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Consider the book.
It’s one of the greatest data-dissemination devices ever conceived, capable of transmitting content in a variety of formats. If handled correctly, it can safely store data for centuries. It’s portable and some versions are even pocket-sized. It has a highly intuitive user interface and nobody has ever complained about its slow boot-up time. It can be cheaply mass-produced and readily recycled. Its fans avidly collect them and those collections can confer a certain social cachet.
It’s a proven technology—scholars say the first products we’d recognize as books came from Egypt in the first century, but centuries before that, Hindu scholars pioneered the concept, writing on leaves they later bound with twine.
And while improvements in its manufacturing—most notably, the printing press—have steadily lowered costs and improved quality, at its core, the book hasn’t changed much since Johannes Gutenberg hosted a 15th-century product demo for a Strasbourg investment banker who ended up fronting him 800 guilders to develop his prototype and take his boot-strapped startup to the ramp-up stage.
“People forget that the book itself is a technology, and it’s evolved from clay tablets to parchment and all kinds of things,” Jeff Bezos told TV interviewer Charlie Rose in 2007. “You forget, because you’re so accustomed to it, that you forget that it’s a technology.”
Five-and-a-half centuries later, he and Seattle-based Amazon.com are trying to improve on that state-of-the-art technology with the digital technology of the Kindle.
“Books are the last bastion of analog,” Bezos likes to say.
Build a better mousetrap, Ralph Waldo Emerson once said, and the world will beat a path to your door. That’s been the key to success for many of Washington’s signature companies for generations: Boeing built a better airplane, Nordstrom built a better retail model—Amazon itself used technology to build a better bookstore.
But in some industries, the basic technology has worn so well and endured so long, it’s not even thought of as technology any more. Books are a great example, but so are water meters.
The same is true with some business models. The residential real estate business in America is based on legal principles handed down from medieval England; the modern network of auto dealerships developed before World War I and didn’t change much until the Kelley Blue Book was made available to the public in 1993.
It’s only been in the past decade or so, as advances in digital technology have changed the way businesses store, use and even think about data, that some entrepreneurial engineers have started scheming for ways to improve on time-tested technologies and methods like the book or the car dealership.
For most of human history, new technology was the result of people with mechanical wizardry who could convert ideas into workable prototypes. But today, while hardware is still important, much of the leading-edge development is being done in software. The power of innovating through software is that the ideas, in part because they cost nothing to reproduce, can end up transforming vast swaths of an industry.
With its high concentration of software talent, Washington has become a leader in creating this version 2.0 of the Industrial Revolution. And companies all across the state, from Puget Sound to the Palouse, are among the leaders.
Amazon’s Kindle Sets Fire to an Industry
Amazon’s various Kindle models—including the latest wide-screen Kindle DX launched in May—are not the first efforts to develop an electronic book device. Early versions started appearing in the ’90s and were widely panned.
“I’ve been selling e-books for a long time,” Bezos told PBS interviewer Charlie Rose. “Nobody’s been buying e-books.” The problem, he says, was that the e-books before Kindle seemed too much like devices.
Amazon spent about three years working on the Kindle before launching it in 2007. Bezos says advances in a number of technologies—including the E Ink technology used to create letters on the view screen—made it possible. But the biggest engineering challenge was to make the device not seem like technology at all.
Instead, Kindle had to be bookish in every sense of that word. As one early reviewer put it, it had to be less of a gee-whiz gizmo and more “an austere vessel of culture”—which is to say that the device couldn’t get in the way of the content, the way early e-books did.
One of the great things about books, Bezos says, is that they “disappear.” Books are so easy to use, readers don’t have to think about turning pages or even reading itself. The technology of the book—the ink, the glue, the stitching—fades from consciousness, and readers become lost in the story. Achieving that same effect with an electronic device became the primary goal of the Kindle design team.
And then the designers had to go a step further. “If you’re going to do something like this, you have to be as good as the book in a lot of respects,” Bezos told Newsweek in 2007. “But we also have to look for things that ordinary books can’t do.”
Those extras include being able to load hundreds of titles into a lightweight device, or having access to an electronic dictionary to look up unfamiliar words. And along with all the software, Kindle had to have great battery life because printed books never run out of juice.
