You are here

Opinion

Business model innovation beats technical innovation

Business model innovation is usually more powerful than technical innovation; it is more disruptive and harder to copy than technical innovation. And yet, so many companies are focused on technical innovation to compete.

Consider Airbnb. What makes them so successful is not a technical advantage, but a business model advantage that provides them near-zero marginal cost. For a traditional hotel chain to increase its capacity, it needs to build more physical space at significant cost. Instead of shouldering that setup cost, Airbnb can add another room to its inventory at almost no cost by enabling people to share their existing houses. That is a business model innovation. Furthermore, it is extremely difficult for the traditional hotel chain to switch its business model to match Airbnb's.

The same is true in Open Source software. While it is true that Open Source often produces technically superior software, its real power may be its business model innovation: co-creation. Open Source software like Drupal or Linux is a co-created product; thousands of contributors build and enhance Drupal and everyone benefits from that. A large Open Source community produces vastly more software than a proprietary competitor, and shares in the production and go-to-market costs. It disrupts proprietary software companies where the roles of production and consumption are discrete and the production and go-to-market costs are high. While established companies can copy key technical innovations, it is extremely difficult to switch a proprietary business model to an Open Source business model. It affects how they build their software, how they monetize the software, how they sell and market their software, their cost structure, and more. Proprietary software companies will lose against thriving Open Source communities. I don't see how companies like HP, Oracle and SAP could change their business model while living quarter to quarter in the public markets; changing their business model would take many years and could disrupt their revenues.

Take Amazon Web Services (AWS), one of the most disruptive developments in the IT world the past decade. While AWS' offerings are rich and often ahead of the competition, the biggest reason for the company's success is its business model. Amazon not only offers consumption-based pricing ('pay as you consume' vs 'pay as you configure'), it's also comfortable operating a low-margin business. Almost 10 years after AWS launched, at a time that vast amounts of computing are moving into the cloud, HP, Oracle and SAP still don't have competitive cloud businesses. While each of these companies could easily close technical gaps, they have been unable to disrupt their existing business models.

If you're in a startup, innovating on a business model is easier than if you're in a large company. In fact, an innovative business model is the best weapon you have against large incumbents. Technical innovation may give you a 6 to 18 month competitive advantage, but the advantage from business model innovation can be many years. Too many startups focus on building or acquiring innovative or proprietary technology in order to win in the market. While there is usually some technical innovation around the edges, it is business model innovation that makes a successful, long-standing organization -- it tends to be a lot harder to copy than technical innovation.

Entrepreneurs, not the government, will save Europe's economy

(I originally wrote this blog post as a guest article for The Next Web (English) and De Tijd (Dutch). I'm cross-posting it to my blog.)

If Steve Jobs was adopted by a Belgian family rather than an American family, it's extremely possible he may have ended up working in a bank instead of co-founding Apple. Why? Because starting a company and growing it is hard no matter where you are, but the difficulty is magnified in Europe, where people are divided by geography, regulation, language and cultural prejudice.

While entrepreneurship and startups have spread tremendously in Europe, a lot of aspiring young entrepreneurs leave Europe for the United States. Very little will stop a true entrepreneur from trying to reach his or her goals, including uprooting their entire life and moving it across the ocean to optimize their chances of success. From my interactions with them, the United States' gravitational pull is only getting stronger.

So, what can Europe do about it? Here are my three recommendations.

Focus on creating large companies

Europe produces plenty of small businesses: restaurants, small technology firms, clothing stores, hair salons, and so on. What it doesn't produce enough of are innovative companies that grow quickly and end up big. It's a problem.

Look at the 500 largest companies in the world (Fortune Global 500). According to Bruegel, a European think tank devoted to international economics, Europe created three new, large companies between 1975 and today. The U.S. created 26.

That number is even more incredible when you take into account the fact that Europe has about twice the population of the U.S. The reality is if Europe were to be competitive, it has to produce 25 times more large companies than it does today.

Access to capital continues to be a challenge in Europe. Getting seed capital (1M EUR or less) has become easier, but raising significant money (25M EUR and more) to turn your company in a global business continues to be difficult. Large companies also provide an important 'exit strategy' for startups. Without a vibrant exit market, it's harder to attract both entrepreneurs and investors.

Large companies also play an important role in creating successful innovation centers. They are catalysts for creating angel investors, for providing distribution, and serve as a breeding ground for talent and practiced management.

