Internationally Renowned Business Consultant, Author
This week, Stephen Ibaraki, I.S.P., has an
exclusive interview with Roy Levien, Inventor at Intellectual Ventures, an
intellectual property fund, and the Manager and Principal of Keystone Advantage
LLC, a strategy and technology consultancy.Firms that do this right, which I call
"keystones" in analogy with their biological counterparts,
have the potential to increase the
stability and productivity of these systems by facilitating the flow of value
though the system. Their privileged position lets them control how much value
they extract for themselves, and how much they leave for the other members of
their network. If they balance this right, they can enable and sustain a large
and dynamic system that lasts a long time. And there are specific things they
can do to achieve this. One of the most important is the creation of a platform
– a set of tools, technologies, and standards – that makes it easier for other
members of the system to participate and share the value they create with other
members of the system.
His recent works have generated
considerable interest including, “The Keystone Advantage: What the New Dynamics
of Business Ecosystems Mean for Strategy Innovation, and Sustainability” (with
M. Iansiti, Harvard Business School Press), and the article, “The Ecology of
Strategy” (also with Prof. Iansiti, Harvard Business Review). The New York Times was
particularly impressed with the “admiring stir” that “The Keystone Advantage”
was causing in among those who study innovation, competition and corporate
strategy; Strategy & Business Magazine selected it as the “Top Book in IT
& Innovation for 2004.”
Roy, considering your tight schedule as an internationally renowned expert, we
are very fortunate you had the time to do this interview. Thank you!
A: It’s always a pleasure to share ideas. Thank
Contrast and then detail your association and history with Aldaron,
Intellectual Ventures, and Keystone Advantage.
A: Aldaron is a private umbrella for a
variety of undertakings, including my writing, while Keystone Advantage has, of
course, a consultancy built around the core set of ideas discussed in my recent
book with the same title. I find that these are merging now into a consultancy
that takes a biological view and looks towards the future in a wide variety of
domains of which business is just one. My work at Intellectual Ventures (IV) is
unrelated. My role is as an inventor working on new ideas and shaping them into
valuable intellectual property. IV has been covered recently in the press, both
in a feature in Newsweek and MIT’s Technology Review, and frankly, I can’t say
much about what goes on there, except that it’s a lot of fun. I work with the
smartest and most creative people I know in an environment that’s a combination
of being in Buckaroo Banzai or U2, and the early days at Microsoft. Strange but
Keystone Advantage has two categories of clientele. Can describe these two
groups and how you address their needs?
A: Generally I look for companies that can
benefit from a rethinking of their place in their network. While they could be
divided into two groups, firms that are smaller and trying to understand how
they fit in to their ecosystems, and firms that are larger and have more
influence on their systems and hope to get better at it, I don’t see them as
that distinct. Both groups face opportunities and challenges that overlap.
Another thing that unites the kind of firm I look for is that they eschew the
conventional consultancy model in which armies of junior analysts bill hour
after padded hour to work out and “operationalize” all kinds of fantastic plans
that they present in endless PowerPoint. My model is that a day of intensive
brainstorming with the right people is your best value. Beyond that, the client
either has the capacity to run with it pretty much on their own, or there’s
really not much hope in the first place.
Whether it’s colonial empires, biological systems, or businesses such as eBay
with their small number of engineers, there are hubs or smaller number of
entities influencing larger networks. Can you discuss your concepts of sharing
value, innovation, business ecosystems, and keystones?
A: This is the core of the argument we
develop in the book. In a nutshell the idea is in almost all complex networked
systems that evolve over time – whether they are biological ones, like
ecosystems, evolving through a process of natural selection, or man-made, like
firms, governments, cities, empires or other institutions – they share features
in their structure and dynamics. One of these is that, when you look at them as
networks consisting of nodes and connections between those nodes, certain nodes
are inevitably much more richly connected than others. These hubs have a
disproportionate influence on how these networks function – far beyond any
measure of their physical presence in the system. They shape the way the system
Microsoft is an excellent example. They
have a huge influence on how the computing ecosystem works that is far out of
proportion with any measure of their physical presence – number of products,
revenue, number of employees. They achieve this through careful management of
their position in the network of firms and technologies that constitute that
ecosystem. Thinking about Microsoft in this way requires some refocusing, we
are accustomed to seeing it as an ever-expanding dominating firm that crushes
competitors that get too close to it, so it’s initially difficult to think of
it as a small part of a much larger network. But if you take your eyes off the handful of firms near the core of the
network that have been swallowed or crushed by Microsoft, and direct your
attention to the fringes of the network you can see a pattern: for each firm
that is crushed, many new opportunities are created elsewhere. This happens
because Microsoft absorbs the functions of the eliminated firms into an
expanding and increasingly capable platform on which others can really expand.
