Economics of Technology – Page 84

Internet Enabled Creative Destruction

(p. R4) To understand the challenges that faced businesses the past 10 years, consider the household names that didn’t make it through the decade: Anheuser-Busch, Compaq, Gillette, Enron, Lehman Brothers, Merrill Lynch, WorldCom.
. . .
As the decade rolled on, the Internet came to be known for destroying businesses. It upended decades-old business models in fields such as media, advertising, travel and entertainment, as consumers and advertisers migrated to the digital world.
But that same shift created opportunity. No one epitomized that better than Google Inc. A mere 15 months old at the beginning of the decade, it morphed from a startup technology company into an advertising and media powerhouse and is now plotting a move into communications. There, it will clash with Apple Inc., which was reborn following the return of co-founder Steve Jobs in 1997. Apple’s iPod and iTunes reshaped the music industry; its iPhone revolutionized communications by opening itself to independent innovators.
“This is what [Austrian economist Joseph] Schumpeter had in mind with his term ‘creative destruction,'” says Paul David, an economic historian at Stanford University. Industrial collapse is a “messy, messy process,” Mr. David says. “It’s a great drama, and watching it play out in this decade has been very interesting.”

For the full story, see:
SCOTT THURM. “Creativity, Meet Destruction; The Decade Rewrote the Corporate Handbook, Thanks to the Web, Globalization and the Collapse of Two Bubbles.” The Wall Street Journal (Mon., DECEMBER 21, 2009): R4.
(Note: ellipsis added.)
(Note: the online version of the article is dated DECEMBER 22, 2009.)

“It Isn’t the Consumers’ Job to Know What They Want”

“Steven P. Jobs has played a significant role in a string of successful products at Apple, including the iPad, shown above, which was introduced last year.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B1) Shortly before the iPad tablet went on sale last year, Steven P. Jobs showed off Apple’s latest creation to a small group of journalists. One asked what consumer and market research Apple had done to guide the development of the new product.

“None,” Mr. Jobs replied. “It isn’t the consumers’ job to know what they want.”
For years, and across a career, knowing what consumers want has been the self-appointed task of Mr. Jobs, Apple’s charismatic co-founder. Though he has not always been right, his string of successes at Apple is uncanny. His biggest user-pleasing hits include the Macintosh, the iMac, iBook, iPod, iPhone and iPad.
But as he takes a medical leave of absence, announced on Monday, the question is: Without him at the helm, can Apple continue its streak of innovation, particularly in an industry where rapid-fire product cycles can make today’s leader tomorrow’s laggard?
. . .
(p. B4) With the iPad tablet, Apple jump-started a product category. But with the iPod (a music and media player) and iPhone (smartphone), Apple moved into markets with many millions of users using rival products, but he gave consumers a much improved experience.
“These are seeing-around-the-corner innovations,” said John Kao, an innovation consultant to corporations and governments. “Steve Jobs is totally tuned into what consumers want. But these are not the kind of breakthroughs that market research, where you are asking people’s opinions, really help you make.”
Regis McKenna, a Silicon Valley investor and marketing consultant, said employees at Apple stores provide the company with a powerful window into user habits and needs, even if it is not conventional market research.
“Steve visits the Apple store in Palo Alto frequently,” said Mr. McKenna, a former consultant to Apple.
. . .
In a conversation years ago, Mr. Jobs said he was disturbed when he heard young entrepreneurs in Silicon Valley use the term “exit strategy” — a quick, lucrative sale of a start-up. It was a small ambition, Mr. Jobs said, instead of trying to build companies that last for decades, if not a century or more.
That was a sentiment, Mr. Jobs said, that he shared with his sometime luncheon companion, Andrew S. Grove, then the chief executive of Intel.
“There are builders and traders,” Mr. Grove said on Tuesday. “Steve Jobs is a builder.”

