How has the Internet changed the rules on business and economics?
The Friction-Free Economy offers up some entertaining, if not enlightening, notions
What are the forces that govern today's high-tech marketplace? Forget about those economic theories you learned in school: Adams, or Keynes, or even Karl Marx have no place in Silicon Valley, according to T.G. Lewis. He tries to answer this question in his new book, The Friction-Free Economy: Marketing Strategies for a Wired World (2,600 words).
The Friction-Free Economy:
Marketing Strategies for
a Wired World
Blame the publishers. In his self-review on Amazon.com's Web site, Lewis says that he wrote this book at the behest of HarperCollins, in order to pull together ideas he's gathered during consulting gigs that "at first I thought... were too obvious." He wanted to write "an entertaining account." In that, he has succeeded. The Friction-Free Economy reads like a series of lectures from a college professor to students who are easily bored and not too bright; he feels that he should entertain, and he repeats his central themes over and over to make sure you get it. Lewis is in fact a professor -- actually, a graduate-school professor of computer science, even though his book is more about marketing than about technology.
His writing style is filled with cutesy puns and alliterations, crass metaphors, and other low-rent rhetorical devices. Here is a sample paragraph (with italics included):
Young and aggressive businesses start out with a very low teeth-to-butt ratio. These young wolves aspire to become lions by chewing their way across the Chasm on the way to mainstreaming. Being of limited teeth, wolves hunt in packs and bring down their prey by outrunning and outnumbering them. They have less butt, and less teeth -- not too much of either one -- but they are on their way to getting more of both.The "Chasm" refers to marketing guru Geoffrey Moore's concept of the gap in market acceptance between the small number of "early adopters," who like to adopt the latest technology, and the large, highly lucrative mainstream. Lewis makes liberal use of Moore's material, as well as that of other business and technology visionaries like George Gilder, Alvin Toffler, Bill Davidow, Peppers and Rogers, and probably others -- but sometimes he does this without attribution of any kind.
This book suffers from various editing problems. Several factual errors were left in (e.g., representing Microsoft chief strategist Nathan Myhrvold as "Cameron Myhrvold," and various misspellings, such as the name of Larry Ellison's Savile Row tailor). Charts and graphs look too simple -- their curves too smooth, the distinction between actual and estimated data not made clear -- and their placement is often too far from references to them in the text.
All of these problems obscure the substance of the book. This is too bad, because the The Friction-Free Economy is largely an intelligent exposition of topics related to how the Internet changes many rules of economics and business. Lewis begins with a basic explanation of three of the most important economic theories: Adam Smith's 18th-century free-market capitalism, Karl Marx' 19th-century socialism, and John Maynard Keynes's 20th-century synthesis of the two. He does this in order to show how the "wired world" is engendering a new type of economics where none of these theories hold.
A basic principle of modern economics is that supply and demand counterbalance each other, acting like an "invisible hand" to produce equilibria in markets and stability in a company's market share. According to Smith, the equilibrium point is one at which products are what everyone needs and prices are affordable. Marx disagreed, saying that without heavily regulated markets, the equilibrium point is one at which wealth is concentrated in the hands of a small number of rich people. Finally, Keynes proved through mathematical means that, in a sense, both Smith and Marx were right: There are two possible equilibria, and a given economy can end up at either one depending on a variety of factors.
You won't need Adam Smith in the friction-free economy
As Lewis explains it, the new "friction-free" economy changes all the rules. One most important difference in the friction-free economy is that, because information (bits) is basically an unlimited resource, supply can always exceed demand. A corollary is that, because the spread of information feeds on itself, a product can enter a positive feedback loop that results in ever-increasing market share. This has many interesting consequences for vendors of software and other bits-based products. Most notably, price is no longer the most important factor in determining financial viability and market trajectory of a product. Two things are more important: the value that a product adds as part of a value chain, where other links in the chain may be supplied by other vendors, and the market share that a product has among its competitors who occupy the same link in the value chain.
An example that Lewis cites to illustrate this and many other points is the rise of the Internet/intranet market, thanks to vendors like Netscape. "Internet" turns out to be a value chain that includes Web servers, routers, server software, browsers, search engines, Web site development tools, and so on. Netscape has many products that fit into this value chain, but by no means all of them -- servers come from Sun and others, routers from Cisco and Bay Networks, search engines from Lycos and InfoSeek, development tools from Wallop and Kiva, etc.
