Predictions for a technological revolution in construction, Part 3

When assessing technologies, I often look at them through the lens of increasing returns.  Increasing returns are simply defined in this HBR article written by Brian Arthur (*side note: increasing returns, as promoted by Arthur, has faced a lot of scrutiny by economic scholars.  I acknowledge this, but I still like the framework due to its simplicity for non-professional economists like myself). Increasing returns are bestowed upon products that get ahead in the market and get continuously further ahead and produce above normal profits.  Products, particularly those in high tech markets, are able to produce increasing returns because they possess three characteristics:

• High up-front costs:  Actually, it’s not the high up-front costs so much as the fact that unit prices fall as sales increase.  Many high tech products are complicated to design and have high research and development costs relative to production costs.  This means they are costly to develop, but once ready for mass production, the production costs are very low.  Arthur uses the example of Microsoft Windows (which applies to any vintage of the operating system): the first unit of Windows sold costs several hundreds of millions of dollars, but the subsequent copy costs only a few dollars.  Or putting it simply, unit costs fall as sales increase.
  

• Network effects:  Increasing returns can be achieved if high tech products can be an integral part of a network of users.  Users beget more users, and the more people that use a product, the more likely it will become the industry standard.
  

• Customer groove-in:  highly technical products often require training prior to use.  However, once someone learns how to use the product, they become wedded to it.  The user only needs very little additional training to stay current with subsequent versions of the product.  They are not likely to switch to a competing product only to have to relearn a new product from step one.
  

When a product has these three characteristics and become the dominant product, it is unlikely uses will readily switch once they have made the investment in the product.  Arthur uses the example of operating systems.  In the 1980s, there were multiple competing operating systems that had an opportunity to become the de facto standard: CP/M, DOS and Apple’s Macintosh.  When Microsoft successfully licensed DOS and then negotiated with IBM to be the exclusive platform for their computers, that was the break they needed to become the industry standard.  This happened despite the fact that DOS wasn’t the first to market or even the best product on the market.  But we all know how the story ended: Microsoft became the industry leader and made tons of money, and became the standard for the industry, which meant more and more people kept buying it.  Only until very recently has Microsoft’s dominance been challenged, and not until after most of the world invested heavily in Microsoft products.

Since my focus is construction, let me give you an example of construction software: Primavera P3 (or more specifically, the current network-capable version, P6).  P6 is a complicated program.  I don’t know the development costs, but they were likely very high.  Most sizeable contractors and agency CMs have a copy of it, so there is almost someone on a relatively large construction project that knows how to use it.  It’s complicated to learn, but once someone knows how to use it, it becomes the standard for most contractors.  It’s the standard scheduling software product in the industry.

There’s just one problem:  this whole model for increasing returns seems to be breaking down.  Software is no longer that expensive to develop.  Building on operating systems like Apple’s iOS and Google’s Android, a few programmers with access to a server, space in their parents’ basements, and some pizza and Mountain Dew can create apps that are powerful and easy to use (and venture capitalists are very happy with this capital efficient model for software development, which is why there is a robust seed-stage investing market for it).  These apps and the operating systems are increasingly simple to use.  Digitally adept Millennials and Gen Y’ers can pick up a device that runs either operating system and master apps on them very quickly.  The reduction of development costs and the ease of users to switch almost seamlessly between operating systems and apps means it will be a long time before a dominant technology platform can have a virtual monopoly over users (but this is why Apple, Google and even still Microsoft are fighting like mad to get a strong foothold in this market with the long-term hopes of getting the same break Microsoft did in the 1980s).  It’s not hard for most people to picture an app being developed that could credibly challenge status quo technologies (like Primavera P6).

The only characteristic of increasing returns left that holds are the network effects, which can be better described by Metcalfe’s Law.  Metcalfe’s Law states that the value of a communications network is proportional to the square of the number of users connected to the system.  A particular technology becomes more valuable as the more users of that technology become connected.  One mobile phone is essentially worthless because it has nothing to connect to.  Two mobile phones have value as they allow two people to communicate from a distance.  A network of thousands of mobile phones has a value of 1,000 squared if there is a person on the end of each phone willing to talk with the other phone users.

As has happened in other industries, construction companies are beginning to enjoy the benefits of technology.  As communication is fostered on projects due to the number of interconnected people using tools for which there is no dominant standard, are inexpensive to develop, easy to use, and companies are willing to pay for (or individuals are willing to pay for them because they are inexpensive and make their lives easier), a market for construction management tools should emerge (it’s early, but it looks like it’s happening).  A complicating factor for construction companies will be the lack of a standard.  If a standard operating system emerges, construction companies will arrange their IT investments around it.  Until then, they must be prepared to manage devices that run different operating systems and be prepared to manage multiple operating factors.

The bottom line: IT is becoming less expensive and easier to use, and the benefits of a well-connected team are becoming evident in the construction industry.  As construction companies utilize technology more, and importantly, pay for the technology, a robust market for apps should emerge.  The difficult part for builders is that because a dominant platform has not emerged, they will have to be prepared to manage more than one, complicating things somewhat.