by Forbes Staff
While sending out all these feelers, Microsoft has assembled an impressive team of computer scientists, including Gordon Bell, the legendary minicomputer inventor, to work on blue-sky projects.
Hedge, hedge, hedge. Keep putting out those feelers. Microsoft labs are doing a lot of work in speech recognition but that hasn’t stopped Gates from investing in Lernout & Hauspie, a German designer of speech recognition software.
Bill Gates isn’t the only business person putting out feelers against small changes that could become giant ones. Intel has a portfolio worth $750 million invested in 125 small companies. In the venture capital world that buys lots of startups. And yes, Intel hopes that some of these investments will turn out to be winners, but a big reason for all this spending is to keep Intel alert to what’s going on out there in the marketplace.
Intel has invested in CyberCash, an outfit developing an electronic payments system, CNET, an online news service, and OnLive!, which has created an Internet chat room with 3D avatars. It’s unlikely Intel wants to be in any of these businesses, but what happens in them could matter a lot for its chip business. These investments help protect Intel from being blindsided.
Silicon Valley isn’t the only place where smart people are consciously or unconsciously recognizing what chaos theory means to business. Fashion is about as chaotic a business as exists. Gap Inc., among the smartest purveyors of fashion, has become a master at improvisation and at utilizing computers for picking up early signs of change.
“Retailing has gone from an information-scarce to an information-rich environment,” says Erik Brynjolfsson, a professor at MIT’s Sloan School of Management.
In the information-scarce environment, a retailer had to decide by intuition and experience what items to stock. In the information-rich environment, she who acts first on new information picks up the prizes.
Gap Inc.’s Banana Republic store near San Francisco’s fashionable Union Square is filled with leather jackets, sleek suits and Italianate sweaters. In the middle of the store, a sudden change of pace: shelves of dishes and cutlery, tables stacked high with bedding and artful displays of candlesticks and picture frames, all influenced by Japanese minimalist design.
An apparel retailer selling minimalist home furnishings?
Improvisation at work. Sales clerks in Banana Republic stores noted that customers often asked to buy the “props” decorating their stores.
Sensing instantly the significance of this bit of gossip, the company ordered pillows, picture frames and candlesticks for the following Christmas. Big success. Within a year the chain’s larger stores added home furnishings departments.
Gap Inc. didn’t bring in a consultant to tell it to get into home furnishings. Nor did it do extensive marketplace research. It threw the stuff out there and it stuck.
You don’t learn the new paradigm just by buying lots of computers.
MIT professor Brynjolfsson recalls a recent visit to a chief executive who proudly showed off a bank of computer displays in his office.
“There was no way he could absorb, much less act on, the information, and it wasn’t getting out to people who could,” says Brynjolfsson.
You need to create a system built around understanding and acting fast on the computer-generated information. As Brynjolfsson likes to point out, this requires a decentralized system. Yahoo, the Internet directory started by Stanford University graduate students Jerry Yang and David Filo, is a child of improvisation.
Yang and Filo started cataloging what they regarded as the best of the new sites that spring up each minute on the Internet. While big media companies like Time Warner and The New York Times Co. tried to force electronic versions of their print publications on cybernauts, Yahoo tapped the Web’s vibrant creative community to come up with entirely new products. Where the established players were counting on experts and experience to design their products, Yahoo was tapping the entire chaotic marketplace.
Yahoo delivers an average of 95 million webpages a day, making it the most-accessed content site on the Net. Yahoo throws new programs on its site without researching or brainstorming, making changes daily.
Improvisation is its middle name. Within two weeks Yahoo knows whether it has a hit or a flop, and the flops get scrapped. “There is no such thing as perfection,” says Yang.
Contrast this chaotic but cheap and fast process with the long, slow process of making a movie or a TV series. It takes $1 million to develop the pilot for a half-hour TV sitcom and a little more than a year to get it on the air. At Yahoo it takes the salary of an Internet surfer and a program “producer.” In the old days of Hollywood, moguls like Louis B. Mayer decided what the public wanted and delivered it to them. Yang has become an entertainment and communications mogul not by deciding what the public wants, but by direct and instantaneous communication with the public.
“We’re both short-attention-span people,” Yang says of himself and his partner. Which is why they are naturals for the rapid-feedback loop that business is fast becoming.
Discount brokerage giant Charles Schwab & Co. calls this feedback practice “recycling.” “You can’t invent products in the lab or with a focus group,” says Schwab President David Pottruck. “You go out into the market with a product and then you fine-tune it until it works.” The discount brokerage has unleashed new products at a blistering rate. A few of them hit it big, others wither—but the flood keeps coming.
Consider how Schwab “recycled” its mutual fund business, responsible for much of the firm’s rapid growth in recent years. In 1984 Schwab began offering about 100 no-load mutual funds to its discount brokerage customers. For the convenience of buying from Schwab rather than seeking out individual funds, customers were charged $50 per transaction. It wasn’t big money for transactions in the thousands of dollars, but customers balked. “They loved it in theory,” Pottruck recalls, “but they hated the $50 fee. It was weird. It’s like buying a nice new car and then sweating the price of the floor mats.”
