Articles

Bhaskar Chakravorti tells how the network hinders, then helps market innovation

Bhaskar Chakravorti is Partner and Thought Leader at Monitor Group, the global strategy firm. He leads Monitor's practice advising the world's preeminent companies on growth strategies through the practical application of game theory. Prior to Monitor, he worked in high-tech R&D as a game theorist at Bellcore and as an economics professor at the University of Illinois at Urbana-Champaign. Before moving to the US he was with the Tata Administrative Service, the management arm of India's largest business house. Chakravorti is the author of "The Slow Pace of Fast Change: Bringing Innovations to Market in a Connected World."

UBIQUITY: The title of your book suggests a paradox: the slow pace of fast change. How can that be?

CHAKRAVORTI: Fast change is any new idea, technology, innovation or product that makes a fundamental difference in our social, political or commercial lives. My argument is that the process by which technology has an impact is actually quite slow even if the intrinsic benefit of the innovation is enormous. It's a point that seems to have been lost on many people in the last few years.

UBIQUITY: In what way was the point lost?

CHAKRAVORTI: Everyone was excited by the convergence of the many disruptive changes that were happening all around us, and expected these changes to make a profound and immediate difference. Many people had made huge up-front commitments to reap early rewards and are disappointed by the fact that things haven't changed much.

UBIQUITY: In the book you talk about game theory. Explain what game theory has to do with these kinds of changes.

CHAKRAVORTI: Game theory takes a particular environment and decomposes it into the individual participants who make up that environment. It's as if you are describing a situation on a stage. You must understand the behaviors of the actors and the context for those behaviors and the specific choices the actors make in order to understand a situation overall. Then you need to understand what drives the choices that the actors make and how those choices interconnect with each other. Eventually, you have a framework to think about how to orchestrate choices in ways that meet your strategic objectives.

UBIQUITY: You have a number of excellent examples in your book, but perhaps out of perversity, could we ask you to talk about an example that's not in your book?

CHAKRAVORTI: Of course. Recently, the FBI decided that one of the top security risks is a terrorist using shoulder-based antiaircraft missiles to aim at planes taking off or landing from major airports -- remember this happened in Kenya recently and they just nabbed an arms dealer who was attempting to get them into the country. So the FBI gave cell phones to clam fishermen in the area around Logan Airport in Boston. All those guys standing knee-deep in Boston Harbor with cell phones are part of the first line of defense against terrorism. There's one big problem in this scenario. Say a fellow digging for clams in Boston Harbor sees something suspicious and then dials 911 to report it. He says, "There's somebody about 15 yards away from me who is carrying something that looks like a shoulder-based missile gun." The natural question that would come up is, "Where are you?" Boston Harbor is a large area, and it's water, so you can't give cross streets. This is a longwinded way of saying that if you dial 911 from your home phone and you forget to say where you are or you collapse, the emergency system will be able to find you because there's an address tied to your phone. But if you are on a cell phone, as are our friends who are helping the FBI, there's no address attached to it and the 911 systems will have no information popping up on their screens.

UBIQUITY: That seems like a huge gap in the 911 system.

CHAKRAVORTI: Right. It's been recognized for a while. Several years back, the FCC mandated that location technologies be developed and implemented by 2005 by all the wireless carriers so that 95 percent of all cell phone calls to 911 systems will be locatable. Otherwise, the wireless carriers will be penalized. The entire industry has tried to figure out how to solve this. Nobody can quite figure out how to solve the problem. The behaviors and choices -- in terms of technology, standards and investments -- of this fragmented system of decision-makers need to line up. And to ensure that, their incentives have to be aligned as well. If everybody's choices don't line up, the solution won't happen.

UBIQUITY: What needs to take place for a solution to be found?

CHAKRAVORTI: You literally need two hands to clap here. Actually, you need at least three hands. You need the wireline players to upgrade their networks, because they connect from the cell phone that works into the 911 call centers. The 911 call centers need to upgrade their systems so that the latitude and longitude data shows up on their computer screens. All parties must make investments. Simply putting the pressure on the wireless system is not enough. This is a classic example of the basic dilemma that I talk about in the book. You have the technology to solve the problem, but it will take a long time for that technology to translate into fast change, in terms of plugging this hole in our national security system, because all the different parties must coordinate their choices.

UBIQUITY: Who are these different parties?

CHAKRAVORTI: There are at least six major wireless carriers plus a whole bunch of rural carriers. There are the major wireline carriers (the ex-Bell system players and others) and then some 7,000 911 call centers. Each of them has to upgrade their system. Equally important, the 7,000 call centers are administered in different ways. Some of them are run by the local administration. Some of them are administered by city government and some are administered by the state. Who will pay for the upgrades and how will the choices line up from the standpoints of technology, policy and economics?