By and large, Amazon’s designers succeeded, according to most reviewers. Tech writer Om Malik has praised it, writing on his blog that, “the reading experience, while different from the organic nature of the printed word, was enjoyable. I could clip, make notes, rewind and search through books. It felt more immersive, more interactive.”
Stephen King—one of his short stories was preloaded onto second generation Kindles—said at the Kindle’s launch that he was “surprised at its ease of use. If you can turn on a button and turn a page … it’s really amazing to me. They’ve really done their best to make it easy.”
Kindle seems likely to revolutionize publishing. Once a book is stored in a digital form, the cost to “print” it onto a Kindle—that is, to transfer the words from an Amazon database to the device—is next to zero. That plays into digital media thinker and Wired magazine editor Chris Anderson’s theory of the “Long Tail”: almost-zero printing costs make it feasible for publishers to bring back works that had audiences too small to justify cranking up the old printing press.
Bezos also suggests that the Kindle could dramatically lower the cost of college textbooks. Some studies have suggested that the constant revision and reprinting of textbooks to reflect advances in their fields are a big reason why textbook costs have risen faster than inflation during the past decade. With digital textbooks, the cost of actually printing and distributing updated books is eliminated.
Beyond that, Bezos and other technophiles think the Kindle could change the very nature of literature itself. Instead of selling books as a completed product, authors could sell subscriptions to books that are published a chapter at a time, the way magazines serialized novels in the 19th century. Feedback from fans could influence the plot, and books could become more collaborative, rather than the work of a solitary artist locked in a garret.
“This could be the most significant thing we’ve ever done,” Bezos told Rose.
Whether it’s a smart business move, some on Wall Street doubt. The challenge is that in pushing Kindle, Amazon could jeopardize its core business: books. As Sanford Bernstein analysts noted, “unlike Apple with the iPod, which cannibalized somebody else’s sales—namely the music industry’s—Amazon with Kindle is in part cannibalizing sales of its bestselling product, and this must be factored into the economics.”
For that reason, they believe that Amazon will keep Kindle prices high, making it a very profitable niche product.
But some analysts wholeheartedly agree with Bezos’ vision for Kindle in academia. Global investment bank Barclay’s Capital projects there will be more than a million Kindles on campuses by 2012. Each user will save between $400 and $750 a year on textbooks, Barclay’s estimates, which will more than justify the DX’s $489 purchase price.
For all its technological advances, one thing Kindle can’t do, however, is book signings. Signings are a big promotional tool in the book business, and for that, you need a physical book for an author to sign, Bezos acknowledges. “You can’t out-book the book,” he told Rose. “We have to look for things that we can do with this technology that you can never do with a paper book, instead of trying to duplicate every last feature.”
Redfin’s Reality Check on Real Estate
Redfin is an online real estate brokerage whose website takes advantage of online mapping software to allow potential buyers to shop through databases of homes for sale in the neighborhoods they like. It then connects buyers with the listing agents.
But Redfin also represents a significant disruption to the traditional real estate business model, in which brokers and agents controlled all the key information and took 6 percent commissions in exchange for their expertise. Redfin’s business model is designed to appeal to consumers: After all, if you buy a home through Redfin, the agent rebates half his or her commission after you buy it. With the typical Washington state home selling for $266,700 in the most recent quarter, according to the Washington Center for Real Estate Research, that rebate amounts to about $4,000.
But there’s an upside for agents as well—they don’t have to spend time looking for clients, and once they are contacted by an interested buyer, they don’t have to spend time dragging them around from house to house they may be interested in; instead, the buyers tell them which places they want to see.
Essentially, the buyers find their own homes, then hire a Redfin agent to help them negotiate a sale. Freed from the need to hustle up business and from the hand-holding involved in house hunting, the agents can focus on closing the deal. This model could explain why Redfin agents are among the most active in the Seattle market. Citing Multiple Listing data, CEO Glenn Kelman, a prolific blogger, reported this spring that three of his agents were the top deal closers in King County in April and May.
The result may also be a better sale price for the buyer. Redfin claims that its internal data show that its customers pay on average $3,594 less than buyers of similar homes who use traditional brokerages.
And Redfin pays agents bonuses based on customer service ratings, not commissions. “We pay our agents to do the right thing,” Kelman wrote recently. “Redfin agents earn a salary and bonuses based on customer satisfaction surveys... As a result, our agents negotiate hard to get the best deal for our clients. With Redfin, there’s no sales pressure.”