Instead of complaining about how irrational the customers were, Schwab changed the product. Customers wanted cheap, Schwab would give them cheap.
It told the mutual funds that they would have to pick up the tab.
“Most of them told us to pound sand,” Pottruck says. Seven small firms agreed to pay the fee. In six months those funds saw assets rise between 40% and 50%. Schwab soon had hundreds of takers and a booming new business.
Inevitably, improvising produces lots of losers and requires a willingness to end up with egg on your face. In theory, at least, you could earn a better return on investment by trying to pick a few winners rather than scattering your investment money as Microsoft and Intel have done. But, says Microsoft technology guru Nathan Myhrvold: “The only thing more expensive than doing product development this way is not doing it this way.” How else can you catch the currents when that famous butterfly flutters?
TECHNOLOGY SUMMIT
By Tim W. Ferguson and Neil Weinberg
July 1998
JAPAN COULD DO with a bit of good news—and guess who was in Tokyo last month spreading some? Bill Gates, the planet’s richest man and its most famous missionary for technology. As the high-tech revolution made the once-stagnant U.S. economy boom, Gates preached, so would it rescue Japan’s sick economy.
Wherever Gates goes, as he did to Japan and the rest of shell-shocked Asia to unveil his new Windows 98 operating system, he carries with him some of the keys to the new kingdom. In Tokyo he appeared with executives of four consumer electronics giants. But he had a special date with his friend Nobuyuki Idei, a revolutionary in his own right as president of Sony Corp., arguably the most advanced and worldly of Japan’s technology companies.
Sony’s specialty is entertainment tech. Microsoft’s is information tech. The two technologies are blending, and their future together portends wondrous possibilities.
We interviewed Gates and Idei at a golf club near Narita Airport where Gates, an improving 23-handic
apper, enjoyed a game with Idei, a practiced 80s shooter.
Forbes: Sony Chairman Norio Ohga recently declared that Japan is on the verge of economic collapse. What do technology guys like you have to offer to get Japan back on its feet?
Gates: Certainly if you look at the U.S. economy, it’s a much better picture than anyone can explain. If you talk to Alan Greenspan or many of the intelligent observers, they think that the use of technology and the efficiency of technology is a major factor there. I certainly believe that. If you look at the innovation in our business, the [economic] opportunities are incredible.
During the past five years the information technology industry has generated a quarter of the U.S.’ real economic growth, and it now accounts for more than 8% of our national output—much of that for export. This pattern is being repeated in varying degrees around the world. And by helping people work from wherever they live. A Turkish Web designer in Istanbul can work for a company based in Boston. This helps democratize wealth.
Japan has a tradition of keeping information nonpublic. Isn’t this a drawback in the information age?
Gates: I think you’re vastly overstating any cultural impediment in Japan to using technology. Go back 10 years ago. Every article in America was about how Japan knew how to do things and we knew nothing. We had to throw out all our approaches. Every industry was going to go over to Japan. We didn’t stand next to our desks and sing songs, or what was it we needed to do?
Now, 10 years later, other than the U.S., what is the economy that has technology leaders, investment in education, world class excellence? Certainly Japan is in much better shape than most European countries.
Idei: Europe is very strong in telecommunications, with the GSM standard, and in digital terrestrial television. Europe will become stronger with the introduction of the euro single currency.
Getting back to Japan …
Gates: The fascination with technology in Japan is very, very high. There’s some work to be done on the communications infrastructure, government, capital allocation, but the sort of humble phase Japan is going through is just as valuable to Japan as the humble phase the U.S. went through 10 years ago was to the U.S.
Idei: More positive action should be taken in Japan to transform this country to a more American type of model. In that respect I think we need to change a lot.
Governments and politicians are not very comfortable with letting information flow freely.
Gates: When Martin Luther had a problem with the religious hierarchy, he printed 100,000 handbills and it was hard to stop, so printing democratized communications quite a bit. The Internet takes it one stage further, makes it tougher to block information. There are not many governments left that thrive on the ability to block information. Drive around China. There are quite a few satellite dishes. We have a research and development group in China, and I don’t think there’ll be a problem. I’m more worried about whether we can hire as many great people as we want than about restrictions. China’s at an early stage in all this stuff, and it’s amazing how open things are, actually, given where they are politically and economically.
Even before the Internet, communications were hard to control, what with printing presses, copying machines and satellite video. With the Internet it’s really hard to control. Information can get in and out of countries. That’s just a fact of life. Probably a good fact.
Singapore’s government limits access to newspapers and magazines that carry material it objects to.
Gates: Sit down and use the Internet. Tell me a webpage that’s limited.
In Singapore?
Gates: You might nominally be breaking the law.
