Don M's JDSU Review:
Thanks dm!
Re: JDSU, a Kingilla Standing on the Shoulders of Giants
Warning: Long Academic Post
Part I: Introduction
In my earlier post on the competitive advantages of the JDSU-SDLI merger, I reviewed the four-phase strategy of JDSU and eight of its competitive advantages that were revealed in their conference call about the merger. Then, I introduced three major types of competitive advantage: Changed Competitive Landscape, Vertically Increased Added Value, and Value Added by Network Effects.
Taken together, I believe these latter three types of competitive advantage can produce a dominating and sustainable advantage, particularly when combined with advancing innovations. Because increased GAP and sustained CAP are the heart of value added in a Gorilla Game, is there another route to controlling--partially or completely--a value chain besides a proprietary architecture? To apply these ideas to JDSU, I must specify, support, and qualify this claim.
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Attempting to advance Gorilla Game analysis, my thesis is that JDSU is becoming a mutant King with some Gorilla genes, creating a new hybrid that I call a "Kingilla." A Kingilla is less than a gorilla but more than a king.
My first post evoked two immediate responses from Uncle Frank and DownSouth. DS concluded, "So JDSU does not enjoy the benefit of 'proprietary open' products, but simply 'compliant' products." Because, we're both Alabama boys, I took that to mean, "Analysis talks, but B.S. walks." In his double-edged style of "welcome "diplomacy, UF said, or so I took him to mean, the same thing, "if you claim to be a G&Ker, show us your portfolio." Holding my crotch tightly, I did. To myself, I said, "Uh, Oh! These GGers play a hard game. Have I already stepped in it? I just know that Merlin must be sharpening his exegetical knife. I better get my mojo working."
Worried, I woke up from a dream at 3:30 am with an image, a metaphor, a King standing on the shoulders of giants." Once again, my unconscious had saved me. Beds generate far more "Eurekas!" than baths. Now all I had to do was figure out a way to tell the story.
Part II: Changed Competitive Landscape
Once upon a time, there were some troubled but brilliant scientists who thought they (and their sciences) were stuck in a terrible rut. To get one foot out of the grave, each went on a quest to Santa Fe to discover and invent a new science of complexity. Now a network of scientists is a beautiful thing to see: creativity is unleashed and value is added.
Complex systems, like the stock market, have non-linear dynamics; sometimes a small shift induces a large change, an inflection point, which reorganizes a system. In contrast with the traditional premise of diminishing returns, which the senescent, dismal discipline of economics had embraced, Brian Arthur introduced a Law of Increasing Returns that seems relevant here. It is a positive feedback loop in which success generates success. Stated simply, this Law says, "Them that hath, gets." I believe Moore describes first-mover advantages as following a law of increasing retrurns.
In his book, Age of Spiritual Machines, pp. 32-33, Ray Kurzweil applied his Law of Accelerating Returns to the evolutionary process. Briefly, he argued that, in an evolutionary process: (a) evolution builds on its own increasing order (where "order" is information that fits a purpose); (b) therefore, order increases exponentially; (c) therefore, time exponentially speeds up (that is, the time interval between salient events
of the process) accelerate; and (d) therefore, the returns (that is, the valuable products of the process) accelerate. Humankind is not a mere toolmaker; humans use their intelligence and their tools recursively to critique their designs and to operate on their tools, permitting accelerating infinite progress. (Think: JDSU is accelerating its pace in introducing valuable new products as it builds on its own increasing order, and it is recursively integrating these product in modules.)
For Kurzweil, technology is evolution by other means. Technology requires both inventing tools and keeping a record of their advancing sophistication. (Yes, I wish JDSU's record keeping consisted of a set of proprietary patents, but JerBlake is right, probably only process patents.) Kurzweil (p. 35) concluded, "Evolution's grandest creation-human intelligence-is providing the means for the next stage of evolution, which is technology." Kurzweil predicts that technological change in the next twenty years alone will outpace that of the last century. (Can you imagine how rapidly the Internet will change, given the accelerating pace of these valuable products? Roll Tide! G&Kers should be salivating and giving thanks to these creative scientists/technologists.)
