VenChar

Currents of thought on the Technology Adoption Lifecycle

I had discussed the acceleration of the product lifecycle in a previous post, drawing on the adoption cycle for DVDs and WiFi as examples. Recently, I've seen a couple of discussions that suggest that the Technology Adoption Lifecycle has changed in fundamental ways in recent times. Both start out from the observation that the adoption curve has steepened - an observation founded on the rapid uptake of DVDs, Wi-Fi and cameraphones.

Umair Haque at Bubble Generation challenges the assumption that the needs of Pragmatist customers differ significantly from those of Early Adopters and that the discontinuity in adoption profiles between these classes of consumers that characterize the chasm exists any more.

The disappearance of the chasm is really about a discontinuity in consumer needs for technology goods, which destroys all of the old distinctions that adoption segmentation was based on. There might have been a chasm between the needs of ‘innovators’ and ‘pragmatists’ before – but now, consumer needs have shifted because of technological discontinuities and ruptures in market dynamics. This shift in consumer needs in effect renders all of the old adoption segments irrelevant. In effect, it turns everyone into part innovator and part pragmatist.

He identifies the drivers behind this shift:

There are three fundamental drivers of acceleration in adoption, which are interrelated: the Net, interconnectivity, and hypercompetition. The Net’s impact is easy to understand, though most marketers still try their best to discount it: it enables people to get the information they need about which goods meet their needs much faster and cheaper than was possible before. At the same time, it enables everyone to become part innovator, because they can easily find simple hacks, tweaks, plug-ins and add-ons for the goods that they buy. Hypercompetition, which is in part enabled by the Net, Because hypercompetition increases the potential search costs consumers face in finding goods which they derive value from, it turns everyone into a pragmatist –they simply don’t have the time to play with all of the various goods and service available to them.

Finally, interconnectivity is about complementarity. Many technological goods can be connected to – and are often dependent on – a broad range of other technology goods. Interconnectivity drives accelerated adoption because people realize combinatorial benefits from interconnected technology goods – and conversely, realize little benefit from disconnected goods. Interconnectivity lets everyone be a pragmatist and an innovator simultaneously – by combining and recombining goods in different ways, to realize pragmatic benefits through user innovation. At the same time, interconnectivity means that those rare goods which meet shifted consumer needs become even more valuable – because their value is driven in larger and larger part by other goods consumers already possess.

He argues for a segmentation into three broad classes - pre-adopters, mass market and post-adopters. The first two categories, he says, are distinguished not by their requirements of the product so much as by the timing of their adoption of the technology (which is driven, basically, by the pre-adopters being more plugged in to what's new/hot). he points out WiFi an DVD adoption as examples: "What didn’t drive [adoption across the pre-adopter and mass market segments] so much was whether or not firms provided you high technology or low technology. In fact, for these two goods, there was no high or low technology." Not sure if I agree with the WiFi example. Before MSFT integrated WiFi into the OS with XP, it was actually a real pain in the ass to get a wireless card and install a driver for it, configure wireless settings and get on the network - even so there were early adopters who were willing to go through that drudgery. Now, of course, it's mindlessly simple.

Haque goes on to argue that accelerating technology adoption is creating a trend towards winner-take-all markets:

Accelerated adoption is helping turn most technology markets into winner take all markets. All of the same old mechanisms fueling positive feedback are still around – network effects, early mover advantages, scale economies – but accelerating adoption means that successful technologies will be picked up ever more quickly, and so will also be harder for competitors to displace. Conversely, the steepening of the adoption curve highlights the time-sensitive nature of technology markets.

Over at VentureBlog, Andrew Anker is also thinking about the accelerating pace of adoption, and what it implies. His conclusions (to summarize) are the following:

*The product uptake curve is accelerating
* The laggard market is disappearing
* New products will either open big or get killed early
* It's not about technology any more
* Early adopters will become a big enough group to serve on their own

Some of these observations/conclusions parallel those of Haque, while some are different. Both agree that (1) technology adoption is accelerating, (2) that tech products are moving towards hit-driven, winner-take-all models, (3) early adopters are becoming a big segment on their own and their needs are not so different from those of the mass market. Again camera phones and DVD players are cited as examples of these trends.

