ROT311

GOODBYE
THINKING:
Hello Exponential!
Our brains were not designed to process at the scale or speed
of today’s ‘exponential’ world. Learning ‘the 6Ds’ can help.
by Peter Diamandis and Steven Kotler

THE WAS and George Eastman was a 24-year-old junior available, later marketed under the slogan ‘You press the button,
clerk at the Rochester Savings Bank in dire need of a vacation. we do the rest.’ The Eastman Dry Plate Company had become
He decided to go to Santo Domingo, in the Dominican Republic. the Eastman Company, but Eastman wanted to call it something
At the suggestion of a co-worker, Eastman purchased all of the ‘stickier’ that people would remember and talk about. One of his
requisite photographic equipment to record the trip: a camera favorite letters was K. In 1892, the Eastman Kodak Company
as big as a Rottweiler, a massive tripod, a jug of water, a heavy was born.
plateholder, the plates themselves, glass tanks, an assortment of In those early years, if you would have asked George East-
chemicals, and, of course, a large tent — this last item providing a man about Kodak’s business model, he would have said the com-
dark place in which to spread emulsion on the plates before expo- pany was somewhere between a chemical supply house and a
sure and a dark place to develop them afterwards. dry goods purveyor (if dry plates can be considered dry goods).
Eastman never did go on that vacation; instead, he became But that changed quickly. “The idea gradually dawned on me,”
obsessed with chemistry. Back then, photography was a ‘wet’ he once said, “that what we were doing was starting to make
art, but Eastman — who craved a more portable process — heard photography an everyday Eastman later said he wanted to
about gelatin emulsions capable of remaining light-sensitive af- make photography “as convenient as a pencil,” and for the next
ter drying. Working at night in his mother’s kitchen, he began to 100 years, Eastman Kodak did just that.
experiment with his own varieties. A natural-born tinkerer, East-
man took less than two years to invent both a dry plate formula The Memory Business
and a machine that fabricated dry plates. The Eastman Dry In 1973, Steven Sasson was a freshly-minted graduate of the
Plate Company was born. Rensselaer Polytechnic Institute. His degree in Electrical Engi-
More tinkering followed. In 1884, Eastman invented roll neering led to a job with Kodak’s Apparatus Division research
and four years later he came up with a camera capable of lab where, a few months into his employment, his supervisor ap-
taking advantage of that roll. In 1888, it became commercially proached him with a ‘small’ request. Fairchild Semiconductor

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 By the time Kodak realized its error, it was unable
to keep pace with the digitalization of the industry.

had just invented the first ‘charge-coupled device’ (CCD) — an to corner the market, they were soon cornered by that market.
easy way to move an electronic charge around a transistor — and Back in 1976, when Sasson first demonstrated the digital
Kodak needed to know if these devices could be used for imaging. camera, frightened executives wanted to know how long it would
Could they ever. By 1975, working with a small team of tech- be until this new invention posed a serious threat to Kodak’s mar-
nicians, Sasson used CCDs to create the world’s first digital-still ket dominance. Fifteen-to-20 years, Sasson told them. In arriving
camera and digital recording device. Looking, as Fast Company at this answer, Sasson estimated the number of megapixels that
once explained, “like a ’70s Polaroid crossed with a Speak- would satisfy an average consumer at two million. Then, in order
and-Spell,” the camera was the size of a toaster, weighed in at to figure out the time it would take for two million megapixels to
8.5 pounds, had a resolution of 0.01 megapixel, and took up to become commercially available, he relied on Moore’s Law for his
30 black-and-white digital images — a number chosen because calculation — and that’s where the trouble started.
it was in alignment with the exposures available in Kodak’s roll In 1965, Intel founder Gordon Moore noticed that the
film. It also stored shots on the only permanent storage device number of integrated circuits on a transistor had been doubling
available back then — a cassette tape. Still, it was an astounding every 12 to 24 months. The trend had been going on for about a
achievement. decade and, Moore predicted, would probably last for another
“When you demonstrate such a system,” Sasson later said, decade. About this last part, he was off by a bit: Moore’s Law has
“that is, taking pictures without film and showing them on an held steady for nearly 60 years. This relentless progress in price
electronic screen, inside a company like Kodak in 1976, you have and performance is the reason the smartphone in your pocket
to get ready for a lot of questions. I thought people would ask is a thousand times faster and a million times cheaper than a
about the technology: How’d you make that work? But I didn’t get supercomputer from the 1970s.
any of that. Instead, they asked me, Why would anybody want to This is exponential growth in action. Unlike the +1 progres-
look at their pictures on an electronic screen?” sion of linear growth — whereby 1 becomes 2 becomes 3 and so
In 1996, 20 years after this meeting took place, Kodak had forth — exponential growth is a compound doubling: 1 becomes
140,000 employees and a $28 billion market cap. Effectively a 2 becomes 4 becomes 8, and so on. This doubling is unusually
category monopoly, in the U.S. it controlled 90 per cent of the deceptive. If you take 30 large linear steps (say three feet, or
film market and 85 per cent of the camera market. But it had for- one meter per step) from your living room, you end up 30 me-
gotten its purpose: Kodak had started out in the chemistry and ters away, or roughly across the street. If, alternatively, you take
paper goods business, but it came to dominance by being in the 30 exponential steps from the same starting point, you end up
convenience business. What exactly was Kodak making more con- a billion meters away, or orbiting the Earth 26 times. This was
venient? Photography was simply the medium of expression; precisely where Kodak went wrong: they underestimated the
what was being expressed was ‘the Kodak Moment’ — our desire power of exponentials.
to document and share our lives. Kodak was in the business of
recording memories. And what made recording memories more The Six Ds of Exponentials
convenient than a digital camera? We hominids evolved in a world that was local and linear. Every-
That wasn’t how the Kodak Corporation of the late 20th cen- thing in our forebears’ lives was usually within a day’s walk. If
tury saw it. They thought that the digital camera would undercut something happened on the other side of the planet, they knew
their chemical and photographic paper businesses, essentially nothing about it. Life was also linear, meaning nothing much
forcing the company into competing against itself; so they buried changed over centuries, or even millennia.
the technology. Nor did the executives understand how a low- In stark contrast, today we live in a world that is global and
resolution 0.01 megapixel image camera could hop on an ex- exponential. The problem is that our brains — and thus our
ponential growth curve and eventually provide high-resolution perceptual capabilities — were never designed to process at
images. So they ignored it. Instead of using their weighty position either this scale or this speed. Our linear mind literally cannot