This is the same process that goes on in
biological evolution: its capacity to build increasingly complex systems
through integration. One living system absorbs and incorporates functions from
others and thus gets more capable. That’s an important innovative process in
evolution – at least as important as mutation, which generally gets all the
attention. If there had been conventional anti-trust regulators around billions
of years ago to cry foul when plant ancestors acquired (perhaps enslaved is
even the correct term) chloroplasts, or when animal ancestors acquired mitochondria, then
we’d live in a much simpler and less interesting world (actually “we” wouldn’t
exist at all) – though perhaps a “fairer” one from the perspective of
chloroplasts and mitochondria!
This process of evolution through
incorporation (in addition to mutation) has parallels in business networks:
integration in addition to invention. Integration is a critical part of
innovation in such networks. That’s why it’s unfair to knock Microsoft for not
being innovative. They may invent less than people think they should, but they
innovate through integration, just as Nature does. This is a process that may
not produce optimal or aesthetically pleasing results – Nature is full of “good
enough” solutions – but it works and leads to rapid advance.
Can you detail dominators traits including the areas of control and value
A: Dominators are the “bad guys” of this
view of business networks. They exploit their hub position to extract value for
themselves, leaving too little to grow or sustain a healthy network around them
so that in the end they become the network. Dominators can also arise though
mergers and acquisition or other anti-competitive practices, but the end result
is the same: instead of a network with a large number of contributors sharing
ideas and value, you have one or two big firms.
Can you distinguish the ecosystem roles of niche players from dominators and
While keystones and dominators both sit at
the hubs of their networks, but they manage them very differently. Niche
players constitute the bulk of any network: they make the vast majority of
products and account for the variety of what a healthy network does. They are
specialists, using the tools and technologies that the network makes available
as a foundation, so that they don’t need to reinvent the wheel and can thus
focus on the things they do best. If I make toothpaste or board games or desk
lamps, I can plug into Wal-Mart’s efficient retail platform and be assured that
many decisions about distribution, shelving tracking and stocking – decisions that
are not what I’m about – will be handled efficiently. If I make a financial
software package or a PC game or an online music store, I can use Microsoft’s
platform and tools to handle most aspects of interaction with the user, the hardware, and other
applications and files. I can focus on adding my own value and am not
redundantly creating things that are not only outside my own expertise, but
which would make my product interact poorly with others if each niche player
“rolled his own”.
Clearly it is the dominators and niche
players who have an adversarial relationship: dominators are about displacing,
eliminating, or absorbing niche players. But it’s not all love between niche
players and the keystones either. This is one of the biggest challenges for
niche players: they have to be pragmatic about their place in the network. If
they are too close to the keystone, making something that is a candidate for
incorporation into the keystone’s platform – like Netscape or Real with respect
to Windows – they will end up in a high stakes game of survival. If they
survive, they may, in effect, own a piece of the platform, thus becoming a
keystone in their own right; if they lose, they lose completely. But in a
healthy business ecosystem, new niches are being created all the time. Because
the platform is constantly acquiring new capabilities, you can go, in a few
years, from a situation where getting any sound out of your computer is a chore
and where connecting with another computer requires a degree, to one where kids
can acquire and listen to just about any music they want with the click of a
mouse. Music players, something once considered inconceivable, now represent a
hotly contested niche. But because the platform is evolving, it is also target
for incorporation into the platform. That is one of the toughest things to
accept about the dynamics of business ecosystems. Unless your niche is
relatively secure and small, you will eventually end up as a candidate for
incorporation into the platform. And that can be a boon or a bane, depending on
how you prepare for it. Protecting your intellectual property and establishing
yourself as a keystone in your own domain are critical parts of that. So is
timing: Vermeer Technologies’ sale to Microsoft is an example of how to time
things right; Netscape is an example of how to time things perfectly wrong.
