A Proprietary and Open Architecture: Distinguishing "Commodity" from "Commoditization"
The essential features of SanDisk's intellectual property and the creation of the CompactFlash Association.
This is the fourth installation of my investment case for flash memory and digital photography. The content of my discussion will follow the table below. I am also including links back to prior chapters so as to facilitate participation by thread members who may have missed earlier portions of this presentation.
Table of Contents
Message 9880779
CHAPTER ONE
Tornado Watch: The Unrealized Potential of Flash Memory in Digital Photography and Portable Consumer Electronics
Message 9878229
CHAPTER TWO
Discontinuous Innovation: The Fossilization of Kodak, Fuji and Agfa?
Message 9897772
CHAPTER THREE
Links in the Value Chain: The Essential Features of a Digital Darkroom
Message 9920884
CHAPTER FOUR
A Proprietary and Open Architecture: Distinguishing "Commodity" from "Commoditization"
The essential features of SanDisk's intellectual property and the creation of the CompactFlash Association.
In introducing his book Moore states, "The Cliff Notes version of these chapters is that hypergrowth markets, in order to scale up rapidly, will often spontaneously standardize on the products from a single vendor." And as hypergrowth begins to take hold "it creates a unique set of market place dynamics that frequently will catapult a single company into a position of overwhelmingly dominant competitive advantage." The process of standardization is solidified by a value chain whereby other vendors rally around the central solution while summarily excluding alternate vendors from the market segment."The reward for every company in this new marketplace's value chain is the opportunity to grow with virtually no competition from well-establised incumbent vendors."
Standardization also plays an important role once the barometric pressure begins to drop. During the proliferation phase of the growth cycle "the new paradigm springs up everywhere seemingly at once."
"It is caused by the same herd dynamics that create the chasm, only now operating in reverse."
Thus, at some point in the development of a marketable and discontinuous innovation which has bridged the chasm (or had the chasm conveniently bridged by a complimentary market entering a tornado), further growth is spurred by this standardization process which continually seeks the pathway of least resistance. This is usually followed by a severe inversion of the suppy and demand relationship leading to the tornado itself. Thus, early in the tornado phase one manufacturer "shoots out of the pack" and outdistances the remainder of the pack. Moore contends that once a vendor is elevated to this "gorilla role" the outcome is permanent and irrevocable.
Darwinian Forces
What dynamics select this future Gorilla? Our tour guide tells us that this is not necessarily because a single product line stands head-and-shoulders above the crowd. Rather market desperation nominates a defacto standard based on the architecture of a leading vendor. I find these remarks simplistic and contrary to good judgement. Visionaries actually begin the selection process early in the stages of the game, single out the most promising solutions and facilitate crossing of the chasm, then pick the "best of breed" based on the attributes of the product line. It is a far cry from a decision made desperately at the last possible moment.
"Commodity versus Commoditization"
Semiconductors fall into the category of enabling technologies. As such, these products commoditize extremely well and migrate far afield from the original point of introduction. This is referred to as a "network effect". In contrast, items such as application software are non-enabling and are forced to interact with an infrastructure of common enabling technologies. Applications software does not commoditize well and possess a limited capactiy to network. The ability to network successfully on several platforms is what Moore refers to as "commoditization". It is distinct from the less appealing term, "commodity", which we frequently associate with high volume, low margin, run-of-the-mill items such as pork bellies and DRAM memory.
In situations where a defacto standard does not develop, or where standards are created by a consortium of vendors in a non-proprietary fashion the risk of producing a commodity rather than creating commoditization in the market place is high. Examples of this type of situation include the current desktop PC market, competition between phone modem producers, and the cellular telephone market.
Proprietary Open Architectures
The most stringent definition of a proprietary and open architecture is one that requires control be taken by a single vendor (proprietary) with a visible set of specifications that allow other vendors to build to these specifications (an open architecture). Once deeply entrenched in this open architecture it becomes extremely difficult to escape from it or to dethrone it. The adoption of a single architecture also helps to remove bottlenecks to growth.
"The most rapidly proliferating architectures have proved to be proprietary and open."
The notion of control, unthrottled market domination and creation of a sole vendor is, in my opinion, distasteful. I calls to mind such related concepts as anti-competitive spirit, intentional destruction of competitors, price fixing, and the like. It also risks the stagnation of further development of the core specifications unless done so to throw competitors off balance. This seems to be less than a healthy environment for innovation. Some will contend that such priviledges are owed to the company able to engineer a dominant, proprietary standard. This may be true, yet it also creates a great deal of animosity. The recent investigations on such Gorillas as Intel and Microsoft underscore the distaste that many harbor for such giants.
The goal of a consortium, as I mentioned above, is to create a market enviroment similar to a proprietary, open architecture which can be applied to a given discontinuous innovation. It represents a more calculated election or creation of a defacto standard and, in essence, eliminates the possibility of dominant Gorilla. It also leads us to a more royal existence. An existence with Kings, Princes and Serfs. It is the type of environment that engenders much less in the way of scrutiny, animosity and distaste. It is a more politically correct form of "socialistic" capitalism or a collective that rewards ingenuity and innovation, offers outstanding value to the consumer, encourages continual improvement and upgrading while at the same time avoiding the discontent common to Gorilla markets. It is this type of arrangement that defines SanDisk's approach to the flash memory market.
The CompactFlash Association
compactflash.org
In a stroke of genius in 1995, Dr. Eli Harari, a respected innovator in the field of flash memory and President & CEO of SanDisk Corportation, offered the fruit of his labor, the concept of the CompactFlash card, as an open standard so as to guarantee the continued improvement and refinement of this enabling technology (http://www.compactflash.org/faqs/faq.htm#What_is).
The goals of the CompactFlash Association are well defined:
The CompactFlash Association is a non-profit, mutual-benefit corporation that promotes adoption of CompactFlash as a worldwide, ultra-small, removable storage standard for capturing and transporting digital data, audio and images. The CFA, which makes the CompactFlash and CF(logo) trademarks and CompactFlash Technical Specification available royalty-free to member companies, is headquartered in Palo Alto, CA.
The goals of the CFA are to promote and encourage the worldwide adoption of CompactFlash technology as an open industry standard. The association's primary objectives are to drive alternate-source availability; to drive acceptance of the CF specification as an industry standard across platforms and markets internationally; to ensure compatibility for users of CF products, and to evolve the approved CF standard over time while ensuring backward compatibility.
At the point in time the CFA was forming, the first design-ins for CompactFlash in the consumer electronics market were just emerging. And rather than risk the intrusion of an inferior solution to the market demand for rugged, non-volatile, portable memory (or, as Moore would contend, the "desperate" selection of market Gorilla), Dr. Harari unveiled the functionality of CompactFlash in its entirety, solicited the participation of established market leaders (network participants) and gambled on the emergence of CompactFlash as the defacto standard. In my opinion, this was done to "commoditize" CompactFlash and deeply seat the technology in the digital camera market. In doing so it facilitated the recognition of the attributes of CompactFlash, insured the presence of "second sources" to consumers and OEM's, and eliminated the stigma of "anti-competitive behavior" common to industry Gorillas such as Intel and Microsoft.
SanDisk and the CompactFlash association represent a new breed living in a terrain somewhere between the restrictive, proprietary and open architectures of today's gorillas and the gorilla-less domain of a consortium. It is a company of the new millenium.
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