Monday, September 13, 2010

Innovation vs Commoditisation of the technology Market

"Commoditysation" only occurs if there is lack of innovation. And by innovation I don't mean introducing a faster or smaller processor that that does the same thing but entirely new set of technologies that destroy the current market balance.

The Netbook was a product of extreme commoditisation. Nothing new, just the old stuff produced at extremely low cost and smaller size. A smaller and cheaper computer, not a better computer.

Now consider the iPad. While its component cost is similar to that of a netbook, the mix is entirely different as are the technologies used. The result, a dramatic new level of functionality rendering the netbook obsolete in many respects.

Most companies on the market today benefit from commoditisation. The reason is that they do not produce a complete product but rather compete for the parts of somebody else's product. Those that offer complete solutions however benefit from innovation more. The reason here is that profits are greater when your product offer something new, rather than counting on your suppliers to provide you with the same but cheaper components.

The question comes down to which force on the market will dominate? Well, evolution did not result in humans by making the DNA a commodity. It constantly experimented with a new variations and it constantly introduced new strains and mutations.

Between 1985 and 2005 there was a force in the technology market that choked innovation by constantly searching for it and destroying it using its market power. That was Microsoft. For 20 years the only thing that changed in the computer market was the speed of the components. The PC remained the same. Thing only looked prettier. Only only need to remember that they even tried to make the phones work and look like a PC!

However, even Microsoft could not be everywhere. One of the things they missed to swash in time was very small but very important "organism". It was called the iPod. It eventually grew to dominate the market not by destroying it but by out-inovating it, trough a new "DNA mix" every year. Sometimes one of the new iPod species did not have a successful "DNA mix" (iPod with 4 buttons, iPod Video, iPod Shuffle 3rd gen). However, its creator Apple kept trying harder and harder even when there was no other competition in the entire "food chain" left. The iPod now only competes with itself, but it has not stopped to try a new "DNA mix" every fall.

Unless the technology reaches a fundamental "bottleneck" or a higher power demands the stop of this constant innovation arguing that ever increasing GDP is unsustainable, the world will not plunge into another era of technological commodisaton.

Until that day, the creator that is Apple is likely to mirror the "evolution" success of its "species" in every market niche, as long as everybody refuses to build a complete solutions and rely on commoditisation.

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