Vermeer knew that it wasn’t quite a keystone in its own right yet, but knew
that it had technology that was going to be an essential platform
component in the near future. It negotiated on that basis and the result was a
win-win situation. Netscape thought it was a platform when it wasn’t even close
to being one: it saw the potential, but was nowhere near actually embodying it.
It acted on the basis of its delusions and died.
You have particular views on outsourcing, innovation and its implications; and
also about the origin of ideas. Can you elaborate?
A: Ideas come from people, not firms. Big
in-house R&D is largely a waste of money. I’ve mentioned that innovation
encompasses both new ideas and the combination of ideas in novel ways. Firms
and networks of firms can be very effective at achieving this later kind of
innovation, a process that we discuss a great deal in the book; but ideas
themselves are quite different. They generally come from a very small number of
individuals, often working on their own or as part of a creative team with
unique interpersonal dynamics, history, and experience. Managers and corporate
structure make essentially no contribution whatsoever. That’s a hard pill to
swallow, but most managers just come from a completely different culture and
hinder rather than aid the growth and development of ideas. To the extent that
the idea market can be taken out of the corporate setting and returned to
people, everybody – especially those with the ideas – will benefit. Networked
business ecosystems enable this process like never before, by making it easier
for a product to be assembled in a distributed way from ideas, components and technologies. These
may come from a wide variety of sources, even from individual or small groups
outside the normal corporate structure: in short, “outsourcing” of ideas by
using the network to innovate. Ironically, just as we are increasingly able to
make this a reality, and transfer power for the creation of ideas to
individuals, there are movements afoot to steal the rewards for those ideas
Can you forecast other niche winners for 2005/2006 such as Nvidia and Intuit
from the past? Please provide some commentary.
A: Everybody who asks me this question
wants me to say Google or EBay. But that’s not how it will turn out.
EBay, maybe, if they can see themselves not as a
marketplace for things, but as a platform for the exchange-mediated communities.
What does that mean? It means a system for bringing people together based on
something that one person can transfer to or share with others. Sounds like a
marketplace, and it is, but not in the narrow way that EBay currently conceives
it. The “items” could be ideas, poems, songs, dates, photos, rendezvous –
anything. You can see EBay users trying to push things in this direction with
some of the unusual “items” they post, but EBay has been slow to respond with
any meaningful changes to the capabilities of its platform. What they need to
do is refocus on the communities that grow around these exchanges and the
specific features that they will need. If they succeed they would become the
platform for every kind of mediated interaction between people that involves something; it’s that general and it’s
that big. A critical piece of that is to stop thinking of themselves a website
and begin building a platform that can be embedded everywhere, from phones to
kiosks to coffee shops: EBay-enabling these things would enhance them in ways
that make them more effective in matching people with things and with each
other. I don’t see this EBay-enabled world happening soon given their current
course; fortunately they have the advantage of not being on Microsoft’s radar,
so they have time.
Google doesn’t have that advantage – and
they really don’t get it. Charles Furguson (of Vermeer Technologies, which was
sold to Microsoft in 1996 to form the foundation of some of its Web
technologies, most notably FrontPage), in a great recent analysis of Google’s
future challenges in MIT’s Technology Review summarizes their situation by
saying that they “will need brilliant strategy and flawless execution simply to
survive.” He’s right. Right now, Google is the best search engine by far, along
almost every dimension; and they are establishing connections between search
and all kinds of interesting directions that enhance its usefulness and power.
None of that matters though if they don’t work furiously to establish
themselves as a keystone in the ecosystem of which search is the hub. I didn’t
say “search ecosystem”, because that’s not the point. The point is to build an
“architectural empire” by defining standards, protocols, and application
programming interfaces – a platform for finding things, and for all the
activities and associated services and processes that accompany finding things
– everywhere. Microsoft already has a headstart on a lot more of this space than
Google investors seem willing to admit to themselves, and they have tremendous
success at building platforms. A lot of this space is unoccupied too, but the
rush is on and Microsoft is a fierce opponent, and one that is more
sophisticated at this game. My money is on them.
Of course there are other, less visible
firms of all sizes turning their niches into ecosystems of which they are the
keystone – we can talk about them another time!
IBM has adopted a Linux strategy. Can you share your views on this?
