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SpectralShifts Blog 
Sunday, January 29 2012

Every institution, every industry, every company has or is undergoing the transformation from analog to digital.  Many are failing, superseded by new entrants.  No more so than in the content and media industries: music, retail, radio, newspaper and publishing.  But why, especially as they’ve invested in the tools and systems to go digital?  Their failure can be summed up by this simple quote, “Our retail stores are all about customer service, and (so and so) shares that commitment like no one else we’ve met,” said Apple’s CEO. “We are thrilled to have him join our team and bring his incredible retail experience to Apple.”

Think about what Apple’s CEO emphasized.  “Customer service.”  Not selling; and yet the stores accounted for $15B of product sold in 2011!  When you walk into an Apple store it is like no other retailing experience, precisely because Apple stood the retail model on its head.  Apple thought digital as it sold not just 4 or 5 products--yes that’s it—but rather 4-5 ecosystems that let the individual easily tailor their unique experience from beginning to end.

Analog does not scale.  Digital does.  Analog is manual.  Digital is automated.  Analog cannot easily be software defined and repurposed.  Digital can.  Analog is expensively two-way.  With Digital 2-way becomes ubiquitous and synchronous.  Analog is highly centralized.  Digital can be easily distributed.  All of this drives marginal cost down at all layers and boundary points meaning performance/price is constantly improving even as operator/vendor margins rise.

With Digital the long tail doesn’t just become infinite, but gives way to endless new tails.  The (analog) incumbent sees digital as disruptive, with per unit price declines and same-store revenues eroding.  They fail to see and benefit from relative cost declines and increased demand.  The latter invariably occurs due to a shift from "private" to public consumption, normal price elasticity, and "application" elasticity as the range of producers and consumers increases.  The result is overall revenue growth and margin expansion for every industry/market that has gone digital.

Digital also makes it easy for something that worked in one industry to be easily translated to another.   Bill Taylor of Fast Company recently wrote in HBR that keeping pace with rapid change in a digital world requires having the widest scope of vision, and implementing successful ideas from other fields.

The film and media industries are a case in point.  As this infographic illustrates Hollywood studios have resisted “thinking digital” for 80 years.  But there is much they could learn from the transformation of other information/content monopolies over the past 30 years.  This blog from Fred Wilson sums up the issues between the incumbents and new entrants well.  Hollywood would do well to listen and see what Apple did to the music industry and how it changed it fundamentally; because it is about to do the same to publishing and video.  If not Apple then others.

Another aspect of digital is the potential for user innovation.   Digital companies should constantly be looking for innovation at the edge.  This implies a focus on the “marginal” not average consumer.  Social media is developing tremendous tools and data architectures for this.  If companies don’t utilize these advances, those same users will develop new products and markets, as can be seen from the comments field of this blog on the financial services industry.

Digital is synonymous with flat which drives greater scale efficiency into markets.  Flat (horizontal) systems tend toward vertical completeness via ecosystems (the Apple or Android or WinTel approach).  Apple IS NOT vertically integrated.  It has pieced together and controls very effectively vertically complete solutions.  In contrast, vertically integrated monopolies ultimately fail because they don’t scale at every layer efficiently.  Thinking flat (horizontal) is the first step to digitization.

Related Reading:
Apple Answers the Question "Why?" Before "How?" And "What?"
US Govt to Textbook Publishers: You Will Go Digital!
This article confused vertical integration with vertical completeness
Walmart and Retailers Need to Rethink Strategy
Comparison of 3 top Fashion Retailers Web and App Strategies

Software Defined Networking translated to the real world

Posted by: Michael Elling AT 10:54 am   |  Permalink   |  0 Comments  |  Email
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