In order to play in this value chain, Netscape must get sufficient market share for its value chain links (products and services). That's why Netscape gave away its browser for a while before charging for it: to build the value chain to sufficiently attractive size and get enough market share of a particular link in the chain to assure longevity of the entire chain, while placing itself on a trajectory toward browser market dominance. Conversely, as Lewis observes, Apple failed because it did not understand the idea of the value chain and how to fit into it. Instead, Apple insisted on remaining a vertically-integrated hardware and software company and built marketing strategies based largely on pricing. As another example, IBM began an extremely important value chain by opening the PC design to clone manufacturers, but it did not take sufficient steps to build market share as the value chain came into being.
Another theoretical basis for the friction-free economy is that new, murky branch of mathematics called "chaos theory." Lewis observes that changes in things like adoption of a certain technology or a company's market share are governed by chaos theory instead of by traditional predictive mathematical models. Chaos theory is neither particularly easy to define nor completely understood, but for these purposes, its importance is that it divides quantity movements over time into three categories -- stable, chaotic stability (volatile but within limits), and true chaos ("off the scale" to infinity or zero) -- and that stable or chaotically stable quantities converge on fixed points called "strange attractors."
The key to using chaos theory to predict market behavior is to understand when a measured quantity -- such as a vendor's market share -- makes the transition from one of those three states to another in a system of many different contributing factors. The Internet/intranet market contains many factors, including all of the types of vendors mentioned above as well as other things like availability of worthwhile content, bandwidth, and cultural acceptance. You could use chaos theory to figure out when markets and market shares of Netscape, Sun, and other vendors are sufficient to make the "Internet" value chain stable. Netscape's meteoric rise was perhaps the one factor that pushed the entire value chain into prominence. We can say that although the positions of various vendors in the Internet value chain may wax, wane, or blink out completely over time, the overall market and value chain is relatively stable, moving toward some strange attractor that we will eventually discover. (Installed base? Total sales? Market capitalization? Lewis doesn't specify.)
This is all fascinating stuff, but Lewis stops short of supplying any depth or detail in his analysis. Although he does show examples of how chaos theory can apply to predicting stock prices, it would have been more interesting to show exactly how chaos theory applies to technology-driven value chains like the Internet.
The New Lanchester Strategy
The same lack of detail pervades other tantalizing parts of The Friction-Free Economy. Another example is Lewis's exposition of something he calls the New Lanchester Strategy. The New Lanchester Strategy is derived from the work of Frederick William Lanchester, an early 20th century British scientist and engineer whose theories of combat became major influences in the fields of operations research and, through W. Edwards Deming's (misspelled in the book as "W. Edward Deming") Total Quality Management.
As Lewis puts it, Lanchester's theories of weapons and troop strength can be applied to sales and marketing in the friction-free economy. When adapted in this way, participants in a market fall into four categories: monopolist, leader, player, and non-player. He goes through examples of these categories, and how to use them, from the PC industry. But first, he defines these categories in terms of market share: 0 to 26.1 percent share means you're not a player; 26.1 to 41.7 percent means you are a player; 41.7 to 73.9 makes you a leader; and more than 73.9 percent means you have a monopoly.
Where did he (or Lanchester) get these numbers? We never find out -- not even a brief explanation. It would be especially interesting to compare Lewis/Lanchester's scheme with Geoffrey Moore's taxonomy, from his book Inside the Tornado (reviewed in SunWorld, August 1996), that involves Gorillas, Chimps, and Monkeys (roughly speaking, a gorilla is a leader or monopolist, a chimp is a player, and a monkey is below player level). Moore describes his levels of competitor in terms of qualitative behavior in the marketplace, whereas Lewis claims some sort of hard statistical derivation of his categories. Unfortunately, we never find out where that derivation comes from.
Another important ramification of the bits-based, friction-free economy is that it enables marketing techniques like mass customization, one-to-one marketing, and narrowcasting. The best elucidators of these trends are Don Peppers and Martha Rogers in The One to One Future (see Bill's Bookshelf, March 1997) and their other books. Lewis doesn't seem to have read them. If you believe Peppers's and Rogers's point of view, then Lewis is confusing target marketing with one-to-one marketing. The former means breaking down the space of customers, by demographics or psychographics, into smaller and smaller groups. The latter deals with individuals only and does analysis bottom-up, measuring share of customer (how much business does he or she give you over time) rather than share of market (how many customers do you have). This distinction may seem like merely semantic nitpicking, but Peppers and Rogers make a convincing case that the two require fundamentally different analysis techniques, organizational structures, and systems to make them work. Lewis doesn't see that difference.