OK. I’ll have to go down to Singapore and log on to some of the Swedish sites.
Gates: Yeah. You’ll find it’s unblocked.
How is the Internet changing the ways information flows? How is the Internet radically different?
Gates: If you want defining events for the Internet, you could look at something like political elections and the ability to go and see every speech a candidate has given. To see his votes and search for the things you care about. Or go to a chat room where people kind of organize.
As you read the newspaper, coverage of an election and political news just isn’t good enough. But on the Internet it’s fantastic. It will redefine some of those activities.
Idei: Instead of meeting with Bill Gates, you can visit the Microsoft website, and you can learn almost everything—who is doing what.
Gates: Every speech I give.
Idei: The same with me.
The Internet allows individuals who are interested in politics to absorb more material, but it has not in fact widened participation in voting. Doesn’t technology, in some respects, accentuate differences between the uninformed and those who have a hunger for information?
Gates: Well, you can draw people in. For example, if they’re reading a news article about a political issue, you can include how their representative voted. We do that on our MSNBC website. Then you can just click and send mail to your representative and say whether you agree or disagree. So the ease of learning about things is much greater.
I vote in local elections. I don’t know these people, but with the Web I can just go to a couple of voter sites and feel that I’m semi-informed. It’s all driven by curiosity. Fortunately, young people in particular have a lot of curiosity.
Technology empowers people at every level, and it brings information and participation to people who never before had it. You will see electronic voting and virtual town meetings, and all this will gradually strengthen democracies in every country and at every level.
Idei: Technology is also a problem in an aging society [as we have in Japan]. I think one of the missions for Sony is to make it easier to use or easier to access information for the older generation.
Both of your companies are involved in WebTV. What have you learned from WebTV about people who are slow to adopt technology? How can you broaden this usage of the Internet to people who generally would not want to go near a computer?
Gates: In WebTV the user interface is very good so there are a lot of older people using it, often primarily to email their grandchildren. I view WebTV as in its early stages. As the hardware improves, as the speed of connections improves, the concept of something simpler than the PC, but still interactive, is shared by Sony and Microsoft. We’re brainstorming together on that.
Idei: In television’s case you can receive all the information passively; the anchorperson is a kind of psychological link to access these stations. But in the case of a website I think we need to find something more. … What’s important is to bring the website and the average person together. This is really important. I don’t know what it is, but I think we should find a way. That’s the reason Sony started many channels on SkyPerfecTV! in Japan. Channels are a kind of knowledge navigator to find something of interest. Many people will see the sites by seeing television first. These are things we have to do. Today’s technology is so vertical I think we need collaboration between Microsoft and Sony to make the bridge between computer-based technology and passive viewing habits.
Bill, you mentioned “friction-free capitalism” in your book [The Road Ahead]. A buyer and a seller can deal directly, and middlemen who don’t add value will disappear. At the same time my experiences in Japan, where I’ve lived on and off for 15-plus years, show the government is very strongly committed to maintaining inefficient mom-and-pop shops.
Idei: We were looking at Japan from the helicopter this morning, and he [Gates] said there are no shopping malls. [But] in all countries, all societies, you have rulemakers and rule-breakers. In Japan there are a lot of retailers who are trying to break the traditions. So they are very prosperous. In Japan in five or 10 years the trend in distribution will be much, much closer to the American model.
Gates: If you think of the Internet as sort of the next stage [in retailing], it may be more exciting to Japan than to the U.S. b
ecause you don’t have the big shopping centers. So if you want to get a special kind of luggage or clothing or an obscure book, it may be that the Internet, compared to physical distribution, is particularly advantageous. I don’t think there’ll be any restrictions on Internet shopping.
What’s next on the technology horizon?
Idei: I think parallel to the personal computer revolution there’s an explosion of digital cellular. This is already true. Today in Japan digital phones have become extremely popular. No one predicted that the market would be this big—close to 40 million mobile phone users. In the future, digital cellular will have picture communication [potential] so that kind of thing will happen very rapidly.
Why is this revolutionary?
Idei: Today’s digital cellular technology can only handle the transmission of voice and simple text data. However, from around 2001 the next-generation mobile communications service, called IMT-2000, will become available. This will be able to handle transmission of moving pictures.
Of course, even though the technology will be available, it does not necessarily mean that it will generate business. What will determine the strength of the service will be the type of products, content and lifestyle that can be provided. No matter how advanced the technology is, if you are not able to create a type of “killer application”—in other words, the right combination of product, content and service—you will not generate any business.
However, as we enter the age of multimedia mobile communications service, a company such as Sony will be in a very strong position. By combining our digital AV electronics expertise with our large content library, Sony will be able to create exciting new applications.
What happens to Sony’s huge television and content businesses?
Idei: I believe that the TV will evolve into a “home gateway” for accessing a wealth of interactive services. This will be in addition to using the TV for passive viewing. To achieve this, we need to further incorporate information technologies, especially software architecture, into consumer electronics appliances.
