CRN Interview: More From Moore

Author Geoffrey Moore discusses the rules of product and service distribution in the new economy with CRN E-Commerce Editor Amy Rogers.

CRN_ You've spoken about changes in distribution channels brought by the Internet economy. How would you sum up those changes?

MOORE_ I think the opportunity on the Internet,and readers of CRN will be very much aware of this,is to simplify the transaction flow. The challenge for anyone who has been part of the traditional transaction flow is to find a place in the new, disrupted order. When people first started talking about the Internet, the belief system was that the distributor and the [integrator] were two candidates for disintermediation. As Internet companies become more and more experienced in the act of being the [intermediary], their appreciation for the lessons learned in distribution and reselling and the relationships gained increase dramatically.

My vision of the way this thing is going to unfold is that resellers and distributors who embrace the Internet can get a leg up on the opportunity going forward, particularly if they partner with a more technologically aggressive but less sales-savvy kind of institution.

CRN_ Another segment that you've singled out to excel in the new economy are providers of e-business applications and infrastructure. What do they stand to gain if their contributions succeed?

'The Internet enables service providers...to offer in service form what historically has been offered in product form.'

MOORE_ During the gold rush, the people that sold picks and shovels, Levi's, oysters and eggs to the miners made the bulk of the money, or at least got a lot of the gold money after it was pulled out of the hills. The current discussion is on the sustainability of these business models. What they are is an enterprise application software business model modified to migrate toward some kind of annuity transaction stream. Historically, we used to get that through software maintenance.

Taking a piece of the transaction is naive in that the business models for many of these sites are not going to allow them to split up their transaction fees 27 ways to Sunday. Taking equity in the institution, however, is an interesting way to leverage it going forward. As long as the infrastructure build-out is going on, there is going to be a lot of seller power going on in these companies.

CRN_ Your book "Crossing the Chasm" came out in 1991. What's different about a company making that leap today than when "Chasm" was published?

MOORE_ When the book came out, the entire focus of high-tech was on products. Services were something that you used to sell products. In the early market, the whole strategy of "crossing the chasm" was to use niche markets as a way of incubating standards and then use mass markets as a way of proliferating them.

The big change in the past five years is something that [MIT Media Laboratory Director] Nick Negroponte and others have drawn attention to. Nick's book was called "Being Digital," where the value-creation point is migrating from product to service,rather than own a lawn mower, I would just want someone to mow my lawn. Increasingly, the Internet enables service providers, particularly transaction service providers, to offer in service form what historically has been offered in product form.

The advantage of that to the customer is that the customer doesn't have to take responsibility for a service. The service provider "owns the monkey."' Whose back is the monkey on? In a service provider contract, the service provider owns the monkey. In a product contract, the consumer owns the monkey. If the product works as specified, it's the consumer's problem to mow the lawn. The service model is extremely attractive to the consumer. Therefore, the Internet technology,even though it was disruptive,was rapidly adopted at the consumer end because it is so much less burdensome than buying and being responsible for a product.

That, however, shifted the pain from the customer side of adoption to the vendor side of adoption. In the marketplaces of high-tech,where multiple companies have to come together to create a value chain,the adoption pain point is, increasingly, further back in the value chain. Where it hits is different with each market. Finding where the adoption crisis is going to hit turns out to be a bit of a crisis now. It used to be it was always going to hit at the customer site. Now it's not going to hit there. But where is it going to hit? The second issue is the transaction services revenue model. It's an incremental build, which means that for a long time it doesn't pay back the cost of the build-out. In many markets, the cost of the build-out is never recovered.

CRN_ But the scenarios that you mention, where the cost of the build-out is never recovered, aren't as acceptable today, given the volatility on Wall Street. Would you agree?

MOORE_ It's always unacceptable. The fact is, it also happens. Nobody plans for there not [to] be a recovery. There's going to be, in the next year, a lot of Darwinian selection going on. The winners will get accelerated, so those investors will do well. But [say] there are 18 furniture.com competitors, and it is questionable whether we need one. It's not questionable that we don't need 17. It's not obvious what you could sell a defunct dot-com for, because it's not clear what you would buy. As a result, there may not be any liquidation price for some of these companies. Historically, when this was a venture-backed issue, the venture model has built into it that some number of stocks in your portfolio may create zero asset value. That's part of the model. But the public markets have never had that model, so this [shakeout] will be shocking.