Esther Dyson on New Markets

In a discussion with Fortune [part of the Brainstorm 2002 series], Esther Dyson says:

Most marketing represents investment in customers who already exist. In other words, we’re only hunting and gathering current customers, rather than coming up with new ones.

How can you create new customers? By turning people into effective producers, who can then earn enough money to become potential customers for the products of several companies. That’s the thinking that drove Henry Ford when he doubled his workers’ salaries early last century. He created customers not for himself but for the US economy, which in turn produced customers for Ford Motor. Keep in mind that usually only large companies can afford this kind of investment. Smaller companies still need to work like hunter-gatherers, investing in R&D or production. But they’re counting on these larger companies and employers. These firms are big enough to benefit from the growth of an overall economy and too big to grow much if the economy around them is not. In practical terms, the biggest supply of potential customers is in emerging markets. Take Russia, my favorite example. Right now, I’m working with a group of companies on the US-Russia Information Technology Roundtable. The group is led by the American Chamber of Commerce in Russia, the US-Russia Business Council and Russian counterparts, and will hold its kickoff meeting during the Bush-Putin summit meeting in Moscow later this month. The companies involved are all trying to build the Russian IT market. That, in turn, will make Russian business more efficient, Russian workers more productive, and Russian consumers better able to afford new products.

Although it’s not explicit, this joint approach addresses one of the basic issues of spending in developing markets: How can you ensure that you can capture those customers you create? You can’t. The trick is to join with other companies and invest in an entire economy rather than just a single company’s work force. Although this particular event is just an IT roundtable, the Chamber of Commerce has more than 650 members, and the presence (and investments!) of each of them benefits them all. That’s why AmCham in Russia–and indeed Chambers of Commerce around the world–are so active in many developing economies. Although they may not be thinking consciously of the ideas I’ve outlined, their efforts to improve conditions for producers also enrich the workers who become one another’s customers. More and more, I’m running into companies who are not simply selling abroad, but building markets. ITC, an Indian company, is putting Internet kiosks into soybean-farming villages, enabling its suppliers to operate independently of middlemen who control prices. BchinaB is helping Chinese plastics producers to reach markets in the West–and to buy other products from those same markets. BusyInternet Cafe in Ghana is selling Internet access not just to consumers, but to small businesses who use its wired offices to make their businesses more effective. These are just a few examples.

Instead of focusing on market share in mostly mature markets, companies need to focus on developing new markets. They can do that with new products, which are my regular focus. But they can also create those new markets–and whole lot more–by helping to create new consumers.

These are the ideas on which we need to build Emergic. Our new markets are the world’s emerging markets.

Digital Dividends

As part of a series on Brainstorm 2002, Fortune asks if companies make money while bridging the digital divide. It discusses what CK Prahalad has to say:

Picture the world population as a pyramid. At the top (Tier 1) are the rich–people who read fortune, drive cars, take vacations, and shop for fun. Below them are the strivers, the global middle class who can meet their basic needs, know who Shakira is, and maybe even own a CD of Laundry Service. But it’s Tier 4, consisting of people making less than $2,000 a year, that most interests Prahalad, who figures that something like four billion people reside at the pyramid’s chunky base. (Other estimates put the number of people in Tier 4 as low as two billion; in any case, it’s a lot of people.)

Individually, the purchasing power of Tier 4 is limited. But together it adds up to trillions. And while the poor will no doubt have to live without lattes, their general wants and needs are familiar: securing better lives for their children, getting the best price for their labor, staying healthy, and having fun. Tap into that, Prahalad says, and there is a “Fortune at the Bottom of the Pyramid”–the title of an article he co-wrote with Stuart Hart in strategy+business magazine.

This is what we want to do with Emergic – create low-cost technology solutions for the “other 90%”.