If you look at Silicon Valley, Hewlett Packard, among others, served that purpose in the early days, and more recently, a number of successful entrepreneurs have emerged from Google.

I recommend that European government stimulus focuses on companies that could become titans, not on small companies that won't move the needle. Too often, there are investments made in companies that have limited or no growth potential.

Level the playing field

Anyone who has built a global organization likely understands that European work regulations can shackle the growth of startups. Taxes are high, it's hard to acquire a European company, severance packages can be outrageous and it's extremely difficult to fire someone.

It only gets worse when you attempt to operate in multiple European countries, as anyone with the ambition to build a large company has to. Each country is different enough that it requires setting up a local legal entity, and having local accountants and local attorneys. Setting up and running these legal entities costs valuable time and money, a huge distraction that gets in the way of actually running and growing your business.

Europe needs to roll out unified labor laws that are competitive globally and unified across Europe. My biggest worry is the branches of government that try to promote entrepreneurship are not powerful enough to address Europe's labour rules.

Change our culture

A small business can be started anywhere in the world, but it takes a different level of ambition to aspire to become the next Apple. The biggest thing entrepreneurs need is the belief that it can be done, that it's worth taking the risk and putting in the hard work. Having the right culture unlocks the passion and dedication necessary to succeed.

Silicon Valley is a state of mind. To recreate Silicon Valley in Europe, Europe must first adopt Silicon Valley's culture. I believe Europe's culture would benefit from adopting part of the American Dream: the egalitarian belief that everyone is able to succeed through hard work, and that it is acceptable and encouraged to better oneself economically through hard work.

It doesn't mean Europe needs to give up its strong communal beliefs and its desire to look out for the greater good. I'm a firm believer that many modern businesses can "do well and do good". Businesses that generate value for their shareholders and that also have a positive impact on the world go beyond generating profits.

Our world does not lack business opportunities; there are plenty of people with needs that aren't met. Enabling entrepreneurship enables innovation, and innovation helps change the world. The entrepreneurs that succeed in building large businesses, especially those that are aligned with fixing the world's problems, will transform the lives of others for the better and introduce more opportunity on a global level.

Entrepreneurs, not the government, will change the world. It's time for Europe to help their companies grow.

The assembled web

(I originally wrote this blog post as a guest article for Forbes. I'm cross-posting it to my blog.)

To "assemble" means to build. Assembling also means that we come together. Sometimes, both aspects are true. When that happens and we work together to build, we are better off for it.

The open source community is a perfect example of this. When Linux creator Linus Torvalds spoke about how it felt to get contributions from a worldwide network of people, he remarked "I had hoisted myself up on the shoulders of giants". I'm lucky enough to feel the same way.

The Internet has created a culture of sharing, letting people connect and collaborate on areas of common interest. When I started developing Drupal in 2000 from my university dormitory in Antwerp, I never imagined I'd build a network of people who were interested in building a content management system with me. Yet word of my project spread, and before I knew it, I was getting contributions to my project from around the world. Soon I also was standing on the shoulders of giants.

We didn't know it at the time, but this founding group of Drupalists was creating the basis for the assembled web. The assembled web is the next stage in the evolution of the web. While the coded web will always continue to exist, it will be a minority.

Think of the assembled web almost as an app store model for creating a digital experience. For example, if you want your website to allow social comments to flow in from Facebook or Twitter, you can simply add a module that someone has already coded. If you want to add analytics, maps, or almost anything you can imagine — there's probably a module for that.

While the modules are built on a foundation of code, they require no coding to install and build with ... to assemble. Instead, the vision of a great digital experience can be accomplished by someone with no coding experience, who can now simply "snap" the pieces of a new web experience together.

So, why is the assembled web rising to prominence so quickly, and what does that mean for developers?

  • First, there are more websites now than ever before, and there's no sign of that growth slowing down. Ten years ago, a company had one website. Now, that same company might manage dozens or even hundreds of sites.
  • Second, the complexity of websites has skyrocketed. Applications, integrations with third-party systems, social media integration, and the mobile web have all driven this complexity. New technologies emerge and replace the old. For example, Flash has almost been driven to extinction, replaced by HTML5, CSS3 and other more modern standards.

These two trends, set against the way many sites are built today, make it difficult to keep up with the changing standards, much less innovate and move the digital experience forward.

There is only one way to keep up: do more with less. I first imagined the assembled web in 2005, when the widespread use of content management systems began to replace the webmaster role as we knew it. Webmasters were no longer hired to write HTML by hand, or upload code to an FTP. In a way, the CMS eliminated the middleman.