In case your are missing the foreshadowing here, later on in this endless post, one premise of my argument will be that JDSU, by acquisitions, has reached a critical mass through "owning" a proprietary network of applied scientists and engineers. This coup has permanently altered (or, at least till the next discontinuous technology comes along) its landscape of competition. Corner the scientists/engineers and acquire the innovators on the fringes and you OWN (if you execute) the continually advancing continuous technology. (Hallelujah! Shake that value-chain! Get your mojo working!)
The Internet is a complex system, and its accelerating growth is awesome. Not only that, but a global distribution of people communicating in an exciting new medium generates an avalanche of demand for more, and that need for more is also accelerating. Moreover, the elasticity of the price-demand relationship in Say's law-lowering price increases the level of demand-is an amazing financial catalyst for accelerating still more growth in demand. Advances in DWDM permit the lowering of prices. (Picture JDSU, with its ENABLING technology, as riding the crest of this technology wave.)
Next, recall that Moore, in Fault Line, pp. 167-168, described the power of a tornado as coming from the simultaneous unleashing of the two bottom layers of the Competitive Advantage Hierarchy: the Technology Wave and Value-Chain Domination. Moore said, "The primary source of competitive advantage is simply to be riding the new technology wave as it enters the tornado. But, this mass-market adoption is a CATEGORY advantage, which extends to the entire chain.
The second necessary element, Value-Chain Domination, according to Moore, derives from the potential institutionalization of key market-making companies as value-chain leaders or dominators. "That is, for each element in the value-chain, tornado markets seek out a single market-leading provider to set the de facto standards for that component." (For DownSouth the sentence that I stepped-in was, "When you set the standards, the industry standardizes on your product to foster hyper growth of their markets as well." I apologize for any ambiguity in my use of "set the standards." If you will grant that "proprietary" was not necessarily intended, then I think I paraphrased Moore. Of course, given my dream that saved me, I am not too sure myself.)
Moore continues, "That role normally goes to the company that garners the most new customers early in the race." (Think: JDSU has been singled out to set de facto standards as market dominator. A year ago, JDSU was twice as large and growing twice as fast as its nearest competitors combined. Now it owns competitors OCLI and ETEK and has SDLI on its plate. Critical mass in scientists, products, and manufacturing equals nuclear fission! Well, if not an atomic EXPLOSION, at least an inflection point that permits setting de facto standards.)
Part III: Verticals Increase Value-Added and Value is Added from Network Effects
A common example of a discontinuous innovation is Henry Ford's invention of the assembly line to build his Model T. However important the moving-of-the-line was, I believe the principle of modular design is more basic. Standardizing, say, the size and shape of the components of a clock is important; but an assembled clock tells time, adding emergent value through its vertical integration. If you want to build a Ford today, do you use individual components or modules that were preassembled?
A module of optical/photonic components assembled on a board is a simple architecture, but it is architecture. Given their Kingly lead in scientists/engineers, I claim that JDSU's modular strategy is the beginning of an accelerating pace of new modules that will combine more components into increasingly useful preassembled units, accelerating JDSU move up the learning curve leading to the holy grail of photonic systems on a chip. Modules save the customer time-to-market and costs of assembly, packaging, and testing. Although I know too little about the technology to make a strong claim, I contend that it permits increased degrees of control of the value chain by securing incremental competitive advantages whose emergent impact becomes more than the sum of its parts.
Just as the value of the Internet for businesses and consumers increases exponentially as the number of nodes increases arithmetically, this exponential growth in value and demand for increased value is directly impacting demand for JDSU's modular products, thereby increasing and accelerating its degree of control over its value-chain. Imagine the set of competitive advantages that follow as links in a chain of actions, with each link a strategic step that increases the degree of power over a value-chain until a tipping point is reached that produces strong control: When network effects exponentially multiply first-mover advantage: (a) JDSU's reputation is not only enhanced but it also secures a lock on this modular market through its breadth of product line, innovation, and acquisition of innovators; (b) JDSU preempts a position as modular leader with a future of increasingly advanced modular integration that leads the industry toward, say, all optical switching; (c) JDSU builds in high switching costs from the finely-tuned integration of complex technology that cannot be easily duplicated, (d) JDSU receives increased preference from suppliers and customers in multiple channels, (e) JDSU gains both cost advantages and differentiation advantages from being the first mover up a modular integration learning curve, (f) as first-mover, JDSU defines the de facto standards for its modular units, (g) JDSU secures patents and develops know how that protects their growing and accelerating position of value-chain dominance, and (h) JDSU uses their early profits and increased market cap to acquire more innovative companies, increasing and accelerating their technological and manufacturing leadership.