Redfin’s model represents a growing trend for many service-based businesses, says Ric Merrifield, a business consultant at Microsoft and author of the new book Rethink: A Business Manifesto for Cutting Costs and Boosting Innovation. More and more, companies are using new technologies to push work that used to be done by an employee into the hands of the customer. Think of automated teller machines at the bank or ticket kiosks at the airport. What companies find is that their costs go down because they need fewer people; at the same time, customer satisfaction goes up—customers like having more control. The only issue for a company is that the technology must be easy to use, Merrifield says. A clunky user interface will drive users nuts—and drive them away.
Redfin hasn’t been embraced by traditional brokers. For a time, some agents refused to deal with buyers represented by Redfin, and a dozen states have passed laws that block real estate agents from rebating their commissions to clients—thus effectively outlawing the Refin business model. Still, despite the opposition—and in the face of a national real estate meltdown—Redfin is expanding. The company last summer opened for business in Chicago, and in April, it announced it was opening branches in suburban New York City and in California’s Central Valley. “Who knows whether Redfin will succeed?” Kelman mused in a blog post about venture capital. “I think everyone would agree, though, that there’s a need to make big bets and small bets, and that Seattle will be better off when a decade from now one of today’s startups becomes a company like Microsoft, Real [Networks] or Amazon, one that can buy other startup companies, too. That’s still worth shooting for.”
The Schweitzer Solution for the Power Grid
You find them out in the woods or in deep river canyons across the country: big metal towers that hold up long thin cables that faintly buzz with the passage of uncounted trillions of electrons as they race from an electrical generating plant to your neighbor’s toaster or turn the darkness into dawn.
Power transmission lines are the epitome of old-school industry, essentially unchanged since Thomas Edison’s day, except in scale. But that’s about to change, thanks in large part to technology invented on the Palouse.
Today’s continent-spanning power distribution grids have their roots in technology developed about 125 years ago, when a couple of teams of electrical engineers worked out a way to use alternating current systems to transmit electricity over long distances. Prior to that, direct-current technology limited the distance power could be moved, which meant generating plants had to be close to electricity users.
The new AC technology allowed utility companies to generate power wherever it makes sense to do so—like at a Columbia River hydroelectric dam or alongside big Montana coal deposits—and then transmit it over high-voltage metal cables to where it’s needed.
Ninety-eight years later, Edmund O. Schweitzer III—the third engineer in his family to bear that name—made one of the next great steps in power-transmission technology. What Schweitzer did while working on a doctoral thesis at Washington State University was embed circuit boards into power-distribution lines. It was the first all-digital protective relay, and it was more or less the birth of what we now call “smart-grid” technology.
Schweitzer’s digital relays detect and predict imminent failures in power-transmission lines. Automated switches then reroute the flow of energy around the failure point without interrupting the transmission. This technology also reports back, which allows repair crews to zero in on where fixes need to be made. The combination cuts downtime, lowers repair costs and improves reliability.
“Power is rerouted and restored so quickly that motors don’t stall, computers don’t need to be rebooted and alarm clocks don’t need to be reset,” says Schweitzer.
His thesis complete and his WSU degree in hand, Schweitzer launched his company—Schweitzer Engineering Laboratories—in Pullman in 1982. It made its first sale in 1984 to a Minnesota power company and has grown steadily, now employing 1,800 and providing equipment and services in 142 countries. The manufacturing plant and engineering labs remain in Pullman.
Demand could be poised for explosive growth. Utility companies are pouring billions into smart-grid technology—one report predicts they’ll spend about a trillion dollars on it before they’re through, and U.S. Sen. Maria Cantwell recently suggested smart-grid technology was a $6-trillion industry. In the short term, the Obama administration has put $4.5 billion in stimulus funding into smart-grid and power-meter technology.
The reason? As new types of green power generation come online, the big old megalithic power lines will have to be used in more nimble and flexible ways. Wind power, for example, fluctuates as wind speeds rise and fall. To handle these natural fluctuations, utilities need smart sensors—like the ones Schweitzer’s company designs and builds—to coordinate the amount of power coming from the green sources with that generated by other sources to keep a steady flow.
“In a smart grid you generate a lot of information,” says Brad Zenger, managing director at Pivotal Investments, a Portland-based venture capital company. “How you manage that information is a significant software challenge and opportunity.”
