The Market Takes Bewkes and Jobs to School

It was 2006 when I last set foot in a Blockbuster store. In 2008 my family cancelled cable television. A high-speed Internet connection and a $9.99 monthly subscription to Netflix satisfy my family’s video entertainment needs.

The incumbents claim they are not worried about families such as mine. Last December, Jeffrey Bewkes, the CEO of Time Warner, said dismissively of Netflix, “It’s a little bit like, is the Albanian army going to take over the world? I don’t think so.”

And now it’s about to get even worse for the incumbent media and cable companies. Netflix just purchased 26 episodes of a new series “House of Cards” starring Kevin Spacey. Maybe Bewkes should talk to the former management at Blockbuster who watched their seemingly invincible position vanish as they too sneered at Netflix.

But what could Bewkes possibly understand about competition and innovation? Time Warner, like all cable companies, built their market position in a way far different from the way Netflix has built their position. (Note: In 2009 Time Warner Cable became a separate company from Time Warner.)  Netflix grew by building a culture of innovation that consistently delivers entertainment to consumers inexpensively and creatively.  Time Warner, like all cable companies, built their market position by government grants of monopoly power; and that unearned market power allowed them to be oblivious to consumer needs. Apparently Bewkes literally cannot conceive of his privileges eroding; his dismissive attitude is not surprising.

“Of the many deals the [media] industry has made with Netflix,” Bewkes said, “this has been an era of experimentation, and I think it’s coming to a close.” Bewkes is projecting rather than correctly reading the market: Time Warner doesn’t innovate much, and they do little experimentation. Think of the USPS, your motor vehicle administration, or a Soviet made car and you have an idea of the type of products monopolies produce. Unfortunately for Time Warner, Bewkes doesn’t get to dictate how much experimentation other companies in the media industry engage in. If one company doesn’t want to sell to Netflix, surely other companies will.

There are two ways to earn profits—by turning to government for grants of monopoly power, subsidies, and protection or by satisfying the most urgent needs of the consuming public. Over the years, a corporate culture develops that supports the pursuit of either unearned privileges awarded by government or just rewards from consumers for a job well done.

Instead of focusing on competing, Bewkes depends on government to protect his eroding position. If with government’s help the cable industry is able to protect its position, Bewkes can charge them premium prices for the media he sells. Bewkes is not alone in relying on government. Will it surprise you to think of Steve Jobs in that same light as Bewkes? At first appearance, Jeffrey Bewkes and Steve Jobs would seem to have little in common. One man runs a company partially built by a government grant of monopoly and the other has run a firm known for its cutting-edge innovations. The connection is found in the way Jobs is responding to the eroding market position of his iPhone.

Over 2 1/2 years ago I wrote a blog post “Android Changes Everything.” Contrary to conventional wisdom, I predicted: “Android will beat Apple and any other closed operating system.” I wrote:

There are smart developers at Apple who have apparently made a pretty good product in the iPhone. But a handful of smart developers can’t compete against many smart developers, and pretty good can’t compete against great. Planned development can’t compete against the decentralized forces of spontaneous development. Self-organizing systems are more powerful than a thousand Steve Jobs; and they rarely behave as experts… predict.

And now less than three years later Wired’s current May 2011 issue cover blurbs “Why Android Beat the iPhone.”  The author Fred Vogelstein writes:

The competition is only going to grow more heated. Android doesn’t just use different carriers, different manufacturers, and different software than the iPhone; it represents a different vision for the entire mobile industry. Apple exerts complete control over the iPhone. It builds the hardware. It designs the operating system. It runs the marketing campaigns. And it curates and polices its App Store, refusing programs it deems potentially offensive or a threat to its own business….

Android, by contrast, prides itself on its lack of control. It gives away its operating system for free to anyone who wants it—though manufacturers must submit their phones for testing if they want to access its app market or run optimized versions of Google apps. Android doesn’t review apps before they’re added to its marketplace, pulling them only if users complain, and manufacturers can and do modify the look and feel of the OS on their phones.

In short, Android will continue to morph faster than the iPhone, and Android’s market share will continue to grow. Apple, of course, made the same mistake at the dawn of the PC era by refusing to license their operating system. Steve Jobs apparently is unrepentant about his earlier decision. Instead of following Android and opening up their operating system, Apple “is waging an all-out patent war on anything Android.” So, like Bewkes, instead of focusing on competing, Jobs is looking to the government to protect his eroding position. That strategy is likely to work as well for Apple as Time Warner’s reliance on government has worked for them.

