Steve Pearlstein and the internet ecosystem

I’ve authored posts in the past about the dynamically competitive and highly innovative nature of the Internet ecosystem, the wide array of companies, providers and the users themselves that make the Internet valuable and a vital part of society. Recently, US Telecom hosted an event where this issue was discussed by Jonathan Sallet and Jeff Eisenach, both of whom have excellent papers exploring the economics and business model implications of dynamic competition in the Internet ecosystem. Links to Jeff’s paper and Jonathan’s can be found here and here.

This article by Steve Pearlstein in the Washington Post on Sunday (September 16, 2011) does an excellent job of explaining how the rapidly changing business models in the Internet ecosystem and the forces of technological change and consumer demand have led to innovation and more value for consumers. Here is what Pearlstein says about the nature of change in the Internet ecosystem (It is a long excerpt but worth reading):

“Rapid change in technology is obviously a common thread running through all of these stories. While it’s difficult to figure out how new technology will develop, it’s impossible to say how it will be adapted. It is only in hindsight that Nokia looks so dumb not to have fully understood the promise of surfing the net while listening to music or for BlackBerry not to have realized that people would prefer to type their messages on a flat screen than pushing buttons with their thumbs.”

“The key to success in such a fast-changing environment isn’t developing clairvoyance. It’s keeping a mind open to numerous possibilities, having the discipline to experiment with several conflicting strategies and moving quickly to embrace one of them when the direction of the market becomes clear.”

“A second lesson is that as long as the technology remains unsettled, so will be the business models around that technology.”

“Today it is gospel that success in the smartphone market requires integration and control of both hardware and software, just as Apple has done with all of its products. But that hasn’t assured the success of BlackBerry, which has stubbornly embraced the same model. And it doesn’t explain why Nokia, which once had not one but two operating systems, has scrapped them both and gone in with Microsoft’s new mobile operating system. Unless, of course, you believe that it’s only a matter of time before Microsoft buys hardware maker Nokia, following the path set by software maker Google last year when it bought hardware maker Motorola.”

“It may appear today as if competition from the likes of Amazon dooms brick-and-mortar retailers like Best Buy, particularly for low-margin appliances and electronic equipment. But perhaps there is a good business to be had by unbundling the sale of hardware from the services required to demonstrate and explain it, install it and service it, which can be charged separately for customers who chose to buy their equipment elsewhere. Under such a model, it would be Best Buy that has the brighter future, and Amazon that gets stuck competing in a low-margin commodity competition.”

“The point here is that over the next decade we’re likely to see many more Nokias, RIMs and Best Buys before the technology sector settles into a more stable, predictable competitive dynamic. Until then, you should be highly skeptical of anyone who claims to know how it’s going to shake out.”

A new book by Alan Wurtzel, a former chief executive and chairman of Circuit City during its heyday, is also referenced by Sloane in his article. It makes much the same point – no company can sit on its laurels in the dynamically competitive and changing Internet ecosystem. The book is coming out next month. Wurtzel and his company were profiled in Jim Collins’s best-selling management book, “Good to Great,” in 2001 as Pearlstein notes. Wurtzel’s book - “Good to Great to Gone,” looks at lessons Wurtzel takes away from Circuit City’s subsequent demise. He basically says they knew change was coming but in the end they could not make the transition fast enough.

This phenomenon – best captured in the classic series by Clayton Christensen “The Innovators’ Dilemma” – is a key feature of the Internet ecosystem. We’ve often said that this dynamically competitive and innovative ecosystem does not fit the anticipatory regulatory models of our existing policy structure. But the truth is that not only regulators and policy makers but business leaders as well can’t predict the direction innovation and competition will take with regard to the Internet ecosystem. And it is a good thing they can’t because this openness to change and the willingness to adopt a whole new direction is what helps make the Internet so valuable to everyone.