UBIQUITY: This reminds me of the expression "herding cats." Is there anything that the cat herder can do when the cats go off in every direction?

CHAKRAVORTI: It's not just herding cats. It's herding cats and dogs. There are unpredictable conflicts and collaborations that happen across the different species. The drivers of behaviors of the different species are potentially out of whack with each other. Oddly enough they would all benefit from an alignment -- something that is often referred to as a "coordination problem." Say that a bunch of friends agree to meet in Manhattan but they don't quite agree on where to meet. Everybody heads off into different parts of Manhattan trying to guess where the other parties are most likely to show up. If each of you had indicated to meet at the Empire State Building, then you would all head in the same direction. It's in your best interest to limit the search cost. A similar analogy holds when you're thinking about adopting new ideas and technologies. If the players don't know what the other people are doing, and everybody's guessing, then there is a tendency for them to simply look at their individual context with the result that everyone heads in different directions.

UBIQUITY: Bob Metcalfe has said that your book explains "how to break through the status quo using game theory and network effects." How does game theory make a breakthrough possible?

CHAKRAVORTI: If you have a problem you must understand who the relevant actors are in that problem, what is the nature of the status quo, and what are the choices that explain the current gridlock. One actor may be doing things that constrain anybody else from adopting an innovation.

UBIQUITY: Example?

CHAKRAVORTI: The next big thing that the automobile industry is hoping for is adoption of broadband technologies -- telematics -- in the next generation of cars. The problem is that consumers are not convinced that they want multimedia display panels on their dashboards or in the rear seats. Even where it is available, they're not willing to pay the pretty huge price there is for it right now. The telematic service providers who are keen on making this happen don't have the money. They need somebody to subsidize them. The car companies are interested but they're squeezed from a financial standpoint, so they're not willing to subsidize the process right now. The technology players are obsessed with the recession in their own industries, and right now this is not on their radar screens. So everybody's at gridlock.

UBIQUITY: How do we move out of gridlock and get the traffic flowing, so to speak?

CHAKRAVORTI: The first aspect is simply to understand why this is a nifty proposition. Many people spend a lot of time in a car. Wouldn't it be great if they could make that time productive without becoming dangerous drivers? It would be great if there was a magic wand that could be waved and make this all happen. A lot of the technology is there, yet the market hasn't come about. It's because of the gridlock nature of the choices of the players. So the first piece is to understand where we are right now in terms of the choices of the key actors and why we are stuck at that point.

UBIQUITY: What do you do next?

CHAKRAVORTI: The second aspect of this is to determine what would be an end game where all the right choices necessary for successful adoption were to happen. You could take each of the players one by one and state what would need to be true in terms of achieving the final outcome. So now you've got two endpoints of a problem. You know the status quo, which you can observe around you, and you visualize an end game, which is a configuration of choices. In the telematics case it would be consumers paying market price and seeing value for the money that they're paying. So what you have is the current status quo and the future, which you need to create. The challenge for the innovator is to break that current equilibrium and make that future equilibrium happen.

UBIQUITY: Fill in the blanks: how do you get from the current to the future equilibrium?

CHAKRAVORTI: In order to get from here to there, you break down the problem into the choices of individual players: what their current choices are and what you want those choices to be. You also have to think about what is driving those choices. You create a map of potential barriers or motivating factors for specific players that you as a strategist might be able to influence.

UBIQUITY: How does interconnectedness speed up or slow down the pace of fast change?

CHAKRAVORTI: The current status quo is in a gridlock equilibrium because all the players are interconnected with each other. They are part of a network and they cannot act alone. In the case of the telematic service providers, they need help from the auto companies, the wireless companies, the hardware players and software players. The network initially is an enemy of innovation, which seems somewhat paradoxical because you would think that interconnectedness should be helpful to innovation. But in the initial state, it is a huge barrier. As a strategist, if you can figure out how to mitigate some of the barriers, it could then, in time, create a domino effect of changes. That is, if I drop the barriers for the other companies, they could in turn provide some subsidies to the telematic service providers who could then in turn provide more attractive, up-front products for consumers. This connectedness then becomes a weapon in your armory to help diffuse the innovation and get to that future equilibrium faster.

UBIQUITY: You used the expression "magic wand" and mentioned in passing that we have a free-market system in which one can't do the kinds of things that could be done in the Soviet system, for example. Soviet Russia was never especially known for innovation, was it?

CHAKRAVORTI: Well, let's see. They were the first people to put a human being in space. They made tremendous advances in science and technology. For instance, lasik eye surgery was initiated in the Soviet Union. They actually pushed through a huge amount of innovation and advancement of basic science. A lot of it succeeded not just because of Soviet and Russian ingenuity and their passion for science and technology, but also because of the fact that a central coordinator set mandates and said, "You shall do this."

UBIQUITY: Are there any policy implications to the United States or other Western countries?