For the full story, see:

STEVE LOHR. “The Missing Tastemaker?” The New York Times (Weds., JANUARY 19, 2011): B1 & B4.
(Note: ellipses added.)
(Note: the online version of the article is dated January 18, 2011 and has the title “Can Apple Find More Hits Without Its Tastemaker?.”)

REVISE THIS ONE: Patents Needed to Provide Money for “the Many Fruitless Experiments”

(p. 234) . . . ; together, Watt and Arkwright wrote a manuscript entitled “Heads of a Bill to explain and amend the laws relative to Letters Patent and grants of privileges for new inventions,” essentially a reworking of Coke’s Statute of 1623 that had created England’s first patent law. In addition to its policy prescriptions, which were largely an unsuccessful argument against the requirement that patent applications be (p. 235) as specific as possible, the manuscript offered a remarkable insight into Watt’s perspective on the life of the inventor, who should, in Watt’s own (perhaps inadvertently revealing) words, “be considered an Infant, who cannot guard his own Rights”:

An engineer’s life without patent is not worthwhile . . . few men of ingenuity make fortunes without suffering to think seriously whether the article he manufactures might, or might not, be Improved. The man of ingenuity in order to succeed must seclude himself from Society, he must devote the whole powers of his mind to that one object, he must persevere in spite of the many fruitless experiments he makes, and he must apply money to the expenses of these experiments, which strict Prudence would dedicate to other purposes. By seclusion from the world he becomes ignorant of its manners, and unable to grapple with the more artful tradesman, who has applied the powers of his mind, not to the improvement of the commodity he deals in, but to the means of buying cheap and selling dear, or to the still less laudable purpose of oppressing such ingenious workmen as their ill fate may have thrown into his power.

Source:
Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.
(Note: the second ellipsis and the italics in original; the first ellipsis added.)

Fluorescent Bulbs Burn Out Much Faster than Utility Predicted

(p. A5) When it set up its bulb program in 2006, PG&E Corp. thought its customers would buy 53 million compact fluorescent bulbs by 2008. It allotted $92 million for rebates, the most of any utility in the state. Researchers hired by the California Public Utilities Commission concluded earlier this year that fewer bulbs were sold, fewer were screwed in, and they saved less energy than PG&E anticipated.

As a result of these and other adjustments, energy savings attributed to PG&E were pegged at 451.6 million kilowatt hours by regulators, or 73% less than the 1.7 billion kilowatt hours projected by PG&E for the 2006-2008 program.
One hitch was the compact-fluorescent burnout rate. When PG&E began its 2006-2008 program, it figured the useful life of each bulb would be 9.4 years. Now, with experience, it has cut the estimate to 6.3 years, which limits the energy savings. Field tests show higher burnout rates in certain locations, such as bathrooms and in recessed lighting. Turning them on and off a lot also appears to impair longevity.

For the full story, see:
REBECCA SMITH. “The New Light Bulbs Lose a Little Shine; Compact Fluorescent Lamps Burn Out Faster Than Expected, Limiting Energy Savings in California’s Efficiency Program.” The Wall Street Journal (Weds., JANUARY 19, 2011): A5.

When Yarn Was Scarce There Was Less Incentive to Develop Power Looms

(p. 223) Though power looms had existed, at least in concept, for centuries (under his sketch for one, Leonardo himself wrote, “This is second only to the printing press in importance; no less useful in its practical application; a lucrative, beautiful, and subtle invention”), there was little interest in them so long as virtually all the available yarn could be turned into cloth in cottages. This fact reinforced the weaver’s independence; but it also encouraged another group of innovative types who were getting ready to put spinning itself on an industrial footing.

Source:
Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.

