Category Archives: Economics

Disrupting Mobile Phones – Google’s taking the lead and Apple is going to lose

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http://news.phonebloks.com/

Photoblok’s high level picture of their design

For some people, Motorola’s Project Aria, in partnership with Phonebloks, is going to be a game changer, while others are kind of like, meh. I think that the end result of this phone will actually be a game changer, but not everyone will switch to this format of phone. Many people will continue to buy phones that have been designed for the full experience. However, I do think that theses phone will significantly impact in how many people think of phones.

These phones represent a disruptive shift for the phone industry. Why are these disruptive when I said that Kayak isn’t disruptive? Well, in the book Innovator’s Dilemma Dr. Christensen argues that when new industries are formed the leaders are companies that are able to combine all the pieces that are needed for producing that good under one roof. In the case of airline travel all the booking used to take place through the airlines, eventually this was outsourced to Travel Agents which were something of an extension of the airlines. The first disruption came when other groups were able to use the internet to book reservations. The act of reserving a seat on a plane became decoupled with the actual flight and service.

So, in the case of mobile phones, specifically smart phones of course, the most successful firms were the ones that were able to combine everything you needed for the phone to be useful. Blackberry did this, but Apple was clearly the best at it. The original iPhone was basically an iPod with a cell antenna in it. This was an amazing thing though. Apple had disrupted the music distribution industry with iTunes and was able to leverage that innovation into smart phones. This of course was a disruption in that industry because everyone was focusing on productivity first, Apple approached it from a content perspective. Content always beats out productivity. In a very real sense, the market changed over night. Apple owns everything in their cell phone, the OS, the design of the chip, the distribution network for apps, music, movies, etc. This is a very classic example of fully integrating as much of the supply chain as possible.

This is exactly how computers started. Large companies like DEC and IBM built everything for a computer. The boards, the operating system, the software, and the interfaces. These companies were large and structured in a way to make money from extremely expensive mainframes which had a very small market. Between Xerox and IBM the personal computer as we know it today was invented.

Our PCs today are modular, which means that every portion of the computer can be built and designed by different firms. This allows a lot more innovation across the platform because it doesn’t rely on one firm to create everything. It allows specialization and diversification for an assembly company. It was because of this modular nature that Intel, Dell, and Microsoft became successful. They were able to leverage the platform that IBM delivered with the PC and grow and develop new capabilities.

This modularity also allowed just about anyone that wanted to the capability to built their own custom made computer. This has become less so with laptops – you can’t buy an empty laptop but you can customize it from a company. This just isn’t the case with smart phones – which are essentially mini computers. The new tablets coming out are as powerful as computers from the early 2000s.  The modularity of PCs offer an additional benefit, you have the ability to easily fix them. If your processor dies or your graphics card does you can buy another and simply pop it in. Even if the motherboard goes, you can still replace that and plug all your existing components into the board. The case is the only thing you don’t have to change if you don’t want to.

With phones the screen is like the case. You don’t really need to upgrade your screen every time. Especially with how hard the screens are unless you drop the phone and crack the screen you don’t need to replace it. Furthermore, we’re getting to the point we are with TVs that the resolution of the screen isn’t going to make much of a difference. Yes, we’re in a DPI battle between Amazon, Google, and Apple but we’re getting close to the point where we can’t tell the difference. Which means that the screen is a perfect thing to act as the phone’s “Case” for modularity purposes. The modularity will help immensely with repariability, which current scores pretty low, if you’re interested in those scores check out iFixit.

So, how does Phonebloks come into all of this? They are essentially pulling an IBM by creating a system that can be modular. Google’s Android will be the operating system of choice, but it’s likely that even this could be flexible in the manner that PCs are today. It’s unlikely that iOS will be on these phones legally, although I’m certain someone will figure out a way to install the operating system on these phones. This will hurt Apple in the long run as people will not be using their operating system will leave their ecosystem and prevent them from making as large of revenues in the future. People will still buy their products, but there will be much less sales. Apple could be repeating history if they don’t offer to sell their operating system for phones like this.

