Why it’s Hard to Set a Standard and Maximize Short-Term Profit

After my post yesterday on Kevin Lynch’s move to Apple (link), Infinity Softworks CEO Elia Freedman sent me a followup question:

“This line is interesting: ‘You can’t set a standard in tech and maximize short-term profit at the same time.’ Talk more about this?”

He’s right, I did assert that without explaining it. So here goes:

There are a couple of different tech industry things that we call standards. The first type of standard is a product that almost everyone uses because it has critical mass: Microsoft Word, Internet Explorer, etc. The second type of standard is a technology or tech specification that almost everyone builds on or incorporates into relevant products: HTML, JPEG, etc.

Once in a while you can establish a standard without limiting your short-term revenue (Adobe Photoshop is probably an example; it's carried a premium price ever since it was introduced in 1990). But in most cases, to establish a tech standard you have to limit your near-term profitability. Sometimes that means lowering your margins for quarters or years until the standard is established. In other cases it means permanently giving up some revenue streams in order to create a position of power.

A few examples:

—Adobe gradually gave away PDF in order to solidify it as a standard for document interchange. At first Adobe made the PDF reader free of charge, and eventually it gave away the PDF standard itself, enabling other companies to create PDF readers and creators that competed with Adobe. This move enabled PDF to become one of the most resilient standards in computing. Think about it – despite the hostility of much of the Internet community, and full-bore attacks from Microsoft and others, PDF continues to be a standard today.

When Adobe gave up control over PDF, it reduced the near-term revenue it could have earned through selling PDF readers and creator apps. This undoubtedly lowered Adobe’s quarterly revenue for a while, but it enabled PDF to survive as a standard when many other Adobe standards have withered away. Plus Adobe managed to keep a nice business selling PDF management software to large companies.

—Amazon has been selling e-reader devices at cost for several years in order to jumpstart the market for ebooks. I doubt Amazon will ever make much money from its hardware, but it’s willing to make that sacrifice in order to control the ebook transition and establish itself as the standard electronic bookstore.

—Google doesn’t charge license fees to use Android in a smartphone. This played a huge role in the early adoption of Android by phone makers; I think there’s a good chance the OS would never have taken off if Google had tried to charge for it. Google obviously hopes to make the money back through bundled services, but it’s not clear how successful that will be, and in the meantime Android is a huge cost sink for Google.

—Many open source companies operate by giving away their software and then charging for services or other ancillary products related to them. This approach defers revenue until the software becomes established as a widely-adopted standard.

As I explain in Map the Future, strategies like this are very problematic for an analytical company that focuses on logical cost-benefit planning. The benefits of establishing a standard are usually nebulous and risky, while the costs are immediate and painful. Faced with that kind of choice, most analytical companies will focus on tangible near-term opportunities. Thus Adobe made the prudent and logical decision to make money from Flash Lite when it had the chance, rather than sacrificing revenue to possibly make it a standard in the future.

You made your choice, now you have to live with it.

In the tech industry, the road to hell is often paved with prudent business decisions.

Kevin Lynch and Adobe: Shooting the Messenger

There’s been some nasty commentary about Apple’s decision to hire Kevin Lynch from Adobe. John Gruber at Daring Fireball has been especially acerbic, and there certainly are some things Lynch has said that look dumb when you read them today. But while I usually agree with the Fireball, in this case I think you need to look beyond Lynch’s statements and understand the situation he was in at Adobe.

Let me start with a little history. Adobe is a software powerhouse, with a long and very successful history in publishing and multimedia. But despite all its successes, I think it deserves to go down in history as the company that choked when it had the opportunity to rule the world, not once but twice.

In the formative years of the Internet, Adobe could have set the standard for formatting web pages. Adobe PostScript was far more sophisticated and capable than HTML, which became core standard for displaying web pages. HTML is basically a text formatting specification. You give it a bunch of text tagged with suggestions for things like “this should be bold” or “underline this” or “this is a link,” and then the browser does its best to interpret the tags. HTML was derived from a formatting standard used in academia and government publishing, and it’s great for long text-only reports. But it was not designed to mix text and graphics. That’s why we still struggle to fully integrate great graphics with the web even today.

