OLPC and sustainability

I’m fascinated by Negroponte’s candor about his interests in “The Prophet of Cheap.” He sees himself as a visionary, disruptive force goading and threatening existing players to “create downward pressure on the market.”

Yet, he’s operating in a market that has continually experienced really intense downward pressure, arguably since the 1981-82 proliferation of IBM clones. Consumer electronics (CE) is a fast-cycle business where, typically, component hardware is a commodity that does not bring in high margins. Incumbents like IBM and HP have actually exited the hardware side in favor of more profitable service offerings.

The Negroponte quote that I find especially provocative is, “The success of [the XO-3] will be measured by how many people copy it.” According to my corporate strategy professor, “sustainability” in business is a function of complementary assets and isolating mechanisms, the things that keep products from being copied. Once an innovation is readily copied, the product becomes a commodity, and prices compress. Eventually, everyone prices at marginal cost and no one makes an economic profit.

From a strategy standpoint, funding R&D primarily through donations and then giving away the resulting innovation to as many manufacturers as possible is totally unsustainable. It could work for one (technology) generation, but it depletes value from the whole industry. Negroponte may argue that he is merely accelerating natural cycles of innovation, but there’s a limit to what additional pressure can achieve – as evidenced by OLPC’s revenue and cost challenges.

Contrast this situation with the Tata Nano, where R&D expenditures yielded not only a dramatically more affordable car but also a source of competitive advantage and phenomenal branding. If relatively affluent customers buy more Tata products as a result, their cash fuels R&D and a virtuous circle of self-sustaining social innovation develops.

Apparently Negroponte sits on the board of Motorola and is a prominent angel investor in tech companies, so his statements in the Forbes article don’t paint a complete picture. However, it’s surprisingly difficult to discover his real strategy. For example, see how he skirts the topic of financing in this 2011 London Business Forum presentation. In the end, OLPC is a wonderful visionary concept, but there may be better approaches than the “threat” to sustaining social innovation.