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R E C E N T L Y

Just pay for it
By Andrew Leonard
Technology may bring the Olympics to your desktop someday -- but not for free
(02/11/98)

21st Challenge
By Charlie Varon and Jim Rosenau
Ticklers for every situation
Plus: Haiku error message winners
(02/10/98)

Windows on their world
By Karen Lillington
On site at Microsoft's museum and shop: Where the Windows never cease
(02/09/98)

AOL's insecurity complex
By David Cassel
The online service can't even keep its own staff bulletin boards private
(02/06/98)

Let's Get This Straight
By Scott Rosenberg
Technospeak, part 2: A turnkey solution in every pot
(02/05/98)

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BROWSE THE
21ST ARCHIVES

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TRENDY THEORIES OF A "FRICTION-FREE ECONOMY" HIT SOME BUMPS IN THE REAL HIGH-TECH WORLD.
[_ 2_ 1_ s_ t__ b_ o_ o_ k_ s_ ]
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BY ANDREW LEONARD

The pitch was seductive: Learn how you, too, can apply Lanchester's Second Law of Warfare and the Trafalgar Technique to gain market share and ruthlessly crush your enemies. Well, maybe not enemies; "competitors" is more accurate. But it's easy to get carried away when the topic of discussion is "Business as War" -- when the goal is to master the strategies of "Combat in the Friction-Free Economy," to become a modern "warrior in the Wired World."

So, along with about 50 other pilgrims to the heart of Silicon Valley, I headed down on Monday to the Stanford World Internet Center -- shouting distance from the venture capitalists who swarm along Palo Alto's Sand Hill Road -- to hear Dr. Ted Lewis give a lecture based on his 1997 book "The Friction-Free Economy: Marketing Strategies for a Wired World." My fellow attendees were an intriguing mix of sharp-eyed marketing consultants, program managers, independent contractors and other veterans of the vital Valley start-up scene -- all looking for an edge in the high-tech marketplace.

Whether they got one from Lewis' fuzzy presentation is unclear. Although Lewis' buzzword-per-nanosecond rate was impressive, the content, boiled down, didn't amount to much more than a single imperative: "Market share is everything." You see, according to Lewis, in the friction-free economy -- where, supposedly, the cost of manufacturing and distributing a product approaches zero -- "the bottom line is that the only thing that matters is market share."

This is where Lanchester and the Trafalgar Technique come in handy. The Trafalgar Technique is a combat strategy adopted from the famous naval battle in which the British admiral, Lord Nelson, defeated superior French and Spanish forces by targeting a weak point and breaking though the lines. Lanchester, an air warfare theoretician in the first half of this century, codified the strategy by arguing that you should only target opponents who are within your "shooting range" -- that is, who have market-share positions similar to or weaker than your own. In this world, David never goes after Goliath, but stays busy picking on dwarfs his own size.

Why is market share so important? Because once you've gotten it -- even if that means giving away your product, à la Netscape, or paying exorbitant fees to attract customers, à la American Online, or discounting your product 40 percent, à la Amazon.com -- you get more. Market share leads to "lock-in," and "lock-in" guarantees "increasing returns."

The term "lock-in" means that your customers are committed to (or stuck with) you. As in, once you've started using Microsoft Office 97, all remaining roads lead to Redmond -- you can't switch back. Lewis argues that the increasingly faddish economic theory of "increasing returns" means, essentially, that more is better. For example, if more people buy VHS videocassette recorders than Sony Betamax, more video stores will stock VHS cassettes, which will encourage more people to buy VHS VCRs, and so on.

The concept of increasing returns has undeniable value for understanding today's high-tech economy. Microsoft is a master of the technique (in fact, many people first heard of "the friction-free economy" when Bill Gates extolled it in his "The Road Ahead") -- although in the world of Gatesian economics, it's hard to tell the difference between "increasing returns" and "leveraging monopoly power."

So, pump up the marketing budget, give away those free diskettes, make the "company jewels" available for free downloading, run up those hundreds of millions of dollars per quarter losses. And if you can't grab market share yourself, then just buy the companies that already have it. This is a favorite technique for Silicon Valley start-ups who aren't making the impact in the marketplace that their business plan demands. No better recent example is available than the Excite search engine company, which responded to its minuscule stock price and lackluster traffic by exercising Lanchester's Second Law to perfection: Excite purchased its equally unimpressive competitors, Magellan and Webcrawler, and today it is considered one of the big boys, along with Yahoo, Lycos, Infoseek and AltaVista.

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N E X T_P A G E | Netscape -- poster-child company for the friction-free market?