Virtual worlds and The Innovator’s Dilemma

This week, ReactionGrid has all but abandoned OpenSim in favor of its proprietary, Unity-based Jibe virtual world platform. And Linden Lab has also distanced itself from OpenSim, removing support for the “-loginURI” feature which allowed people to access OpenSim grids with the official Second Life viewer. Both of these decisions may make practical, short-term business sense. But they may also help set up the companies to fall victim to The Innovator’s Dilemma. If you haven’t read that book — and if there’s one business book you should read, that’s the one — here’s a brief summary:

  • Smart business managers do the right things and lead their companies all the way to the top of their markets then fall off the edge of a cliff once they get there…
  • … because while they were doing that, innovative competitors were making cheap, inferior products that nobody wanted …
  • … until the cheap inferior products had improved the point where they were good enough and everyone switched over…
  • … except the original companies, who were trapped in their old, expensive, business processes with their high overhead costs.

The tragedy of The Innovator’s Dilemma is that even if everyone sees it coming, nobody can do much about it.

Here’s a typical example: Microsoft Office is an expensive product, and Microsoft spends quite a bit of money developing it, marketing it, and defending it. Meanwhile, inferior alternatives in the form of Open Office and Google Docs are nipping at its heels. If Microsoft suddenly decides to give away its Office product for free it will instantly destroy a whole division of the company — with no guarantee that it will ever be able to make the money back from other revenue sources. Meanwhile, Open Office and Google Docs keep getting better and better and are quickly getting to the point where they are “good enough” for most users.

Will Microsoft be able to innovate its way out of the trap?

Some companies, faced with the same dilemma, say, “let’s destroy our own business before someone else does it for us.”  They set up a skunk works or a subsidiary to create the new, disruptive technology while the parent company milks the cash cow for whatever’s left in its udders.

Other companies reimagine themselves from the ground up. IBM, for example, was once known as the place to go for expensive, proprietary hardware and software. Then the company sold off its personal computer division, re-focused on low-cost, commodity hardware and open source software, and began selling services instead. The reinvention was amazingly successful and proves that even giants can overcome The Innovator’s Dilemma.

But the sexiest recent example is that of Apple. On paper, the iPad is a disruptive technology. If the cheap, light-weight tablet is good enough for most casual users, then the company’s traditional line of laptop and desktop computers could be facing a massive decline in users.

There’s a great Harvard Business Review article about how Steve Jobs was able to solve The Innovator’s Dilemma:

“Jobs was profoundly influenced by The Innovator’s Dilemma — he saw the company he created almost die from it. When he returned to Apple, Jobs was determined to solve it. And he did… flipping the priorities away from profit and back to great products.”

Instead of focusing on the bottom line, Apple now focused on making cool stuff for their customers, cool stuff that the customers didn’t know that they wanted yet. Because that’s one of the great ironies of The Innovator’s Dilemma — your customers will continue to buy, and be happy with, your existing products until one day, they just stop. In fact, some customers will swear up and down that they’d never switch to the new-fangled, inferior alternatives. Until they do.

After Jobs returned, Apple returned to focus on passion and vision. Yes, there was a guy at the end to make sure the dollars and cents lined up, and that Apple was charging the best prices it could get for its products. Just because you’re passionate doesn’t mean you have to go broke. But the number crunching came last. The vision came first.

It wasn’t always clear that Jobs’ vision would be a success. The company’s first attempt at a tablet, the Newton, was a flop. There were plenty of Windows tablets as well that didn’t go anywhere. And the name — iPad — was reminiscent of a feminine hygiene product.

The decisions to make iPods and iPhones were similarly risky — and counter-intuitive. Even if you believed, like every Star Trek fan did, that we would someday all be carrying around smart, easy-to-use devices that did just about everything, it took a lot of courage to decide that this company would be the one to make them, and that this was the time to do it.

The virtual future

Similarly, we all know what the virtual future will look like. We’ve read about it, we’ve seen the movies. It will be extremely realistic. It will be universal, and widely accessible. People will work, play, and socialize in a common, immersive, 3D universe — the metaverse.

That’s the vision of the future. Many of us share it, especially those who read this publication. We know its inevitable.

