Wednesday, December 15, 2010

OpenRTB and Architectural Innovation

I sent out a good number of emails on Sunday asking for opinions on OpenRTB.  People were mainly dismissive, partly because of the secretive way in which it was concocted, partly because some think Google is better accomodated than challenged, but mainly because the current goals of the spec are slight.  After reading the spec, I was a bit underwhelmed myself.  But I've changed my mind.

In a post in April, I talked about architectural considerations in ecosystem design, taking the engineering concept of End-to-End as an analogy.   In that post I was pushing for architectural change because innovation is highly dependent on a layered and modular architecture*.  Architecture is important.

But architectural change is also interesting in determining winners and losers, and that was my deeper motivation.  From a (technically astute) businessperson's point of view, the article to read is Rebecca Henderson and Kim Clark's Architectural Innovation: the Reconfiguration of Existing Product Technologies and the Failure of Established Firms.  They point out that "architectural" change favors innovators over incumbents.

In laying out their thesis, the authors talk about the failures of incumbent firms in adapting to relatively minor market changes, despite their deep expertise in the core components of the new products being built**.  They also make the distinction between incremental change, radical change and architectural change to draw attention to the fact that seemingly minor changes in the architecture of a system are actually more likely to cause incumbent dislocation than radical changes in the underlying technology.  This is an extremely important point.

The essence of architectural innovation is the reconfiguration of an established system to link together existing components in a new way... Architectural innovation is often triggered by a change in a component... that creates new interactions and new linkages with other components in the established product...
Established firms often have a surprising degree of difficulty in adapting to architectural innovation. Incremental innovation tends to reinforce the competitive positions of established firms, since it builds on their core competencies... In contrast, radical innovation creates unmistakable challenges for established firms, since it destroys the usefulness of their existing capabilities...
Architectural innovation presents established firms with a more subtle challenge... established organizations require significant time (and resources) to identify a particular innovation as architectural, since architectural innovations can often initially be accomodated within old frameworks.  Radical innovation tends to be obviously radical--the need for new modes of learning and new skills becomes quickly apparent... the introduction of new linkages is much harder to spot.  Since the core concepts of the design remain untouched, the organization may mistakenly believe that it understands the new technology***.
Dismissing OpenRTB as not being really anything very interesting at all is missing the point.  OpenRTB is not radical change, it barely qualifies as incremental change.  But it is architectural change.  It is the reconfiguration of existing linkages, or the beginning of it

Architectural change is subtle.  It is ignorable, for the time being.  But it may--may--be enough to change the existing architecture, the architecture that is more and more contained within Google.  Those that realize this and adapt to it will prosper.  Those that dismiss it--either because it is too subtle or because they are a large incumbent and ignore those who profess to compete with them--might find themselves Xeroxed.

There's a subtle belief in our VC-backed community that technological innovation is the sine qua non, the ne plus ultra.  Build a better mousetrap and the world will beat a path to your door.  Unfortunately, we're wrong.  Build a better technology and the incumbent will copy your innovation: they will notice a better technology pretty quickly.  What we need to do is change the competitive dynamic by shaping the architecture of the ecosystem.  This is something we can do without the permission of the Incumbent, and something the Incumbent will have a hard time responding to.

OpenRTB is just as start.  But the more new linkages we can create in the ecosystem, the better chance we have to compete based on merit.

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* An overview of this argument and its consequences was brought to my attention by Brad Burnham somewhat after I wrote about it: Internet Architecture and Innovation.  I want to say that this book is really excellent, because it looks like it, but I haven't had the time to do anything but flip through it yet.
** I am not in love with their chosen examples.  In both cases the lower-cost/lower-functionality disruptive (as in Innovator's Dilemma disruptive) element is also present, so as natural experiments they leave something to be desired.  Christensen, in fact, draws heavily from Henderson's work in his book--IMHO, more heavily than he seems to admit.  His description of this paper, in Dilemma, mentions their thesis primarily as a study in organizational structure.  Christensen then talks about "value networks" instead of architecture--and Dilemma is an essential read--but I think Henderson and Kim's work is more directly to the point here.
*** Read the article, really.  The case studies alone are worth it (and might give some comfort to those of us who despair at the ever-incipient chaos in our little sub-industry by highlighting that this is not something we managed to invent ourselves but is, in fact, normal.)

9 comments:

Mike Baker said...

Jerry

Insightful post. I liken OpenRTB to the adoption of standard gauge railway, a trivial technical spec (who cares about the width of the tracks?) that enabled national and indeed global commerce to bloom.

Julian Tol said...

Jerry - Enjoyed your post and will seek out the examples quoted. I was underwhelmed by OpenRTB myself but have committed to take another look after reading your post.

Jerry Neumann said...

Mike--

Well, you and I are old-timers. I bet back in 1995 you Boston internet folk were reading Friedlander's "Emerging Infrastructure: the Growth of Railroads" the same way us NY internet folk were. (A series, BTW, she is still working on, it seems: http://www.cnri.reston.va.us/series.html )

Thanks for spearheading this. Let me know if I can help in any way.

Jerry

Zach Coelius said...

Jerry,
Rtb itself is the architectural change that is in process disrupting the incumbents. The problem with Openrtb is not the sparseness of the spec. The reason why it is unlikely to succeed is as attempt by a few small players in the space to direct the evolution of an industry standard it means nothing without the buy in of Google which controls more then 50% of the market. The history of the battles over software standards and protocols that have gone on in the computer industry over the last 30 years seems to indicate that this is a waste of time.

Zach

Jerry Neumann said...

C'mon, Zach, tell us what you really think.

Rob Leathern said...

Jerry - I think starting with creative approvals and blocklists is great and means it might actually go somewhere; there is pain there for anyone in the marketplace buying and selling through these platforms. I think more than that though we need to get into the meat at some point which is that there needs to be standards around actual marketplace connections - on Adexchanger I said I hoped it wasn't a Passport-Liberty Alliance waste of time around standards for a product that end consumers didn't really need and provided little benefit. I'd like to see people realize too, to Zach's point, that for anything market-moving you're going to have to get Google on board; or everyone else, because Google's going to be half the game right there.

aweissman said...

"What we need to do is change the competitive dynamic by shaping the architecture of the ecosystem. This is something we can do without the permission of the Incumbent, and something the Incumbent will have a hard time responding to."

Very very insightful. It also explains why open source generally wins in platforms. So where is te open source solution here?

Jerry Neumann said...

Good question... I guess I think of standards being open source, although that certainly isn't always the case. I'll have to ask the principals if they are making the standard free, and if so if it's free as in beer or free as in speech.

Bill Simmons, CTO DataXu said...

Jerry: The standards are free as in beer and speech. There is no charge to use them and no restrictions in terms of modifying or expanding them.