The State of the PC Industry

Writes Fortune: “Their industry–one of the largest in the world, with annual sales of $150 billion and 125 million units shipped–is in terrible shape. Last year, for the first time since 1985, sales actually fell, dropping by 4%, according to Gartner Dataquest. That’s devastating in a business accustomed to 15%-plus annual surges. All indications are that this year will be just as bad. Corporations, once voracious buyers of all things tech, are spooked by the economy and have snapped their pocketbooks shut. People don’t feel compelled to buy PCs at home either. Only 11% of consumers say they want to buy a new PC, according to consumer technology research firm Odyssey. That’s the lowest level since 1995. A key metric of industry health, the average time before a buyer replaces a PC, has stretched to an unprecedentedly long 41 months for business desktops and almost five years for consumer machines.”

The article goes on to discuss what each of the leading players is doing to bring growth back into the market.

The reality is that the tech industry in the developed markets has matured. It is now an incremental, upgrade market. This is the reality which few are seeing. In Christensen’s language, what the industry needs to do is to get new growth markets through disruptive innovations. Instead, these are trying out sustaining technologies in a market that is already in overshoot.

Eric Schmidt on Innovation

From Dan Gillmor’s article on Google, quoting the CEO Eric Schmidt:

Innovation happens no matter what markets do, Schmidt says, a common refrain. “Innovation comes from universities,” he says, “and it’s producing enormous step-ups in wireless, chip design, Linux and information mining,” among other areas. But most of the innovations he sees tend to be interesting technologies without a persuasive business case.

Yes, Innovation can and is happening everywhere. We need the vision to see it. In my life, I’ve always liked to be different and innovative. There is a plus and a minus. The positive side is that one does not face too much competition in the marketplace, because there isn’t anyone else doing something similar. The negative is that one has to sell concepts to potential buyers and that can take time. In this selling process, the greatest ally for the entrepreneur is his Passion. And that can win over even some of the die-hard naysayers.

Microsoft’s Monopoly Profits

Microsoft Piggy Bank Tops $40 Billion, says Dan Gillmor. “The monopoly continues, unabated, and could even grow stronger. Innovation is almost dead in desktop software, where Microsoft has sucked the financial oxygen out of the system. The company’s behavior doesn’t improve.”

Suggests John Robb:

What if Microsoft took $300 m and provided a $3 m grant to 100 small independent companies doing the most innovative software on Windows? What if they promoted their products to customers? There are still lots of things that Microsoft doesn’t do. Could this restart the PC upgrade cycle? I think it could. The great part about this is that Microsoft would make back that money in less than three years through upgrades. The PR bonanza would be huge.

However, this won’t happen. Microsoft has now yielded to NIH (Not Invented Here) disease. They think that the $5 b a year that they squander on R&D will actually yield a real innovation — it won’t. Hey Ballmer: most of the smart people in the world of technology don’t work at Microsoft. Real innovation is going on right now in the trenches, as it always has. However, it is growing slower than it should because the air supply has been turned off.

Even as others in the tech industry feel the pain, Microsoft gets stronger and stronger. [Vinod Khosla: 8,000 out of the 10,000 tech cos. in the US need to die.] We can all talk about what Microsoft needs to do. It is a waste of time. But remember that every monopolist has only a limited time at the top.

The way to counter Microsoft is in the world’s next markets. These are markets which cannot afford to pay for Microsoft’s products, and Microsoft cannot afford to reduce their prices for these “negligible” markets. This is where the opportunities of tomorrow lie for innovative software companies. There is very little legacy, so one can re-think all the components for the desktop and the enterprise. Use the newest ideas (blogs, web services) and create low-cost software solutions which consumers and enterprises in the emerging markets can use.

The good think about targeting the bottom of the pyramid is that (a) there is zero competition (b) there is huge opportunity – in terms of users, at least as big as the existing computer markets of today – in excess of 500 million (c) at some point, the products will become good enough for the mainstream also in case one feels playing the Monopolist.

