My dean Tom Cooley is a firm believer in the role of business as an agent of social change and progress. In case you are wondering why this is related to digital strategy, check out the wonderful story of ITC's eChoupal that we discussed in my MBA class today.
I'm torn about two issues on this subject:
(1) Where should a business draw the line between maximizing familiar "shareholder value" metrics and facilitating broader social transformation and progress? I respect the writings of both Milton Friedman and Ed Freeman, but their views diverge pretty radically on this front. Or do they?
(2) Is it sensible to allow a corporation to own physical and technological infrastructure essential to a nation's commerce? This is clearly a more important question for developing countries. However, before you conclude that its only relevant to them: the Internet took off after it was freed from the shackles of DoD ownership. As a consequence, an essential and integral piece of today's U.S. commercial infrastructure is entirely owned by a handful of telecom companies. Leading to, for instance, debates about net neutrality.
Anyway, food for thought. Look forward to your feedback.
Tuesday, March 25, 2008
Saturday, March 15, 2008
The Amazon platform paradox
My MBA class and I took a look at Amazon's 2007 numbers last week.
Sure, the 40% revenue growth is impressive. What's more notable, however, is that Amazon's operating income is growing even faster (on the order of about 60% ), despite them ramping up IT spending to north of $800M. This suggests a couple of things:
(1) Amazon's high-margin "platform" services are probably generating an increasing fraction of their revenue.
(2) Spending over $800M on technology and less than half of that on marketing suggests that Amazon is clearly committed to growing the more pure-IT-centric parts of their business model. In a sense, these are substitutes, because growing the platform plays a key role in attracting and retaining customers.
(Remember the November 2006 BusinessWeek article that suggested Wall Street was worried about Amazon not focusing on its core retailing business? Here's how Amazon's stock has performed since then, relative to a large traditional retailer:)
It looks like Bezos' risky bet is paying off. But here's the paradox. First, Amazon built the most enduring aspects of its platform -- scalable ecommerce fulfilment and inventory management -- by raiding WalMart's experts. Makes one wonder why WalMart, with its legendary supply-chain expertise, couldn't do this themselves. Second, having created capabilities that set it apart from the ecommerce pack, Amazon was bold enough to turn itself "inside out", and, rather than leveraging this core competency, offer its computing, process and human expertise up to anyone competitor who wanted to pay for it. This is almost like WalMart deciding to rent out its procurement and supply chain to its competitor's in the '90s, rather than using it as the source of proprietary advantage that led to their dominance. And, strikingly, this platform business model is working. Maybe there's a parallel with American Airlines and the Sabre system from a few decades ago.
Sure, the 40% revenue growth is impressive. What's more notable, however, is that Amazon's operating income is growing even faster (on the order of about 60% ), despite them ramping up IT spending to north of $800M. This suggests a couple of things:
(1) Amazon's high-margin "platform" services are probably generating an increasing fraction of their revenue.
(2) Spending over $800M on technology and less than half of that on marketing suggests that Amazon is clearly committed to growing the more pure-IT-centric parts of their business model. In a sense, these are substitutes, because growing the platform plays a key role in attracting and retaining customers.
(Remember the November 2006 BusinessWeek article that suggested Wall Street was worried about Amazon not focusing on its core retailing business? Here's how Amazon's stock has performed since then, relative to a large traditional retailer:)
It looks like Bezos' risky bet is paying off. But here's the paradox. First, Amazon built the most enduring aspects of its platform -- scalable ecommerce fulfilment and inventory management -- by raiding WalMart's experts. Makes one wonder why WalMart, with its legendary supply-chain expertise, couldn't do this themselves. Second, having created capabilities that set it apart from the ecommerce pack, Amazon was bold enough to turn itself "inside out", and, rather than leveraging this core competency, offer its computing, process and human expertise up to anyone competitor who wanted to pay for it. This is almost like WalMart deciding to rent out its procurement and supply chain to its competitor's in the '90s, rather than using it as the source of proprietary advantage that led to their dominance. And, strikingly, this platform business model is working. Maybe there's a parallel with American Airlines and the Sabre system from a few decades ago.
So here's to Amazon's continued growth. Though it might be wise to steer clear of cloud computing as a business line. Do they really want Google and Microsoft as direct competitors?
Sunday, March 9, 2008
The open iPhone: why Jobs is still guarding the gate
Last Thursday, Apple took a bold step, opening the iPhone and releasing the SDK (software development kit) that facilitates developing iPhone applications. Jobs has now moved away from the "control" we've seen impede Apple's technological leadership over the last 20 years, but is doing so in a measured and strategically sensible manner. Here's why.
The iPhone will be an incredibly tempting platform to build on, and the SDK will attract a lot of talent. However, Apple still controls what you can install, and if you pay, takes 30% of the revenue. If its free, Apple decides. So a lot of what is developed isn't going to generate revenue, or even be available to you. As a software developer, you're therefore going to try a lot harder. Especially since you might want your slice of the dedicated $100M iFund
And as Apple generates platform revenue and value, it simultaneously makes sure the user experience can be controlled. Thereby not making the mistake Facebook has, where there's now a lot of clutter that is damaging what used to be a clean user experience. This is an especially important consideration for Apple: they owe a large part of the success of their recent generations of devices and software to superior and simpler user-device interfaces.
Sure, this revenue cut implies higher prices for paid applications. Which aligns really well with the current (high-income) iPhone user base. Perhaps this will be revisited as the platform grows, the iPhone's technology becomes more stable, and the device becomes mass-market (if this ever happens). Let's wait and see.
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