How to avoid Aftershock: a book excerpt

Geoffrey Moore, managing director of The Chasm Group, a US-based consulting firm he founded in 1992, became a household name in Silicon Valley when he published ‘Crossing the Chasm.’ His new book, ‘Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet,’ continues his exploration of the intersection of business and technology. In this excerpt, Moore discusses how services became more valuable than products.

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By  Colin Browne Published  January 16, 2001

Owning the information|~||~||~|In ‘Being Digital,’ [MIT Media Laboratory Director] Nick Negroponte describes how value in the age of the Internet has migrated from atoms to bits. The implication for the new management agenda is that information about an asset has become more valuable than the asset itself.

It is now more profitable, in other words, to own information about oil than to own oil, information about airline flights than to own an airline, information about a nation’s currency than to own the currency itself.

In this new world, information is king. The more information you have, and the better (and faster) your analysis, the greater the probability that you will make winning investments. That is why speakers and authors continually note that we are living in an information age—information is not only more plentiful, it is more valuable.

It is also why companies in the information technology sector have taken over the stock market, causing a massive transfer of wealth from the NYSE to Nasdaq. But why now, one might ask. Why didn’t this happen 10 years or 100 years or 1,000 years ago?

||**||Services are better than products|~||~||~|It turns out that for information value to exceed asset value, you need relatively efficient markets that are free from intimidation and corruption. If markets are not efficient, then you cannot capitalise on information advantage because by the time you seek to execute the trade, the information has become more broadly disseminated and your knowledge is no longer differentiated.

In such cases, it is better to just possess the asset. Similarly, if your environment is war-torn, if it is dangerous to expose your goods to potential customers because it also exposes them to risk of theft or confiscation, or if trades can be thwarted or taxed by unlawful authority, then again, holding the asset is likely to be a better strategy.

And finally, if information systems are relatively primitive, then you cannot garner sufficient information to diminish the risk in any trade of making the wrong decision, and so, once again, the better play is to hold on to the proven asset.

Thus, it is only in recent years, with the rise of efficient and increasingly global markets, the relatively low level of warfare and the dramatic progress in information technology, that an information-value strategy has come to the fore. The question now is, so what?

||**||La plus ca change ...|~||~||~|The first implication, and perhaps the most profound, is this: In an information age, products are less valuable than services.
This is just the opposite from an asset economy, and the amount of havoc this change is wreaking is astounding.

Start with accounting procedures. Today, virtually nothing of importance is on the balance sheet, and everything of importance is off it. As executives managing knowledge-based businesses (and, pray tell, what business these days is not?), we have long understood that our people and what they know are at the core of our competitive advantage. But there is no way to acknowledge any of that on our books.

But forget about accounting. Let’s just think about core strategy. It used to be that product companies got much higher multiples than services companies. And even today, if the comparison is made between a product company and a project-oriented professional services firm, that valuation rationale can hold, although the Internet services firms are currently giving the product folks a run for their money.

But it is a whole new ball game when you bring transaction services to the table-recurrent revenue streams from delivering subscriptions, clearing transactions, connecting phone calls or data links, booking reservations, or advertising or selling to consumers. These are all things at the core of the new Internet market, where the bulk of the market capitalisation has gravitated to the service providers.

Indeed, the fewer the atoms in your business plan, the more it is devoted just to bits, the higher the valuation investors are giving it. Services have fewer atoms than products.

||**||Does anyone really need a drill?|~||~||~|From a strategic point of view, the relation between service and product is intriguingly interchangeable. A long time ago, there used to be a professional service called an answering service, which was then replaced by a product called an answering machine, which in turn was replaced by a transaction service called voice-mail.

At the outset for many companies, computing used to be a transaction service rented from a service bureau, which was then replaced by the acquisition of a suite of computer products installed by a professional services firm called a systems integrator, which are now poised to be replaced by a new category of transaction service provider called an ASP (application service provider), whose offerings are accessed over the Internet.

The French have a saying: “La plus ca change, la plus c’est la meme chose,” the more things change, the more they remain the same.
Thus, the advantaged form of delivery can shift back and forth between product and service. If there is no widespread infrastructure in place, then the advantage goes to product, but if the infrastructure is already in place, if all you have to do is send bits over an existing array of atoms (what else is a TV programme, for example), then the advantage goes to service.

And that is where we are today. The Internet represents an inflection point in the deployment of global communications infrastructure. Before its emergence, inertia was on the side of the status quo, and new offerings had to overcome it. Now inertia is on the side of change, and new offerings have only to ride the wave.

That is why even the most product-centric of companies-automobile manufacturers, factory equipment vendors and raw materials providers, real atoms guys-are now assigning their best and brightest to the task of differentiating on services.

||**|||~||~||~|Consider the example of Ford. CEO Jacques Nasser has announced he wants to transform the company from an automobile manufacturer to the premier provider of consumer services in the automotive industry. Nasser recognises that for every dollar spent buying a car, there are four dollars spent on financing it, insuring it, fueling it and maintaining it. And that’s just today.

In the future, the car-among other things-is destined to become a second media centre, a mobile node on the Internet, with all the e-commerce implications that entails. Or consider the example of Hewlett-Packard. Nick Earle, corporate strategist, has announced that the company’s future does not lie in computers as much as in computing.

Earle recognises that computer power delivered over the Internet is an anonymous commodity, like electricity, and that what will differentiate it in the future are the services attached to it.
To put this as bluntly as possible, in the age of the Internet, product is more likely to be a liability than an asset.

And there is nothing that is a product that cannot be delivered as a service. Clothing? Rent the tuxedo. Car? Take a cab. Stove? Dine out.
All products have benefits, to be sure, but it is the benefits-not the product-that you want to buy. I don’t want to own a one-inch drill; I want to buy a bunch of one-inch holes.

Once I have the holes, what would I want the drill for? Once you have your directory on your phone, what do you do with a phone book?||**||

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