Artisan’s Skills Were Still Required for Kay’s Flying Shuttle

(p. 223) Kay’s flying shuttle made it possible for weavers to produce a wider product, which they called “broadloom,” but doing so was demanding. Weaving requires that the weft threads be under constant tension in order to make certain that each one is precisely the same length as its predecessor; slack is the enemy of a properly woven cloth. Using a flying shuttle to carry weft threads through the warp made it possible to weave a far wider bolt of cloth, but the required momentum introduced the possibility of a rebound, and thereby a slack thread. Kay’s invention still needed a skilled artisan to catch the shuttle and so avoid even the slightest bit of bounce when it was thrown across the loom.

Source:
Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.

Cornucopians Win Another Bet with Malthusians

(p. D1) Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011.

The bet was occasioned by a cover article in August 2005 in The New York Times Magazine titled “The Breaking Point.” It featured predictions of soaring oil prices from Mr. Simmons, who was a member of the Council on Foreign Relations, the head of a Houston investment bank specializing in the energy industry, and the author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.”
I called Mr. Simmons to discuss a bet. To his credit — and unlike some other Malthusians — he was eager to back his predictions with cash. He expected the price of oil, then about $65 a barrel, to more than triple in the next five years, even after adjusting for inflation. He offered to bet $5,000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars.
I took him up on it, not because I knew much about Saudi oil production or the other “peak oil” arguments that global production was headed downward. I was just following a rule learned from a mentor and a friend, the economist Julian L. Simon.
As the leader of the Cornucopians, the optimists who believed there would always be abundant supplies of energy and other resources, Julian figured that betting was the best way to make his argument. Optimism, he found, didn’t make for cover stories and front-page headlines.
. . .
(p. D3) When I found a new bettor in 2005, the first person I told was Julian’s widow, Rita Simon, a public affairs professor at American University. She was so happy to see Julian’s tradition continue that she wanted to share the bet with me, so we each ended up each putting $2,500 against Mr. Simmons’s $5,000.
. . .
The past year the price has rebounded, but the average for 2010 has been just under $80, which is the equivalent of about $71 in 2005 dollars — a little higher than the $65 at the time of our bet, but far below the $200 threshold set by Mr. Simmons.
What lesson do we draw from this? I’d hoped to let Mr. Simmons give his view, but I’m very sorry to report that he died in August, at the age of 67. The colleagues handling his affairs reviewed the numbers last week and declared that Mr. Simmons’s $5,000 should be awarded to me and to Rita Simon on Jan. 1, . . .

For the full commentary, see:
JOHN TIERNEY. “Findings; Economic Optimism? Yes, I’ll Take That Bet.” The New York Times (Tues., December 28, 2010): D1 & D3.
(Note: ellipses added.)
(Note: the online version of the article is dated December 27, 2010.)

London’s Albion Mills Was “Likely” Destroyed By Millers’ Arson

(p. 187) The Albion Mills, as it would be called, was built on a scale hitherto unimagined. The largest flour mill in London in 1783 used The Albion Mills, as it would be called, was built on a scale hitherto unimagined. The largest flour mill in London in 1783 used four pairs of grinding stones; Albion was to have thirty, driven by three steam engines, each with a 34-inch cylinder. Within months after its completion, in 1786, those engines were driving mills that produced six thousand bushels of flour every week–which both fed a lot of Londoners and angered a lot of millers.

The Albion Mills was London’s first factory, and its first great symbol of industrialization; its construction inaugurated not only great age of steam-driven factories, but also the doomed though poignant resistance to them. That resistance took the shape of direct action–no one knows how the fire that destroyed the Albion Mills in 1791 began, but arson by millers threatened by its success seems likely– . . .

Source:
Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.
(Note: ellipsis added.)

Trade Stats Count iPhone as Chinese Export, Despite Only 3.6% of iPhone Costs from China

Source of graph: online version of the WSJ article quoted and cited below.

(p. B1) . . . two academic researchers estimate that Apple Inc.’s iPhone–one of the best-selling U.S. technology products–actually added $1.9 billion to the U.S. trade deficit with China last year.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.
“A distorted picture” is the result, they say, one that exaggerates trade imbalances between nations.
Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China’s contribution is the last step–assembling and shipping the phones.
So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month.

