In Praise of Ecosystems

Innovation doesn't occur in a vacuum -- which is why Apple's iPod will eventually be eclipsed by rivals that can cooperate and compete together.

The iPod is doomed. Not this month, not this year, and maybe not the next. But soon enough, Apple will lose its hold on the marketplace for both digital-audio players and digital songs. It's inevitable.

Already the iPod's features are being copied by Samsung, Dell, iRiver, Sony, and others. Competitors are adding tuners, cameras, gaming, and more to devices. They're rolling out a host of new music services. Meanwhile, the iPod has not changed much since its debut four years ago -- and Apple's latest iteration, the iPod shuffle, has met with limited success. The competitors will win. Why? Because they have created an economic ecosystem that powers innovation. Apple hasn't.

By economic ecosystem, I refer to a set of companies, cooperating and competing at once, that together deliver a product or service by providing different components that share some critical capabilities. In an ecosystem, more than one company can provide features or functions to the product. The product is "open."

The iPod, like most Apple products, is decidedly "closed." Your Yahoo music subscription won't work with your iPod because Apple does not support Microsoft's WMA file format. (Too bad, because Yahoo's $60-a-year Music Unlimited is terrific. Just try approximating its "give me like artists" feature on iTunes.) More important, no one can improve on an iPod except Apple.

An ecosystem beats a product because its collective of competitors can explore and invest in many more ideas than any single company can muster. For example, RCA might link a portable music device to satellite radio. If it fails, RCA bears the cost. If it succeeds, others will copy it. Simultaneously, Sony may push the option of adding more memory to its flash memory players. The bet may or may not pay off. But in either case, Apple on its own cannot match this capacity of the group to experiment.

In an ecosystem, all the players share some key components. Devices that can read the Windows version of digital music (WMA) all share the song base, and almost all can use subscription services such as Napster and Yahoo's Music Unlimited. (Already, Napster and Ericsson have announced they'll cooperate on a wireless version of Napster's online music service capable of delivering tunes directly to cell phones.) Many non-Apple devices, by contrast, can't use iTunes, just as iPods don't work with WMA. This closed system made sense for the iPod's launch phase, but once the music ecosystem has the capacity for far more experimentation -- and that will happen any minute -- even Apple, a profoundly innovative company, won't be able to keep pace.

Throughout industrial history, open standards have enriched customers and fueled productivity. The Springfield Armory wielded enormous economic influence after 1819 on the basis of the brilliant invention of Thomas Blanchard: a lathe that enabled even an unskilled operator to create identical rifle stocks. Standard parts from Blanchard's lathe overtook other forms of manufacture because they cost less and because the U.S. Army liked their interchangeability.

Likewise, the Internet, with its open set of tools for communication and presentation, provides standard parts for knowledge work. The Internet ecosystem enabled massive value creation, both for incumbents like Microsoft and IBM and for new entrants like Cisco, Amazon, and eBay. But remember, it was the ecosystem -- not the market leaders -- that radically expanded the market.

"Ask yourself: How can we make it easier for others to add innovations that will make our product more valuable?"

Why don't more companies launch ecosystems? Because doing so requires faith that the market is a better judge of innovation than any one company -- and that doesn't jibe with command-and-control management. Automobiles, with their efficient, self-sustained power plants, should be platforms for telecommunications and entertainment systems; a traffic jam on the Los Angeles freeway is a telecommunications network waiting to be born. Instead, carmakers design products to accept only proprietary parts and subassemblies designed by captive suppliers -- and they forgo revenue from any number of services. Likewise, the cell-phone market is stagnating because manufacturers and carriers restrict which features consumers can add to their proprietary systems.

Is it time for your company to open up? Ask yourself: Can we create an ecosystem of innovation that will expand our market? How can we make it easier for others to add innovations that will make our product or service more valuable to more customers?

This type of thinking is hardly comfortable. Entrepreneurs like Steve Jobs have been taught to protect any advantage, at almost any cost. But sometimes it is in the letting go that we discover entirely new sources of innovation and growth. Apple should be opening up the iPod and licensing iTunes to others so they can build out the ecosystem. If it doesn't, the iPod will lose, just as the brilliant Macintosh computer ceded market leadership years ago to IBM's dowdier -- but more accessible -- personal computer. The iPod and iTunes, like any closed system, can give Apple outsized profits -- but only for a time. Ultimately, no one company can out-innovate the market.

John J. Sviokla is vice chairman of management consulting firm DiamondCluster International Inc.

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