Part I. Executive Summary; Section B.
Sixth, The Network of over 50,000 Application Developers. A virtual network of embedded application engineers is a valuable resource. Embedded engineers are in short supply; the average code becomes longer as new requirements for communication and service are added; embedded microprocessors become more complex, varied, and ever cheaper; more connected smart devices are invented and marketed; innovation accelerates; Moore's law marches on; the law of the Telecosm sprints on. To summarize these trends using Jerry Fiddler's word, in a word, it is b>COMPLEXITY.
Accelerating complexity requires reliable integrated end-to-end solutions. It favors standardizing on a common platform. Given the shortage of engineers, the mobility of engineers will lead them to leave large companies in favor of new small innovators to gain higher pay and valuable stock options. Job mobility plus Moore's law must hasten the transition to an industry standard, because, first, old companies do not want to waste their time and spend their money training new personnel on an in-house proprietary OS that may soon be obsolescent, and second, new companies do not have the resources to waste on rolling their own. The Internet era requires a constant focus on core, the OEM's customized application; outsourcing embedded software increasingly becomes essential. If a company is to keep pace, Wind River's building blocks provide the necessary context to the OEMs who seek to manufacture smart devices quickly, efficiently, and cost-effectively.
By continuing the evolutionary integration of its new stand-alone tools and of other RTOS's APIs into its Tornado IDE/VxWorks AE platform, Wind River enlarges its markets and extends its offer of one-stop shopping by embracing its competitors as new partners. It extends the set of tools available for use with their rival's OSs in sure and certain hope of eventually converting them to Wind River's total solution. This strategy attests to Wind River's confidence that their growing popularity, based on the quality of their tools and other building blocks, will naturally embrace all embedded software engineers. Once these engineers discover the value residing in their tools for pre-integrating hardware, simulation, visualization, and device management, their pre-integrated standard stacks, drivers, and protocols, and their integrated middleware that extends an OS vertically into many diverse niches, then they must come to see the wisdom in the mantra: focus on core; outsource context; embrace Wind River. Wind River must believe, as I do, that they are going to become another natural technology monopoly because of the acceleration of their indirect and direct network effects.
By continuing the evolutionary integration of its new stand-alone tools and of other RTOS's APIs into its Tornado IDE/VxWorks AE platform, Wind River enlarges its markets and extends its offer of one-stop shopping by embracing its competitors as new partners. It extends the set of tools available for use with their rival's OSs in sure and certain hope of eventually converting them to Wind River's total solution. This strategy attests to Wind River's confidence that their growing popularity, based on the quality of their tools and other building blocks, will naturally embrace all embedded software engineers. Once these engineers discover the value residing in their tools for pre-integrating hardware, simulation, visualization, and device management, their pre-integrated standard stacks, drivers, and protocols, and their integrated middleware that extends an OS vertically into many diverse niches, then they must come to see the wisdom in the mantra: focus on core; outsource context; embrace Wind River. Wind River must believe, as I do, that they are going to become another natural technology monopoly because of the acceleration of their indirect and direct network effects.
The Twelve Networks of Lily Ponds
Once OEMs develop and sell their products, which include VxWorks or pSOS, they or their VARs pay Wind River run-time royalties based on average selling price and production quantities. Because Wind River is a ubiquitous embedded system enabler, it may have several customers who are selling competing products. At their Analyst's Day last June, Wind River introduced a model, using the xDSL market as an example, to illustrate how run-time royalties might be estimated. The model multiplies Growth X Market Share = Units, and then multiplies Units X ASP = Revenues. For DSL, according to credible market research, the projected compounded growth rate was 230%, and Wind River was in 47 of 52, or 90%, known manufacturer's DSL products. The average royalty was about a dollar. Using these figures, analysts can estimate future royalties, within the limits of the assumptions they choose. If analysts were to use this method of estimating future royalty, Wind River would becomes analogous to pharmaceutical company that has estimated future revenues from its pipeline of products, because WRS has a real option on future royalties in its pipeline of design wins.
On the SI "Wind, Up, Up, Up" board, recently, its founder, the analyst Allen Benn, has put the model suggested at Analyst's Day to good use in the form of spreadsheets located at a WEB site created by peter grossman for Allen's Lily Ponds. Its URL is:
net-gain.com
Allen Benn uses "lily Pond" as shorthand for a set of defining features; the Lily Pond metaphor is chosen to remind us that compounding growth may continue doubling each day all summer but only become noticeable "suddenly" in the last few days of the summer. Although compound growth is explosive, when it begins from a small base, it must compound for a time to become more than a mere snap, crackle, and pop. The earliest doubles in exponential growth are no more noticeable than the first few grains of rice on the Emperor's checkerboard. The criteria that need to be fulfilled to qualify as a Lily Pond are: (a) signs of high and sustainable current and future growth; (b) dominant and growing market share; (c) success in market place already demonstrated by significant existing royalties; and (d) expected increase in ASP, not to tail off with higher volume. The intent is to identify Lily Ponds as signs of upcoming inflection points, where a few inflections points combined can produce an inflection point for Wind River.
