Will the Killer Application Kill Your Company?

for the Business & Economic Review

Looking for the killer application that will make the net a business success? Will you be happy with it if you get it? This article looks at possible killer applications that could be put in place with today's or near future technology. The good news: We have done some substantial work to get to the killer application. The bad news: You may really hate it. The Killer App may mean real opportunity for you. It could also kill your ability to make money on line. At the end of this article, we will discuss how to take advantage of the uncertainty.

This is all an issue because there is no economic base for the Internet today. Despite all the forecasts and hopes, the net is still a minor part of basic business and it is not growing rapidly enough. This is not just about concerns over security. According to a recent study from A.T. Kearney Ltd. of Toronto, for every company that is stays off the net for security reasons, half again as many don't bother with the net because they feel that the net is not appropriate for their product. Technology can address the security issues, but not the perceived lack of importance.

On the other end, users continue to come and not buy. More important, they have shown that they will not pay more for Internet services. Pricing for business and personal use is at or below break even for providers. If the current users will not pay full freight, how can support the needs of the net? Just like physical structures, economic engines will always move to stability. It is entropy, but in the virtual mode.

Who will support enough net usage to make the net viable? As with phone and power, the real economic leverage comes from the largest growth sector - small businesses. The stable and successful Internet will be based on sales to small companies. (See Internet Blues - B&ER April 1997.)

The stability of the net is likely to come in one of three ways. The ugliest is with a tremendous crash as the net collapses in a flash of datastorms around an inadequate infrastructure. If companies do not invest in supporting the net, it will fail more and more often until it resembles that commercial with the elderly lady who fell and can't get up.

A second form of stability would come from going to a monopoly structure similar to how phone companies delivered service last decade or power and cable TV are still distributed today. In this structure, each regional supplier would have the exclusive franchise for Internet distribution and connections. By giving them the same sort of control we give Cable TV companies, we could offer them a chance at enough cash flow to pay for infrastructure.

The third form of stability comes from saving the net with Killer Apps. This is the solution that most supporters are hoping for and working to deliver. But will that make things better or worse?

The Source of the Killer Application

What is a killer application? It is a usage so attractive and powerful that people will break habits to use it and pay a premium to get it. Its name comes from the moment when the application is so wonderful that people see it and say, "Man is that killer!"

Killer applications create whole industries. Driving is the killer application that makes gasoline expensive, but it is an expense we shoulder willingly.

The killer app is only one way to jump start a market. Scott Kriens, President of Juniper Networks and veteran of several market share wars, points to two models: Building into a coming change, or building a solution that relieves a sudden pain. (Conversation with the author - Summer 1997.) In the first, you grow as it does. Cable TV adapter boxes have grown as a business as the Cable TV market has increased.

But no slow changes are attracting enough small companies to the net to make it pay. Kriens' coming change model is too slow for the Internet. We need to jump start it, and that is why a Killer App makes sense.

A Killer App is hard to forecast or create. Movies on demand were to be the killer app that made the Information Superhighway worth the investment for entertainment companies. Internet was to be the killer app that made ISDN worth the expense for telephone companies. Both failed. They did not attract the market well enough to demand the premium required for the feature.

If we cannot attract people to the net quickly enough, can we create enough pain that people must use it?

It can happen by accident. No one started to build Norton Anti-Virus, McAfee, and Dr. Solomon into half-billion dollar companies. Someone simply started distributing computer viruses and these companies responded to the pain. The threat of a virus is enough pain to sell a complex tool to people who do not really understand it. Markets created through pain usually arise by accident. No one started viruses to create the market, and no one predicted it.

There are some important exceptions. Consider the pain that made Videotext workable. This is a product that has been around for decades, but has never gotten acceptance in major markets. Trials in the US and other countries failed to create an economically viable product. Videotext has failed almost everywhere. Except in France.

What is different about France? In the US Videotext was an incremental addition to existing services. Not so in Paris. Success did not come from the addition of a new service. It came from the deletion of an old one. Videotext in France comes from the same people who supply phone books. The new technology took off when that supplier stopped providing phone books. If you want a white page listing in France, your only accurate choice is Videotext. The demand for the new technology is related to the deletion of a service, and the pain it created. They created the Killer Application by creating pain and then resolving it.