Why do I think that these phones are going to be winners? Well, it will increase the longevity of the phone. With phones costing upwards of $600 for the top of the line phone anything that can increase the length of time that a person is using one is a good thing. Secondly, as Android and other OSes evolve they require more capabilities from the phone which means older phones aren’t able to use the latest operating system. Buying a much cheaper CPU to install would be a lot better for end customers. This will also disrupt the supply chain as companies like Qualcomm aren’t used to selling directly to customers. Finally, as long as the design is good, then it won’t seem as much of a burden to have the same phone year in and year out. It will require people to think differently, but that’s something that I believe Motorola and PhoneBloks can over come.

These phones are going to change the industry and possibly enable other companies to develops phones in the same way. Hopefully they pick one standard interface like the Motherboard that all companies conform to. This will allow companies like Google and Microsoft to go back to innovating on operating systems and to get out of the phone building business.

Tools that will help disrupt Healthcare

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I’ve been reading this really interesting book on healthcare – it focuses on the potential Hows that healthcare can be disrupted. If you aren’t sure what disruption and/or disruptive innovation is then check out my last blog about some of the industries where it’s occurring and you’re likely part of the disruption.

If you buy your own health insurance you may have noticed a new type of insurance. It was new to me whenever I joined my health insurance company in the North West. Neither AMD nor Samsung had similar plans so when I first signed up for it, I was extremely ignorant of what it was and just signed up for something that looked good. This type of insurance is called HDI w/ HSA.

HDI: High Deductible Insurance. This means that you’ll likely have a high deductible (obviously) and will have to pay out of pocket.
HSA: Healthcare Savings Account. This is an account that allows you and your employer to make pre-tax contributions. You will also be able to pay for healthcare tax-free and accrue interest tax free as well. This is great in terms of how much money you actually gain from this. When you pay for a healthcare service like a Doctor’s visit, you’ll have to pay all $150, however, since you didn’t pay taxes on that $150 you end up saving money. Further, your employer can contribute to this account in the same fashion as your 401(k) and your account will be invested in a similar fashion as a 401 (k).

Of course there are some draw backs to this type of health insurance. First, until you reach your deductible you’re going to end up paying out of pocket. You could potentially have a deductible as high as $5,000 which is highly undesirable. Your employer might not contribute to your account, which places more of the burden on you, which sucks.

How can this contribute to disrupting healthcare? Well, you’re going to start really shopping around for your day to day medical expenses. You’re not going to go to a specialist unless you really think you need to. You’re not going to go straight to the hospital for care. You’re going to try to find another place to get the care you need. This will open up the possibility for care givers to provide healthcare in other fashions. This will potentially change the way that insurers will begin to pay out to providers as well.

There is also a push for Accountable Care Organizations, look for those as well, which are paid based on outcomes rather than the type of service being provided. These organizations will help disrupt incumbent firms and will likely capture the attention of insurance agents. I believe that in many cases this is where a lot of Exchange insurance programs are going.

Personally, I’m excited about the potential to work within an insurance company to disrupt the industry. I believe that there are changes that can be made internally, through educating on what metrics are and how to improve based on these metrics. I also believe that we’ll be in a position to help enable providers to be more efficient and effective care.

Continual disruption – still happening in TV and content

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One of my favorite things to read about is innovation. For those of you that know me, that’s not really a surprise. However, I think that there’s a lot of misunderstanding out there about what “disruptive” innovation is. Most people think that apps that modify the way you do something is disruptive. For example, people have said that companies like Kayak and Hipmunk are both disruptors of booking travel. However, the true disruption came from travelocity or orbitz, whichever came first. These sites really did change the way the game was played for booking travel because they essentially cut out both the middleman (travel agents) and the airlines involvement in book flights. Anything beyond that has simply been sustaining innovations. These are innovations that are quickly co-opted by the existing incumbents as it’s possible for them to do that. A more disruptive technology for travel would view the process holistically from the moment you booked the trip to the time to returned home from your completed vacation. The site would need to account for getting you to your destination without any sort of delays. In James Womack’s book Lean Thinking, they point out the “value add” activity of a flight was only 3 hours, while the total waiting time was over 12 and they didn’t include the effort it took to book the trip back in 1995. All inclusive it’s likely to be much worse now. Especially the way that airlines measure “on time departure” (leaving the gate on time) which is different than our “on time departure” (taking off on time).

