Open Source Commentary from Navica's CEO,
Bernard Golden
January 2008
In This Issue
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Digitization Causes the New Rustbelt
Digitization Causes the New Rustbelt
Quick: what do you think about when you hear the term “Rustbelt”?
If you’re like me, you think of shuttered steel mills
in Pennsylvania: abandoned hulks, exemplars of the long-superseded
industrial age. The obituary for America’s manufacturing
sector is widely known: high-cost labor, inefficient manufacturing
processes extended well past their replacement date, entrenched
management unwilling to change, and a litany of a thousand
more reasons. Frankly, in today’s service economy, America’s
manufacturing past, for many people, sounds like a fable from
antediluvian times. In other words, the rustbelt’s condition
is completely irrelevant to us, with no useful information
to tell us about where today’s economy is heading. After
all, we’re the new economy: building businesses that
serve one another, making lives more enjoyable or productive
– with our basic needs taken care of, companies that
focus on meeting needs beyond the basic are those that will
prosper. The service economy is rustbelt-immune.
Or is it?
I read an interesting story this morning about Kodak. Its
travails over the past few years are well-known, and the story
focused on its efforts to find its way in the new world of
digital photography. Mentioned as a minor fact near the end
of the story: “five mammoth plants where silver halide-based
products were made or stored were reduced to rubble.”
Kodak, which grew fat on millions of people creating “Kodak
moments,” is a rustbelt business due to the onslaught
of digitization.
In terms of understanding the upcoming trends in our economy,
Kodak’s tale is much more relevant than Bethlehem Steel’s.
Digitization will wreck current service-based companies and
build a new economy on their rubble, and open source will
provide the building blocks of the new economy.
Another industry under assault by digitization is widely
discussed (perhaps over-discussed): music. With the easy digitization
of music, the old business model of sales (and control) based
on shipment of physical goods is rapidly shrinking. Obviously,
the major music companies haven’t responded very well
to this trend. Labeling digital music consumers as thieves,
suing users on shaky grounds, attempting to control the distribution
of music via clumsy DRM mechanisms – the industry has
practically developed a textbook in how not to respond to
a shift in one’s business.
Of course, there’s an irony in all this. Despite the
reduced sales, there is actually more music being listened
to today than ever before in history. The ease of access made
possible by digitization has created new and more satisfactory
listening options that have allowed people to “consume”
more music.
More use, lower sales. What should the industry do?
In “The Long Tail,” Chris Anderson stated that
digitization is great for musicians, because it helps them
do the “really fun” part of being a musician:
performing live in front of audiences. By generating more
listeners, more demand for live performances is created, offering
musicians a way to make up for the lost royalties of physical
music goods.
Frankly, I’m unconvinced of this. While performing
live is undoubtedly one of the joys of being a musician, I’m
not sure that most would prefer to replace royalties received
in leisure for earnings generated by endless touring. In other
words, making a living by performing live is hard work. I
believe a solution that leverages digitization is more likely
to be a more satisfactory long-term response to digitization.
Since music is ubiquitous, finding ways to make special offerings
that leverage ubiquity yet do not require in-person service
(i.e., standing in front of a bunch of people warbling one’s
songs) is the way forward.
Just in the past few days the music industry appears to be
moving away from customer conflict and toward a more creative
solution for prospering in the digital age. The majors all
appear to be considering a subscription-based offering, where
in return for a set fee per month, music is available on an
all-you-can-hear basis. This makes a ton of sense. In return
for an easy-to-use service, I pay a single monthly fee, for
which I get tremendous freedom to listen to music the way
I want to (after all, the subscription model works well for
the wireless industry; most people purchase monthly subscriptions
despite using far less of the service than they’re entitled
to – the convenience and peace of mind far outweigh
the poor economics of the subscription).
Furthermore, it’s bound to be good for the music industry,
because easy availability of music will encourage listener
experimentation, exposing them to new artists, and further
driving up use.
There’s one fly in the ointment, however. I predict
conflict about how the artists’ slice of the revenue
stream gets divvied up. Today, musicians are paid like baseball
players: under-rewarded during their prime, over-rewarded
on the downside of their careers. When subscriptions come
in to being, there will be terrific conflict about how to
fairly distribute the royalties among musicians, with aging
rockstars demanding a share greater than their actual listening
percentage.
But imagine what new music businesses can be created. With
much more accurate listening statistics available, new offerings
will be possible: boy bands formed to address a subsegment
of the pre-teen girl audience; special pay-per-listen concerts
made available only to subscribers who show a strong listening
preference to Yo Yo Ma and Nadja Solerno-Sonnenberg. The music
business will shift from selling access to music to selling
value-added offerings based on what customers with unlimited
access to music choose to expose themselves to.