40 / Rotman Management Fall 2016

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[email protected] or 800-988-0886 for additional copies.
grasp exponential progression. DISRUPTION. In simple terms, a disruptive technology is any inno-
However, if the goal is to avoid Kodak’s errors (if you’re a vation that creates a new market and disrupts an existing one. Un-
company) or to exploit its errors (if you’re an entrepreneur), then fortunately, as disruption always follows deception, the original
you need to have a better understanding of how this change technological threat often seems laughably insignificant. Take
unfolds — and that means understanding the hallmark charac- the first digital camera. Kodak took great pride in things like con-
teristics of exponentials. To teach these, we have developed a venience and image fidelity, and neither were present in Sasson’s
framework called the Six Ds of Exponentials. Let’s follow the original offering. His camera took 23 seconds to snap and store
chain reaction. a 0.01 megapixel, black-and-white photograph. No threat there.
In the eyes of the Kodak brass, Sasson’s innovation would re-
DIGITALIZATION. Innovation occurs as humans share and exchange main more toy than tool for many years to come. With their focus
ideas. I build on your idea; you build on mine. This type of ex- on the quarterly profits of their chemicals and paper business,
change was slow in the early days of our species (when all we had they didn’t understand the disruption soon to be wrought by ex-
as a means of transmission was storytelling around the camp- ponentials. If Kodak executives had done the math, they would
fire), picked up with the printing press, then exploded with the have realized that the desire to not compete against themselves
digital representation, storage and exchange of ideas made pos- was actually a decision to put themselves out of business.
sible by computers. Anything that could be digitized — i.e., rep- By the time Kodak realized its error, it was unable to keep
resented by ones and zeros — could spread at the speed of light pace with the digitalization of the industry: it began to struggle
and became free to reproduce and share. Moreover, this spread- in the 1990s and stopped turning a profit by 2007, then filed for
ing followed a consistent pattern: an exponential growth curve. Chapter 11 in January of 2012. Because it forgot its mission and
In Kodak’s case, once the memory business went from a physical failed to do the math, a gargantuan 100-plus-year-old industry
process (that is to say, imaged on film, stored on paper) to a digi- leader foundered and became yet another cautionary tale about
tal process (imaged and stored as ones and zeros), its growth rate the disruptive nature of exponential growth.
became entirely predictable: it was now on an exponential curve. The fact is, we live in an exponential era, and this kind of
Of course, it’s not just Kodak. Anything that becomes digi- disruption is a constant. For anyone running a business — and
tized hops on Moore’s Law of increasing computational power. this goes for both start-ups and legacy companies — the options
And once a process or product transitions from physical to digi- are few: either disrupt yourself or be disrupted by someone else.
tal, it becomes exponentially empowered.
DEMONETIZATION. This means the removal of money from the
DECEPTION. What follows digitalization is deception, a period equation. Consider Kodak. Its legacy business evaporated
during which exponential growth goes mostly unnoticed. This when people stopped buying film. Who needs film when there
happens because the doubling of small numbers often produc- are megapixels? Suddenly one of Kodak’s once-unassailable
es results so minuscule they are often mistaken for the plod- revenue streams came free of charge with any digital camera.
der’s progress of linear growth. Imagine Kodak’s first digital In one sense, this transformation is the downstream version of
camera with 0.01 megapixels doubling to 0.02, 0.02 to 0.04, what former Wired editor-in-chief Chris Anderson meant in
0.04 to 0.08. To the casual observer, these numbers all look his book Free. In it, he argues that in today’s economy, one of
like zeros; yet big change is on the horizon. Once these dou- the easiest ways to make money is to give stuff away. Here’s how
blings break the whole-number barrier (become 1, 2, 4, 8, etc.), he explains it:
they are only 20 doublings away from a million-fold improve- I’m typing these words on a $250 ‘netbook’ computer, which
ment, and only 30 doublings from a billion-fold improvement. is the fastest growing new category of laptop. The operating
It is at this stage that exponential growth, initially deceptive, system happens to be a version of free Linux, although it
becomes visibly disruptive. doesn’t matter since I don’t run any programs but the free