In a true disruptive situation you’ll typically see the incumbents resorting to changing laws to keep their supremacy of the markets, we don’t see this in travel at all. Where we do see this is in telecom and cable. The image below from Mashable pretty well explains why this is happening.

There’s likely overlap between users of Netflix, Prime, and Hulu, but if I was cable TV I’d be running scared. I also would love to see this graphic if you add Twitch.tv and specifically ESPN. I think eventually twitch will be disrupting ESPN and the traditional sports networks out there.

How are the cable companies using legal and technical mechanism to limit access to content on Netflix, Amazon, Hulu, and Twitch? First, the movie industries have absurd agreements with cable companies (providers) giving their services, like Xfinity from Comcast first access to content. In many cases this will translate into something earlier on the subsidiaries of those in terms of networks. Second, cable providers use their control over the network to throttle the internet speeds of these internet services. This is leading them to try to change the laws around net neutrality so that the cable providers don’t just become “dumb pipes” that content is passed through but the users don’t interact with.

I believe this also indicates that both cable networks and internet providers are being disrupted in a way that they don’t understand. They are using every tool they have at their disposal to fight against the adoption of these services, but they don’t understand what’s happening. Consumers have hired comcast, verizon, and others to provide them a solid consistent connection to whatever content the user wants. Internet providers are trying to force themselves into a middleman role that the users don’t want. When opportunities arise that will allow the user to experience content on their own terms. It’s clear that cable TV is losing the fight and this will only accelerate as people purchase more tablets and devices like that. Chromecast (which allows people to display things from a laptop/tablet on their TV) is another disruption that Google is providing, Amazon has something similar for their Tablets (which will increase Prime usage by the way). The TV companies are losing and need to figure out new business models to stay afloat. This is where disruption is happening. Not in other spaces.

Amazon’s potential army of Drones – what’s the point?

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Amazon wants to deliver packages to you in 30 minutes via drone. While the convenience might be pretty awesome. I’m not sure how good of an idea this is going to be. I also think that this points to a broader push for Amazon. In the past Amazon has mentioned how they had plans to sell groceries locally and deliver rapidly. This is currently in beta test with only two cities involved, LA and Seattle. Depending on the size of these drones this will make delivery of groceries much easier and reduce the risk for goods to thaw while waiting for the resident to come home and get the groceries. Furthermore, if these drones are really good, Amazon could time the delivery of the groceries based on when the customer wanted them to arrive at their home. Let’s say you place the order in the morning, but know you won’t get home until around 6:30, you could ask Amazon to deliver the goods around 6:30 so you could just bring them in the house and start cooking.

A few years ago there were some rumors that Amazon was planning on going to brick and mortar stores while everyone else is going more web, web, web. These drones that are in the video do not look like they have the farthest range in the world, which means for a place like my home town about an hour north of Pittsburgh by car and if there was a distribution center in Pittsburgh (there’s not, but there is one in Allentown), the drone would need to fly close to 120 miles per hour. That doesn’t seem likely for these things. They don’t look like they have the speed, they are clearly designed for shorter ranges than that. Additionally, implementing these drones would require significantly more distribution centers throughout the US. Distribution centers work best when there is a need for high volume, high speed, and high variety at least in many distribution models. However, if Amazon were to use retail stores as part of their distribution network and looked to use the stores as the location where the drones would send goods from, this makes a lot more sense. Retail stores aren’t really there to be retail stores, but micro distribution centers.