Market forces are impersonal; they have no sense of entitlement, and they don’t care that Steve Jobs is a cultural icon. Market forces reward companies that devote their full energies to serving the consumer. Bewkes and Jobs may believe otherwise, but they will continue to be schooled by the power of the market.

Android Changes Everything

Do you remember life before Amazon? Do you remember life before Google? Or even, life before personal computers? Every so often a new product creates a sea change so big that life before the product seems like just a vague memory of a previous existence in a foreign land.

And now there is Android. Android is an operating system for mobile phones that is being developed by Google. I would bet on Android to crush the iPhone and other competitors.

Now, this is a rather bold prediction coming from someone who hardly uses his mobile phone, has never seen an iPhone, and knows nothing of Android other than what he has read in news stories. True confession—I have never sent a text message. So, what the heck can I know about the future of mobile phones?

In contrast to my prediction, many technology experts, such as Matt Asay, believe Android is no match for Apple’s expertise. Asay explains, “In part this is because Google may lack the aesthetic touch that Apple has in spades, just as Microsoft does… Android is still no iPhone killer.”

Asay is wrong. Aesthetics are critical when products are close competitors in price and quality, but no amount of design aesthetics would currently sell many Changfengs (a Chinese car) over Hondas in the United States. The why is clear—a Changfeng would not be in the same quality league as a Honda.

I understand that to Apple fans, such as Asay, my comparison is ridiculous. The iPhone to them is the current pinnacle of mobile phone development. However, what Asay may not understand is the enormous flexibility and innovative capacity of open source operating systems. Unlike the iPhone and every other competitor, Android is an open source operating system.

True, there are smart developers at Apple who have apparently made a pretty good product in the iPhone. But a handful of smart developers can’t compete against many smart developers, and pretty good can’t compete against great. Planned development can’t compete against the decentralized forces of spontaneous development. Self-organizing systems are more powerful than a thousand Steve Jobs; and they rarely behave as experts, such as Asay, predict.

Google is not going at this alone. Scott Taves writes that Google has put together a “collaborative group including Google and more than 30 semiconductor and software companies, mobile operators and handset manufacturers.”

But it doesn’t stop there. Most importantly, Google is encouraging independent teams not affiliated with any company to develop applications for Android. To kick off interest among developers, Google is awarding $10 million dollars in prize money to developers with the best applications. Developers, according to Google’s Eric Chu, “will be able to make their content available on an open service hosted by Google that features a feedback and rating system similar to YouTube…We feel that developers should have an open and unobstructed environment to make their content available.”

Even before the first Android phone has even been released, there are applications that will interest even a “not much use for a cell phone other than to call and say I’m stuck in traffic” person like me.

How about these features? You are out shopping and about to buy something on impulse. But you wonder, is it a good price? You scan the barcode of the item into an Android phone; and the phone gives you the best price online, as well as the prices at local merchants nearby you.

Or, consider this. There is an emergency; immediately, you need to physically locate a family member. Android will be able to do that too.

Here is the bottom line—free-markets always beat centrally planned economies; and similarly, Android will beat Apple and any other closed operating system. Due to compounding inherent in the market’s discovery process, five years from now, the Android powered mobile phone will be a gadget that we could hardly recognize today. In ways we can’t anticipate today, the long-promised era of convergence among all of our various electronic gadgets with different operating systems will be at hand. If Google is successful with Android, imagine next a Google computer with the open source operating system Linux. Imagine your phone seamlessly integrating with your computer. Imagine no longer having to gnash your teeth over whatever future proprietary operating system Microsoft will be trying to sell. If I was Microsoft, I would be very scared. But then again, those in Microsoft who urged a movement away from proprietary software have long ago been forced out of the company.

A world without Windows is hard to imagine, but then again, so was a world with personal computers. Smart people make mistakes, because they can’t anticipate the power of markets to change the status quo. In 1977, when IBM and Digital Equipment Corporation (DEC) dominated the computer industry, DEC’s CEO, Ken Olsen, said, “There is no reason for any individual to have a personal computer in his home.”

Of course, there turned out to be thousands of reasons; but those reasons needed to be discovered by the market process. Android will unleash a new process of discovery, and the results are likely to be as revolutionary as the personal computer.

Parts of this piece may read like a gushing press release for Google. I assure you that I am not on Google’s payroll. With unrelenting bad news unfolding in the economy and the iron fist of government increasingly choking off innovation, it is good to know that American entrepreneurs are still busy changing the world and making all of our lives better in the process.

This is the free-market at its best. Without any direction from politicians, Google is about to revolutionize the world—again.