At the same time, the more important point is that in the friction-free market, individually targeted offerings become easy to manufacture. Lewis says, quite correctly, that the "wired world" makes it possible to customize products and services to individuals -- or small qualified groups -- with very little overhead, certainly far short of what it would take to modify a factory assembly line.
How to kill a giant
The best part of this book is one of the last chapters, called "How to Kill a Giant." (The "teeth-to-butt" quote actually comes from that chapter.) In it, Lewis discusses attempts to beat the past and present giants of the computer business, IBM and Microsoft. He outlines four different strategies for overtaking market leaders: Brute Force, Momentum, Anti-Monopoly, and Pure.
Unfortunately, Lewis never really explains what the brute force play is, except to illustrate it by example (Iomega beating SyQuest in the removable storage device sweepstakes). The momentum play means accelerating "around" the competition to obtain a larger market share. The example he gives of momentum play is that of the Network Computer, where Oracle, Netscape, Sun, IBM, and others are building a base of support for the NC that they hope will go around Microsoft/Intel's PC to become the dominant low-end computing platform. Notice that the momentum play primarily involves market share and a value proposition for the product, rather than pricing issues per se. The NC's value proposition does involve product price (an NC for $500), but it also involves ease of administration and lowered total cost of ownership.
Lewis uses two examples to illustrate the anti-monopoly play: one unsuccessful (PowerPC vs. Intel) and one that might become successful (Java vs. Windows). Litigation is one of the tools he lists as useful in the anti-monopoly play; he considers litigation to be a tactic that helps but never fully succeeds in giant-killing. This perspective is especially interesting in light of Sun's recent decision to sue Microsoft over the terms of the Java license.
The pure-play strategy involves focusing, planning, and executing flawlessly. It's what Microsoft has done with Windows and Sun has done with its servers. Lewis chooses a poor example for this one: Corel's PerfectOffice suite. It's unfortunate as explanation, because what Michael Cowpland (the CEO) is doing at Corel seems to resemble a brute force play more than a pure play. (Plus, given 20-20 hindsight, Lewis is wrong in his assertion that Corel is taking back the office-suite application market from Microsoft. PerfectOffice achieved notable sales volume only through the dubious practice known as "channel stuffing," and Corel recently announced its decision to cease development on the much anticipated 100% pure Java office suite. At this point in time, Corel looks like it is in big trouble again.)
The "How to Kill a Giant" chapter offers some clear thinking and a useful framework for companies as they seek to overtake market leaders. Elsewhere in the book, Lewis's thinking and advice are not so clear or useful. His views on how the Internet is bringing society back to a "tribal" culture, and how tribalism relates to mass-customized products and services, are harder to digest than they are to believe.
Another example: his definition of "prosumption" is just plain wrong. Prosumption is generally defined as producers and consumers collaborating on product/service production; the canonical example being a customized daily news service where the user specifies what kinds of things she wants to read. Lewis uses "pyramid" marketers, like HerbaLife and Amway, to define prosumption simply because those organizations' middle-tier members both buy and sell products. Lewis wanted to illustrate how businesses like these can become more efficient by using the Internet. This may be true, but I would suggest that if he wants to use a technical term for the way they do business, superdistribution is more applicable than prosumption.
The Friction-Free Economy is a good piece of reading, on trains, planes, or stationary bicycles, for someone who isn't familiar with the work of its influencers. It's probably worthwhile to seek out T.G. Lewis when he is giving a lecture -- he's undoubtedly a dynamic, entertaining speaker. But it's better to invest the time in reading the works of Davidow, Moore, Gilder, Peppers and Rogers, and others to get a deeper foundation in marketing strategies for the Wired Age.
Title: The Friction-Free Economy: Marketing Strategies for a Wired World
Author: T.G. Lewis
List price: $25.00
About the author
Bill Rosenblatt is market development manager for media and publishing industries at Sun Microsystems. Reach Bill at email@example.com.
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