(01) Lecture Note: R. Fichman (2012). Distinctive IT Characteristics: Implications for Digital Innovation and Value Creation, Boston College.Creation Flashcards
Which three distinctive characteristics of IT are discussed in this paper?
(1) Moore’s Law
(2) Digitalization
(3) Network effects
What does Moore’s law refer to?
Strictly speaking, Moore’s Law refers to the doubling of the number of circuits on computer chips every 18-24 months.
However, over time the meaning of the term has been blurred, and it now means exponential improvements in the performance-per-dollar of any computing component.
What are two reasons behind the immediate result (=tremendous value creation) of Moore’s law?
(1) the same products can be produced for rapidly decreasing cost and with rapidly increasing performance
(the cost of flash drives has dropped 10-fold in just few years)
(2)
innovative new products, services and business models are made possible that were not cost-effective before
(high quality cameras, free social media)
What does “Digitalization” mean?
Digitalization means taking content or processes that used to be primarily (or entirely) physical or analog and transforming them to be primarily (or entirely) digital.
What does digitizing content mean?
digitizing content simply means taking content that used to be stored in traditional formats (e.g., LP records, cassette tapes), and instead storing it as digital data (i.e., 1’s and 0’s).
So, instead of physical documents,35mm film, LP records, and VHS movies, we now have digital documents (e.g., MS Word, Adobe), digital images (JPEGs), digital music (MP3s), and digital video (DVD, MPEG, TiVo)
While digitalization is enabled by Moore’s law, it represents a potent force for innovation and value creation in its own right.
Name four advantages of content digitalization
(1) digital files can be perfectly copied any number of times. And because of Moore’s law, the cost of storing and sharing those copies has dropped close to zero.
(2) digitalization of content has led to digital convergence, which means we no longer need a different device (i.e., radio, TV, record player, tape player), to play each kind of content.
(3) It also allows content to be automatically analyzed and manipulated to correct errors or to improve quality.
(4) digital content can be automatically searched, indexed, and cross-referenced to improve availability and shareability. –> enables economics of the “Long Tail”
What do we refer to when we talk about “The Long Tail”?
The Long Tail refers to the many thousands of worthy—but less popular—books, songs and movies that aren’t carried in stores, and aren’t shown in movie theaters or broadcast over the airwaves, because demand is too low to justify use of those channels.
But digitalization (of content itself and of information about content) unleashes the value in the Long Tail. It becomes economical to offer content that interests only a small percentage of consumers. There’s virtually no limit to the number of titles that can be offered through online channels.
What does digitizing processes mean and what is its main effect?
This means taking a process that a firm previously did manually or with physical machines, and turning part or all of that process over to computers or other digital devices.
The main effect of digitizing processes, aside from the obvious efficiency gains, is to make them more flexible and tailorable.
How can we represent the value of network externalities?
with Metcalfe’s Law.
Which states that the total value of a network is proportional to the number of links between network nodes (i.e., users), which grows as the square of the number of nodes.
Explain what network effects are.
Network effects means the benefit of technology use increase with the size of the community of other users. This leads to virtuous cycles of adoption where each round of adoption makes the technology even more attractive, which encourages more adoption in the next round, and so forth.
What is a key source of network effects?
One key source is direct interactions among users as they communicate and share data or other assets. These are called positive network externalities.
The term “externality” comes from: it’s a benefit—or cost, in the case of negative externalities—that is external to the original transaction,
Explain the difference between consumer-side and producer-side network effects.
Consumer side: benefit that comes from going along with the crowd.
(telephone example)
Producer side: effects that drive down product costs and increase quality.
(most technologies are subject to a learning curve, meaning that as the volume of production increases, the cost per unit falls. Products with a large network move down the learning curve faster.)
(Also, many types of IT products (microprocessors, software) have very high fixed costs of development, and very low variable costs of production and distribution, meaning there are huge scale economies.)
Network effects tend to produce self-reinforcing virtuous cycles of adoption and “winner-take-all” outcomes, wherein one technology or standard eventually dominates.
They also have a tendency towards three additional diffusion patterns. Name the three patterns, explain them, and give an example for each one.
(1) standards wars (where two or more technologies compete for dominance)
Windows vs. Apple Mac OS, Apple iPhone vs. Google Android, Internet Explorer vs. Mozilla vs. Chrome,
(2) path-dependent technology trajectories (where the outcome depends on small, chance events early in the process)
A great example of path dependency is IBM’s decision back in 1980 to have Microsoft build the operating system (OS) for the IBM PC instead of IBM taking a few months to build the OS themselves
(3) technology lock-in (where a standard cannot be overturned even when a better technology comes along).
most of the world has become locked-in to Windows as a standard OS, due to extremely high switching costs and other factors.