And we can make some guesses about specifics, as well. For example, if it’s to be universal, then it has to be accessible to everyone — not just the major corporations, but the little guys. To be resilient, it has to be decentralized. And, to allow for the easy travel, there have to be some standards at the core.

In fact, many of us — including me — think that it will look a lot like the World Wide Web. There will be a variety of server platforms running up virtual worlds, available at all price points from free to very, very expensive. A variety of viewers used to access them. And a set of standards, protocols, or libraries stitching everything together.

But the present is very different.

We have multiple, incompatible, virtual environments. Social platforms — Second Life, Blue Mars, Eve, Utherverse, Cloud Party. Gaming worlds like World of Warcraft and Lord of the Rings Online. Business platforms like Protosphere, Olive, Venuegen, Avaya Live, and Jibe. And open source platforms like OpenSim, Open Wonderland, Open Qwaq, and Sirikata.

The most money is made at the top of the food chain — the proprietary platforms serving enterprise customers, the social platforms that charge the most for the virtual land, the games will millions of customers that charge subscription fees or sell in-game content.

It makes perfect business sense for those companies to continue to improve their products, to tweak them to better appeal to their core, high-profit-margin customers.

It would make no practical sense for them to tear down their walls, to let their users and content travel, to embrace lower-cost — and less-functional — alternatives.  Their users, after all, are happy with what they’re getting now, and are paying for it.

It would make as little sense as it did for IBM to suddenly embrace open source software, or Apple to bet its future on a tablet.

The hypergrid is what I would consider the disruptive innovation. Although hypergrid-enabled worlds currently run on OpenSim or its derivatives, like AuroraSim, there is nothing keeping other, proprietary server platforms — like, say, the Second Life servers — from hosting hypergrid worlds as well.

The basic software is free, so hosting prices are low — there isn’t much opportunity there for companies to make a profit. And, since there are a number of providers, customers can move their worlds from one hosting company to another, in search of the best combination of price and service.

No wonder smart companies want to get out of that business and into selling higher-end, customized, proprietary solutions, and then work to improve their solutions to attract even bigger customers, with even bigger budgets. This kind of rational, progressive innovation is a proven, successful business model.

The trap of incremental innovation

Disruptive innovation is extremely risky. It’s a bet-your-business strategy that can kill a company.

Incremental innovation is a much easier sell to corporate boards and investors.

A company could add new features to existing products and move up the value chain. Or it could find new markets for those products, and expand the customer base horizontally — or expand the customer base by creating new products similar to the old ones but serving different niches. It could also expand its customer base by acquisition.

Game companies in particular can add new games to their portfolios –usually, according to game design consultant Tadhg Kelly, slightly improved or tweaked versions of their current games.

His article Zyngapocalypse Now is a great read about how this strategy is ultimately self-defeating for a company as players get sick and tired of the same-old, same-old.

But truly disruptive innovation, the kind that gives customers what they want before they even know they want it, is difficult and extremely risky.

“That’s why the second generation of social games is unlikely to come from any of the current big players,” wrote Kelly. “They think too small.”

Today, many virtual world companies fall into the trap of thinking too small.

  • They’re just like Second Life, except with better graphics.
  • They’re just like Second Life, except in a browser.
  • They’re just like Second Life, except with better enterprise controls.
  • They’re just like Second Life, except cheaper.
  • They’re just like Second Life, except with more sex and gambling.

The idea is that players are tired of Second Life, so to appeal to them, give them something a little bit different, a little newer.

I don’t think this is a viable strategy for the long term.

Storm clouds. (Image courtesy Karsun Designs via Flickr.)

So what do you do if you have a vision of the metaverse future but don’t have a Steve Jobs around, or millions of dollars to bet on it?