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[email protected] or 800-988-0886 for additional copies.
 For anyone running a business, the options are few:
either disrupt yourself or be disrupted by someone else.

Firefox Web browser. I’m not using Microsoft Word, but phones, consumers expected it to come free with most phones.
rather free Google Docs, which has the advantage of mak- In 1976, Kodak controlled 85 per cent of the camera business. By
ing drafts available to me wherever I am, and I don’t have 2008 — one year after the introduction of the first iPhone — that
to worry about backing them up, since Google takes care market no longer existed.
of that for me. Everything else I do on this computer is What makes this story even stranger is that Kodak knew
free, from my email to my Twitter feeds. Even the wireless this change was coming. Moore’s Law was well established by
access is free, thanks to the coffee shop I’m sitting in. that point, already driving the ceaseless expansion of memory
storage capacity, the process that would lead to the demon-
And yet Google is one of the most profitable companies in Amer- etization of photography. Kodak’s engineers surely knew this.
ica; the Linux ecosystem is a $30 billion industry; and the coffee They arguably also knew about Hendy’s Law — coined by Kodak
shop seems to be selling $3 lattes as fast as they can make them. Australia employee Barry Hendy — which states that the num-
Billions and billions in goods and services, as Anderson pointed ber of pixels per dollar found in digital cameras doubles every
out, are now changing hands sans cost. Now, sure, there is loss- year. The writing wasn’t just on the wall for Kodak — they had
leader free — as with Google’s giving away their browser but mak- put it there themselves. Yet Kodak still failed to stay ahead of
ing a killing off the information they gather along the way — and this curve.
there are open-source efforts like Wikipedia, Linux and the rest, Just think of all the 1980s luxury technologies that have de-
which are actually free. Either way, it’s a shadow economy, hap- materialized and now come standard with your average smart-
pening in plain sight. phone: an HD video camera, two-way video conferencing (via
At the time Anderson wrote Free, beyond a few extremely Skype), GPS, libraries of books, your record collection, a flash-
obscure papers, economists had not studied the idea of free in light, an EKG, a full video- game arcade, a tape recorder, maps,
the marketplace. It was a blank spot on the map. In other words, a calculator, a clock — just to name a few. Thirty years ago the
even people who make their living studying economic trends devices in this collection would have cost thousands of dollars;
were fooled. Once demonetization arrived, they didn’t know today they come free or as apps on your phone.
what hit them.
Nor is it just economists or, for that matter, Kodak execu- DEMOCRATIZATION. Obviously, this chain of vanishing returns has
tives. Skype demonetized long-distance telephony; Craigslist to end somewhere. Sure, film and cameras now come free with
demonetized classified advertising; Napster demonetized the smartphones, but there are still the hard costs of the phone with
music industry. The list goes on and on. And because demon- which to contend. Democratization is what happens when those
etization is also deceptive, almost no one within those industries hard costs drop so low that they become available and affordable
was prepared for such radical change. to just about everyone.
To put this in perspective, let’s return to Kodak. The com-
DEMATERIALIZATION. While demonetization describes the van- pany didn’t just make money selling cameras and film, it also de-
ishing of money paid for goods and services, dematerialization veloped the film, manufactured the paper the photographs were
is about the vanishing of the goods and services themselves. printed on, and manufactured the chemicals used to develop
In Kodak’s case, its woes didn’t end with the vanishing of film. that film. Why was this such a good business? First, when you
Following the invention of the digital camera came the inven- snapped your photos, you had no idea which of them would actu-
tion of the smartphone — which soon came standard with a ally turn out to be any good, so you had to print them all. Even if
high-quality, multi-megapixel camera. Poof ! Now you see it; nothing was in focus, you still paid. Second, snapping photos was
now you don’t. only part of the fun; printing extra copies and sharing them was
Once those smartphones hit the market, the digital cam- the real treat.
era itself dematerialized. Not only did it come free with most Two decades back, the only people who could snap and

