Content is Bling

In about 1973, my father helped start a company that spun off from the CMOS chip manufacturer, Solid State Scientific, that he had previously helped to start. He was unhappy being a marketing executive and wanted to get back into engineering. The new company, Integrated Display Systems, Inc. (IDS), was formed to combine integrated circuit technology with the newly commercialized liquid crystal displays (LCD) to design and manufacture modules for LCD digital watches.

In the box of tech relics from my dad that I brought down from the attic last week was one of the watches that he worked on. It's a "Chronosplit" built for Swiss watchmaking giant Heuer. Introduced in 1975, the Chronosplit was the first digital wristwatch to combine a digital stopwatch function with a quartz digital timepiece. It was a tour de force of the day's technology, and I remember my dad being very proud of it. The Chronosplit used two separate displays for the two functions. The LCDs of the day were too slow to support the stopwatch function, while the LEDs sucked too much power to constantly display the time.

Much has been written about the Swiss watch industry and how it was disrupted and almost destroyed by the invention of the quartz digital watch. Although we're now used to the way consumer electronics drops in price with market penetration and manufacturing scale, the rapid reduction in digital watch prices that occurred in the early 70's is still astounding. From 1972, when the first LED watch, the Pulsar, was introduced at a price of $2000, to 1976, when Texas Instruments launched a digital watch that retailed at $20, the watch industry experienced a bewildering technology and business transition.

The 100-fold reduction in price could have been predicted. From the user interface point of view, the Pulsar was rather clunky. Even though the watch had no hands, you needed two hands to read the time, because the display was normally off. A subsequent version added an accelerometer that turned on the display when you flicked your wrist. In order to sell the Pulsar, its manufacturer had to capitalize on the novelty value. The Pulsar came in a gaudy gold case- which looked great when it was featured in a James Bond movie, Live and Let Die. The resulting manufacturing bill of materials was thus dominated by the case. Japanese manufacturers realized that by putting quartz modules in cheap cases, they could deliver accuracy as good as the most expensive Swiss watch for a fraction of the cost; Swiss manufacturers took decades to recover.

The first few years of the digital quartz watch were marked by incredible creativity and diversity. Eventually,  economies of massive scale resulted in a shake-out among digital watch producers. (IDS went bust and my dad moved to Hong Kong to run a watch factory.) If you go to the store today to buy a watch, you find an amazing diversity of digital watch cases and a depressing lack of diversity of the electronics inside them. The watches are sold purely as jewelry- even watches that cost hundreds of dollars use electronics modules that wholesale for a few pennies.

At the center of the US watch industry of the 70's was an electronics importer called North American Foreign Trading (NAFT). NAFT was a company owned by New York's Lowinger family. Maurice Lowinger was a survivor of the Holocaust who emigrated from Hungary to New York and built a business importing consumer electronics and other items from Japan and Hong Kong. Among the items they dealt with were inexpensive watches. When Hughes Electronics went looking for a partner to sell digital watches, they were rejected by numerous Swiss and American watch makers. Lowinger jumped at the opportunity, however, and became one of the top watch producers in the US. The consumer electronics company that resulted, Unisonic,  was successful in a number of similar businesses, including electronic calculators and digital phones.

Today, Maurice's son Andrew leads the family business, which has become the DMC Worldwide group of companies. DMC includes companies specializing in private equity, logistics and supply chain management, GPS tracking devices, luggage, and even life insurance settlements. Their latest venture aims to create a new distribution channel for ebooks, called the Copia. It's a major investment.

On Wednesday evening, I had a chance to chat with Andrew Lowinger at an event where the Copia platform was being introduced to the New York publishing community. He emphasized DMC's long history of working with many partners, integrating technology, marketing, distribution and sales so that each partner could focus on their core competencies and overlay their business models onto new technologies. The message to publishers was that working with DMC would allow them to stick to publishing great content and avoid all the messy techy and selling stuff they hate.

The Copia platform will include e-Commerce, social networking, reading applications and a line of ebook reader devices; platform components will be launching gradually throughout 2010. The Copia hopes to provide infrastructure and technology to a variety of "powered by Copia" partners. Although there's nothing innovative about any single aspect of what the Copia is doing, the combination of all these pieces represents a level of ambition and effort that's right up there with Apple, Amazon, and Google.

What DMC and the Lowinger family really bring to the table is experience in successfully exploiting rapid technological change in consumer markets. My guess is that DMC will repeat its strategy of providing value to the consumer by pushing prices lower, just as in the watch, calculator, and phone handset markets of the past.

A look at the evolution of these industries suggests a possible future for ebook readers. In each case, an existing industry is invaded by new technology. At first, the new technology is pricey and a bit clunky, but as technology advances and manufacturing moves to scale, prices drop. In each case, successive generations of devices add functions at the top of the line while continually lowering the price of the base model. Prices drop until a floor is reached. The base model then adds functions in new iterations until the high end of the market is marginalized.
 