For the full story, see:
ANDREW BATSON. “Not Really ‘Made in China’; The iPhone’s Complex Supply Chain Highlights Problems With Trade Statistics.” The Wall Street Journal (Thurs., December 16, 2010): B1 & B2.
(Note: ellipsis added.)
(Note: the online version of the article is dated DECEMBER 15, 2010nd that were not in the print version.)

The research report breaking down iPhone costs by country is:

Xing, Yuqing, and Neal Detert. “How the Iphone Widens the United States Trade Deficit with the People’s Republic of China.” ADBI Working Paper Series, no. 257, December 2010.

Under Health Care ‘Reform’ the Total Cost of Health Care Will “Go through the Roof!”

“Jonathan Bush, nephew of one former president and cousin of another, built a small medical practice into a national enterprise with nearly 1,200 employees.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B10) In the world of health care innovation, the founder and chief executive of Athenahealth has an outsize name. In part, that’s because his name is Jonathan Bush, and he is the nephew of one former president and the cousin of another. But it’s also because his company has mastered the intricacies of the doctor-insurer relationship and become a player in the emerging medical records industry.

Based in Watertown, Mass., Athenahealth offers a suite of administrative services for medical practices. It collects payments from insurers and patients, and it manages electronic health records and patient communication systems. All of this is done remotely through the Internet — or “in the cloud,” as Mr. Bush puts it. Doctors don’t have to install or manage software or pay licensing fees; instead, Athenahealth keeps a percentage of the revenue.
. . .
Q. What’s going on in the health care industry to deliver that kind of growth to you?
A. We are a disruptive technology. We are the only cloud-based service in an industry segment full of sclerotic, enormous, personality-free corporations that have been in business making 90 percent margins doing nothing for decades and decades.
Q. What keeps other companies from building cloud-based systems?
A. For software companies, the biggest barrier to entry is that they give up their business model. Those companies would get hammered on Wall Street if they started selling a service that they have to deliver at a loss for five years. In terms of new entrants, there are two things that we’ve done that would take a good decade to replicate. One, we’ve built out the health care Internet. We’ve been building connections into insurance companies and laboratories and hospital medical records for years and years and years.
And the other barrier to entry is that rules engine. Every time a doctor anywhere in the country gets a claim denied, we have analysts ask the Five Whys. When we get to root cause, we write a new rule into Athenanet and from that day on, no other doctor gets that particular denial from that particular insurance company ever again. We now know of 40 million ways that a doctor can have a claim denied in the United States. The average practice has to rework about 35 percent of their claims, and we only have to rework about 5 percent of ours.
Q. What’s the prognosis for bill collecting under health care reform?
A. Well, there’s going to be new connectors and a whole series of new insurance products that will be managed by the states’ health insurance commissioners. And the law provides for every state to do all of these its own way, so they will have their own rules and regulations, and each state will do it differently. That sounds like springtime in Complexity Land.
Q. What do you think will happen to the total cost of health care under reform?
A. Oh, it’s going to go through the roof! It’s widely accepted that this is not a cost-reform bill — it’s an access bill. It’s in fact a cost-expansion bill.

For the full story, see:

ROBB MANDELBAUM. “Views of Health Care Economics From a C.E.O. Named Bush.” The New York Times (Thurs., September 9, 2010): B10.
(Note: ellipsis added.)
(Note: the online version of the article has the date September 8, 2010.)

The Hungry Innovate Because They Have Less to Lose

(p. 124) . . . , the eighteenth-century Swiss mathematician Daniel Bernoulli,” who coined the term “human capital,” explained why innovation has always been a more attractive occupation to have-nots than to haves: not only do small successes seem larger, but they have considerably less to lose.

Source:
Rosen, William. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention. New York: Random House, 2010.
(Note: ellipsis added.)