on the special format discs that will only work on the PSP. At what point does Sony realize that they're shooting themselves in the foot? People don't want proprietary formats that only work in very specific devices any more, and every time Sony tries and fails to do so again, they seem to simply ignore this lesson."

Yes and no. It's not analogous to Sony' position with ATRAC for a fairly interesting reason - the format wars for next-gen video haven't played themselves out yet. MP3 was long-established as the digital audio standard when Sony aggressively pushed ATRAC, which was of course an inferior strategy which immediately caused a scale disadvantage.

But this case is different - in fact, there's massive standards fragmentation in the video market, which creates significant barriers to consumption - on average, consumers have to learn a lot before they get anything resembling working video at a decent resolution. This is a key leverage point.

So, if Sony plays a purely proprietary strategy, it will be easily dominated. But if Sony actually uses it's format as leverage to achieve first-to-scale, by making it at least to some extent open/interoperable, it has a huge chance to win the market. But that has to be the key strategic understanding.

-- umair // 11:26 AM //




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