Posted by: rolfsky | December 29, 2006

The market/innovation cycle

THE PATTERN

Ok, so here’s the pattern. It’s related to my recent post on Web 2.0.

1) production technologies are priced so that only professionals have access to them, because they are able to vet and create products which consumers will buy. Because production/distribution costs are proportionally high, considerable time and investment is put into the product itself.

2) production and distribution technologies are driven to higher efficiencies by companies looking to increase profits. In an attempt to gain market share, some of these increased margins are translated into lower competitive costs. As barriers to entry are lessened, talented non-professionals (avid hobbyists?) are able to make ideas happen that would not have been accessible before. Usually, they are able to take a single, well-thought idea to market for profit.

3) as avid hobbyists enter the market, a secondary market for supporting them is created to take up the slack of what would normally be handled by the professionals. Avid hobbyists avail themselves of new, professional consulting and outsourcing firms and prove to be a valuable source of revenue.

4) professional outsourcing/small production/distribution firms, hoping to increase market penetration, expand their markets outside of avid hobbyists. To do this, they provide increasing levels of support (automated if possible) to the individual contributor and assume a larger percentage of the profits. Now we have everyone and their sister creating small-run, JIT, custom shirts, circuit boards, and websites. Because there is little need for a wide audience to support revenue generation, the custom items are aimed squarely at the combination of what was least available and most desirable in the previous market.

5) the non-designers are prolific and produce much niche work/product/content, of highly variable quality. Eventually, the market becomes so saturated that the “niche”-ness of a product is no longer a selling factor. The market begins to gravitate towards the best designs/products, which are by-in-large created by professionals or semi-professionals.

6) the efficiencies created by the push to a non-professional market are re-applied by professionals, who can now create high-quality products with low initial and continuing costs. We find ourselves essentially back at step 1, where professionals are competing against each other. Now, with higher margins, they will sacrifice some of their profit to increase share.

WHAT THIS MEANS FOR INDUSTRY

The most simple observation is that someone is always dying to eat your lunch. While you may pay your professionals top dollar for the design work they do, there are just as talented avid-hobbyists that will work for free, fueled only by their passion.

The second observation is that the market you think you hold, is really not under your control. It’s actually under the control of your suppliers and manufacturers, who are beholden to nothing more than their profit. Diversification as a producer puts their eggs in multiple baskets to promote their long-term security. They need to move on to the “next” big thing perhaps even more than you do.

The third observation is the necessity of embracing new product/market/technology efficiencies. Your competitors are just now being born, and they are fresh to the market that you spend your hard-earned dollars building. That money you spent on expensive servers for 100% uptime? Total sunk cost. Completely gone. Your competitors face the market with no baggage and no need to create revenue to support their past actions. Clinging to the business practices which helped you build a market will result in an ultimate failure, as those processes/equipment/investment no longer make sense in the market you’ve now created.

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