In contrast, PostScript is a programming language designed to mix text and graphics effortlessly. You can use it to control exactly where every pixel and image goes on the screen, and exactly how it looks. It was so powerful and so far ahead of its time that Steve Jobs’ NeXT chose it as the graphics language for its workstations. Using PostScript, you could easily draw things twenty years ago that we still can’t do on web pages today. The nagging incompatibilities and formatting weirdnesses we have to cope with from HTML, the fragile hacks and workarounds that web page designers live with every day...none of that had to happen.

Unfortunately, Adobe was so obsessed with making money selling PostScript interpreters that it was unwilling to make PostScript an open standard when it could have made a difference.  And so Adobe missed the chance to set the graphics standard for the web.

Fast forward a few years, and Adobe again fumbled the chance for greatness, this time with Flash. This wasn’t just Adobe’s fault; it was a joint project with Macromedia, which Adobe bought in 2005. Flash became the dominant animation and video playback standard for the web because, unlike the situation with PostScript, the player was free. There was no cost for users or tech companies to adopt the standard, and so it spread wildly, boosted by a bundling deal with Microsoft (link). There was a time in the early 2000s, prior to the iPhone and Android, when the mobile phone world was ripe for a takeover by software that would let you produce great visuals on a smartphone. Palm OS was too weak for the task, Windows CE was a mess, and Symbian was, well, Symbian. Macromedia, and later Adobe, could have set the standard for mobile phone graphics if they had given away the Flash player for mobile phones. But Macromedia had lucked into a licensing deal under which Japan’s NTT DoCoMo paid to put Flash on millions of mobile phones (link). Macromedia and Adobe fell in love with that revenue stream and decided they could extract money from every other mobile phone company in the world by charging for the player.

I’d call that move arrogant, but it was more than that – it was stupid. You can’t set a standard in tech and maximize short-term profit at the same time. For a few years of profit, Adobe sacrificed the opportunity to dominate the mobile phone market for a generation, and in the process fatally weakened Flash on the PC as well.

I could go on and on about the opportunities Adobe squandered: AIR, e-books...it’s a depressing list that reminds me of the stories people tell about Xerox PARC. If I thought Kevin Lynch was the executive responsible for those moves, I’d be shocked that Apple hired him. But as far as I can tell, they were made by other people, and he was stuck playing out the hand he was dealt. I’ve been there, I’ve done that. If you’re part of a team you do the best you can and trust that the folks around you will do theirs. If you want to fault Kevin for something, fault him for staying so long at a company that was putting quarterly profits ahead of long-term investment.

So my reaction to the Lynch hiring depends on what Apple’s going to ask him to do, and we don’t know that yet. If Apple wants him to run business strategy I’ll be worried, because I don’t think he had great role models at Adobe. If Apple wants him to run marketing I’ll be alarmed. But I think Apple has hired him as a technologist. In that role he’s extremely smart and easy to work with, and Apple fans, I think he can be an asset to the company.

Disclosure: I did a little bit of consulting for Adobe in the past, and have met Kevin Lynch. This article doesn’t include any confidential or inside information.

Coming Soon: My Book on Business Strategy

I’m getting ready to publish my book on business strategy, Map the Future. It’s all about how a business should plan for the future, and how to manage the functions that help you make those plans: competitive analysis, market research, and advanced technology. It’s not a case study book; it’s more like a business cookbook, with detailed how-to instructions on everything from segmenting the market for a new product to influencing people who don't want to listen.

I’ll post more about the book when it ships, but in the meantime I wanted to offer a review copy to any journalists or bloggers who want to look at it. If you’re interested, please write to me at the address here. Be sure to include the URL of your publication or blog.

Now that the book’s finally done, I can get back to blogging. There’s a lot of interesting stuff going on, and I’ve been dying to dig into it.