The evolution of new technology markets

New technologies naturally evolve through five market phases: training, consulting, custom development, shrink wrap software and consolidation.

When I founded XMLSolutions in April 1998 with six other motley fellows, the World Wide Web Consortium (W3) had only published Extensible Markup Language (XML) the month before. At that time, we did not know where the real impact of XML would occur. No one did. If they said they did, they were lying. Our best guess was that the financial sector would be the first to invest broadly into XML. We were wrong.

As history shows, XML made its big splash in business-to-business electronic commerce. Yet, as history also shows, XMLSolutions was a leader in the application of XML for business-to-business electronic commerce. How is that possible if we guessed wrong? We did not try to dictate to the market where it should invest. We did not pretend that we were smarter than the invisible hand of the market. We followed the natural evolution that all new technologies seem to follow.

New technologies emerge all the time. There are new Internet standards like XML and new approaches like service oriented architecture (SOA) or model driven development (MDD). When these TLAs (three-letter abbreviations) pop up, the market follows a predictable pattern of evolution that can be described in five phases.

1. Training.

The first thing companies need for a new technology is training. The subject matter experts are usually the engineers that worked on creating the technology in the first place. Some of these engineers begin getting paid to teach other engineers the new technology.

The originators of the technology often fail to capitalize on the new technology they created for two reasons: they assume that the market is too smart or they assume the market is too stupid. On the one hand, the subject matter experts (I refuse to call them SMEs) often scratch their heads wondering why people demand training. They taught themselves and expect that most everyone else would do the same. It is simple for them to understand the new technology and they project that ease onto others. On the other hand, the subject matter expert comes up with his own idea of how the technology should be applied in the market. He is usually wrong, but he spends all his energy championing his idea, wondering why everyone is so stupid and not doing what he thought they would do.

2. Consulting.

Training leads to consulting. A client receives training and begins to want to apply what he has learned to his particular problem. "You talked about widgets in your examples, but I make snack food. How exactly would the technology apply to making snack food?"

Again, the subject matter expert sometimes scratches his head wondering why the customer cannot extrapolate. The fact is that the customer has a thousand other things that he has to be an expert in; he does not have time to ponder and extrapolate how to apply this new technology. The customer has used the training to sniff out the technology, to see if there is something there. Now that the technology has passed his sniff test, it is far more cost effective for him to pay an expert to create the answer. It lowers his risk.

3. Custom development.

Consulting leads to custom development. The consultant shows the client how to apply the technology. The client responds, "All my developers are tied up on other projects. Can you do what you described needs to be done?"

At this point, the subject matter expert that started teaching has become a team of professionals. It is easy for a team to get the wrong idea of what their true value to the market is. Teams know that they have to remain focused in order to be successful, but it is easy for them to define their focus to the how rather than the what that they do. The classic example is the railroads defining themselves as operating trains rather than moving freight.

At this point in the evolution, you will here the team say, “We train and consult, but we do not build software.” When that happens, that team is washed away to insignificance by the flow of the market.

4. Shrink-wrap software.

The custom developer sees that many customers are asking for the same type of solution. He creates a software product that can be "shrink wrapped", that is, it is packaged with manuals and install scripts, etc.

Product development and custom development are not the same thing, far from it. Custom develop should be managed as professional services and product development must be manage as, well, product development. There will be other entries on this website to describe the differences. Nevertheless, professional services are the single best source for determining what products the market wants.

5. Market consolidation.

The process I have described has a very low barrier of entry. As a result, many companies enter and crowd the market. The potential customers cannot evaluate every product, so they create a short list. The companies that are not on the short list do not make the sell. The market has to consolidate. You must acquire, be acquired or die.

It is interesting how many venture capital firms ignore step 5, consolidation. It should be a clear part of the business plan. The structure of the funding should take into consideration consolidation. That is, the venture capitalists and the board of directors should be thinking about the contingency dilution required to snap up smaller competitors. Unfortunately, they seem to keep the blinders on, thinking only of a traditional growth and exit strategy. They are taken by surprise by the acquisition opportunities and as a result it is much more difficult for them to respond.

Lessons

Here are some lessons that I would point out:

1. The market will follow these five phases of evolution. Do not fight the current of the market. Instead, decide to move in the slipstream of the market.

2. Do not try to be smarter than the market and think that you can prophecy. Do not guess, know. Get engaged with the customers and they will tell you what they really need.

3. Do not stand outside the market and wait for a big neon sign to tell you what products to build. The customer does not know what to ask for. You have to get inside his four walls and find out, and the customer is willing to let you do just that.