For digital watches, the price floor today is set by the case and the batteries; for ebook readers, the display and batteries are likely to set the price floor, at least in this decade. DisplaySearch, an analyst firm covering the display industry, estimates global production of 22 million e-paper displays and $431 million in display industry revenues in 2009. (That's an average price of about $20 per display.) For 2018, they forecast a market of 1.8 billion units and $9.6 billion total revenue. That's $5 per unit. eBook readers are forecast to consume 77 million of those units, suggesting that display prices will be driven down by applications (such as shelf tags) having nothing to do with ebook readers.

If the price of an ebook reader drops by a factor of 10 from today's Kindle, it will be $26, less than the list price of a new hardcover. If it drops by a factor of 100, the way digital watches did in five short years, it will be $2.60, similar to what it costs to print a book; the print book would join the mechanical watch as a low volume niche product.

The recovery of the Swiss watch industry in the 90's came about as Swiss watch manufacturers began  once again to market their products as jewelry. The value of a watch today is not in the mechanism, it's in the bling. When the cost of an ebook reader drops by more than a factor of ten, the value of the reader will once again be in the content it holds. Once again, content will be bling.

I'll write more about the implications of cheap ebook readers in my next post.
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The New York Times is NOT Being Disrupted by Innovation

Clayton Christensen coined the phrase "disruptive innovation" to describe a recurring pattern of incumbent technology companies being unable to maintain their market leadership through a particular type of technology transition. If you have not read the book, or watched one of his lectures, you should take two minutes right now to watch his video, or else stop reading this post NOW.

It really bugs me when people who have not read the book or have not taken the time to understand Christensen's insights steal the phrase "disruptive innovation" or "disruptive technology" and plaster it onto something that doesn't fit Christensen's model. For example, one characteristic of disruptive technology is that incumbent companies fail to adopt a new technology because it doesn't meet the needs of the market, i.e. their existing customers. This characteristic gets twisted by some entrepreneurs and technologists so that a technology's failure to address customers' needs (or to have customers in the first place) is cited as evidence of the technology's disruptive nature!

Another common misunderstanding of "disruptive innovation" is to assume that a technology is disruptive just because it poses a threat to an incumbent technology. Here's an easy way to tell if a "threatening" technology is a good fit to the disruptive innovation model: ask yourself "is the new technology a threat because it delivers higher performance, with a hope that its cost will be driven down to challenge current technology? Or is the technology a threat because it's really cheap, and has a hope to increase performance to be able to challenge current technology?" The high-performance technology is what Christensen labels a "sustaining technology"; the low-cost technology is what Christensen label a "disruptive technology".

In a previous post on whether scientific publishing is about to be disrupted, I argued that the problems of newspaper industry were not germane to the future of the scholarly publishing industry. In this post, I want to examine whether the newspaper industry fits the Christensenian model of incumbents facing disruptive innovation. Michael Nielsen's article argues in favor of disruption, suggesting that a blogs like Techcrunch, by adopting low-cost technical infrastructure, are disruptive innovators. I agree that the low cost infrastructure fits the disruptive model- there are no printing companies that have attempted to develop blogging infrastructure, for example. But that doesn't make Techcrunch a disruptive innovator, or newspapers a disrupted industry. The reason is that both Techcrunch and newspapers are really in the business of selling advertising. The advertising that Techcrunch sells is actually at the high-performance, highly targeted, expensive end of the market compared to the advertising that the New York Times sells.


In Christensen's model, incumbent companies abandon low-margin market segments to the disruptors because they want to focus on the most profitable parts of their business. But this is the opposite of what has happened in newspapers. Real estate listings and other classified ads have huge margins. Internet sites such as Zillow and Craiglist exploited these huge margins to make businesses out of delivery of high-performing ads.

I find it much more useful to think of the newspaper industry not as one being disrupted by innovation, but rather as one being fragmented by innovation. The internet allows information services to be profitable at much smaller sizes than previously possible. The result is that many markets previously served by newspapers became vulnerable to competition from smaller, more focused services.

I can think of a number of industries afflicted by fragmentation, and the outlook for incumbent companies is not nearly so dire as for industries afflicted by disruption. The television broadcasting and semiconductor industries are good current examples. Although many companies fail to adapt to a fragmented market and disappear, many survive and remain vital. There are a number of strategies for survival- the "roll-up", the "smaller but focused company", and of course the "climb up the food chain" and "move down the food chain" strategies. There are also strategies for failure, most prominently, the "pretend nothing's wrong" strategy.

The bottom line here is that I think there's hope for companies in the newspaper industry. Unless the New York Times shrinks its typeface and crossword puzzle so loyal readers like me can't read it anymore, it might not go bust.


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