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Conclusion and Advice to Readers 251
which implies that investing in larger companies that have the advantages of a centralized structure is the best strategy. By considering market uncertainty as a factor, the mix of a VC's investment portfolio will increase the expected gain.
The way VCs fund ventures in stages fits my theory well. When market uncertainty is high (the first round of funding), there are many small deals. Then, as some ventures don't pan out, a few successful companies get more funding. At first, when market uncertainty is high, VCs make many smaller bets. When market uncertainty is low, VCs make fewer, but larger investments. When market uncertainty is low, VCs don't need many deals to capture value. This is the time to take advantage of centralized management and efficiency and not worry about meeting the market because it is so easy to predict users' preferences.
VCs should take advantage of experimenting in the most lucrative region (shown in Figure 11.7) by investing in small startups that have expertise in their particular area. VCs are putting money into firms that are experts in their particular area, which means that a VC can maximize its gain by investing in several firms that are expert in their particular area and the most productive with experimentation. Good ideas are expected to come from the innovative startups, not the big established vendors and service providers. It makes sense to provide funding to those most likely to have the best ideas. This strategy of experimentation in the critical area where value is maximized is what VCs need to maximize their value.
Service providers can be huge with vast centralized infrastructures (RBOCs, long distance providers, and wireless carriers), or they can be niche companies serving a small group with a more decentralized management structure. Each type of service provider needs different strategies to maximize the value of providing services to users. Large centralized organizations are expected to be the most efficient, but also the least innovative. Smaller and more nimble service providers are more likely to have better ideas, but they have a hard time efficiently providing these cutting-edge services. With the correct strategy, either can win because there is room for small and large service providers because different users have different needs, as seen throughout this book. Following the arguments in Chapter 11 about the coexistence of distributed Wi-Fi and centralized cellular wireless infrastructure, small and large centralized services can add value to each.
252 Chapter 13
Large Centralized Providers
Companies such as Sprint and the RBOCs are experienced in providing network services within a centralized management structure. As Chapters 2 and 4 explained, this type of centralized management structure has many advantages. The telephone network illustrates the success of this type of centralized architecture. Unfortunately, these advantages of centralized structure make it less likely to think "out of the box." It is "out of the box" thinking, though, that is needed to find great services in uncertain markets. These big service providers have a dilemma: They are in the best position to provide many types of services as long as the number of users is large, but they are the least likely to figure out the services that will be successful enough to merit the efficiency of a centralized management structure.
The strategy for these large carrier-type service providers is to do what they do best — provide services that are known to be successful. In most areas (see Figures 11.6 and 11.7) where these large organizations don't have cutting-edge dexterity, their experimentation is unlikely to be successful. By funding or buying ideas from smaller niche service providers that have specialized expertise, these large organizations can discover a stream of services that migrate into their centralized structure, providing a continued flow of revenue. This is an options value — the option of capitalizing on the innovation of others. Big service providers don't need to have the best ideas; rather, they just need to watch and see what the ideas are, letting the market select good candidates for migration into their centralized umbrella. By doing what they do best (efficiently providing services to many), these large centralized service providers can be successful.
Centralized service providers supplying a basic infrastructure such as basic IP (including wireless), second-generation cellular, and traditional telephone companies will also gain value if they open up their network to capture value from the innovation of others (see the open garden discussion in Chapter 11). Billing is one area in which these infrastructure providers can add value to the services offered by others, as DoCoMo's I-mode has demonstrated. Depending on the business model, centralized providers might gain revenue from additional data from services with which they have no affiliation. Encouraging other small service providers that are not affiliated with the infrastructure provider helps build a fertile environment that fosters innovation. These successful unaffiliated service providers are future partners to the infrastructure service providers. I believe that the options framework presented in this book implies that the open garden architecture described in Chapter 11 will maximize value.