CHAKRAVORTI: That's one of the $64 million questions. In the free-market economy market participants make choices in individual context. It's a wonderful system because eventually the price mechanism gives everybody the right signals, that is, eventually the price drops and that starts equilibrating the market. It's a wonderful mechanism. However, it's relies on individual initiative and incentives for progress to happen, and that's a messy process. In theory it would be wonderful to have a central coordinator who tells the people wandering about Manhattan from my earlier example to suggest the Empire State Building without mandating anything. The individual choices must be made on the basis of individual incentives and their own information about the opportunities and constraints.

UBIQUITY: Who would be the central coordinator?

CHAKRAVORTI: There is no easy answer to that question. It depends on the context. Sometimes regulators play a role. Consider the public safety and Homeland Security example I gave you. The FCC tried to play the role of a coordinator. They said, "We have control over part of the system -- the wireless industry -- so we're going to force them to do something. Maybe that will have a triggering effect on everybody else." Recently the FCC is thinking about this problem from a system-wide perspective, so they're recognizing that it's not just a wireless industry concern, it's also a concern for public safety.

UBIQUITY: What are the public policy implications here?

CHAKRAVORTI: It has a clear public policy implication, which is that it's important to recognize ALL of the market participants who are relevant for a particular change to happen. Don't look at just a subset of them. Another public policy implication is the need to think about how your leverage as a regulator can be utilized to make sure that all the participants are involved in the choices. The whole telecom communications and technology space, in which there were such high expectations, collapsed or failed to mature because it is a very fragmented system of players. People who create content, people who provide communications systems, people who provide enabling technologies, all need to come together in a consensus. Maybe one policy implication could be to create a forum for these disparate parties to come together and recognize what choices they could make in a coordinated manner -- and by coordination, I don't mean collusion. From a policy perspective, if you could get people to work together in a consensus manner, we could actually make this change happen a lot faster.

UBIQUITY: Can you imagine how something like that would work in the US or Western Europe?

CHAKRAVORTI: It's possible to bring the different parties together and have them discuss their options and make choices in a coordinated manner without necessarily having the Federal government overlooking them or having some sort of a central social planner or regulator. For instance, in the area of wireless networking several major companies such as Intel and IBM and others have formed a consortium to develop wireless wi-fi hot spots across the country. Companies such as Sun and Oracle and IBM have at various stages tried to coordinate on fundamental changes in information technology and computing. Of course, one part of their agenda is to change the status quo of the Microsoft monopoly. A few years back they had an initiative to displace the PC with something called a network computer. More recently, several of these companies are trying to displace the current notion of information technology with a notion of utility computing and grid computing.

UBIQUITY: Is there a noticeable difference between fast innovation that takes a long time and a fast innovation that never happens at all? Television took forever to be accepted widely by the population but eventually it was. With that as a background, how do you see the past, present, and future of the network computer?

CHAKRAVORTI: That's a great example. I don't think that a network computer in its pure form, as articulated by Oracle CEO Larry Ellison several years back, will happen. However, many aspects of that original idea are already happening. It's the classic example of fast change in innovation taking a long time. When the innovation appears, it does so in a form that is embodied in a completely different incarnation.

UBIQUITY: How does the current incarnation of a network computer (NC) differ from Ellison's vision?

CHAKRAVORTI: At the time when Ellison was talking about the network computer, people were getting interested in something totally different. It was a little device called a Palm Pilot, which took off like a rocket. The Palm Pilot had very few applications but some aspects of it had the same value proposition as the network computer. It was a so-called "thin client," as it didn't have a whole lot of intelligence sitting on it. However, if you stuck it into a pocket, it could synchronize with a central server, which was the user's personal computer, and you could match up the data on your Palm Pilot with the stuff on the PC and vice versa. You could use it for a limited number of purposes and then come back and dock it into the server. That's not very different from a much broader set of applications that the NC was designed around.

UBIQUITY: One of the big things that everybody's talking about in the world of information technology is something called grid computing. What is your take on that?

CHAKRAVORTI: I think it is another incarnation of the network computing vision in many respects. With grid computing, or utility computing, people will plug a wire into a wall and all the computing systems, applications and intelligence will sit somewhere outside the user's machine. Will we have complete utility computing where information technology is much like electricity the way it is right now? We don't use private generators in our homes and offices. We plug into a grid and electricity flows, at least most of the time. It's possible that computing will head in that same direction. That vision is not very different from a notion of network computing where the intelligence is somewhere in a server inside the enterprise. However, the ultimate penetration of a utility computing concept will also have to reckon with an inter-connected network of participants and a coordination of their choices. This is similar to the challenges that the network computer had to confront.

UBIQUITY: Do you have any examples of an innovation that popped up a long time ago, like the fax machine, but took forever to be adopted?