The examples used in the analyses are drawn almost exclusively from the consumer electronics arena. Do these shifts in the adoption lifecycle also apply to other categories of products or industries? I'm not convinced that, for instance, enterprise software or infrastructure products face an adoption landscape in which the needs of early adopters mirror those of the pragmatist customers who desire, above all else, referenceability and evidence of market share. That said, I can see why the drivers Haque identifies: interconnectivity, hypercompetition (driven in turn by effects such as standardization, which reduces barriers to entry and lowers costs to the end consumer) and the Net are (a) speeding adoption, (b) erasing the distinction between the needs of early adopters and pragmatists in the _consumer products markets_.

Focus on India

Much has been written about software outsourcing to India as well as the trend towards offshoring call centers and services and support. Less has been written about the other ways in which Indian knowledge workers are making their presence felt on the global economic scene.

It was inevitable that India's highly skilled technical workforce would begin to find ways to migrate up the value chain to offering products and capturing more of the margins. Via Om Malik comes this interesting Far Eastern Economic Review article profiling some Indian software startups.

Increasingly some of the world's best-selling software products are being made in India by Indian companies.

Their rise is due to a convergence of factors: With the U.S. cutting back on issuing and extending work visas for Indian professionals, many have returned to India equipped with the expertise to develop their own software. Meanwhile, a protectionist backlash against outsourcing is gaining momentum in America and Europe, and competition remains fierce in the offshore IT-services market. Indian companies have already cornered 60% of that market, worth $16 billion a year. But with competitors slashing costs and margins in services shrinking, companies are realizing that the high-margin products business--where Indian companies have only tapped 0.2% of a $180 billion global market--is the way to go.

The real "Made in India" companies may have a small services component, but most of their revenues comes from their products, which are comparable to better-established rival products, not low-cost alternatives.

The article mentions i-flex solutions (whose Flexcube is the world's best-selling banking software package), iCode (which developed one of the world's first ERP software products for small and medium-sized businesses), Talisma Corp. (which makes Web-driven CRM software), Subex Systems (which has a telecoms-fraud-management product) and iCode (which sells software to SMEs to manage their accounting, payroll, customer transactions and other functions).

Many of these India-based software-products companies are incorporated in the U.S. But because they were founded by Indians and Indians perform all of the product work in India, they are essentially Indian companies They have incorporated in the U.S. to leverage their contacts and to raise venture capital, and many of their top executives commute between the two countries.

Indian professionals who have returned to India from abroad understand corporate software needs, they know which niches are potentially lucrative and they have global contacts. They've also gained exposure to the way multinationals do business from their IT-services experience.

On its heels comes this Business Week article titled The Rise of India that points out that offshoring is growing to include other core functions such as R&D, accounting, etc.

Indian knowledge workers are making their way up the New Economy food chain, mastering tasks requiring analysis, marketing acumen, and creativity. This means India is penetrating America's economic core.

Yup.

Lethal, non-contagious, vaccine-resistant viruses

More on viruses, this time the biological kind. The New Scientist reports on research into deadly variants on viruses created through genetic engineering. Basically, the virus is enhanced through the addition of a gene (the IL-4 gene) that is responsible for the production of an immuno-suppressant protein. This modification renders the virus immune to traditional vaccines and gives it a lethality rate of 100%. Also, interestingly (and mysteriously), the virus is rendered non-contagious - this means that only directly-infected individuals will succumb: so it would be possible to infect a population and reliably kill all members of the infected population without running the risk of having the disease spread outside this population. All in all, this sounds like a deadly bioterror tool in the making.

Cellphone viruses

Cautionary NYT article raises the spectre of viruses and worms that infect and spread through internet-enabled handsets:

What if viruses phone 911 randomly? That, in fact, is what happened in Japan in 2000 and 2001. NTT DoCoMo, the country's largest cellular phone provider, received complaints from customers who were being sent messages that froze their screens and automatically dialed 110, the emergency line to the police in Japan.

NTT DoCoMo, with its commanding share of the Japanese market and rapidly expanding presence overseas, is one of the more aggressive companies trying to tackle the problem. In October, it announced an agreement with Network Associates, a California-based security software company, to develop an antivirus program for handsets.