Beyond our own evolution as developers, outside forces have also fundamentally altered the web. Ten years ago, the global phenomenon of Facebook didn't exist. Twitter didn't exist. The iPhone had yet to be released and create the mobile ecosystem that we know today. Think about the amount of change that's happened in such a short period. Now what will the world, and the web, look like another 10 years from today? No one knows.

The best thing to do is to adopt a platform that can change at the pace of the web. Developers will be tasked with building new functionality, and expanding the world of possibilities that modules can deliver. The innovation that developers will bring is crucial, and will power the assembled web by lowering barriers and democratizing the experience of site building.

The assembled web doesn't just have implications for the way developers create websites. It will have a widespread impact on any person or organization that needs to keep up with rapidly changing external forces. That's pretty much everyone. Think about how the assembly line changed manufacturing the first time. And how 3D printing is changing it again now. We can build faster and smarter than ever before. Similarly, the assembled web gives more people the tools to build the web as we know it.

Anyone without coding experience will be able to use an open source CMS to assemble a site by simply snapping modules together. A marketer could build a site for a new product launch without relying on the engineering team. An entrepreneur could launch a company site without hiring a webmaster. This phenomenon frees up time for developers to create new ways to connect citizens to their governments, nonprofits to donors, businesses to customers, friends and family to each other. Launching a disruptive business idea or reacting to today's rapid market changes could be accomplished without technical assistance. Going from vision to realization, for the first time, would be a single step. This advantage would finally bring the speed of digital site building in line with the speed of the web.

This evolution isn't a scary thing for developers; it's an opportunity. The web has forced a constant reinvention of everything. Careers. The way we compete for business. Being more efficient in the way we assemble a website will allow us to focus on the things that matter more, like innovation and creativity. By standing on the shoulders of giants, we can make things look and operate more beautifully than we'd ever have expected.

I bought some Bitcoin and here is why

Over the past twelve months, I’ve become a bit of an obsessive follower of Bitcoin. It started after I read Satoshi Nakamoto’s original Bitcoin paper. It was a fascinating read and my first introduction to crypto-currencies. I even had a couple of lunches in Boston with Gavin Andresen, Bitcoin’s current project lead.

I was close to buying some Bitcoin when I first got interested, but backed off. It was too bad because Bitcoin's value increased from $13 a year ago to around $1,000 at the time wrote this: a 4,000% increase in 12 months. I didn't buy my first Bitcoins until a month ago. I bought them with some reluctance but I figured that people felt a certain reluctance when paper money first came along. But I bought them because to me it seemed like Bitcoin could work and also because I wanted to have a better understanding of what it was all about.

Bitcoin is a purely digital currency. There are no records of Satoshi's identity so no one knows who invented it, no one controls it and it is not backed by gold. It is something akin to a digital version of gold. It's fascinating. At the core of the Bitcoin system is a global, public log, called the "blockchain", that records all transactions between Bitcoin clients. A user can send Bitcoins to another user by forming a transaction and committing it to the blockchain. The blockchain is maintained not by a central body, like a central bank, but by a distributed network of computers, called "miners". Everyone can be a miner, and the miners collectively record and verify all transactions.

Compared to traditional banks, the advantages of Bitcoin are significant. Bitcoin payments can be made at any day of the week, any time of day to anywhere in the world. The fees and delays involved are small compared to those imposed by banks; pennies compared to dollars and minutes compared to days. And unlike paper money, it is unforgeable. Unlike gold, its supply is perfectly verifiable. It is also immune to inflation: governments can't print more Bitcoins to pay off their debts.

The design and architecture of Bitcoin is both a curse and a blessing. The lack of central authority governing Bitcoin raises questions. Governments tend to enjoy power of observation; it makes it easier to fight money laundering, tax evasion and other crimes. As Bitcoin continues to gain popularity, governments may grow increasingly resistant and attempt to shut down Bitcoin. And banks don't like Bitcoin either. Money transfer is an important part of their business; it has almost zero risk, almost zero cost, yet provides them billions of dollars in revenue. In a world where Bitcoin is universally accepted, banks may have a diminished role.

The jury is out on whether Bitcoin is a fantasy destined for failure, or whether Bitcoin will underpin the future of finance. Some predict the value of one Bitcoin could climb to hundreds of thousands of dollars if it becomes universally accepted. While I risk losing some money, it could also turn out to be a massive investment home-run. I felt that the risk/reward decision made it a bet worth taking.