Rebooting Gains Traction
Amazon, Redfin and Schweitzer Engineering are far from the only Washington state companies leveraging digital technology to reboot traditional industries. Some of the others are:
Cobalt Group
Seattle-based Cobalt provides online marketing support for car dealers across North America and claims that more than half the dealerships in the United States use some aspect of its services, which includes customized software for dealerships as well as internet-based services.
According to one auto industry report, 28 percent of all vehicle sales can be attributed to the internet, and studies indicate 80 percent of car buyers research vehicles online before going to showrooms. Most online auto advertising is done by manufacturers or big regional auto groups, but increasingly, the trend is filtering down to individual local dealers.
The free-fall in auto sales has hit Cobalt too. After reaching $170 million in sales in 2007, the company was forced to lay off 45 people last winter, or about 4 percent of its 1,000-person workforce. Along with the Seattle headquarters, Cobalt has an office in Lynnwood, as well as others in California and Ohio.
CEO John Holt, who co-founded the company in 1995, remains upbeat. “We are on the right side of the digital media transformation,” he told TechFlash in December. “Even if marketing budgets shrink, more money is going to go to digital. I am bullish about what we are doing, absolutely. But it is not going to happen as fast.”
Vertafore
Few industries track, compile and crunch data like insurance does—or generate more paperwork. Bothell-based Vertafore provides web-based and desktop programs to help deal with both.
“Whether they are small agencies or the largest carriers, our customers’ technology needs are getting more complex daily,” said Euan Menzies, the company’s president and CEO.
Clients cover the scale from financial services giants like US Bancorp to independent insurance agents. Most of its products are aimed at its 15,000 insurance agency clients, helping them by automating routine processes like data entry or sending out renewal notices, or mining the company’s own data to help with marketing. But it also offers products like underwriting, accounting and claims software to major carriers.
In its current form, Vertafore is a relative newcomer to the Northwest. The company was purchased by a pair of private equity funds in 2004. Within months, it moved its headquarters from Connecticut to Bothell, where it could closely oversee the operations of its largest business unit, AMS Solutions.
At last report, it had about 830 employees in 10 units across the country, including offices in Issaquah and Kennewick. Its 2007 revenues were about $180 million.
Columbia Virtual Academy
There are few enterprises more old-school than, well, school. The current model of a single teacher lecturing to a group of seated students has changed little since the time of Plato.
Technology has long promised to change that model, and after many false starts, Washington has emerged as one of the nation’s leaders in developing virtual schools, with programs spread from Bellevue to Yakima, many offered by private-sector entrepreneurs.
But one of the more unusual is Columbia Virtual Academy, based in the tiny eastern Washington town of Valley. It bills itself as the only “completely public, completely nonprofit and completely shared virtual learning program” in the state.
The program was launched in 2003 as a home-school curriculum for the Valley School District, a rural K-8 district northwest of Spokane, which sends its high-school-age students to Chewelah. Three years later, Valley partnered with other school districts and began offering the program statewide. It now has a dozen partners, from Raymond to Inchelium.
It’s organized as a public school curriculum program offered online to families that have opted to home-school their children. For families who’ve had children in Washington public schools, it’s free—public school funding follows the students who enroll, just as if they’d physically moved from one public school district to another.
Students enroll in a core curriculum for their age group and pick from a range of electives. Parents are assigned a teacher to consult with, and high school students also work with subject-area teaching specialists. The academy offers families a fund to help pay for supplemental teaching materials or activities like music lessons. It also provides all the educational text online, but parents have the option of buying printed textbooks.
Students are required to check in with an academy teacher once a week by phone or e-mail, and parents are required to make monthly progress reports. Parents certify that their children are spending up to 25 hours a week on their studies; students are tested annually to ensure they’re making progress.
The academy has had a big impact on the Valley School District. A state auditor’s report in 2007 found that of the 430 students officially enrolled in the district the year before, more than half—240—were students of the virtual school. The academy’s enrollment last year grew to 930, with 517 of those officially enrolled through the Valley district.
That growth has meant the district has had to hire more teachers. This year, it expects to open bids on a new building to house the academy’s teachers. The district already is a major employer in the community, with 64 full-time employees and another 27 part-time bus drivers, cooks or substitute teachers. Last year, it had a $3.6 million budget.