The article suggests that the following two trends will drive an increase in virus-creation activity in the handset space:
* handsets will increasingly be used to send email (with attachments, pictures, etc.) and to access the Internet.
* as operating systems in cellphones become standardized, virus-creators will begin focusing on vulnerabilities in those systems as they have with PCs.

Interesting remark by NTT DoCoMo exec to the effect that when your PC gets infected by a virus, you expect MSFT to fix the problem. If your cellphone gets infected, on the other hand, you will expect your carrier to fix the problem. (He's actually quoted as saying something a little different, but I imagine this is what he meant.) Since the OS in an embedded device is essentially invisible to the end-user, he's going to hold his carrier or the handset vendor responsible for fixing any virus problems.

As more and more classes of CE devices (a) become network-enabled (DVRs, MP3 players, TVs, phones, cameras, fridges), (b) get equipped with standard OS'es (Windows NT, embedded Linux), expect to see viruses begin to spread to these platforms. This trend probably represents a significant extension to the business of antivirus software vendors (e.g., Network Associates which sells McAfee).

Palm prints

NYT article on palm-printing technologies.

All of a person's "friction ridged skin" is distinctively patterned: soles, palms and even the writer's palm, as the outer side of the hand is called... Surveys of law enforcement agencies indicate that at least 30 percent of the prints lifted from crime scenes — from knife hilts, gun grips, steering wheels and window panes — are of palms, not fingers.

Key enablers for the technology are cheap storage and software advances:

The cost of image storage and computerized matching equipment once limited database entries to fingertips. But technological advances have enabled a growing group of law enforcement agencies across the country — about 30 so far, based on information provided by companies that sell the systems — to build their own palm databases.

How effective is palmprint matching compared to fingerprints? Very.

Indianapolis has come up with a match in 15 percent of its palm searches, according to statistics provided by Identix, the company that created the system. That is not as high as the 31-percent success rate for the city's fingerprint database. But there are only 16,000 palms in the system thus far, compared with 300,000 fingerprint records.

Early adopters seem to be NYC, LA, Miami, Palm Beach, Philadelphia, Indianapolis and Harris County, TX. Seems like a useful interim technology to tide law enforcement over until DNA profiling becomes feasible. The article lists biometrics companies Sagem Morpho, Identix,

Vonage raises $35MM from NEA and others

Saw this on VentureWire today. Relevant statistics (source: Daiwa Eurotelcorama report):
* Vonage has over 64,000 subscribers, and is adding new subs at a rate of 2,000 per week, heading towards 2,500.
* Churn is below 3% and over time parallels the mobile phone industry, without the benefit of a contract period.
* The company expects to exit 2003 with 80,000 to 100,000 users, and full-year revenues of ~$20m, with annual run-rate revenues in the vicinity of $45m. The company should reach breakeven (both in net income and free cash flow) in mid-2004, at around 160,000 subscribers.
* Recently completed distribution deals with retail channel partners (RadioShack and Best Buy) and second-tier MSOs offer significant growth opportunities and an attractive pay-back profile for Vonage. Additionally, word-of-mouth continues to be an important driver of subscriber growth, accounting for c.15% of additions on average.
* Unit costs for CPE, bandwidth and termination services continue to fall dramatically. As primarily a software solution, the company continues to benefit from silicon economics. All these factors point ... to a gross margin on services in excess of 50%.
* One of Vonage’s most appealing features as a business is its relatively low fixed cost elements, and falling variable unit costs. Vonage incurs recurring costs principally in the following areas:
- Phone numbers – Vonage issues numbers to customers under the North American Numbering Plan, and to do so contracts with telephony partners and co-locates in the partners’ facilities.
- RDCs – Here the estimated cost to build one center (routers, voice gateway and servers, along with associated admin expenses) is under $200,000 per site. Co-location cost is nominal and falling.
- Bandwidth costs – As bandwidth continues to be commoditized, costs are dropping precipitously... a DS-3 connection now goes for $195 – 210 per megabit.
- Trunking – Necessary to provide the physical link between the Vonage server and PSTN switches, trunking costs continue to fall (rough estimate is $450 per month outbound and $750 per month outbound per trunk).
- Termination – In order to deliver calls to destinations on the PSTN or mobile phones, Vonage strikes agreements with IXCs (such as Global Crossing and Qwest) to terminate calls on third-party networks. This means that Vonage must build into its pricing a termination cost element, which it absorbs on domestic calls in the US.