In other words, digitization makes information much cheaper,
so new businesses can (must) be built on the basis of data
ubiquity.
As an example of a new type of company that leverages cheap
information, take a look at DayJet. This company, which provides
air taxi service in low-cost jets, was founded by Ed Iacobucci,
formerly of Citrix. What’s really interesting about
DayJet isn’t the planes it uses – new, inexpensive
Eclipse jets – but the problem it had to solve to make
the cost of air taxis low enough that a new market of time-pressed
non-wealthy individuals would be motivated to use them. According
to an interview with Iacobucci I saw, much of the time necessary
to get the company up and running was spent on writing software
to enable the company to provide flexible scheduling –
the company dynamically adjusts the route according to who
has expressed interest in flying and dynamically adjusts the
price according to how willing each individual is to adjust
his or her schedule; the more flexible you are in terms of
when you’ll be picked up and dropped off, the cheaper
the flight. DayJet crunches massive amounts of information
in real-time to create custom schedules for each passenger.
Put another way, DayJet surrounds an inexpensive transport
mode with huge amounts of data to offer bespoke travel at
a modest premium to normal air travel.
Contrast DayJet’s approach to standard airlines, which
adjust pricing (mostly) according to how early or soon you
book your flight, and provide a (mostly) standardized service
based on flying very full large jets between fairly large
airports. While airlines undoubtedly have sophisticated yield
management systems, the systems are primarily designed to
surround an expensive transport mode with off-the-rack travel.
Today’s airline industry was designed at a time when
processing passenger information was incredibly expensive
– live humans had to search schedules, write tickets,
check status, etc., etc. Because of the cost of managing scheduling,
only large jets with inflexible scheduling were economically
feasible, because the information processing overhead could
be spread across large individual transactions (flights).
DayJet has designed a new business based on an underlying
reality of cheap information processing, while airlines have
remained mired in business operations based on obsolete data
realities: they’re applying analog methods in a digital
world.
What does this have to do with open source? The new data
ubiquity must be matched by a software infrastructure with
costs appropriate to that scale. However, the assumptions
underlying today’s software companies are no longer
appropriate for a world of data ubiquity. Today’s software
leaders are mired in the old assumptions of the cost of processing
information. They price processing data by the gigabyte when
the right scale must be the terabyte.
More piquantly, they are priced at a level appropriate to
paving the cow paths of a pre-digital world. The cost is entirely
appropriate if you compare it to the cost of processing data
with humans, but entirely inappropriate if you recognize that
enormous increases in data crunching is necessary to run businesses
in the digital age. In short, the cost of software precludes
building the businesses of tomorrow. I am certain that DayJet
did not design their scheduling software on SAP or Oracle;
in fact, I’d bet there’s open source at the heart
of its software system.
Your reaction is probably something like “software
is a trivial part of the overall cost of providing a service,
so its price is unimportant.” Beyond the fact that this
is a rationalization used by software companies to justify
why their 95% margin products should be consumed by customers
that struggle to make 10% margin, it’s no longer relevant.
Expensive software made sense for a transitional world moving
from physical to digital – providing the means to transform
paper to bits was worth (literally) a fortune. But in an all-digital
world exploding in the way it uses digitized information,
expensive software is not longer a conduit to lower costs,
but a bottleneck to increased revenues.
Returning to Kodak, the article notes the business transformation
it’s attempting. It has moved into an online digital
photo storage business and is pushing into high-end commercial
printing. Moreover, it’s launching an assault on HP
with lower-cost computer printers. I can’t help but
think that it’s missing a trick, however. It should
be looking to a time when people have had digital cameras
for five or ten years and have thousands – perhaps tens
of thousands -- of photos. In that world, online storage won’t
be enough. The biggest problem in that world will be keeping
track of one’s vast collection – the biggest problem
will be finding one photo out of a zillion. Instead of pining
for ways to replace high-margin consumables, it should be
looking for ways to make it easy to locate a specific “Kodak
moment” in the mass of permanent digital photos. That’s
the new high-margin opportunity.
Navica News
You can hear me speak at these upcoming events:
February 7, 1:30 p.m.: "Open Source: An Enterprise Adoption
Perspective", Sun Microsystems, Menlo Park.
March 4, 7:00 p.m.: Black Duck BOF panel with myself, Dan
Bricklin (Visicalc co-founder), Gary Phillips (Symantec),
Bill McQuaide (Black Duck Software): "Leverage of Die:
Challenges and Opportunities in the Era of Mixed Code",
SDWest conference
March 7, 1:30 p.m.: "Open Source Business Models,"
co-presented with consultant/analyst Bill Weinberg, SDWest
conference
If you are interested in having me speak at your
organization:
Contact me directly via email.
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