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Who's Sorry Now?

Pip Coburn was a star research analyst during the Internet boom. Today, he thinks the entire industry has to change.

Time was, I thought about this stuff all the time. I mean Silicon Valley and the venture capitalists who invested in its startups, and the financial analysts who promoted the companies its investment banks took public. I thought about it because from 1996 to 2002 I was the editor of Red Herring magazine, sometimes called the “bible of the boom.” It was an entire world, one that today seems to me as antediluvian as Noah’s seaside villa.

I thought about Pip Coburn pretty often, too, because he was the managing director of the technology group of UBS Investment Research, an investment bank, in charge of its 120 technology and telecommunications analysts, and thus a considerable man in the New Economy. But I also thought about him because he wrote a column for Red Herring from late 1999 until shortly before the magazine’s collapse in 2003. (The magazine has since been relaunched, in more modest form.)

The cover of the May 2000 issue of Red Herring blazes, “Who Wants to Be a Billionaire?” Flipping through its 480 pages of executive profiles, corporate analysis, econometric data, and an endless succession of “tombstones,” (where investment banks advertised successfully managed initial public offerings), I can still find Pip’s column, called “Tactics.” There I read, “What characterizes a practical framework for tech investing? First, accept life in the tech fishbowl the way it is…as opposed to the way it should be, which is rational.” That was almost certainly written in February, one month before the Internet bubble burst.

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Arguably, Pip Coburn has a great deal to explain, although not as much as some analysts of that era: in Red Herring, and in his research reports, he was reliably skeptical about earnings growth estimates for technology companies, and he never hawked stocks he secretly despised. But as he writes in his first book, The Change Function, “I wasn’t spending too much time at that time thinking about the elephant head on the table [he means the overvalua-tion of technology stocks]…because it really was a lot of fun participating in Nasdaq’s run from 333 on October 10, 1990, to the 5,008 peak on March 10, 2000.”

Coburn would have reason to repent of his high spirits: by 2002, the Nasdaq stock exchange had lost 80 percent of the value it had at its height. As I write, Nasdaq is at 2,368, and the technology industry has never recovered the ebullience it enjoyed in the 1990s. The Change Function therefore represents a settling of accounts, although its author would deny it. Coburn (who now works for Coburn Ventures, a consultancy that he founded, dedicated to putting “its knowledge about ‘change’ to work in the realm of technology, telecom, and media investing,” according to the company’s website) writes, “The purpose of this book is really quite simple. I think there’s a problem, and I’m proposing a solution….The technology industry has become self-absorbed as a result of five decades of success….Over time, technologists have become increasingly focused on creating miracles, even if it’s rare that those miracles translate into commercial success.”

The attractively simple thesis of The Change Function is that most tech-nology ventures fail because tech-nologists manage them. Technologists think their business is the creation of cool technologies loaded with wonderful new features. They think this because they are engineers who thrill to the idea of change. By contrast, Coburn says, “technology is widely hated by its users,” because ordinary folk loathe change. Therefore, any new artifact, no matter how much its various features might appeal to technologists, will always be rejected by its intended customers unless “the pain in moving to a new technology is lower than the pain of staying in the status quo.”

Or in Pip’s geeky formulation:

The Change Function = f (perceived crisis vs. total perceived pain of adoption).

This makes goofy sense of why technologies succeed. At any rate, it reflects how I adopt new technologies: unwillingly, and because I must. But the change function really takes off as an explanation of why technologies fail.

Coburn calls companies run by technologists “supplier oriented.” The crisis technologists are solving is their own: they want to justify the expectations of investors and their own hopes for influence. But they do not understand the change function. Technologists think a new technology is adopted when it is ten times better than anything else (former Intel CEO Andy Grove’s law of 10x disruptive technologies), and at the same time, the price of the technology drops because the complexity of an integrated circuit, relative to its minimum component cost, doubles every two years (Intel cofounder Gordon Moore’s Law).

Or according to Pip:

Supplier-centric adoption model = f (Grove’s law of 10x disruptive technology × Moore’s Law).

The supplier-centric adoption model is dangerously limited, according to Coburn. Users want incremental improvements to technologies they already possess. Price is only a secondary influence. Coolness is not a necessary input to the change function, unless feeling uncool precipitates a crisis of identity. Thus, Coburn says, because almost all technology ventures are supplier oriented, “90 percent of VC bets fail.”

Put another way, as Jean-Louis Gassée, the founder of Be Inc., once told me, “The most expensive idea in Silicon Valley is, ‘It will work, because it would be really cool if it did.’”

Coburn’s solution is that technology companies, and the technologists who work for them, must suppress their inner geek and become “user centered” and “[figure] out what people want.” To discover what people really want (something Pip concedes we hardly know of ourselves), he proposes that technologists employ “sociologists, anthropologists, communication consultants, change consultants, professional observers, futurists, and folks who just study change a whole heck of a lot.” This last may be read as a muted plea to employ Coburn Ventures.

All this is amusing and stimulating, but is it true? As someone who saw firsthand the ruin that Coburn describes, I can definitively say, kind of. Having removed the distorting lenses of financial euphoria, we can see that technology companies fail unacceptably often. Also, most new technologies have too many features that no one wants. Finally, the notion of the change function itself is persuasive: an elegant property of Coburn’s big idea is that it accounts for change of all kinds, including personal reformations like dieting or kicking drugs. But Pip’s insistence that users hate change and only want incremental improvements to existing technologies seems an excessive reaction to the recent past: sometimes new technologies really are, in Apple CEO Steve Jobs’s famous phrase, “insanely great.” To use Coburn’s own language, people who saw the first Macintosh computer or Web browser experienced crises of covetousness.

Will The Change Function achieve the author’s stated purpose of reforming an industry that is still supplier-centric? It need not convince anyone. Eventually, Coburn says, the industry’s crisis in confidence will outweigh the pain it feels in abandoning the gratifying illusion that cool technology and falling prices are sufficient to command users’ loyalty.

Such change couldn’t come too soon for Pip. In a recent conversation, he explained to me why he wrote his book: “One day, I thought of all the companies who had come to see me, and I felt some resentment. They really only served themselves. I realized it’s not about the supply [of technology] – there’ll always be supply – but about what causes real change.” Which is as close to an apology as we are likely to get from someone so complicit in inflating the last bubble.

The Change Function: Why Some Technologies Take Off and Others Crash and Burn
By Pip Coburn
Portfolio,2006, $24.95

Jason Pontin is Technology Review’s editor in chief.

Illustration on home page by Eric Hanson.

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