Because JDSU has the broadest range of products, the largest manufacturing capacity, and the best network of creative scientists-engineers, it can continuously leverage its first-mover Value-Chain Dominance through its modular strategy that accelerates the integration of components, innovations in components and modular design, and movement toward smaller, faster, cheaper modules, and, eventually, systems on a chip. Accepting Moore's thesis, combining the lower layers of First-Mover and Value-Chain Dominance creates a compelling and sustainable competitive advantage during the Tornado.
Part IV: Conclusions: Proprietary and Innovative Power
JDSU's control over their value-chain is not the TYPICAL proprietary control of a gorilla over the architecture of some killer app. When I read Moore's analysis of the GG, I think of "Microsoft" as the prototype, with Intel, Cisco, and Oracle as close siblings. If you think of "proprietary open architecture" and the ability to yank the value chain, you think of Microsoft first, followed by a few extraordinary pongid specimens.
At a minimum, JDSU lives, as a King, in a royal world of community-set open standards. However, this royal world is tornadic, with rapid acceleration and near endless demand. The Internet creates the mother-of-value-chains.
Nonetheless, JDSU's dominance of its value-chain remains dependent on execution and, particularly, on continued accelerating technological innovation that drives its dominance beyond that of mere first-mover King to that of a Kingilla capable of shaking if not completely controlling its value-chain. Its power is currently Innovative, not Proprietary.
At a maximum, given success in the strategic chain above, JDSU's innovative power could become increasingly proprietary. As the modules increase in complexity and integration, both processes and architectures can be patented. Also, simply knowing-how to design, develop, integrate, package, and test advanced modules is valuable in itself and not easily replicated. An accelerating advance using the modular strategy is a route to proprietary knowledge: as Sir Francis Bacon said, "Knowledge is power."
In 1675, Sir Isaac Newton wrote, "If I have seen further it is by standing on the shoulders of giants." Embodied by its scientists/engineers, JDSU stands as a King on the giant shoulders of the giant sciences of optics, photonics, and materials. If, as I argue, JDSU has achieved critical mass, it either owns or will acquire the scientists/engineers whose innovations will keep this King perched indefinitely on those shoulders. If so, I conclude that JDSU is a Kingilla, with considerable innovative power over its value chain that can sustain an increased GAP and CAP.
If the strategy accelerates and advances to an inflection point, the architectures of the modules themselves can become proprietary. Thus, as the Kingilla obtains greater degrees of power over its value-chain by advancing from innovative power toward a tipping point that favors a greater ratio of proprietary power, it morphs first into, say, a Gorking, a stronger hybrid with more Gorilla genes. Next, with full proprietary control, the Gorking morphs into a pure Gorilla.
One test of my hypothesis that JDSU is, indeed, currently a Kingilla will be found in the DOJ's coming decision on the merger with SDLI. If JDSU is in innovative control of its value-chain, then no companies in it will make draconian complaints; they should, in fact, support the merger as necessary to the ecology of the value-chain. To test the morphing power of JDSU, follow the accelerating curve of the introduction of integrated modules as they become smaller, faster, cheaper, and more ordered.
I enjoyed writing this post, but I am unsure of what I know and what I just think I might know; the entire fabric is just my opinion. Of course, I can still hope Phase 4 is a patented soliton solution. My depth of knowledge of JDSU's business and technology is very shallow; my depth of knowledge of gorilla gaming or of investing generally is far less than that of the thread elders. No expert, I am just an optimist who believes in technological progress. Your comments will help me learn more, including whether to keep posting or to slink back to lurking.
I am sure that together, however, we can advance the conceptual distinctions in Moore's gorilla game. This board is an example of one of Kevin Kelly's laws of god: Distribute Being. The board's wisdom is an emergent that is more than the sum of its distributed parts (although the intelligence resides in the parts themselves). From distributed intelligences, higher order wisdom emerges. This is why the polls of G&K portfolios are so valuable.
I hope this helps.
Don
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