Friday, October 10, 2003

Bill Gurley On The Digital Hand via VentureBlog



Bill Gurley's newest Above The Crowd updates Adam Smith's idea of the invisible hand. The digital hand, in essence, is the force of Moore's law and Internet time gradually wending its way through various industries, entertainment and consumer products most recently:



Like Smith's invisible hand, the digital hand is a true boon for the consumer, ensuring that fabulous products will be delivered in the most convenient way, and at ever lower prices. However, there is one big difference. The invisible hand suggests that both companies and customers can profit simultaneously. The digital hand is not nearly as charitable to the companies involved. In fact it can be downright brutal.

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As we look towards the future of the consumer electronics industry, the digital hand will ensure two realties. First, consumers will be blown away by the incredible products they are able to buy at shockingly low prices. Second, companies will be blown away by how incredibly hard they have to work in a shockingly competitive industry. Never forget that the undisputed leader of the PC industry has a supply chain and distribution advantage, not a technological one.


Obviously, this is something that has been going on for some time. All you need to to is pick up an old VCR and a new one - feel the difference in heft - that's the new electronics instead of old electronics and mechanics. The most original line here is this,

"The cold fact of the matter is that most digital goods either work or they don’t. You lose the subtle continuum of quality that exists in an analog world. "


I think that is true only in the most general sense. There is still a huge continuum of product quality, and more importantly, design, that goes beyond the pure functionality embedded in the electronics that make the DVD player work. Majority of the consumers will always choose the $50 product over a $200 one, but plenty will consider a $100 device that is prettier and more easily managed and controlled. Additionally, let's not forget that it took *many* years for things such as Dolby decoding to become commoditized. Perhaps the next step in design for the higher end manufacturers is to build better "holding" boxes, akin to high-end receivers, that can easily accommodate additional add-ons inside their bodies or connect to new devices. If consumers are going to protect themselves against device obsolescence by buying the cheapest device, manufacturers should seek to provide easy integration of these new devices into the existing system - and the more high-end the device the more seamless and high-quality that integration should be. They can also use their superior R&D to produce improvements to processing and performing standard-based processing, like the Digic chip for Canon. It is obvious that all digital cameras work, but not all of them work the same. Educating consumers about differences beyond the number of pixels or formats played back will help retain the mid- and high-end of the market. As for the lower end - it was never a good place to be for a serious company.

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