CHAKRAVORTI: My favorite story is about a company called Tel-Musici that was set up in Wilmington, Delaware back in 1909. They did exactly what Steve Jobs of Apple has recently been congratulated on doing, which is provide music on demand, online. They set up a switching center in Wilmington. People would call and ask to listen to opera. Tel-Musici said, "That will be seven cents. Tell us which opera you want to listen to. If you want to listen to ordinary music, we'll charge you only three cents." They had a limited number of offerings that people could request to have played over their phone lines.

UBIQUITY: That's an interesting story. How did it work out?

CHAKRAVORTI: There were several challenges with that old model. The one challenge, obviously, is the technology available in those days. Another challenge is that people had shared phone lines. I imagine it would be awfully inconvenient if you picked up the phone at one end on a shared phone line and somebody else was playing music on the line. Of course, they had no such thing as the Internet. Now, a century later, after Napster disrupted the whole music oligopoly, everybody's been trying to figure out a way to solve the same problem, which is, how do I provide music on demand, get people to pay a fair price and keep the business afloat?

UBIQUITY: Tell us a little bit about yourself and about Monitor.

CHAKRAVORTI: Monitor is a strategy firm. We bring together different pieces that fit together to solve the jigsaw puzzle of strategy. We think of strategy as the need to make firm decisions in a fundamentally uncertain world. In order to make those hard choices, a number of different pieces must be on the table. Those pieces could be consulting, advice, analysis and data. You might need capital infusions. While data is crucial to resolve differences of opinions and positions that decision makers adopt while high on what organization theorists call "ladders of inference", you might also need people who are not bound by data and analysis but can think creatively about the future. We talk about all the different elements that you need to make fundamentally certain decisions in uncertain worlds. Monitor tries to bring those different elements together through a number of different companies, which we call Monitor Group.

UBIQUITY: What kinds of companies are under Monitor's umbrella?

CHAKRAVORTI: An example is M2C (market to customer), which specializes in cutting edge market research. M2C can analyze any market and figure out what drives consumer behavior. It's very rooted in data and analysis. At the other end of the spectrum is GBN, Global Business Network. Essentially, we bring together people who think outside the box and are fearless about coming up with what may sound to many like crazy ideas. They think about the future 5 years from now, 20 years from now, 50 years now, even 100 years from now. We ask them to create different versions of the future. In between the two ends of the spectrum are a whole bunch of consultants and advisors who try to connect that far out vision with the highly analytical data driven vision of the future.

UBIQUITY: What are some of GBN's far out visions of the future?

CHAKRAVORTI: An example of the kinds of visions that GBN creates is seen in the Stephen Spielberg movie "Minority Report" A lot of people don't like that vision of the future. Some other people thought it was cool. Our GBN colleagues were advisors on the vision of the future in that movie.

UBIQUITY: How was Monitor formed?

CHAKRAVORTI: The origins of the company are from the Harvard Business School. When Michael Porter first wrote his books on strategy, his ideas were very well received in the management and business communities. Monitor was a firm that was created to commercialize those ideas. That's the genesis of Monitor. We're just shy of about 1,000 people spread out in 25 offices in more than 20 countries. So it's a global firm. We work in extremely proprietary settings. We work closely with some of the largest well-known companies in the world. It's a deliberate strategy to stay under the radar and not make a big noise about who we are.

UBIQUITY: And your own background?

CHAKRAVORTI: I've been at Monitor for almost 10 years. I started out as an economics professor, with a background as a game theorist. I taught at the University of Illinois in Urbana. I moved from Urbana to Bellcore, which is the part of Bell Labs that split off with the Baby Bell companies. I was part of a basic research group made up of computer scientists, graph theorists, cryptographers and game theorists. The other aspect of my background is that during the Internet boom, I found myself a little bit alone in being somewhat skeptical of the major wave of enthusiasm. People were dropping money on practically anything that moved. In the late '90s I wrote an article on the subject in the Financial Times. I don't think many of my readers remember what the article was about but I know that a lot of people remember the article itself. The reason why they remember the article is that the editors of the Financial Times published a picture of Demi Moore with it.

UBIQUITY: That's right, you have a whole theory of Demi Moore in your book.

CHAKRAVORTI: Yes, that's my claim to fame, I guess. The point is that while Moore's law tells us how quickly computing power doubles, but because of the slow pace of fast change the pace with which such improvement in technology translates into real impact in the market happens - as a rule of thumb - only half as fast. Thus: Demi Moore's law. As it turned out I was a lone wolf because in the late '90s no one wanted to hear that Moore's law was not the right mantra to go by. Fortunately, or unfortunately, over the last few years I'm suddenly getting a very receptive audience. People are saying this is exactly what we should have seen a long time back.

UBIQUITY: But there are no pictures of Demi Moore in your book?

CHAKRAVORTI: Alas, no, my publishers are somewhat buttoned down.