Pain Works

Pain is a well-understood business tool. People who inflict it in the name of competition have been storied, respected, and reviled from Machiavelli to Dickens to today. It has spawned lawsuits and success. To some the idea seems a little distasteful. Something the other guy might do.

Many do it well. Some businesses have an ethic to break other businesses, smash the competition, control the market. The code for domination in my part of IBM once was "our fair share." Our fair share was 103% of any market in which we were. WalMart has done the same in countless small communities. Microsoft and Netscape are arguing over who will do that in the Browser market. The anecdote of the Oakland Raiders is that Al Davis told his team to "Just win, baby." Market domination is a goal for which many of us strive. Pain for others is a tool we sometimes use. It may not be right, but it is effective. And there will always be someone for whom the end easily justifies the means.

Kriens points out that it may make better business sense."If anything, I'd rather be the guy who suggests the benefit of solving a pain-induced problem than the one who proposes the gradual change model. Observing pain, and the need for relief, is empirical, and therefore a much stronger foundation to base a business model on."

Companies with the "Just Win Baby" ethic could be the ones that save the Internet from economic chaos. How? By creating the pain that builds the case for the net. That is what will build the Killer Applications when there is no natural market for them.

How Do You Create Pain?

There are many legal ways to create pain for customers and suppliers. You might create pain or even destroy a market with disruption. George Day points out that "shake outs occur from an imbalance of capacity and demand." (See Strategies for Surviving a Shakeout, Harvard Business Review March 1997, page 92) Well that can be arranged. A large player can suck up capacity or demand. That change could create the pain that fosters the Killer App., but it requires some specific conditions. The creator of pain needs to be able to make it stick.

The logical places to look for that kind of strength are the loci of economic concentration. Look at industries that have had or are now having rapid consolidation, such as airlines, pharmaceuticals, and banking. Good management, mergers, intricate marketing alliances, and bankruptcies are building a class of powerhouse in each of those industries. Each has a few companies that are clearly dominant, and able to change the rules of competition. They are the ones who could accidentally make the net viable.

The effect of funding the net infrastructure is unintentional. Except for Microsoft, none of the true economic powerhouses in the western world are interested in building a net. They are interested in defining and dominating markets. Tactics to do that could make the net economically viable, but as a side effect. It is analogous to the set top box connecting your TV to the Cable company. The big entertainment companies did not set out to build these. The set top box business is an artifact of a larger game.

What if you decided that you had to change the balance of power, to eliminate a layer of distribution or a class of players? How could that affect the net? Lets look at three possible scenarios.

Pain - Eliminate Airline Ticketing

Airlines have enjoyed the dominant position in their distribution chain, but that is changing. Consolidation in the industry has turned innumerable agencies into a small set of powerful super agencies. Individual agents and single office agencies have little clout with an airline. However, large agencies can represent massive volumes. American Express (having bought Thomas Cook) and Carlson (merging with Wagon-lit) and even co-operatives such as Woodside Travel have had the same effect on the industry that unions had forty years ago. The new balance in the industry gives the agencies an even larger voice. It has not been smooth. Twice in recent months, airlines have reduced the fees they pay to agencies. American Airline's reservation system will tell you how well your employees are observing your travel rules, bypassing the agency. Agencies now demand and receive special volume rebates for delivering business to the airlines. As long as the agencies control the link to the customer the airlines are nervous.

Today, you and your business have an opportunity to bypass that link. You can buy travel by phone, mail, or on the Internet. And you can get service across product lines. If you book a ticket with American Airlines today you can expect them to ask if you wish to rent a car. Today's technology allows an airline clerk (either electronic or real) to replace a travel agent.

What would happen to travelers if American, Delta, and United all decided to stop paying commissions to agencies? The large agencies would face two options in serving you. They could stop selling flights on the three largest carriers or they could charge you an extra fee to fly you on these three carriers. You and the frequent travelers in your business would have to choose. The option becomes a seat at the list price through the airline versus the same seat at list price plus 10 percent through the agent. Either answer adds a new level of cost or inconvenience to you and your users.

