This excellent little article over at Emergic reminds us of a well-known economic concept called “co-ordination failure”. In essence, it refers to the inability of a disparate group of actors to draw together a new value chain in a synchronized manner. It’s easy to make an incremental improvement to an existing market, but hard to create a new market. In the example given, distribution of an innovative software product was an achilles heel of a business plan.
The same phenomenon has been seen in telecom. The genius of iMode was to see the co-ordination failure: the handsets, content providers, consumer education, distribution and billing/settlement all required co-ordination. You couldn’t deploy a handset with a browser alone without solving all the other problems. WAP failed because (among other things) a co-ordination failure; the carriers assumed that the rest of the value chain would automatically coalesce around their technology choice.
It also (maybe) partly explains the subsequent underwhelming success of iMode elsewhere than Japan. Once the model had been proven there was no longer a co-ordination failure. Companies like 4thpass provided off-the-shelf over-the-air provisioning platforms. Openwave, Handspring and others created browsers. Portal, Wmode and Amdocs had billing and settlement platforms. And so on. (Of course, iMode failed to translate for other reasons — such as the voice-centric nature of the USA, and the lack of integration with text messaging in Europe.)
The lesson is that even the approaches described in The Innovator’s Solution are not enough on their own: you need to understand how innovation is adopted as well as what kind of innovation to have.
Posted by Martin Geddes at 10:19 PMTrackBack URL for this entry:
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"Co-ordination Failure" goes a long way to explaining the mis-allocation of capital during the telecom bubble.
In fact, co-ordination failure explains why it was a bubble and not a value judgement.
Properly co-ordinated their would have been much more value realized sooner and some of the valuations would have been at least partly justified. Some of the real investments would have been too.
Take for example, a large US telco which spent about $1B on its 2.5G upgrade. It doesn't take all that many $10 APRU increments to repay that. The failure was in assuming that $10 in ARPU was easily switched-on and that there wasn't more to the value chain than the network itself.
I think this also explains why there are sudden swings and hugely impressive results when just one minor element is added. This is because eventually one minor element is the last one to complete the value chain. When this is done, all the capital invested to create the value chain is finally put to use.
Of course, the assets are enjoying their 3rd owner by that time.
Bottom line: When building a new market - think like Henry Ford and vertically integrate!
David
Posted by: at December 12, 2003 11:58 PM