This would impact the types of items that would be a candidate for Air Prime in many locations, for instance cities with Stores only would have a much smaller list of applicable items. Cities with distribution centers near by would likely have any item up for Air Prime that would fit on the drone.

This is still 4-5 years out from being deployed, so why is Amazon showing this off now? Well, bad press recently. There have been several articles that came out this past month about how horrible the distribution centers are in the US.

All said though, I think these drones point to continued interest in providing different approaches to brick and mortar stores as well as grocery stores. I think it will start out small and grow from there. Amazon will likely build out some stores first with a similar function to Best buy where you can pick up in the store. In later store deployments they will have options for Air Prime and pick up in store for certain items. It will certainly change things for Amazon workers and will change the way the distribution centers are managed. They may simply become hubs with a lot more being pushed out closer to the end customer.

Healthcare: the Value Stream of care

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In Lean process improvement, one of the first steps you ever take is to walk the process. For manufacturing this means to go down to the floor where the product is made and walk with one piece from beginning to end. This provides the manufacturer insight into where there’s a great deal of waiting for product to come, leading to idle workers, where there’s a lot of inventory piled up – a bottle neck, if there’s a lot of rework – fixing defects like re-etching a person’s name on the back of an iPhone, and how the material flows around the floor. This works pretty well with doctor’s offices too. You can draw a map to all the different places the Dr. walks, the nurses walks, and where the patient walks. Any transportation in a Lean system is waste, so reducing that is important.

Mapping value streams essentially take this to the next level. You map all the major steps that the material that goes into your product step through before and after you. This allows a manufacturer to see all the waste before and after them, enabling them to partner with their suppliers and customers to reduce waste and unnecessary processing. For example, many of us have worked retail. Some times when you do stocking you’ll find shirts that are in bags that are in a box. This is non-value add because it’s highly unlikely that the bag would protect the shirt from getting wet in the case of a flood. So, it’s a waste of plastic for the bag, putting the bags on the shirts, and removing the bags from the shirts are all waste. Which increases the cost of a shirt. However, there’s a beginning and end of the value stream likely starting with cotton and ending with the final sale to the customer. In the case of a can of cola, it takes 319 days from the mining of bauxite to the consumption of the cola with only a total of 3 hours of actual processing of the material (Lean Thinking, Womack).

Value Stream for a can of cola through bottling (Womak Lean Thinking)

Why such a long introduction? Well, the value stream for healthcare is completely different. The beginning is when you’re born and the end is when you die. Otherwise, every activity you partake in impacts your health and the eventual cost of any episode of care. An episode of care is what happens when you directly interact with a provider, hospital, or health insurer. Arguably, these are the exception to your normal behavior and take you out of your normal routine.

Thinking about health in a value stream like this is non-intuitive for providers and insurers alike. As both have accounting practices and treatment plans that focus mainly on the episodes of care and minimize the remainder of the activities a member does. Thinking in this manner places more importance on preventative care, longer term plans for mental and physical rehabilitation, and care networks for long term diseases. This is a serious shift that is starting to occur in many insurance organizations, but aren’t very effective yet. The most effective portion of those three are the networks of patients that have a similar disease, such as Crohn’s Disease.

I believe that looking at care in this fashion will help redesign the manner that care is designed as it will focus on different portions. As my friend Rachel pointed out, behavioral health issues are typically undervalued in the value stream of healthcare. However, with this model long term care issues should be given priorities as they impact the highest percentage of the value stream. It would also force insurers and providers to look at addressing care holistically and providing the best care in the best way when they can. Sending patients to clinics that can quickly treat conditions as cheap as possible.

I’m extremely interested in how this will play out at my company as we think more holistically about value streams for health care. Checkout my last two blogs about health care:
http://scitechkapsar.blogspot.com/2013/11/heathcare-how-insurance-company-decides.html

http://scitechkapsar.blogspot.com/2013/11/healthcare-why-do-we-need-medical.html