Lewis' main premise in this book is that for companies in telecommunications and related industries, the old rules of classical economics relating to supply and demand no longer apply. Companies in this industry operate in what he calls 'internet time' (where the time from product development to market is vastly accelerated because companies rush to render their own products obsolete before anyone else does). Their goal is to reach a market position that Lewis terms 'mainstreaming', in which a company dominates the market by having a much larger share than anyone else. At this point, because the unit costs of production are so low (due to the accelerated learning curve that is also characteristic of the industry), profits are at a maximum (and huge)! This is the fundamental logic that should govern the development of marketing strategies in these companies.
In order to attain the nirvana of a mainstream position, in this industry product is often given away (think of Netscape making copies of its browser available for free, or Corel bundling its software products with sales of new computers). This builds up market share quickly and establishes a platform for further product and service development. Thus unlike the traditional economy, where the prevailing philosophy is 'demand creates supply', the rules of the new economy are that Œsupply creates demand¹.
"In essence, classical economics has production dogging demand - the manufacturer waits for demand to rise or fall before adjusting production. This friction or delay introduces cycles and uncertainty into traditional markets...In the classical economy, prices go down when demand goes down, forcing supply also to decline. In the friction-free economy, prices go down as supply goes up, forcing demand to rise.
Š the friction-free economy turns the supply-equals-demand rule upside down. Demand effortlessly follows production, because there is very little friction, and virtually no gravity. This leads to a radically different economy." (pp.10, 11)
According to Lewis, when considering an information product such as software, the old classical notion of diminishing marginal returns does not apply. In the classical economy, when a household bought a dishwasher for example, there was little need for a second, third and fourth dishwasher - beyond the first one, an extra dishwasher brought little or no 'additional value' to the members of the household. Thus there was diminishing marginal returns to households for dishwashers. With a software product, however, there is always a new upgrade or related product that consumers will need or want to get - so that in a sense there is increasing marginal returns.
"In the friction-free economy, consumers get hungrier as they eat more. For example, Microsoft customers want more and more software products from Microsoft. Why? Because users of software get locked into a particular word processor or publishing program. They do not want to learn a new system, so they keep buying the next version. Microsoft's profits grow as it releases new versions about every six months feeding off upgrades as well as new usersŠ.When this happens, the product has reached the mainstream." (p. 11)
The nature of the consumer market is also changing in response to telecommunications technologies. Lewis discusses the concepts of narrowcasting, the market-of-one, and the creation of virtual communities through the internet. Products and services that reach the consumer through these means is also a key characteristic of the friction-free economy, and is another reason for the extreme growth rates seen in certain areas (distribution costs are very low or effectively nil, and delivery times are instantaneous).
In short, in this industry, the market is already huge and still growing fast; the cost of production after initial development is essentially nil; and there are not those pesky diminishing returns that act to limit market growth in the same way as conventional products. So it's not at all surprising that the industry is booming.
In a chapter entitled "Making Money in the Wired World" Lewis discusses various ways in which companies can participate in the friction-free economy. The fundamental requirement is that companies add value to products and services at all levels. He provides many examples of this, and discusses how companies are becoming more reliant upon and integrated with one another. (He uses James Moore¹s concept of a business ecosystem extensively in this section of the book: see the Death of Competition HarperBusiness, 1996.)
Lewis provides various of rules of thumb that he maintains are useful to keep in mind when developing aggressive marketing strategies in this industry. (However, one of the problems with the book is that he provides little in the way of sources or documentation for these rules of thumb, and little empirical evidence that they actually hold.) None the less, they are interesting and get one thinking. They are:
William Davidow worked for Intel, where he observed the following: the first product of a class to reach a market automatically gets a 50% market share. According to Lewis, this law is what impels companies to render their own products obsolete before others do (a classic Intel strategy).
This well-known 'law' was formulated by Gordon Moore, also of Intel. It states that computer processor power doubles every eighteen months an example of the accelerated learning curve that is in place within the computer industry.
The New Lanchester Strategy
Frederick Lanchester was an aviation military strategist in World War Two, considered by many to be the father of operations research (OR). The application of his military theories to markets has led to what Lewis calls the 'New Lanchester Strategy'. Essentially it goes as follows:
The combined operation of these three factors drives the telecommunications industry. Lewis presents some ground rules underlying marketing strategies for companies that want to change their market positioning within this cutthroat environment:
"Strong companies get stronger by aiming at the weaker companies first, followed by stronger and stronger companies." (p.74)
A company's market budget must be the square of a target company's in order to take market share away from the target company. (p.74) [This is one of those intriguing but annoying statements that Lewis makes, because he presents it without any empirical justification or foundation. It is also quite unclear as to what he really means by this for example, is the square of two thousand dollars: $4 thousand, or $4 million?]
"Mergers and acquisitions are appropriate when they move a company from unstable to player, player to leader, or leader to monopoly." (p.75)
There are four basic marketing strategies to fight a dominant market leader that Lewis discusses towards the end of the book. These are summarized below:
This is an interesting book, although difficult to follow and frustrating at times by the lack of details on some of the 'laws' presented. The basic concepts however are sound, and the ideas intriguing.