New two-sided wineskins

For the past few years, I’ve been hearing a lot about “two-sided markets”. There’s been a series of well-cited papers by Jean Tirole, there’s now a book and even some of my friends (like Tom Eisenmann) are getting into the act.

To me, two-sided markets looked like “old wine in new wineskins”: from what I saw, calling it a “two-sided market” doesn’t change the phenomenon or what we know about the role of complements in providing value. We already knew about the hardware-software paradigm, network effects, ecosystem management, and a range of other issues about managing the creation of value for IT systems. Much of this was published by the greek-letter economists (name like Katz, Shapiro, Farrell, Saloner) in the top economics journals (and at least one book).

The two-sided literature emphasizes getting money from one party while encouraging (or even subsidizing) another party. However, cross subsidies are also old hat. For more than two decades platform vendors (like Apple) have been subsidizing their developer relations program from sales of their products, while for nearly that long videoconsole makers have been selling consoles at cost while exacting a tax on videogames.

Sunday night, in a London hotel before a conference, I ran into one of the leading economists studying two-sided markets, Geoffrey Parker. Geoff and I met back in February 2000 when I visited Tulane for a job interview. Among other things, Geoff is a co-author with Eisenmann of several papers on two-sided markets.

So at the Regency Hotel, I cornered Geoff and pointedly asked: “what’s really new about two-sided markets?” Geoff was equally honest, and said there are three main points

1. The two- (or multi-sided) market emphasizes that you can charge for any part of the value created, as long as you charge somehow. If they are “sides” rather than “product” and “complements” you don’t make an a priori assumption about which part is the paid part.
2. As with any good economists’ breakthrough, it provides a mathematical way to find the optimal strategy — in this case, the joint optimization of the returns from both (or all) sides of the market.
3. Antitrust regulators dislike predatory pricing (selling products below cost), but total consumer welfare may actually be better off with cross-subsidies (or at least no worse) if it raises volumes and thus economies of scale.

In other words, to optimize your returns from a two-sided market, you charge more either for the bigger market or where the demand is less elastic.

On these modest claims, I’m now sold. Two-sided markets provide an incremental improvement over prior knowledge, and I will cite it in my own work. Otherwise, it’s just econometricians and game theorists crowing about having greek letters where none went before.

Rebooting Linux at 34,000'

I’ve spent a lot of time on Continental Airlines planes the past week, going to and from a conference on platforms held in London. It was my first time flying Continental ever, and on the whole I was pleasantly surprised as they offer the amenities that were once standard among US carriers until commodization meant that the major trunk airlines started treating customers as inconvenient nusiances.

Tuesday afternoon I spent 10 hours crossing six timezones in a steel tube operated by CO that (according to my seatpocket) was a Boeing 777-200.

At one point while trying to play my favorite 20th century choral mass on the seatback entertainment system, it decided to reboot, spewing Linux kernel text messages on the LCD screen.

While I couldn’t take a screen dump of the messages, it was pretty easy to see that I was watching RedBoot (tm) from Red Hat Software — a build of November 19, 2004 — for a system called “MAS eFX.” A little web surfing after we landed makes it clear that the MAS stands for Matsushita Avionics Systems, and that eFX is known to the embedded community.

That a seatback system would use embedded Linux was no surprise; that it would take 4-5 minutes to reboot was a bit more unexpected. That it would spew messages such as “loading XX will taint the kernel” — whether due to a “proprietary license” or “no license” — is an obvious attempt by the GPLniks to discourage the use of non-GPL modules when running Linux.

But why should an airline passenger sitting in seat 20L care? Why is this message (or any of the other messages) being displayed at 34,000'? This is user hostile design — and, in fact, not the only part of this system that would qualify.

Name that company!

I'm starting working on a paper that will probably include a sample of Web 2.0 companies, so I went searching for a good list of such companies.

I didn’t find the list per se, but I did find another way to get names

Web 2.0 Name Generator

This website can be used to generate the name of your new Web 2.0 company, and it also allows you check to see if the domain is available. They also recommend Dot-o-mator as a way of generating domain names. Given the cybersquatter problem, both offer a useful solution to a real problem.

Some sample names generated for the Web 2.0 companies: Chatterfire, Jaxlist, Wikizzy. All seem plausible, and none are worse that the real names of Web 2.0 companies.