42 / Rotman Management Fall 2016

This document is authorized for use only by ENRIQUE LOPEZ ([email protected]). Copying or posting is an infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
share at will were those wealthy enough to afford the consider- come the photo-sharing service, with a very powerful social net-
able paper, printing and processing costs associated with several work to boot. Facebook didn’t want the competition, and they
thousand photographs. But with the digital camera, you gained didn’t want to play catch-up. Thus, on April 9, 2012, just three
the benefit of knowing in advance which shots were actually months after Kodak filed for bankruptcy, Instagram and its 13
worth printing, and with the creation of photo-sharing websites employees were bought by Facebook, for $1 billion.
like Flickr, you could avoid printing altogether. The sharing of How did Kodak fail to take advantage of the most important
images became free, fast — and completely democratized. photographic technology since roll film and end up in bankruptcy
court? Simultaneously, how did a handful of Silicon Valley entre-
The New Kodak Moment preneurs go from start-up to a billion-dollar buyout in 18 months,
Many legacy institutions (like Kodak) were once able to make a with just over a dozen employees? Simple: Instagram was an ex-
great living resting on their laurels. But 10 years from now, ac- ponential organization.
cording to research done at the Babson School of Business, more
than 40 per cent of today’s top companies will no longer exist. In closing
In his book Exponential Organizations, Yahoo’s former head In times of dramatic change, the large and slow cannot compete
of innovation Salim Ismail defines an exponential organization as with the small and nimble. But being small and nimble requires a
one whose impact (or output) — because of its use of networks whole lot more than just understanding exponentials. You’ll also
or automation and/or its leveraging of the crowd — is dispropor- need to understand the technologies and tools driving change,
tionally large compared to its number of employees. A linear or- which include exponential technologies like infinite computing,
ganization — like Kodak — is the opposite: lots of employees and 3D printing, artificial intelligence, robotics and synthetic biol-
lots of physical processes and facilities. For all of the 20th century, ogy, and exponential organizational tools such as crowdfunding,
exponential organizations did not exist and linear companies crowd-sourcing and incentive competitions. These exponential
were protected from upstart intruders by their sheer size. Those advantages are empowering entrepreneurs like never before.
days are gone.
In October 2010, a couple of young Stanford grads, Kevin Welcome to the age of exponentials.
Systrom and Mike Krieger, founded an exponential organiza-
tion called Instagram. Wired magazine described it as a “Shi-
va-the-destroyer application posing as a hipster hobby.” And
what was that hobby exactly? The next step in George Eastman’s
vision of making photography — to borrow the phrase — ‘as
convenient as a pencil’. Combined with the explosion of high-
resolution multi-megapixel smartphone cameras, this renegade
start-up completely demonetized, dematerialized and democ-
ratized the capturing and sharing of photographic memories.
Sixteen months after its founding, Instagram was valued at
Peter Diamandis is CEO of the X Prize
$25 million.
Foundation (xprize.org) and executive chair-
In April 2012, Instagram for Android was released. Down- man of Singularity University. The founder of
loaded more than a million times in one day, it was the killer app more than 15 high-tech companies, he is the
for the already killer company. Instagram’s value shot up to $500 co-author of Bold: How to Go Big, Create Wealth
and Impact the World (Simon & Schuster, 2015). Co-author Steven Kotler is
million. Enter Facebook — which is also in the life-sharing and
the co-founder and director of research for the Flow Genome Project (flow-
documenting business; and they did the math. Instagram was genomeproject.com). This article was adapted from their book. Copyright
growing exponentially. With nearly 30 million users, it had be- 2015 by PHD Ventures. Reprinted by permission of Simon & Schuster, Inc.

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This document is authorized for use only by ENRIQUE LOPEZ ([email protected]). Copying or posting is an infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.