***Looking Back - Looking Forward
by John Latta
2001 was a bad year. 9-11 stands alone in making 2001 like 1941 -
both had events that shaped US history. The economy has its own
story and especially the technology sector. At 4th Wave, the
parent organization to the WAVE Report, we are approaching our
13th year in business. Our core business is market and technology
assessment. The break over the holidays provided an opportunity
to reflect on the business, economy and what we see lying ahead.
Come along for the ride.
Market forecasting is an oxymoron. We come across literally
hundreds of market studies and estimates. The vast majority are
hardly worth the expensive paper they are written on. When we
examined e-commerce market estimates the ratio of the maximum to
minimum market size, for the period 2000 - 2002 was 66:1. The
fundamental issue is that market estimates are predicting the
future and this seldom is even close. Keep in mind that
predicting the future, such as making market estimates, is a
business not a science. See, for example, Sherden, "The Fortune
Sellers," and Malone, "Predicting the Future."
What is much more important is identifying and characterizing
market dynamics. That is, what are the forces that influence
market movement. In the case of the stock market, for example,
the time scale directly impacts the value of market dynamics. For
example, market dynamics around hourly stock movements are
usually only after the fact and thus useless. However, in
technology adoption, which spans months and years, market
dynamics are much more useful. Certainly one of the most useful,
top-level books in this area is Moore's, "Crossing the Chasm,"
however, it is generic to markets and not specific. The
challenge, in specific markets, is to identify the market
dynamics and then extrapolate to forces that have the potential
to shape the evolution of the market.
Optimism blinds. Over and over we find that those enmeshed in a
technology cannot see the key issues. This was endemic with the
Internet and how it was regarded by the technical faithful as the
holy grail of opportunity. In general, many of the technology
companies did not participate in the digital divide activities,
in part, because they did not believe that an individual would
not be interested in a PC and connecting to the Internet. As Ted
Leonsis, Vice Chairman, American Online said at NGN 2001, "If you
thought the first 30m subscribers were hard to get wait for the
next 30m."
Consumer markets are where the action is. 67% of the US GDP comes
from consumers. When seeking large markets this is the one place
to look. The problem is that these are really difficult markets.
The consumer is fickle, very price sensitive, has a short
interest span and makes product purchase judgments in complex
ways. Our analysis at 4th Wave looked at price elasticity for
consumer markets and showed that 67% of all the units sold are
done below $300. Further, as our Internet Appliance market study
highlighted, we believe that significant potential markets lie in
services. At the same time, digital devices must reach marginal
consumer cost price points - <=$50. These are all hard messages
for those who have lived for years at 80% gross margins.
Casual media is important. This is content created by the end
users. We speak of e-mail as being casual text and the telephone
being casual voice. The concepts of casual media may be quite
expansive but with it comes an ease of use assumption. It must be
trivial for virtually anyone to use. AOL sees the potential for
this and yet they do not know in what form this will take. We
believe that casual media will drive broadband delivery because
when content is valuable to consumers they are much more likely
to pay.
Market asymmetries do not last long. In telecommunications,
investments were made in infrastructure for the Internet that had
a weak revenue model. Advertising was to support free Internet
sites and the business model was ineffectual. Toys based on
electronics were to change the toy business but it is impossible
to compete with high priced products when the toy ASP (average
sales price) is only $6. This list goes on and on. Our analysis,
using a market based zero-sum analogy, showed that it was very
unlikely that the Internet would be able to display large
existing non-Internet business models. It did not. Much of this
now all looks so silly but then it was not.
Corporations are poorly posed to leverage a digital economy
driven by consumers. We make the assumption that digital
technology will be much more pervasive than it is today -
potentially only in a few years. Who will lead these changes and
develop the market? Fundamentally one of the most important
factors is to understand the consumer, that is, to be a consumer
company. Is Microsoft or Intel a consumer company? No. Certainly
AOL is one of the better-positioned consumer companies. Sony is a
consumer company. Guess who recently struck a deal - AOL and
Sony. Being a consumer company is about corporate culture,
attitude and market commitment. It is also about size, brand and
scale. Small companies may have innovative products and services
but they certainly do not have the scale to be a consumer
company. Kerbango had an innovative consumer product but it is
gone after being bought by 3Com - and then 3Com exited this
market.
Looking forward to basics. Just as the stock market is now
focused on "old fashioned" values the same applies to the digital
economy. The now dead Internet firestorm blinded us from reality.
We must return to providing consumer value, ease of use,
servicing the mass population, not just the early adopters,
providing useful products below $50 and continually listening to
consumers. The hard part of developing the digital economy has
begun. It is not clear that technical industries really get this.
Many speak of the PC era coming back again. Forget this. That
time has passed. PCs have become an essential commodity but it
will not be the engine that drives the digital economy. The next
bow wave of innovation will be much smaller than the one just
ended. However, it will be an era where the Internet, consumer
appliances and digital services blossom like we never envisioned
before.
Wave Issue 0200 1/4/02 Article 2-01