Hard drives in consumer electronics

Interesting article at InfoWorld on how consumer electronics is driving innovation in the market for hard drives. CE is expected to grow soon to being a major consumer of hard drives:

Shipments of hard drives for consumer electronics products totaled 5.8 million units in 2002, according to Thomas M. Coughlin, president of storage market analysis company Coughlin Associates Inc. He expects the market to hit 18.2 million units this year and expand to 84.4 million by 2008 with personal video recorders accounting for almost half the market. At that level consumer electronics drives would account for around 20 percent of the entire drive market in 2008, according to projections.

Here are a few of the way in which product requirements in CE differ from PC hard drives:
* acoustics (hard drives in the home need to be quieter)
* size (smaller is better)
* "The drives have to be optimized to work best with video streaming rather than the random access that is typical with a computer. That means turning down the amount of error checking the drive does because a constant stream of video data is more important than a perfect bit-for-bit flow....Until recently this lower error correction has been accomplished by a number of proprietary methods but the industry recently agreed on a standard way to do this, called T13, which is included in the latest version of the ATA specifications."

Sustaining Innovations - not as bad as Christensen makes them out to be

Following up on Chari's posts on Christensen and his latest book - "The Innovator's Solution," I wanted to offer a different perspective on sustaining innovations. A not so subtle point Christensen and Raynor make in their book over and over again is the superiority of disruptive innovations over sustaining innovations. I agree that if you can find disruptive innovations, you are better off pursuing them than sustaining innovations. However disruptive innovations are hard to come by and there are still a few categories of sustaining innovations that are still worthwhile to pursue.

This is not a comprehensive list but here are some categories:

a. Create a sustaining innovation which has a high time to market value in an unconsolidated industry e.g. telecom equipment startups. Most of the stuff venture backed telecom startups try to make are really sustaining innovations. However if they can create these products fast then the time to market element makes it attractive for one of the bigger players to acquire them. If the industry is consolidated then the time to market element is not strong as the major players can control the rate of innovation.

to be followed

Commoditization and startups (or channeling Clayton Christensen)

Om Malik writes in Business 2.0 about the forces of commoditization and how they’re being exploited by a new breed of startups. He identifies commoditization as a force within the tech industry acting at various levels: that of hardware (propelled by Moore’s law-style improvements in price-performance), operating systems (driven by Linux/open source software) and talent (through offshoring to low-labor-cost areas like China and India). The startups that he profiles in the article (Neoteris, Mountain View Data, Niveus Media, Mediabolic) leverage commoditized components and focus on adding value through specialized software.

Neoteris, was able to fashion its flagship networking device out of hardware that's available at any decent neighborhood computer store. There's a $900 Intel (INTC) Xeon x86 chip that's twice as powerful as an equal-price chip of three years ago. There's a security chipset that used to cost $200 but now costs $100. The operating system? Linux. Free.

The low-cost parts enabled Kolluri to pour his resources into developing hot-rod software to make his product work better than anything on the market… Neoteris's box sells for $10,000 a pop… Neoteris's total hardware cost: $2,000.

Commoditization -- the process by which technology products become standardized and their prices are shoved relentlessly downward -- has now driven the cost of the building blocks of tech so low that hardware expense has been all but eliminated from the equation of creating new products. Now entrepreneurs and innovators are discovering that they can use cheap standardized parts as basic ingredients, stir in their own flavor of distinctive software, and -- voilà! -- pop out a low-budget company that can swiftly attack a niche market or outmaneuver bigger, bloated rivals.

"The x86 has brought PC-type economics to markets that have never seen them before," says Steve Milunovich, Merrill Lynch's (MER) head of technology research.

The Innovator’s Solution presents a framework for understanding commoditization in terms of the product lifecycle and the technology improvement curve. “The process that transforms a profitable, differentiated, proprietary product into a commodity is the process of overshooting and modularization.”