A: Far more is going on there than meets
the eye. This is part of what I alluded to earlier when you asked about
innovation and ideas. On the surface, IBM appears to be endorsing Linux as a
simple competitive tool: to hit Microsoft where it hurts and to leverage
something that is basically free to them to enhance the value of their hardware
and, increasingly, services. But what’s actually going on is much more subtle
and pernicious. IBM is using Linux to establish itself a keystone in the Open
Source software ecosystem. By endorsing Linux and Open Source, and by releasing
some of their own patents into the ecosystem, as they have done recently, they
are doing more than “reduce costs”; they are also undermining the value of
intellectual property, on its own, creating an ecosystem where the
intellectual property, for the most part, only has value in the context of
their hardware and services products, which they can now produce at lower cost.
In this process they are aided by the Open
Source ideology. There must be some axiom somewhere that says that any ideology
– democracy, socialism, communism, whatever – is ultimately co-opted by
established powers. That’s the real story of IBM and Linux. The Open Source
community, and the anti-intellectual property movement with which it is linked,
is so blinded by its ideology that it has become an accomplice to IBM’s plans.
This process shifts power away from people
(who at least have the potential to file a patent and establish ownership of
intellectual property) towards large firms. Firms, after all – if they are
serving any purpose whatsoever – are more efficient at doing everything that an
individual could do alone, so all that individuals have is their ability to
create. When you render that valueless, the result is a geologic shift in power
from individuals to firms. That’s ironic, even tragic, considering what the
Open Source and the anti-patent movements stand for, but it’s what’s happing.
How do companies go about understanding their dependencies, relationships,
identifying critical assets internally and externally, and building strength
throughout the business ecosystem?
A: In almost all cases where keystones have
managed this, it comes from a deep understanding of how the technology of their network functions.
Technology in the broadest sense: how all the pieces fit together, how things
interconnect, which parts are essential, which parts are most valuable, where
standardization helps, where it is unnecessary, and how these things change
over time. IBM, for example, shows that it understood when they “gave away”
those patents. Doing so encourages people to use them, to incorporate them into
their products, and to accept them as part of the DNA of their own
technologies. It also makes it easier for products from other firms to
interoperate with IBM’s – in short, it draws them into the IBM ecosystem. But
you can be sure that IBM has other patents that it will assert against these
very companies to keep them at bay. If they know what they’re doing, they’ve
taken a hard look at what they have and have said: if we give these away on the
one hand, we will greatly enhance the value of these assets on the other. Doing
that right requires a pretty good intuition about how everything interacts.
Why should antitrust policies be rethought?
A: Conventional anti-trust thinking still
has a role: to protect consumers from unfair pricing or limited choices.
Typically that means coming down on firms that are exceptionally large relative
to their industries, but in a world where the term industry is hard to define
clearly, this becomes problematic, so you have to have a pretty deep
understanding of how networks of products and firms fit together before you go
mucking around with antitrust remedies. This is something we talk a lot about
with respect to Microsoft. Microsoft has a lock on the desktop operating system
market; but is that bad? Are they abusing it to harm consumers? Simple formulae
no longer apply here because there are significant benefits to connected
products hidden, as it were, in the price paid for Windows and in the “cost” of
not having an alternative operating system to choose from. Another thing to
consider is that if you accept our biological view of business networks,
whatever you do to take down the leading player in a such a system will only be
temporary: their occurrence is inevitable, so all you get is a costly
disruption and an eventual return to the same structure. Different players
maybe, but the same pattern. That means policies need to get away from trying
to change this structure, and move towards a regime of trying to work with it
and the dynamics it creates. Put simply, this boils down to enhancing the
things that are good about it (like standardization, predictability, stability,
etc.) and confronting the things that are bad about it.
This last part is actually the hardest,
mostly because we labor under some false axioms about what’s bad: lack of
“choice” and the related barrier to entry for new firms in certain domains. We need to get away
from thinking that these things are inherently negative. How many digital media formats do I need? Is it okay to
have a mediocre web browser that does 90% of what I want, if it means that
developers can target a single well-understood platform? There are
complex trade-offs here that need to be examined closely, case by case, and not
subject to some reflexive application of assumptions about “competition”.
Some things about keystones, though, are
inherently dangerous, and can only be addressed with some kind of intervention.
Wal-Mart is a great example. They create all kinds of efficiencies that benefit
many members of their ecosystem; that’s their area of expertise. But they are
terrible at other things, like architecture, landscaping, and aesthetics.
