The illusion of fast pace in the high tech industry

Many have characterized the high technology industry, in particular software, as one of rapid change where one must be ever vigilant and paranoid, constantly scanning the horizon for emerging threats from competitors and partners alike. However, this mental model of the high tech industry is too broad in its analysis. If we focused our attention on those sub segments of the industry that are the most profitable, have the least number of substitutes and enjoy the highest level of consumer lock-in, namely those sectors that are build on standards and/or exhibit network externalities, a different pattern emerges.

Technologies that benefit from being a standard setter or exhibit externalities often enjoy consumer lock-in (demand side externalities) and channel partner lock-in (supply side externalities). Such technologies spawn an ecosystem (or platform) of product offerings, partner complementary products and consumer preferences. Once such an ecosystem becomes a dominant player, they operate in a relatively low competitive environment and enjoy high margins. These ecosystems are hard to topple and thus industry change along that venue will necessarily be slow and innovation will likely be evolutionary rather than revolutionary (think MS OS or Adobe pdf viewer). Moreover, as these technology eco-systems grow larger in size (i.e. competitive value offering relies on multiple partners or consortia rather than a single firm), the pace of change/innovation will decrease further due to more complexity in coordination, incentives and goal alignment.

The high tech industry is not fast paced. It is characterized by a steady, perhaps rapid, background noise of evolutionary improvements and ecosystem adjustments, interrupted once in a while by a disruptive and loud eco-system platform crash and replacement. This is necessary for sustained profitability.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s