Is SV past its peak?

While visiting London last week, I was asked, in effect, to speculate where will be the center of innovation after Silicon Valley.

My answer was that it was a silly question — Silicon Valley is a portfolio of industries, and so it would be more meaningful to talk about the region’s relative strength in each industry. Perhaps there would be a decline or a replacement, but the issue would come on an industry-by-industry basis.

In talking through my answer, I realized perhaps even more important is the relative importance of Silicon Valley’s industries to the grand scheme of things. Los Angeles was a world center (if not the center) of aerospace innovation for decades, but after the end of the space race (or perhaps end of the Cold War), the relative economic importance of the industry to the economy declined dramatically. Detroit has both declined in its importance in the global auto industry, and that industry has become commoditized and more diffuse over the past 40 years.

Silicon Valley put itself on the mark with information technologies in the postwar era Silicon Valley was named for semiconductors because of people like Robert Noyce and Gordon Moore and companies like Fairchild and Intel. In the 1970s and earlier 1980s, the region fueled in computer systems and software, until applications consolidated under Microsoft and (Apple notwithstanding) hardware commoditized elsewhere. In the 1990s, the Valley was the undisputed world hub of the dot-com era.

But IT as an industry is either in decline, or at least nearing a plateau. Meanwhile, Silicon Valley is participating but hardly dominant in the next round of growth industries.

The broader ICT sector includes mobile phones, which will continue to grow for another 10-20 years. SV is providing some of the software, services and chips for these phones, but in overall is not a major factor in these segments (unlike San Diego, Helsinki, Tokyo and Seoul).

The broader Bay Area is represented in biotech, as the 2nd or 3rd most important center in the US (behind Boston and vying with San Diego). Both as a business and to assuage their consciences, SV VCs are investing heavily in cleantech, some of which is here in the Valley.

So I suspect that in 20 years, the only area where SV will be leading the world is as a financial center for venture investment. There will be world-leading companies here, but no longer will people say that for a certain class of startup, the Valley is the only place to be.

The discussion also forced me to think about my own career, as an innovation researcher with considerable investment (and credibility) in industry-specific knowledge. Mobile phones will continue to grow but might not be enough to take me to retirement, particularly as the emphasis shifts from innovation to low cost production to expand adoption in the less-developed countries.

I had previously though about shifting to biotech. But it's had a good 30 year run, and right now the old model of drug discovery seems to be losing steam. Also, I haven’t had a biology class since high school. Perhaps more importantly, the process of science-based innovation is fundamentally different than the engineering-based industries that I’ve worked in and studied.

Nanotech is another possibility. The problem is, nanotech is not an industry — it’s a technology that will enable innovations across a broad range of industries, including automobiles, electronics and biotech. So as a business researcher, that makes it harder to acquire industry-specific knowledge where there isn’t a single focal industry.

Perhaps the best opportunity is clean technology, particularly around the issues of electricity production (solar, wind, nuclear), distribution and use (e.g. LED lighting). In a world where oil costs $100 (or $200 or $400) per barrel, shifting to more efficient and renewable energy sources will (barring major change) have economic importance for decades to come. Just in California, UC Davis, Berkeley, Stanford, UCSB, UCLA, Caltech and UCSD have initiatives in this area. At SJSU we even plan on offering an undergraduate green entrepreneurship elective (hopefully) in Spring 2009.

Heck, if flaming Friedmanite T.J. Rodgers is pursuing green power, it must be an unstoppable trend. As an added bonus, I get to go back to being an electrical engineer, which is certainly more plausible than large molecule drug discovery.

Tons of 3G iPhones

ImportGenius has found evidence that Apple has imported 188 ocean containers worth of unspecified electronics from its key Taiwanese suppliers, Hon Hai and Quanta. The assumption is that these are 3G iPhones being announced on June 9 (although presumably another product could also be in these containers).

Forbes has a summary of the other evidence, including increased mileage by Steve Jobs on his Gulfstream V.

The scrutiny and speculation seem almost funny: Apple gets all this free advance publicity, just by saying it doesn’t want advance publicity. As in 2007, the 3G iPhone shows that Apple still is the tech industry leader in PR efficiency.