I certainly don't advise you to buy Bitcoin as I'm skeptical that Bitcoin will succeed. I predict Bitcoin to have an extremely bumpy ride, and at best, to follow Gartner's hype cycle. If Bitcoin ends up collapsing, I will be disappointed but I won't feel stupid. I already sold some Bitcoin and recouped my original investment; I'm long with my remaining Bitcoin.

So is Bitcoin a case of speculative greed, or a utopian cyber-libertarian ideology? In a world where everything is going digital, why not currencies? Bitcoin makes it faster, cheaper and easier to store and transport value. It was designed to overcome problems faced with traditional currencies and banks. At a minimum, Bitcoin has created a lot of debate throughout the world, and has shaken a stagnant banking market. Longer term, the concept of a crypto-currency makes a lot of sense to me. It is massively beneficial for the world that we can transfer money easier, faster and cheaper. I find it hard to believe that a hundred years from now, we'd still be digging up gold, and that we wouldn't have a global, digital currency to replace it.

If you believe a digital currency is the future of money, I'll leave you with one question: how would one launch a world-wide crypto-currency like Bitcoin? It can't be owned by a commercial organization, and I simply can't imagine all the world's governments work together to build and launch something like this. Creative disruption often comes from the outside, and not from the inside. It pretty much has to happen in a grassroots way, not unlike the way the Internet was created. Even today after 30 years, the Internet operates without a central governing body and is comprised of independent, voluntarily networks. It works well and changed the world.

The blog post above is a Dutch opinion piece I wrote for the Belgian financial newspaper De Tijd.

To start an Open Source project or not?

People ask me what it is like to be the head of a big Open Source project, and whether they should Open Source their project or not. I wanted to talk about that a bit more in this blog post so more people can pick up my answer.

Having been the project lead of the Drupal project for the past 13 years, I’ve watched my dorm-room activity transform into a community filled with passionate people all working toward the same goal: changing the world and making it a better place through open source.

Today Drupal powers more than 1.5 million sites. Drupal is a source of innovation for business and government. Most importantly, Drupal has helped individuals build a dream, giving smaller groups and organizations a bigger voice, as tools are democratized. But it has also allowed large businesses to develop new ideas, bring and build transformative experiences to the digital world.

The ambitious individuals who would lead the next generation of open source projects will experience moments of joy and excitement. It's exhilarating when your passion drives you to help create solutions to challenging problems. Your joy will be tempered with plenty of moments of frustration and doubt, as roadblocks may stand in your way during crucial points of development. But the successful leaders will be the ones who aren’t dissuaded from their work.

Creating a successful open source project requires much more work than writing good code. If your project is growing, then one day you'll start to see that you are a leader. You’re creating a vision, a culture, and inspiring people to come on board. This evangelism requires a lot of travel, conferences, fundraising, people management, project management and more. Make sure this passion is also within you.

I’ve had the opportunity to travel the world, evangelizing Drupal and have a leading role in a passionate, active community that is making a real difference. I’ve also founded a non-profit organization and a commercial company on that same promise.

As you start to build a community of participants who are willing to commit their time and passion to your project, you’ll soon realize that in life, the luckiest people in the world are those driven by the desire to be a part of something great. When you work in open source, you’ll be surrounded by people like these. Knowing you help make a difference and that hundreds of thousands of people depend on your project, helps you make sense of your commitment. So even on a bad day, it's still exciting.

The world would certainly benefit from having more Open Source, but its not a small undertaking as others come to depend on it. Only you can decide whether you have what it takes. When I started Drupal, I didn't really understand what I was getting myself into. It has been a lot of work, but knowing what I know today, I'd do it again. In a heartbeat.

Open Source code: by the people, for the people

Many organizations adopt Open Source for reasons like flexibility and agility. Everyone needs to do more with less. But in government, Open Source drives both civic engagement and government participation like never before. Because of digital, the world feels much smaller and more connected. And Open Source gives people the opportunity to rally around a cause, no matter where they live.

Think about how we petitioned our government before we had the We The People website. I bet you have to think pretty hard about how it was done (I do!). Now, a website has brought to life the First Amendment rights of U.S. citizens. Millions of people's voices are heard. People pull together based on common concerns. The White House built We The People using Drupal and shared the code on GitHub, opening up the opportunity for other governments to easily create their own online petitioning systems.

