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Management

Size matters in the relentless rise of artificial intelligence

Why IT titans are prioritising growth over profits

PUBLISHED : Friday, 05 May, 2017, 8:07pm
UPDATED : Wednesday, 22 November, 2017, 3:16pm

Microsoft this week declared its intention to take back a market segment long lost to Google: the education sector.

At a New York launch event on Tuesday, Microsoft chief executive Satya Nadella unveiled Windows 10s, which is aimed at the high school market.

“It’s not like education is new to us. We’ve been there,” Nadella said.

The challenge for Microsoft, of course, is that Google has the habit of offering everything free. Its Chromebook series, for instance, many made by third-party manufacturers, including Acer, ASUS, Dell, and HP, sell for as low as US$200.

Adding to the challenge is the free Chrome OS, which runs the same Android apps people already use – Google Docs, Sheets and Slides – at no additional cost.

So, even though the beautifully designed Surface Laptop from Microsoft will cost US$999, the company is ready to price its low-end models starting at US$189. A question thus arises: Why would companies fight so hard over the education market, a segment that is relatively small and not very profitable?

Among business school academics, the so-called network effect is a favoured explanation for the rise of Uber, Airbnb, eBay and Facebook.

In each of these cases, the company took on the role of a platform (another favoured term), facilitating sellers on the supply side and buyers on the demand side in their efforts to exchange goods or services.

The value of a platform depends largely on the number of users on each side of the exchange.

There should come a time when Microsoft alerts you to head home and orders an Uber on your behalf so that you get enough sleep for an important business meeting the next day, all without any human intervention from your Outlook Calendar

Consider for a moment any dating website, from OkCupid to Tinder to Match.com.

Men are drawn toward them because there is a huge supply of women on the other side, and vice versa. Because of this network effect, successful platforms often enjoy an increasing return to scale.

Users are willing to pay more for access to a bigger network, and so profit margins improve as user bases grow.

With little to differentiate products fundamentally – think Uber against Lyft or iMessage against WhatsApp – platform competition is often reduced to a game of “grow fast or die”.

That is why when Snapchat went public last March: the number of daily active users became the single most important metric. The more users there are chatting on Snap, the more willing big brands like Coca-Cola or P&G are to buy ads there.

The logic of the network effect, however, does not apply only to social media apps, but also to technological creators like Microsoft. The reason that Google Chromebooks are becoming so popular among educators and students is not only because they are affordable but because the Android operating system provides users with hundreds of thousands of apps to choose from.

The Chromebook is, in fact, a platform that links students on the demand side, and app developers on the supply side. The more end users there are, the more likely a third party is willing to devote time and energy to develop exciting apps.

But size is not the only thing that matters; quality does too.

Before Facebook, Myspace had been the reigning king of social networks. Founded in 2003, it commanded a loyal allegiance of bands, photographers, and other creative people.

As late as 2006, it was the top social network in America. News Corp’s Rupert Murdoch bought the company for $580 million, believing that Myspace could be worth as much as $6 billion.

Myspace’s fall from grace was striking. By April 2008, the site was losing 40 million unique visitors per month. Some blamed its design, which resembled a massive spaghetti-ball mess; others attributed the failure to the lack of technological innovation.

But the core problem was its reputation. The network was flooded with scantily clad would-be celebrities, filling the site with scandalising photos that led to the public perception of a digital ghetto. Elite users were fleeing en masse to the next safe haven: Facebook.

Viewed in this light, it should come as no surprise that Facebook today is pouring everything it can into artificial intelligence (AI).

“It’s about making sure that every moment you spend online you spend with the content you want to see, with the people you want to share,” explained Facebook chief technology officer Mike Schroepfer.

To avoid getting dethroned, a platform player must constantly dial up the user experience. For Facebook, building AI is key.

“Facebook’s progress in AI can be seen in everything from the company’s news feed to the way in which people are tagged,” Schroepfer added in another interview.

It’s about making sure that every moment you spend online you spend with the content you want to see, with the people you want to share
Mike Schroepfer, Facebook chief technology officer

Again, the primacy of AI is all too obvious for Microsoft as well. Whether it is Google Assistant, Apple’s Siri, Amazon’s Alexa, or Microsoft’s Cortana, a company can improve its AI’s performance only as fast as it grows its user base.

How far machine learning can progress depends on how much data a firm can capture. And the improvement that is brought forth by AI will in turn improve the customer experience, making users even more loyal.

There should come a time when Microsoft alerts you to head home and orders an Uber on your behalf so that you get enough sleep for an important business meeting the next day, all without any human intervention from your Outlook Calendar.

But to get there, data is everything. Specifically, a segment that represents the needs of future users and emerging trends would be undoubtedly most helpful. While the requirements among professional adults will always be high, the tolerance of product failures and the eagerness to embrace the next big things among teenagers and students are well documented. Cracking the education market will provide a direct roadmap for Microsoft to jump-start experimentation with the most leading edge consumer segment it will ever find.

What this all means is that there is a life cycle for industries, where companies need to prioritise growth over profits. For IT players, the rise of AI has triggered such a paradigm shift. The education segment may not look very profitable, but the learning from it is invaluable. Does your company also need to prioritise growth over profits?

Howard Yu is professor of strategy and innovation at IMD Business School with campuses in Switzerland and Singapore

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