Living Economics

Genericization as a Market Maker
The creation of a new market typically involves the simultaneous development of interlocking parts. Sacrificing the short-term gain for at least one part is often necessary to overcome initial supplier or buyer inertia.

The way the first IBM PC was built explains a lot about the popularity of the PC. Instead of using proprietary components, IBM used off-the-shelf standardized parts that were easily available to other competitors. The gain in speed at launching the product was offset by the ease with which competing products could be offered at lower prices.

The genericization of PCs has started a virtuous cycle of market making. First, off- the-shelf components are cheaper because its wide adoption ensures that scale economy will be gained through mass production. Second, wide adoption of PCs attracts software developers to develop useful software that meet the needs of PC users. Third, more useful software in turn makes owning a PC more productive. Fourth, the large pool of existing owners of PCs serving as informal technical support further encourages more people to go with PCs than other platforms.

Ironically, IBM did not directly benefit from its PC innovation and had to exit the PC market recently. While the open standard of PCs did not make IBM much money, the popularization of computers in general has indirectly benefited its other service businesses. Consumers are not the only winners in the genericization of products. The most notable gainers in the PC market are Microsoft, Intel, and Dell. Dell mastered the just-in-time built-to-order production process to dominate the PC industry. Intel dominates the microprocessor market by continually upgrading its product line and lowering prices for old products. And Microsoft lionizes the operating system market and leverages its OS dominance into office applications.

The contrast of the Apple Macs computer market could not have been more different. Apple wants to dominate both the hardware and operating system market of its computers. Instead of lowering its hardware prices to gain dominance in the OS market, it systematically squeezed out competing hardware makers. By making its hardware design proprietary, its computers are too expensive to gain sizable market share. Because it sells too few computers, it also sells very few operating systems. Its limited market share in turns failed to attract software designers to develop innovative software. As a result of its self-imposed limitations by Apple, nobody makes much money in the Mac niche market even though Mac fans insist that their OS is better than the Windows'.

The creation of a new market typically involves the simultaneous development of interlocking parts. Sacrificing the short-term gain for at least one part is often necessary to overcome initial supplier or buyer inertia. This loss on one part of the market may be more than made up by the revenue from any part of the market once the market takes off if the innovator is involved in more than one part of the market. If no one party is involved in more than one part of the market, a party with an encompassing interest in developing the market must be involved. This party may be the government or a non-profit organization.

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