Now, all kinds of open government data made available through the Data.gov project makes it possible for any developer, anywhere, to create a civic app. These apps have made us see our cities and towns in a different light.

Open City is one example of a group of local volunteers who create Open Source apps using government data. While the group is based in Chicago, the idea is that any city can grab code from an Open City app and make it their own.

Here are a few interesting examples: Clear Streets tracks a city's plows in real time. Living outside of Boston, I know we could use an app like that! Crime in Chicago lets citizens compare crime statistics in certain areas of town, which could be useful for people making decisions about where to move their families.

What is perhaps the most gratifying is that as open-source developers, we can collaborate on projects and help people around the world. It's part of what gets us out of bed in the morning. Earlier this year, participants in DrupalCon Portland launched a website in 24 hours to help people in Moore, Oklahoma, find transportation and housing after the tornado. Two weeks later, the site was discovered on Twitter in Germany and was repurposed to help people affected by the flooding in northern Europe. This type of project inspires us all to see how technology can make an immediate difference.

Other events, such as the National Day for Civic Hacking, encourage developers to use open government data to "collaboratively create, build, and invent". The idea that hackathons can help build and create a healthy, citizen-powered technology ecosystem within government is relatively new, and full of promise. Tim O'Reilly believes that government can escape the "vending machine" mentality (citizens put in tax dollars and get out services) by thinking of "Government as a Platform" for participation. I couldn't agree more.

Open Source ideals are already spreading in governments throughout the world, with good reason. A global network of developers is motivated to help. It's one of the best examples of civic engagement. As digital citizens, we all now have the power to contribute. One person's time and talent can make a huge difference. That is a movement I'm proud to be a part of.

(I originally wrote this blog post as a guest article for VentureBeat. I'm cross-posting it to my blog.)

Can Europe copy Silicon Valley?

Every week, I get asked the "Silicon Valley question". This week alone, it came up at least three times. I had a phone call with a Belgian start-up asking me for my thoughts on whether to start their company in Belgium or in Silicon Valley. This afternoon, iMinds, a Belgian research institute that promotes entrepreneurship, visited me at Acquia to talk about similar topics.

There are advantages and disadvantages to being in Silicon Valley, and we could argue them to death. Not every great technology company is based in Silicon Valley, and there are many successful entrepreneurs who aren't in the valley. However, I bet you that deep inside every one of those entrepreneurs wonders whether it wouldn't be better to be in Silicon Valley. More often than not, it actually would be better.

This morning I got a message from Bart Becks, a well-known Belgian entrepreneur and angel investor. He asked for my thoughts on an article he is writing about whether Europe could replicate the Silicon Valley phenomenon. To me, this is the more interesting "Silicon Valley" question.

Europe has no choice but to reinvent itself to become more like Silicon Valley. Entrepreneurs, not the government, will actually change the world. While the government's role is to foster entrepreneurship, clearly the government on its own isn't capable of changing Europe fast enough.

Silicon Valley is a state of mind. To recreate Silicon Valley in Europe, Europe has to adopt Silicon Valley's culture first. That culture has developed around the desire to continuously reinvent everything, including oneself. That is what keeps Silicon Valley relevant, and what Europe needs to emulate most. Once Europe has established a Silicon Valley-like culture, it can slowly mix in the other ingredients that make Silicon Valley successful: money, smart venture capitalists, better engineering talent, better creative talent, and more. But let's start with the culture.

There are other aspects of the Silicon Valley culture that all of Europe should adopt. The Silicon Valley culture encourages people from all over the world with different cultural backgrounds and diverse skills to physically come together, inspire each other, and try to accomplish something unique and game-changing.

I also believe that Europe should adopt part of the American Dream: the egalitarian belief that everyone is able to succeed through hard work, and that it is acceptable and encouraged to better oneself economically through hard work. It doesn't mean Europe needs to give up its strong communal beliefs and its desire to look out for the greater good. I hope the European financial crisis represent a watershed moment that causes Europe to rethink some of its current models.

America's social history wasn't necessarily pretty, but it has created a culture where multiculturalism, ethnic diversity and thoughtful capitalism are part of the national character. I'm worried it may take Europe a couple generations to truly embrace such a culture. Until that happens, we'll see some regional and national successes, but not the European-wide "Silicon Valley" culture that Europe needs to successfully reinvent itself.

Pages

© 1999-2014 Dries Buytaert Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License.
Drupal is a Registered Trademark of Dries Buytaert.