The convergence bubble.

February 1, 2005


Remember the Internet bubble? Retail stores were dead; everybody was going to buy everything on the worldwide web.

Many top executives were carried away by the hype. The CEO o

f Andersen Consulting (now Accenture) quit his job to become CEO of Webvan, an Internet company that was going to put the nation’s supermarkets out of business.

At the height of the bubble, Webvan’s market capitalization reached an astounding $10.9 billion. (By way of comparison, Safeway is worth just $8.1 billion on the stock market today.)

If the head of the nation’s leading consulting firm thought the Internet was the future of retailing, who were we, as mere mortals, to doubt it?

That’s the way a bubble is. One day, everyone believes the hype. The next day, nobody believes it.

History is essentially one bubble after another. No sooner does one bubble burst than the crowd moves on to the next one.

The latest bubble is digital convergence. In a digital world, goes the thinking, individual products like computers, telephones and television sets will disappear and consumers will buy combination devices that serve multiple functions. After all, there’s no difference between an email message, a telephone call and a television signal. There’s all just digital bits.

The intensity of the convergence bubble inched up a notch last month in Nevada.

“What struck me about last week’s Consumer Electronics Show — the huge annual gadget bacchanalia convening, naturally, in Las Vegas – is the buzzword people don’t say anymore,” wrote Steven Levy in the January 17, 2005, issue of Newsweek. “Only a few years ago people breathlessly uttered ‘convergence’ as sort of a catchall mantra. . . now you rarely hear it, because the concept is so here and now that it would be like commenting on air.”

What you do hear a lot about these days is the Swiss Army. According to Mr. Levy: “. . the flagships of this year’s event were handheld devices that have become this century’s version of Swiss Army knives.”

Headline in The Wall Street Journal, January 4, 2005: “Cellphones Become ‘Swiss Army Knives’ as Technology Blurs.”

Worldwide, some seven million Swiss Army knives are sold each year, which seems like a lot until you realize that more than half a billion cellphones are sold annually. Furthermore, most of those 500 million cellphones are put to active use. The vast majority of Swiss Army knives reside in dresser drawers gathering dust.

What can you do with a Swiss Army cellphone? Summing up the features on display at the Consumer Electronics Show, you could send email, surf the Internet, take pictures (still and motion), download songs, play music, send photos, watch television, listen to radio, play games, manage your appointment calendar and address book, pay bills, open your garage door, turn on your lights and air conditioning, check your blood sugar level and participate in a video conference.

And that’s not all. Motorola is working on a phone that could download a full motion picture, then project it on any flat surface. And, according to Microsoft research chief Rick Rashid, the future might bring 3D movies on your Swiss Army cellphone.

What’s wrong with this scenario? Nothing, except it won’t happen. Technologies don’t converge. They diverge.

Did the personal computer converge with the computer printer? No, it did not. It diverged. And now we many types of personal computers (desktop, laptop, notebook, tablet) and many types of printers (inkjet, laser, photo, etc.)

Would Hewlett-Packard be as successful as it is today if the printer had converged with the PC? I think not. It was divergence that created the opportunity for Hewlett-Packard to become a super brand.

When the PC first took off, the leading brand of computer printer was Epson, a dot matrix printer. What Hewlett-Packard did was to become the first company to introduce a desktop laser printer. Now there were two types of personal computer printers. With more to come.

Divergence creates opportunities to build new brands. Convergence does not. Look again at the personal computer and the brands that were created by spinning off some of its components.

• Intel built a big brand out of the PC microprocessor.

• Microsoft built a big brand (Windows) out of the PC operating system.

• Seagate built a big brand out of the PC disk drive.

• Lotus built a big brand (1-2-3) out of the PC spreadsheet.

• Intuit built a big brand (Quicken) out of PC financial software.

• Palm built a big brand (Pilot) out of the PC electronic organizer.

• Research in Motion built a big brand (BlackBerry) out of the PC email function.

• Iomega built a big brand (Zip) out of the PC storage function.

• ViewSonic built a big brand out of the PC monitor.

• Logitech built a big brand out of the PC mouse.

• Dymo built a big brand out of the PC label printer.

It’s funny. Once a company achieves a divergence success by taking things apart, it immediately moves on to a convergence strategy of trying to put things together.

Microsoft, for example, has tried to put the Internet together with television. In 1997, Microsoft bought WebTV Networks for $425 million and has since poured more than half a billion dollars into its interactive TV venture. Results have been dismal. Today, WebTV (whose name has been changed to MSN TV) has about one million subscribers, a trivial number compared to the more than 100 million TV sets in use.

Convergence has clearly become an obsession with Microsoft. “Has William H. Gates become the Captain Ahab of the information age?” asked The New York Times. “Mr. Gates’ white whale remains an elusive digital set-top cable box that his company, the Microsoft Corporation, is hoping will re-create the personal computer industry by blending the PC, the Internet and the television set into a leviathan living-room entertainment and information machine.”

Also in 1997, Microsoft invested $1 billion for 11.5 percent of Comcast Corporation, at the time the nation’s fourth-largest cable operator. According to The New York Times, “Comcast will become a seedbed for Mr. Gates to test his vision of a converging world.”

But that was just a start. In 1999, Microsoft pumped $5 billion into AT&T and secured a contract to install its TV software in as many as 10 million AT&T set-top boxes. Not a single box made it to the top of a television set serviced by an AT&T cable system and since AT&T is now out of the cable business, the contract is just another convergence dead end.

Microsoft keeps trying. After the lukewarm reception to WebTV, Microsoft moved on to UltimateTV which has gone nowhere either.

Microsoft’s next step was the “media center PC.” Watch television, play music, play video and show pictures, all controlled from the homeowner’s personal computer equipped with Microsoft software.

And, of course, Microsoft is a major player in Swiss Army knife cellphones. Last year the company introduced its “portable media center” software that can download and play back TV shows, video movies and digital photos as well as music tracks on your cellphone.

When will it all end? I don’t know, but sooner or later convergence will crash and then it’s on to the next bubble.

Fasten your seat belts.