Because of their powerful position, almost every one of us has to deal with their
bad taste and incompetence in these areas. Microsoft has a parallel problem;
they make great operating systems, great API’s, powerful productivity
applications and superb tools, but they have some of the worst user interface
design in the software universe. Ideally, in both these cases there should be a
way to leave the valuable platform aspects of the firms intact, but to
intervene to prevent the damage they do in areas where they lack competence.
Your views on Enron, Apple, AOL are enlightening. Please explain?
A: All three are examples of firms, that in
different ways, failed to employ their central positions in their networks in
ways that were effective. We talk about them at length in the book.
Instead of serving as keystones, they each
acted as a dominator, each to a different degree and a different mode. Enron is
the most spectacular and well-known example: it served as a kind of “value
dominator”, a usurious landlord on the whole system of energy delivery and
trading. All of its activities – indeed all of its considerable cleverness and creativity – was focused
on extracting value for itself, not on creating it or on allocating it in ways
that sustained the ecosystem. Enron became
the ecosystem, dominating every valuable aspect of it and at the same time it
destroyed its capacity to create new value. We know where that led. AOL did the
same thing to a degree: it extracted high rents from its “hub real estate” and
ended up draining it right out of the ecosystem that they ought to have been
helping to start. During the dot-com heyday, they had startups handing over
huge chunks of the capital they raised directly to AOL as price of admission to
a system that never got off the ground, largely because of AOL’s greed. Both Enron
and AOL are examples of firms that acted as if they failed to appreciate the
important role that a network hub can play in the health of an ecosystem.
Apple is a slightly different case: they
missed a huge opportunity to start a healthy ecosystem because they were so
focused on the quality and greatness of their product that they didn’t think in terms of the possibility of
establishing an ecosystem around an architecture.
This wasn’t an issue of competence: Apple had a superb architecture including
all the right pieces – their APIs and the famous “Phonebook” that describes
them were works of art. But they couldn’t take the business decision to run
things on a longer leash and live in a slightly less orderly but more dynamic
world. That’s precisely the decision Microsoft made and it’s why they are so
much more valuable and influential than Apple today, 20 years on.
Can you detail future papers and books that we can expect from you?
A: I’m working on two books. One, "Resistance is Futile"
that focuses on the
implications of evolutionary processes for the way our institutions and
organizations evolve. In a way it’s a broadening of the very narrow focus of
to encompass other
arenas – political, social, economic, technological, and cultural – and to
address other issues, such as our relationship to the institutions we create
and the extent to which we control them. In parallel I’m working (at a glacial
pace) on a science fiction book, "Exodus 2",
which deals with the same things. Don’t laugh.
you were doing this interview, what two questions would you ask of someone in
your position and what would be your answers?
A: That depends on what you think my
“position” is, and on who’s asking the questions.
The critical question, I think, for most
executives in firms of just about any size, is “where do I sit in my business
network, what are the limits and what is the potential?” If Netscape had asked
this question, it would still be a going concern. If Apple had asked this
question at the right moment, there might never have been a
Windows. IBM asked this question recently, and they are changing the software
landscape. The answer, of course, is different for every firm, but the critical
thing is to be realistic about where your opportunities lie, and to be willing
to rethink your business as a participant in a network of products and services
and technologies, rather than as an isolated firm making something that stands
alone. That means accepting that you have dependencies, often on things you
cannot control; and to be pragmatic and proactive about balancing the good and
the bad that comes from this. There are efficiencies that come from leveraging
the platform, pitfalls of dependency – and potentially huge opportunities for
making some aspects of what you do essential for many
others in the network.
More generally, a critical question that
just about anyone could ask is “what are the broadest insights from your work
to policy, economics, and society?” I’d say that the key insight there is that
biological forces are at work at all levels of complexity. We have a tendency
to draw a line between life and non-life, and between one system and another,
and to think of ourselves as somehow being in the driver’s seat. But that’s
just not how things work: we are embedded in systems that are changing all the
time, subject to their own dynamics; we often simply don’t have collective
access to the levers that control these systems (think traffic jams!) but even
when we can acquire some God’s-eye perspective – through regulation or
legislation – we can’t change the fundamental ways in which they work. That
realization is that it’s not just important for business decision-makers.
Roy, we are so fortunate to have your share your accumulated business acumen
with our audience. Thank you!
A: Thank you. My pleasure.