Is The Genome Sequencing Industry Doomed?
Contributed by Alejandro Gutierrez
Many companies and commentators have likened the evolution of DNA sequencing technology to that of computing (see, for example, this interview with Jonathan Rothberg, founder of 454 Life Sciences). The story goes like this: from a world of “mainframes” — the first-generation Sanger sequencing platforms –, to the current “minicomputers” – the second-generation instruments offered by 454, Illumina and Life Technologies –, it is easy to infer a rapid transition into third- and perhaps fourth-generation technologies that will eventually culminate in the sequencing equivalent of the laptop computer or the mobile, wireless computer.
The cost and time it takes to sequence a complete human genome, which is one way to track the performance of the evolving technologies, has dropped precipitously in the last ten years: from roughly $500 million to complete the first human genome, to the low $ thousands with Complete Genomics’ platform. The rate of improvement in the last three to four years has been faster than Moore’s Law for computing advances as entirely new technologies have been introduced (see this article in Singularity Hub, for example). Emerging companies which have yet to launch a product are promising costs under $100 within the next decade.
But where some see an exciting technological race, others see a challenging business. As with computing and most other technologies, the sequencing instrument industry could be heading toward a cut-throat, price-driven competitive environment. This result would be a bonanza for end-users, just like the commoditization of the personal computer sector has been for consumers, and a rough end for these cutting-edge manufacturers who would wind up in a volume-based, razor-thin margin business, barely differentiated from a technological viewpoint in consumer’s eyes.
The implications of this argument are that the sequencing instrument business is a dismal one to enter, especially in contrast with other segments of the sequencing value chain. The real gold mine, the argument goes, is not the technology, which, despite all the current excitement will soon be as invisible as the innards of the common laptop PC, but the interpretation of the information that the technology will yield.
Is this scenario accurate, and are its implications unavoidable? Or does this analysis paint an overly simplistic and categorical picture which, by leaping to the inevitable final chapter, ignores everything that happens in between?
There is more than one definition for “commoditization”. The Innovator’s Solution by Christensen and Raynor describes it as the process whereby a technology goes from being proprietary and interdependent, to being modular and standardized. The resulting product is primarily differentiated by its selling price, as its technology does not afford opportunities for other types of differentiation. In another definition, technologies suffer “quasi commoditization” when, despite important technical and performance differences, customers are unable to understand the differences and make their decisions based on price. In commoditized technologies, all competing products must meet a minimum level of performance, but there are limited rewards for exceeding that level of performance – instead, to succeed, products must be able to deliver the minimum performance, at the lowest possible price, while addressing other needs like convenience and customization.
In broad strokes, a commoditization scenario for sequencing instruments might look like this:
- New technology continues to drive down the cost of sequencing.
- Still, there remains an unmet need for ever-cheaper sequencing, and therefore an interest in purchasing platforms that provide improved performance.
- As new technologies emerge and make others obsolete, competition is fierce and technology-driven.
- Eventually, the technology will reach a point where performance (the speed, quality and cost of sequencing) satisfies the needs of customers, who will no longer be willing to pay a premium for higher performance.
- As this happens, the basis of competition will shift to price, margins will shrink, and leading-edge instrument designers will slowly become assemblers of standard, modular components.
There is no question that sequencing technologies will eventually become commoditized, maybe even following a pattern like the one described above. But there will be plenty of profit to be made in the meantime, and not all market segments and companies will fare the same. As sequencing costs fall, the market will expand: new applications will become feasible and new users will become customers. The pace of commoditization, and the path to that end will be driven as much or more by the choices of the individual companies as by extrinsic factors.
Today, the sequencing instrument business is far from commoditization and offers significant opportunities for companies that choose the right strategies. It may be foolhardy to predict the winners and losers (see this piece in GenomeWeb Daily News), but perhaps less so the broad patterns of industry evolution.
 “The Specter of Commoditization: Strategies That Buy Time,” Martin Schwirn, SRI Consulting Business Intelligence, September 2002.