Twelve Lily Ponds and a summary of total royalties are forecast and tracked by these spread sheets, whose assumptions are open to modification and revision as better information becomes available. This is a work in progress, not the final word. Benn should be credited for developing the numbers; he will revise and upgrade these spread sheets with the help of Wind Thread members. For example, see Benn's post # 9122, on January 24, where he suggested dropping the Digital Printers/Multifunction Lily Pond for failing to satisfy the minimal-growth-rate criterion. He favors paying closer attention to the relative size of the projected lily ponds. In particular, he pointed out that the Service Appliances STILL is projected to be the largest in five years. Adding, "To put this in perspective, if all lily ponds save Server Appliances grow only 30% annually, then based mostly on this one lily pond, WIND still would be expected to earn $4 per share in four years according to my model."
The Ratio of Many Networks of Applications to Few Killer Apps
All innovations diffuse, but only few diffuse widely, and only a rare innovation diffuses pervasively. I believe it was economist Brian Arthur who first said, "Of networks, there shall be few." If you accept this proposition, it implies that there will be only a few significant standard solutions and only a few devastating killer apps because so many phenomena emanating from complex systems follow power curves: as the power of an exponential change increases, its set of members decreases logarithmically. So, the stronger the network effect, the more rare it becomes.
Innovation is an evolutionary process that is characterized by punctuated equilibrium. Change occurs, not slowly and incrementally, but seemingly suddenly and in big, discontinuous leaps. Down and Mui (2000, p. 4) define a killer app as "a new good or service that establishes an entirely new category, and by being first, dominates it, returning several hundred percent on its initial investment." A killer app is by definition both popular with consumers and a rare outcome. Killer apps are the rare survivors on the power curve of all applications. Of killer apps, there will be few. There will be many applications that use Wind River's building blocks, but only a few will become killer apps. (Leaving aside the question of whether WIND's COTS software solution for embedded system is itself a killer app.) However, as a universal enabler and manager of smart devices, Wind River's wide net may yet scoop up few outstanding applications.
Competitive Environment. And, if it were possible for embedded software engineers to build a high availability, memory protected RTOS from open source code, like, say, a high-featured embedded Linux, without any realistic economic incentive, why would they? And who would rationalize those millions of lines of codes for communication and connectivity coming from different authors? Their inevitable errors would be weighed against WIND's robust reliability. I believe WIND is past the time to worry about such new approaches as more than local in-house projects or potential niche competitors. Tornado tools will embrace Linux, like it did Java, which came before it. When WRS embraces embedded Linux, its functions will be extended to embrace serviceability and connectivity, becoming another RTOS within WIND's total solution. History will repeat itself. Once the fanfare that Java would take-over had passed, Java actually advanced best within the WRS framework; so too, will embedded Linux. Not only will Linux be embraced and extended, but also the IHP RTOSs.
How WRS Embraced and Extended Java. As an example of embracing and extending, look at the many advances Wind River has made in embedded Java. There success was recognized in December, when Wind River was elected to the Java Community Process's Executive Committee to represent the interests of embedded developers, including the 250 customers who use Wind River's Java implementations.
These performance improvements in embedded Java cannot be matched by Sun because embedded software is neither their core competency nor value proposition; so, Sun, in effect, "outsources" more and more of it to Wind River, the embedded specialist. Thus, I believe that Java's history will be repeated, not only by embracing and extending embedded Linux but also with in-house proprietary RTOSs.
For example, in August, WRS announced that Sony was using its software in its first Network Walkman. In the EE Times of January 8, 2001, Toni Aoki, Director of Business Development at Sony Network Entertainment of America commented on why Sony selected VxWorks rather than using their IHP Aperios RTOS in up to 3 million Cablevision set-top boxes, "After evaluating a variety of operating systems, and the availability of tool sets, we decided to use VxWorks. Time-to-market was the most critical factor in this decision." Also, recall that the Palm's OS now incorporates Wind Rivers' version of the TCP/IP stack. Complexity and TTM accelerate the growing dominance of WRS.
The Added Value of the Concept of Network Effects.
Conceptual distinctions clarify what was obscured before the distinction was named. I argue that the term "network effects" names the "dynamics of the process of adoption" within the Technology Adoption Life Cycle. The diffusion of innovations involves a social psychological process in which influence meets susceptibility, influence that is communicated through network-like social channels.
By joining the multiple networks of ISI with the larger, multiple networks of WRS, the network effects of the new Wind River inflected sharply upward. The key point is this: network effects amplify the value of all competitive advantages. That is, instead of competitive advantages (CA) being additive, network effects multiply the arithmetic number of nodes of each CA exponentially. The bigger the network of users the larger the exponent. Competitive advantages become stronger through a compounding explosive growth in value from the amplification of network effects.
Moreover, network effects are the dynamic drivers of the TALC. This implies that network effects, because they are the dynamic amplifiers of competitive advantage, directly drive four gorilla game effects that are embodied as the six criteria of a Gorilla: Strong Value Chain, The Tornado of Hypergrowth, High Switching Costs, and Barriers to Entry. Each arithmetic addition of competitive advantage in these four realms produces the exponential increases in value that are both created by and that reveal the presence of network effects.
Of course, I believe it is this dynamic of network effects reaching critical mass that inflects product adoption in the now susceptible early majority that underlies the tornadic growth within all gorilla games. I contend that this dynamic inflection combines the indirect network effects of a value chain forming around a compatible total solution and the direct network effect of mass adoption by consumers. Network effects is the dynamic driver that engender visible explosive growth, that is, hypergrowth, when the numbers of nodes producing continually compounding growth reach critical mass and inflect skyward. |
