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| The Promise And Danger Of Exponential Growth |
September 11, 2005 |
By Jim Harris
IN JULY KODAK ANNOUNCED IT WILL LAYOFF 22,500 TO 25,000 EMPLOYEES OVER THE NEXT FEW YEARS. IT’S A KODAK MOMENT THAT ALL BUSINESS AND POLITICAL LEADERS SHOULD WATCH CARE FULLY.
While Kodak had been making valiant efforts recently to turn around its business by focusing on digital photography, it was too little, too late.
The lesson for leaders and organizations is that it’s better to align with exponentially growing trends early rather than late. Once changes in consumer behaviour have reached the tipping point, heroic turnaround efforts aren’t necessarily going to save the day.
Organizations are far better off making small efforts to align with exponentially growing trends while they are still small.
IPOD, ITUNES POWER APPLE
On July 17 iTunes sold its 500 millionth song. The service is now selling 50 million downloads a month. By the end of 2005, I predict downloads will be close to a billion.
iTunes sales will accelerate sharply because iPod sales are exploding. In Q2 of this year Apple sold 6.2 million iPods, well above analysts’ predictions, and a 616 per cent increase over Q2 last year.
That brings total iPod sales to more than 21 million. Apple holds 70 per cent of the hard disk MP3 market and has confounded naysayers who predicted the iPod’s demise
and the rise of strong competitors.
But Apple is going from strength to strength, leading one Wall Street analyst to predict the company will sell 100 million iPods by 2008.
Interestingly, as of July 2005 the average iPod had only 23 legitimate (legally purchased) songs from iTunes on it. (That is total iTunes downloads divided by all iPod sales).
But this average is guaranteed to increase. If the average iPod has 50 songs on it by 2008 and there are 100 million iPods, that will make five billion iTunes downloads by 2008. At US$0.99 cents a piece that’s US$5 billion. Not bad for a business that Apple only launched in 2001.
Booming iTunes sales are driving Apple’s profitability sky high. When Apple sells an iPod it has to ship a physical player to a store, but selling an iTunes song doesn’t really cost anything in additional infrastructure. As iTunes sales increase Apple will have to add additional servers to deal with the bandwidth demands, but that’s about it.
In other words, digital services scale far more easily and cheaply than physical ones. That’s why Apple’s quarterly profit jumped fivefold. It reported net income of US$320 million for the period ended June 25, up from US$61 million during the same period a year ago.
By aligning with, defining and driving the digital music trend, Apple has reinvented itself and rejuvenated its profitability.
And the iPod and iTunes phenomenon has even benefited Apple’s computer sales which are up — to more than a million Macs a quarter. Analysts suggest iPod’s “cool” is rubbing off on Macs.
The simple lesson for leaders: aligning and driving fast-growing trends can exponentially increase the bottom line. Apple was going nowhere fast until it created the iPod wave. Where would Apple be today if it had not seized this opportunity? Imagine Apple’s share price if instead a competitor had dominated this market.
ECOSYSTEMS TIPPING
In 2005, the Millennium Ecosystem Assessment was released. The Assessment brought together 1,360 eminent scientists from 95 countries around the world who worked collaboratively for four years under the auspices of the United Nations. Their conclusion: two-thirds of the world’s natural ecosystems face collapse unless the world’s industries undergo profound change.
More than 50 per cent of the world’s Nobel laureates in science have now warned humanity that we face dire consequences unless we undergo profound change. Concern about environmental issues and changing our society is coming from all directions:
- Swiss Re, the second largest reinsurance firm worldwide, believes global climate change is the largest threat to business in the 21st century.
- A Pentagon report in 2004 identified global climate change as a bigger threat to U.S. national security than terrorism.
- This summer the Ontario Medical Association warned that 5,800 people will die prematurely in Ontario in 2005 due to smog.
- Best selling books like Jared Diamond’s Collapse and Ronald Wright’s A Short History of Progress examine the fall of societies like Easter Island because of environmental degradation.
If 20 years ago I’d said that the majority of Canadians today would be drinking bottled water you’d have laughed. But if I predict that within 20 years the majority of Torontonians may have to breathe bottled air unless we have significant change, will any reader laugh?
Environmental issues will be the defining issues of the 21st century — for individuals, communities, society and the human race as a whole. There’s a very real danger though: as in Kodak’s case, will the world’s political leaders respond with too little too late?
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