Interactive TV – via SMS

From the Economist comes a story about how text messaging has overtaken Internet use in Europe. Much of this is being driven by interacting with TV shows.

This has much to do with the boom in reality TV shows, such as Big Brother, in which viewers’ votes decide the outcome. Most reality shows now allow text-message voting, and in some cases, such as the most recent series of Big Brother in Norway, the majority of votes are cast in this way. But there is more to TV-texting than voting. News shows encourage viewers to send in comments; games shows allow viewers to compete; music shows take requests by text message; and broadcasters operate on-screen chatrooms. People tend to have their mobiles with them on the sofa, so it’s a very natural form of interaction, says Adam Daum of Gartner.

Ironport’s Solution to Spam

From the Economist:

Its new anti-spam system also uses economic intuition, by requiring senders of e-mail to state clearly whether they are sending spam, and to back that statement with their own money in the form of a bond that will be forfeited if it turns out that they are lying. The idea, simply, is that, if the price of sending spam rises, less of it will be sent.

Servers fitted with IronPort’s spam-recognition system will be able to identify “bonded senders” by their web addresses, and can block senders that are not bonded. Next week, it expects to announce that many of the best-known senders of non-spam bulk e-mail have signed up, along with the big Internet service providers, to its bonded-sender programme. The size of the bond will change over time, but is likely to be around $100,000 initially. The number of complaints made by recipients of e-mail from the sender will determine whether the bond is forfeited, in full or part. According to Mr Banister, “the first complaint will not cost you much, a 3-4 digit number will cause pain to the bonded sender and 10,000 or more will result in the most severe punishment.”

TECH TALK: Technology’s Next Markets: Three Tests for Disruptive Business

In an article in the Spring 2002 issue of the Sloan Management Review entitled Foundations for Growth: How to Identify and Build Disruptive New Businesses, Clay Christensen, Mark Johnson and Darrell Rigby propose two strategies for turning ideas into plans for disruptive growth businesses. They write: Companies seeking to create disruptive growth should first search for ways to compete against nonconsumption: peoples inability to use available products or services because they are too expensive or complicated.

As we seek to target technologys new markets, we will need to do both create new markets, and compete against the existing technology leaders from the low-end. To this end, it is, therefore, useful to consider and take the three tests that the authors have proposed:

1. Does the innovation target customers who in the past havent been able to do it themselves for lack of money or skills?

The Authors: If an idea cant be shaped to pass this litmus test, the chances for creating a new growth business diminish considerably. The innovation may succeed in satisfying some customers, but it wont create significant growth.

The Deviant Entrepreneur: Yes. Emerging market customers have had to stay away from new technologies because of lack of money to buy the dollar-denominated technologies. We want to pull in new customers and make them consumers of technology. In that sense, there is no direct competition from the entrenched players whose price points put their solutions beyond the reach of the market we intend to target.

2. Is the innovation aimed at customers who will welcome a simpler product?

Authors: If the innovation enables a new population of customers to consumer for themselves, it can more easily be shaped to pass the second litmus test: The disruptive product must be technologically straightforward, targeted at consumers who will be happy with a simple product.

DE: Yes. A simpler computing environment without having to worry about hardware and software upgrades, and a better and more intuitive desktop would be welcomed by the users in the emerging markets. Since we are targeting users who have had only limited exposure to technology, we are sure we can delight them.

3. Will the innovation help customers do more easily and effectively what they are already trying to do?

Authors: This test requires innovators to keep in mind one essential fact: At a fundamental level, the things that people want to accomplish in their lives dont change quickly. Because of this stability, if an idea for a new growth business is predicated on customers wanting to do something that hadnt been a priority in the past, it stands little chance of success.

DE: Definitely. The computer has been the transformational invention of the past quarter century, and by making it available to the mass markets at prices they can afford, we will definitely help them become more productive at whatever they do just as the users in the developed markets have benefited from the computer-based technologies in the past twenty years.

Next Week: Technologys Next Markets (continued)