Abstracting Innovation

I just finished The Upstarts by Brad Stone. The book details the founding and first few years of Airbnb and Uber. Its coverage of Uber’s founding is particularly poignant given the recent anger towards that company. If you want to read more about that story, go check out my post from last week or read Daniel Compton’s post on the potential ramifications of Google’s lawsuit against Uber and Otto.

The Upstarts also got me thinking about the ideation of new technological innovations. In this post, I’ll try to illustrate a framework for thinking about the growth and maturity of similar new technologies. (As I started writing, it quickly became apparent that there was more content here than I originally thought. As such, I think this will be a three-part post that I’ll flesh out over the next couple weeks).

The Innovation Cycle

All new technologies go through a cycle whereby they are invented, introduced as a unique feature, and commoditized. After commoditization (ubiquity), they either go extinct or are reborn in a new iteration with the benefit of underlying technological improvements. I’ve attempted to illustrate this relationship below.

In this model, new technology arises in a few different ways. It is then launched as a unique feature controlled by a small number of stakeholders. The technology then becomes pervasive and permanent through commoditization, which means that it becomes an interchangeable good with no meaningful qualitative differences across its providers. Finally, the feature either goes extinct, finds new use cases downstream, or is reinvented due to new upstream technologies. Let’s break down each step of the process.

Invention

Historically – although there are exceptions – new consumer and enterprise technology came about in one of three ways:

1. Government research
2. New social norms
3. Invention out of necessity

Government research is responsible for most of the ‘general-purpose’ technologies that the modern world couldn’t live without: GPS, the internet, RAM, and microprocessors are just a few examples. However, most of these technologies were invented many decades ago. Recently, innovation has shifted to the private sector. There are a number of reasons why this happened – I’ve provided a few below:

• Decreasing cost of computing power
• Distribution of computing resources available to everyone
• Proliferation of graduate research students including many from formerly developing countries starting private companies
• Changing nature of corporations to include research labs and venture departments internally

Basically, the tools needed to create innovative products have been democratized to the point that they are freely available to all (the innovation cycle itself has been commoditized!). Today, new innovations are either born out of changing social norms and generational shifts or are created by companies to solve their own internal problems.

A quick look at the raft of large private technology companies today provides a decent backdrop for thinking about how changing social norms are responsible for the formation of many of today’s most impactful and innovative brands. Three of the largest private U.S. tech companies have a product that offers access to shared goods and services. These are, of course, Airbnb, Uber, and WeWork. Ignoring the necessity of the smartphone/internet to these products, I contend that each of these business’ products would have been largely unfathomable 50 years ago. If you asked consumers in the 60s whether they would be comfortable sharing their home or car with strangers, or if you asked companies whether they would be willing to work in an open shared space next to their competitors, I think all parties would have responded with a resounding no.

The Great Recession created ~2 generations of consumers that are fundamentally averse to debt and ownership. While the seeds for the sharing economy were likely planted with the growth and maturity of millennials and Generation Z, the lasting scars and slow recovery of the economy since 2008 have created millions of consumers that are resistant to the commitment of ownership and the debt that comes with it.

Modern innovation is also born out of necessity. If we continue looking down the list of valuable private companies, we can see a few examples of companies whose products were created as a tool used internally within a company. Slack, the popular team messaging tool, was created within a gaming company to help improve communication and collaboration internally. Cloudera, the database software company, was founded by Yahoo, Google, Facebook, and Oracle engineers to help bring Hadoop to industries other than technology. Hadoop is an open-source distributed database tool that was created within Yahoo.

While many of the primary innovations that occurred in decades past came about because of hardware innovations funded by public entities, the explosion of software and IT technologies coupled with social and commercial trends is largely responsible for the ideas impacting our world today.

New Features

Shortly after its invention, a new product or use of technology enjoys a short-lived period as a vertically-integrated product/feature unique to its inventor. During that period, users flock to that service primarily due to the novelty of the new product. After the initial exuberance, one of three things happens:

1. The initial surge of users and interest is only hype and the product slowly dies out. There may remain a dedicated base of loyal or niche users, but the product remains essentially unique to its creator. I think Houseparty is at this stage in its lifecycle.
2. The product slowly gains users but adoption isn’t as widespread as the initial trajectory suggested. Total users are asymptotic to a decent and sustainable number. Competitors may offer similar products but new companies aren’t formed to copy the new feature. The product reaches permanence and acceptance in popular culture but continued attention doesn’t substantially grow its user base. I think Twitter is a good example of this.
3. The product gains traction outside the initial surge of early adopters. Adoption continues and new use cases are invented regularly. There is a strong mix of niche use case, hardcore users, and casual users. Competitors spring up to copy the initial concept and add their own differentiating factors, but the core product remains essentially homogeneous across all providers. The product becomes a standard feature in many different use cases and is no longer seen as a differentiating factor. Most people will eventually have some sort of contact with the product. The product will eventually go off the market when the next generation is introduced. I think the video chat that Skype helped pioneer is a good example of this.

Commoditization

The third case above is, of course, commoditization. When a good or service is commoditized, it becomes readily and cheaply available from a wide range of providers. While different providers may offer slightly different features to entice consumers to buy from them, the product from one provider is largely indistinguishable from that of a competitor.

The chart above illustrates the process whereby a feature is invented and then becomes a commodity. Most technology hardware has been commoditized. Cloud computing is in the final stages of commoditization right now. Software providers have to constantly reinvent and improve their products to avoid commoditization.

Commoditization means that the field is level for all players. Everyone gets to start from the same point because everyone has the exact same resources available to them (except human capital). The commoditization of IT and cloud computing has enabled the rapid growth and massive scale of today’s tech leaders. This trend will only continue, although the next generation of technologies like machine learning and AI might resist commoditization given their need for massive data sets to function.

Snap is at the point in the lifecycle of its product Snapchat where it is being tested by the forces of commoditization. Snapchat has two core features: 1. disappearing picture and video messages and 2. stories. While it has launched other features like Discover, I think that the core of Snapchat’s user base primarily uses the service for one of the two reasons listed above. So, then, given that Snapchat’s main features are simply software products, why would they resist the forces of commoditization when so many other products haven’t?

The crux of that question is whether Snap is a brand or a feature set. There are hundreds of clothing brands that make black men’s t-shirts. I have my favorites, and I like them for often bizarre reasons. So, is Snap an enduring brand, much like J. Crew has held on to a category of products for so long? Will consumers continue to use Snap when its main products are available elsewhere? Or is Snap’s feature set simply a new invention that others will implement in their own way (say, on iMessage or Instagram)? Did Snap simply shift the model of media consumption for others to implement on their own channels?

My next post will talk about why some products and companies resist commoditization.

Conclusion

New technology innovations may seemingly come out of thin air, but shifts in generational values and corporate models are largely responsible for most of the new technologies we have today. Once a new product is introduced, its owner enjoys a period of time where it owns the entire market. Once the novelty wears off, the product goes through a period where it either achieves mass adoption or sees rapid extinction. In the former case, imitators move in and the product becomes a low-cost commodity good.

In the next post on this topic, I’ll go through some case studies of technology commoditization. In the final post, I’ll explore why some technologies resist commoditization trends.

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Notes

1. Daniel Compton: The Uber Bombshell
2. TED Blog: Mariana Mazzucato
3. Beating the Commoditization Curve
4. Forbes: Shenzen’s High-Tech Empire
5. HBR: It Doesn’t Matter
6. BPD: Search and Such
7. BPD: Snapchat vs. Instagram
8. TechCrunch: Introducing Instagram Stories