Chapter 6 part 4

The Pipeline in Reverse
Consumer contributors are vital to innovation. Disruptive innovations, which upset traditional markets and business models – like the mountain bike – often start in the margins of a sector, with innovative users with distinct needs. User innovators will also be critical to radical innovation. A radical technology is one that has very broad but so very uncertain application. It marks such a big break, no one quite knows what it is for. History tells us the inventors are often very bad at guessing how such technologies will be used. The inventors of the telephone, for example, thought people would use it to listen into live performances on the London stage. They did not think it would be used for conversation. Thomas Edison created the phonograph because he thought people would want to keep a record of those conversations, just as telegraph messages generated a ticker tape. He had no idea it would be used for listening to music. In our own generation no one in the mobile telephone companies predicted that SMS messaging would become one of the main forms of communication among teenagers. They thought it might be used in an emergency. In all these cases and more the technology in question had many possible applications. It was the users who worked out what it was for.

Mainstream companies operating in mainstream markets often have very powerful incentives not to innovate. The way to get promoted in a large company is to go to the board with a proposal for an incremental improvement, to an existing product, aimed at existing consumers that the company knows well, and which it can sell to through familiar channels and which offers sure-fire returns. No one in their right mind would go in saying: “I’ve got a great idea for an embryonic product, in a marginal market, aimed at consumers we do not know and I am not sure it’s going to work, but the pay offs might be great.” That way lies a career in ruins. Big companies have inbuilt tendencies to reinforce past success and they tend to overlook smaller, emerging markets. In those markets innovation is often carried forward, as in mountain biking, by people who do have an incentive: the passionate Pro-Am developers. Twenty years ago no one in their right mind in the big record companies would have dared to suggest promoting a form of music in which black men in inner city ghettos revelled in their anger at the world and glorified violence. Rap started as a Pro Am activity, with people recording songs at home, distributing them on tapes, often by word of mouth. Twenty years later Rap was the dominant form of popular music in the world, inflecting many other aspects of popular culture.

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Timothy Chan may know a bit about where this is taking us. I met him in a plush, private dinning room, in an exclusive restaurant designed for Shanghai’s new rich, half way up a skyscraper, that sits on a plot of land that ten years before grew vegetables. Now Pudong grows skyscrapers. Chan’s cherubic face and engaging eyes belie his ambition and drive. He wants to build one of China’s most successful companies and what he stumbled on, in 2001, was a way to distribute content to millions of Chinese consumers and get them to pay for it, upfront. Chan used China’s rampant culture of illegal file-sharing to his advantage. His company, Shanda, is not so much customer driven as customer created.

In 1999 Chan left his job as a government adviser to start his own business at the height of the dot.com boom. Chan, his wife and three friends set up an Internet business in his apartment, raised some venture capital funding and started to fiddle around. They got nowhere and in 2001, virtually broke, they launched themselves into multi-user online games on the back of a game they bought from Korea. It went stratospheric. By 2004 Chan’s company Shanda had 170m registered users and 60% of the Chinese online games market with 10m regular players. When Shanda launched its first home grown game it recouped its $1m development costs in a single day of playing.

A key to Shanda’s success (Chan’s contacts in the government have been pretty important as well) has been providing users with a platform for participation and contribution. Shanda distributed its content quickly and cheaply by giving away the basic game software. The company expects the game to be copied over and over again. The players spread the game through a sibling system of distribution. There is neither a sales force, nor a marketing department. However before someone can start playing a game they have to activate it, which means logging onto one of Shanda’s servers, providing a credit card or a pin number from a pre-paid card purchased from a newsagents. The games are mass social events. More than half the participants play from Internet cafes with other people. Shanda specialises in multi-user games, in which a player adopts a character in a fantasy society. The more players, the more action: Shanda provides the playing field, or to be more accurate, usually a battlefield. Chan explained the appeal while crunching through a duck pancake: “The average user plays for three or four hours a day. They concentrate on building up their character and profile in one game. More users means more distribution, which means more action, which attracts more players. It is a virtuous circle.”

When a player runs into payment difficulties they lose access to their character. In that situation they have two options. They could buy a new character quite cheaply but that would mean starting all over again, building up a history from scratch. The alternative is to get on a plane to Shanghai, stay overnight in a hotel and queue outside Shanda’s offices in Pudong to reclaim your original character, complete with all its history and store of reputation. That costs ten times more than the first option. Nevertheless every morning about 500 people are in line outside the Shanda headquarters. To support this vast undertaking – 9,000 servers, in 60 cities and 30 provinces, used by tens of millions of people a week – Shanda employs just 600 staff. Those are the new economics of barefoot organisations: small bodies of professionals can support vast swarms of participants, so long as the users have the tools they need to support themselves.

Consumers are becoming innovators. The fastest growing consumer markets with the youngest consumers are in Asia. Two thirds of India’s 1bn population are below the age of 25. The Philippines has become a centre for innovation in the mobile phone industry because the mobile phone is so ubiquitous and inventive consumers have developed all sorts of ways to trade, share, buy and bank using simple SMS message systems. But most innovation could come from China, assuming consumers have the freedom to experiment. By 2010 China should have more than 200m Internet users and 500m should have mobile phones. A rapidly emerging market on that scale will produce a raft of user-led innovations. The business models that will work in these rapidly growing, but low income economies, will not be the slow moving, top heavy models that developed in Europe and the US in the industrial 20th century. They will operate at low cost by mobilising participants in their millions. The 20th century gave us cinema, still dominated by a few companies based in a narrow strip of Los Angeles, making products for the fast emerging markets in US cities. The fast emerging markets of the 21st century will be found in China and India and that is where the new business models, forms of participative consumption and culture are likely to be created.

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