A nuisance beyond what the market would support? Not if the airlines put some thought and money into making it less painful to use a computer or phone than to use an agency or travel department. Most airlines could support the entire travel package of air, car, and hotel in a single website. If the big three made it more painful to deal with agencies than with their own electronic agents, few passengers would choose to support the agencies.

The pain, artificially induced by a decision of only three major airlines, would drive millions of users to other means of booking. It would create a new class of web users and drive a real economic value to supporting the infrastructure.

Today, most travelers and travel departments prefer paper tickets and agencies. There is little reason for them to change. Pain would provide that reason. If the big airlines stopped supporting agencies, users would have a strong reason to make that change. The net could wind up with a killer application for business travelers. An application created by the inauguration of pain elsewhere in the supply chain.

Pain - Eliminate Record Stores

The same tentative relationship exists between record companies and retailers. The companies could not survive by mail order. They need retailers. The retailers are adapting, and one adaptation has been to request and get cash payments for placement. When you see a poster in a store or a CD highlighted at a listening station, the manufacturer often pays a fee to get your attention.

As the music market has flattened, the record companies are caught between flat revenues and increasing demands for cash payments to the stores. The stores see increased competition and are looking to the record companies to help make it up. Neither side of the equation fully trusts the other.

Most of the major record companies have web sites. Today, you can download a snippet of music and perhaps order a recording. Sony has announced that they are going to sell and download the entire CD. It is inconceivable that other manufacturers will do the same. Then if you want the latest Pink Floyd or Pavarotti, you could have it in less time than it takes to drive to the store.

What if three major record companies stopped paying placement fees, and started raising wholesale prices without raising retail prices? What if they sold CDs on line for two dollars less than a discount retailer? Is it possible? These are the same companies who unilaterally eliminated vinyl and replaced them with compact discs.

Would the retailers stay in business? If the retailers folded, there would be some pain for the consumers. Where would you turn for your Vivaldi or Chris Izaak?

Today, most consumers buy in record stores. They have no reason to change. If Sony, Warner, and others decided to stop supplying stores, that would give a strong reason to change your habits. It would be worth much infrastructure investment to the recording companies to change that habit for you.

Sony already owns the rights to "Netman" and is in development with IBM to create a web based download system. From A&M to Warner Brothers, other majors have web sites now. They could quickly adapt to direct sales and increase the pain for record stores. The net would benefit, but purely as a side effect.

Pain - Eliminate Business and Personal Checking

Right now banks lose money on business and consumer checking. Just as ATMs are, these are tools to keep your deposits.

ATMs are an excellent example. Introduced as a free service, banks wanted you to try them. Then most financial institutions made the alternatives more difficult, leaving you with little else from which to choose. They created so much pain in teller lines that almost no one uses them. Users pay higher and higher fees to get cash.

Since the beginning of this decade, another banking trend has grown. Institutions are consolidating. Large banks are buying smaller ones, and then being bought by the largest ones. We have fewer independent banks, and the ones left are looking for ways to generate cash to pay for the growth.

Retail checking is very expensive for banks. What if the national banks decided to stop funding bank drafts? What if Bank of America, Chase, Citicorp, and First Chicago refused to deal with paper checks? This would create an unacceptable level of pain for users.

One way to deal with the pain is to promote electronic banking, a service that has not taken off. This is promising for the financial institutions. It has the potential of lowering their costs and letting them have the use of your cash for an extra day or two. Electronic banking would be a great service to them, but what is in it for you?

A lot if the powerhouse banks started to eliminate checks and offer electronic clearing as the alternative. If the paper transactions disappeared, would small businesses migrate over to electronic clearing? They would have to. The pain would make electronic banking tolerable.

Today, most businesses want paper checks. There is little reason to change. A decision by several major banks to cut costs by eliminating business checking would offer that reason to change. The net could become the place to change to, the tool of least pain.

The Safety Valves

This might not be a pretty picture, but it is not all bleak. Several forces are working against this consolidation of power on the net. Lets look at one weak force and several strong ones.