Here are three ideas for getting around The Innovator’s Dilemma without losing your shirt:

  • The skunkworks approach — internal or external disruptive projects. NBC, Fox, and ABC each own roughly a third of Hulu, which is a very disruptive product that could make broadcast television obsolete.  Google allows its developers to work on their own projects 20 percent of the time, in hopes that they’ll eventually come up with something useful. IBM and Intel both have contributed development effort to the OpenSim project, just in case something interesting comes out of it. Existing virtual world companies can give their in-house employees time and space with which to experiment with OpenSim and related technologies, or invest in startups.
  • Build for scale. Yes, the margins on reselling open source software are razor-thin. The solution is to build scalable technologies — you might sell virtual land really really cheaply, but you make up for it in volume. Some OpenSim hosting companies taking different approaches to this include Kitely, Dreamland Metaverse, and Talent Raspel. By using standard open source components, scalable hardware or cloud hosting, and automating every possible management task, the companies are trying to position themselves for success once the market is ready for their products.
  • Build for services. Open source software and commodity hardware doesn’t have to mean low margins if, like IBM, your company is focused on providing services. At someone point, every company will need help getting its grid online, secured, and optimized. Existing technology and Web consulting firms can start developing in-house expertise now, or keep an eye on specialized firms as possible future acquisition targets.

I don’t want to see existing virtual world companies go out of business. Many people will suffer if they do, including their customers, their employees, and their investors. I understand that capitalism requires some amount of creative destruction, but if a company can avoid that by successful reinvention, then everyone wins.

We all need to pay our bills. But if our need for short-term profits clouds our long-term vision of the future, then everyone suffers.

maria@hypergridbusiness.com'

Maria Korolov

Maria Korolov is editor and publisher of Hypergrid Business. She has been a journalist for more than twenty years and has worked for the Chicago Tribune, Reuters, and Computerworld and has reported from over a dozen countries, including Russia and China.

  • leonelm

    I agree entirely and said as much in my opinion piece four years ago!
    http://journals.tdl.org/jvwr/article/view/469/430

    • I’ve produced several columns on this topic myself… it’s THE business dilemma of our age.

  • Paul

    In a way it is similar to the Sunk Cost problem. However, in this case it is about creative investment and established business models rather than just about money.

    I actually see this kind of thinking in many businesses and even in management styles, not just in the technology industry. It is indicative of human thinking and psychology, and gives us an interesting insight into human nature.

    But, knowing this, it would be better for businesses to design their structure to allow them to take advantage of this kind of thinking, that is to be able to quickly re-adapt their business plan to break out of this Innovator’s Dilemma/Sunk Cost problem and use ity to their advantage.

  • It’s not just the sunk cost issue, though that is bad enough. It’s the overhead cost issue as well.

    Say you’ve got a product… to pick an extreme case… that costs $100,000 a pop. You have to have a high-priced sales staff to support it, and a high priced development team. To house them all, you’ve got fancy offices. And to manage everything, you’ve got high priced CEOs. Your high end customers wouldn’t want anything less. Remember the old saying? “You can’t get fired for buying IBM.”

    Then you’ve got another product, that costs $10 a month, sold by world-of-mouth and run by some guy and his rented servers out of his mom’s basement — to pick something on the very other extreme.

    And there are only a few customers for that $10 product.

    What possible business sense does it make to throw out your $100,000 offering and sell your customers the $10 thing instead? Even if you decided to ignore the money you spent in developing it, you’d have to lay off your entire sales force, all your senior management, sell your office building, and move into YOUR mom’s basement to get costs low enough that you can afford to do it.

    So either you say, like Apple did, damn the costs, we’re moving ahead anyway, and we’ll figure out a way to make money with it later.

    Or you start up an arms-length skunkworks — like Hulu.com — and then let them compete with you.

    And they’ll start taking away your customers — $10, even if for a lesser product, sounds a lot better than $100,000. They’ll start with the small customers, and move up. And then your existing customers will suddenly decide that they don’t need all your bells and whistles anymore — or the startup guy will add those bells and whistles — and the old company will be out of business.

    Remember the days of enterprise-grade CMS systems? A company I worked at spent around $1 million on Vignette. Today, Drupal and WordPress do a lot more — for free. This blog here, for example, is run on WordPress, using a free template, on a low-cost hosting company and is easier to use and has more functionality than a million-dollar platform offered 12 years ago.

    Which reminds me — there’s probably going to a a period, of about ten years give or take a few, where you’re going to be able to sell million-dollar 3D content management systems before the bottom falls out of that market. If I had any programming skills, I’d be writing that CMS now!