All the World in a Wristwatch

Aug. 15, 2008 — -- Let's talk about watches.

Not the most exciting subject, I'll admit -- especially when we're speaking not of Rolexes and Audemar-Piagets, but the kind of cheap watches you find in the department store or even a pharmacy. In fact, it was just the sight of a humble little display rack of Timex watches that I saw in the Fred Meyer store in Coos Bay, Ore., that started my musings.

It is often the most prosaic of consumer products, the most forgotten corner of the tech world, that can offer the most interesting lessons about how high technology really works -- especially as it collides with human nature. It is a lesson often forgotten by high-flying young companies and that often brings them suddenly to Earth.

When a hot young company with a hot new technology in a hot and newly emerging market looks ahead, it typically sees three great obstacles ahead to overcome.

First, it must win the technological race, leading all competitors in producing the most cost-effective, technologically advanced and performance-leading product or service. Second, it must beat its competitors to market, either by introducing its product first, or soon after its competitors and with a self-evidently superior offering. And, third, it must capture the market's imagination via the best product, best support and most compelling message and, in the process, gather up a dominant and defensible market share.

Those steps, with a few minor variations, are what's needed to win the business world, especially with a young company in an emerging market. That's what they teach you in business school and that's the path that investors (and eventually shareholders) expect you to take. Deviate from it and, even if you are a founder of the company, you will likely find yourself kicked out of the company you helped to create.

And, yet, there is something profoundly wrong with this business model -- or, at best, it is dangerously incomplete. And to understand why, you need merely to study that forgotten little watch kiosk at your neighborhood department store.

The first thing you should notice is just how unimportant that display is to the entire store. Clocks were once miracles, a touchstone of the Enlightenment, a symbol of the Scientific Revolution and, indeed, one of its most important tools.

And a clock that could be carried on one's person -- a pocket watch -- was a miracle upon a miracle. A pocket watch required components so finely tooled that the earliest ones could only offer an hour hand. The minute hand took a small revolution in itself; and a reliable second hand was only possible after the complete reordering of society around new forms of energy, organization and time management that we call the Industrial Revolution.

Even then, in a world now defined by the mass production of interchangeable parts, a pocket watch was still a comparatively expensive item -- and an accurate one so expensive that typically only specialists (railroad engineers, factory foremen, etc.) owned them, and they were awarded with great ceremony by one's employer after a lifetime of work.

Needless to say, if you wanted to buy one of these watches, you had to go to a jewelry store, to a shop dedicated to selling timepieces or to the most exclusive corner of a luxury department store. As premium items -- and thus a major revenue source for the retailer -- pocket watches were typically kept well-polished and displayed under lock and key under the watchful eye of a veteran employee or security guard.

World War I brought the next great turning in the story. Technological breakthroughs in tooling, combined with the demands of warfare -- the two great engines of change in the 20th century -- shrunk the pocket watch and put it on the wrists of officers in the trenches. The age of the pocket watch was over; the wristwatch era had begun.

Wristwatches accelerated a process that had already begun of bifurcating the market between expensive (usually gold) chronographs and cheaper (usually steel) everyday watches. Nevertheless, the cheap wristwatches of the post-WWI, even the post-WWII, world were still not that inexpensive -- and they were still most likely to be found in locked display cases. It really wasn't until the 1960s, when Timex began to produce low-cost wristwatches by the millions, did (some) timepieces finally come out from the display case. But they were still a long ways from that kiosk at Fred Meyer.

But now the real revolution was just around the corner.

I'm one of the few technology writers still working who remembers the arrival of the first digital watches. Even though the ground had been prepared with the first quartz crystal watches, digital watches still landed like a bombshell. First LED watches, which proved to consume too much battery power, then LCDs, which fit the bill nicely, then a growing number of added features -- indeed, as many functions as found in a whole laboratory of barometers, chronographs, medical monitoring equipment.

Somewhere in there, the original clock function, simple now to construct to an accuracy unavailable even to kings a century ago, became almost an afterthought. What had at the beginning of the century still cost a noticeable fraction of one's annual salary, now was available literally for pocket change. Clocks were now everywhere, even given away in children's free toys at McDonald's. And thanks to Moore's Law, it would only become cheaper and cheaper.

The lesson: Anything tech touches it ultimately commoditizes.

But I also remember something else: Those first digital watches cost retail nearly $400 in the mid-'70s -- likely more than a thousand bucks in today's money. It's no wonder then that the big semiconductor companies -- Intel, National Semiconductor, Japan's Casio, Texas Instruments -- all rushed into the market.

After all, a digital watch was little more than a microprocessor wired to a display and stuffed into a steel case. Everything else was pure profit. Even with a slow decline in retail prices, the chip companies looked forward to years, even decades of huge profits. It was going to be like printing money.

Five years later, nearly every one of those companies was out of the digital watch business, instead selling their chips to other watch manufacturers who were better able to squeeze a couple bucks profit out of the now $35 digital watches.

What the chip companies hadn't counted on -- ironic, because they had invented the concept -- was that the watch industry, once it went digital, would fall under the regime of Moore's Law and that the long lazy price-performance curve of watches would suddenly take a precipitous fall. The chip companies thought they were getting into the watch business but instead they turned the watch industry into a chip business.

For years thereafter, Intel's Gordon Moore wore an Intel/Microma digital watch -- he called it his "$35 million" timepiece -- as a reminder "to never get into a consumer business you don't fully understand."

The lesson: Technological revolutions not only create new industries, but new business cycles as well.

But the biggest lesson of all is the last. And you can learn it merely by looking closely at each one of those astonishingly powerful, $10 watches you see in that Fred Meyer kiosk.

You see, every one of those watches is analog. At least they are on the outside. Their mechanisms may be digital circuitry rather than escapements, gears and springs, and they may feature a little window for a digital read-out, but their faces, with their numbers and hands, would have been familiar to a Tudor prince. Why? Because that's the way we like it. And that is enough, because we are the consumers.

At some now-forgotten moment, probably in the late 1980s, the novelty of digital watches wore off, and simple human taste reasserted itself. And when it did, we discovered two things: 1) that we wanted our digital watches for specific applications, and we wanted them to be sturdy, powerful and disposable, and 2) that we wanted our "real" watches, now that we live in an age of ubiquitous clocks, to be elegant and expensive jewelry containing clever little mechanical contraptions. And that is the way it has been ever since.

So the final lesson, one that every Web 2.0 tycoon and budding tech entrepreneur should never forget, is that: However great the innovation, in the end human nature will have its way.

They might want to stop by a wristwatch kiosk at a nearby mall every once in a while just to remind themselves.

This is the opinion of the columnist and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNews.com "Silicon Insider" columnist since 2000.