The underlying dynamic Christensen and Raynor identify is the following: When the performance of a product category lies in the realm of not-good-enough, the market favors highly integrated, proprietary product architectures that can deliver on the performance requirements of the market. As the industry develops, the technology inevitably overshoots the consumers’ demands on the axes of functionality and reliability. When this stage is reached, the basis of competition changes from functionality and performance to convenience and price. The advantage now shifts to firms with more modular architectures. A modular architecture allows individual components to be substituted for each other, thereby increasing flexibility, speed-to-market and customizability; trading off these benefits against some loss in performance, which is now affordable since the product is now better than good-enough on the axis of performance. At this stage in the industry’s evolution, the more modular architectures are in a position to disrupt the more highly-integrated architectures.

We can observe this causal dynamic of overshooting, modularization and commoditization at work in the data storage space in Malik's article:

Since 1998 the price of a typical x86 chip has fallen roughly 30 percent to $140 as its speed has jumped 12-fold. "The x86 has brought PC-type economics to markets that have never seen them before," says Steve Milunovich, Merrill Lynch's (MER) head of technology research. One of those markets is data storage, heretofore dominated by the likes of EMC (EMC), which became a powerhouse by building machines with proprietary chips and other custom parts to warehouse corporate data.

[Over the period 2000-2002], storage market leader EMC's sales dropped more than a third to $5.4 billion; it lost $118.7 million in 2002. EMC itself is borrowing from the instant-company playbook to stanch the bleeding. In the past six months, it has spent more than $3 billion to buy makers of specialized software that runs on standardized hardware. Mark Lewis, the company's CTO, says the moves show that EMC has fully embraced commoditization.

The Cryptophone

The Cryptophone is a GSM cell phone that provides end-to-end encryption of voice calls.

Today's complex telephone systems make it impossible to predict what path a phone call takes inside the network. Calls are routinely transported over unencrypted directional microwave radio links that are subject to easy interception with even modest equipment. In order to save costs, calls are frequently routed through networks or operators that might have dubious security standards. Your whole business confidentiality might get compromised by a single corrupt phone company employee. There exists a device known as IMSI-Catcher which allows anyone to listen into mobile phone calls. IMSI-Catchers are readily available on the market and are being used with increasing frequency.

All these threats can be eliminated by using the CryptoPhone.

Their FAQ makes it clear how easy it is to intercept and monitor calls using off-the-shelf equipment:

Not all GSM providers can afford to have 'land lines' connecting their antennas on the street with the switching station and the rest of the telephone network. If you have ever seen a GSM base station antenna mast, you might notice that some of them have little round 'dishes', or 'beamers' at the side of it. These are the directional antennas for the microwave links that provide the connection to the rest of the network.

Over these links, all calls made in the area are transmitted to a point where they are fed into landlines. These links are very vulnerable, because no encryption is used on most of them. An interceptor can tap into the radio signal, and listen in to many call simultaneously. Commercial equipment for this kind of interception is available on the market at moderate prices.

Nothing more is required then a very small rooftop antenna in the path or vicinity of the microwave link, a wideband receiver and the appropriate channel demultiplexing and recording equipment. Since the antenna radiation patterns of the microwave links contain so called sidelobes, receiption of their signals with sensitive receivers is also possible outside the straight line of the link.

The NSA (National Security Agency, the electronic surveillance intelligence agency of the USA) is also known to have satellite-based microwave link interception capabilities. Since the directional microwave beam does not stop at the receiving antenna, but travels further on in the original direction, it can be intercepted from space with a satellite placed at the appropriate position.

The Cryptophone uses open, peer-reviewed, non-proprietary encryption protocols (AES and TwoFish, Diffie-Hellman. This is a smart move. Here's their design rationale:

The team that built this crypto-phone has spent the better part of fifteen years thinking about it. During this time, we have brainstormed with the top security people around the globe on how to do it right. One thing was clear from the start: the computer code behind the system must be available to the cryptographic/academic community (and to the public at large) to allow flaws and backdoors to be discovered and fixed as fast as possible. As far as we know, there is no secure GSM phone on the market that offers this extremely important feature.

The one obvious drawback is that both communication end-points need to use a Cryptophone in order to exploit the encryption capabilities. Via Gizmodo.