The weak force is ethics. To create pain to move customers from one platform to another clearly approaches what many would consider to be wrong. To wipe out the travel agencies or consumer checking or to gain a few points of margin may be unethical. It does not stop people from trying it. In fact, some of the same people who could become dominant in net technologies have histories of creating pain to move users from one platform to another. A discussion of Right versus Wrong is not likely to make a large difference.

There are stronger forces. These include hubris, entropy, and the legislative bodies.

Hubris - As powerful as these companies are, few of them are as powerful as they think. That gives them the opportunity to overstretch and fail. It happened to American Airlines when they tried to change the pricing structure of the airline industry, to McDonnell Douglas when they hoped to change the rules of airplane manufacture.

Entropy - Cabals and artificial market structures are subject to the same effects as mountains and buildings. They fail due to entropy. Many business structures have failed over decades as they stagnated. The same may happen to any pain-centered program to move people to the Internet. If no one renews it, it will become ineffective in short order.

Legislation - If Congress is willing to consider regulating fees on ATMs, they might choose to regulate any of these three scenarios. You might not wish to rely on this. Legislatures are notoriously hard to predict and control.

An Even Uglier Side of Killer Apps

All these tools to move businesses and people to the net can be used to kill the net as well. Anybody interested in creating a killer app through the application of pain is not likely to let the net just go free. For the amounts of money they will be investing, they will want to have considerable say in how the net supports this application. They will demand stable support and infrastructure. To get that, they will need to exercise great control over the net. Instead of a free and wide-open network, these scenarios lead to a dark world for advocates of an open network.

The strongest safety valve in the net is the lack of domination. Where the national banks could combine to eliminate retail checking, who can control anywhere that much of the net? So far, no one.

Any of these scenarios could happen by themselves. They are more likely if someone decides to create the pain for business reasons. It would not happen as a way of intentionally strengthening the underpinnings of the net.

Instead, that would be a byproduct of an intentional effort to eliminate a layer of distribution or to wipe out a class of competitors. The only way to do that may be to create substantial pain. That pain would create the killer application, giving the phrase a new meaning.

This is not a prediction of these three examples. Any combination of these or other scenarios could create the Killer App that could fund the infrastructure for the Internet. It does not matter which ones. The key point is that all these scenarios come from industries that have no stake in the net. The success or failure of the net is purely an accident of the Killer Application.

What Does This Mean for You and Your Company?

Where does the idea of pain and killer applications leave your business? Consider two possibilities. One is that you are strong enough in your market to be able to create pain for a distribution layer or channel. In the opposite position you can't control your distribution chain.

For example, the airlines can use dominance to create pain for agencies. If you can create this level of pain, you can look to the net to eliminate a layer of cost from your business. Or, it can become a tool to get closer to your customers.

In this case, ask what you could do for your customers that the other channels cannot. Will your customer truly be better off if you create a change? If so, do it before someone else does it to you. If not, build a scenario where you face a dominant competitor who is trying to create pain in the distribution system. Put a plan in place for that.

An example of the second position is TV stations. If you run a TV station, you are not able to dominate either your suppliers (the networks, syndicators, or local producers) or your customers. You cannot change the economic model or even create much pain for others.

If no one is creating pain around you, you can prosper. But imagine what it would be like if you made your living as a printer of checks and the major banks decide to do away with business and personal checking. For companies in this position, killer applications will be deadly. The company that survives a killer application will be the one that is not between the goliaths and the customers.

Look at your position. If you are part of the distribution chain, do not assume that you are necessary. Are TV stations, travel agents, and check printers necessary in the future? It is not at all safe to assume so.

To be safe, assume that someone could remove you from the chain. What will happen to people who make CD holders if the recording companies stop using retail stores?

If you are in a business where industry consolidation is possible, move your business from the distribution chain to a place where you can control the pain. If you distribute for others, find a market niche where you can be the creator or manufacturer. Occupy a spot where the end users cannot do without you. That spot will change over time, and you will need to change with it. Always try to change to the creator/manufacturer position and become indispensable to the customer.

As you do that, remember that whether you are on the net is not important. What is important is that you do not become an accidental business death when the creators of pain start to look for the killer application.

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