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Computer-challenged elves need not apply

perspective MIT Dean Richard Schmalensee says key role of software in this year's toys underscores a bigger shift.

Hammers and nails are gathering dust in the elves' workshop this season.

That's because two hot gifts--PlayStation 3 and Tickle Me Extreme Elmo--are almost entirely dependent on software inside. These new toys are just the latest evidence that software platforms have become one of the most important economic and technological developments of the early 21st century. They are the invisible engines behind not just toys, but the businesses of the future.

Sony introduced its PlayStation 3 last month to long lines and megabids on eBay. There's no telling how many annoying habits a teenage boy might give up if you snag one of these dream machines for the holiday season. Then there's TMX Elmo. He slaps his knee, falls to the floor, rolls over and pounds his arm during his laughing jag. Red and fuzzy, the latest Elmo has been flying off the toy shelves after its ridiculously early holiday introduction in September.

The software in these toys is the real revolution. Their intelligence comes from a software platform that humans write in geeky languages like C++ or Java. String enough statements like "IF i < n THEN" together cleverly and Elmo will go nuts.

The software in these toys is the real revolution.

This isn't just happening at the North Pole. Software platforms are slowly changing numerous aspects of how we live--and making many entrepreneurs and their investors very wealthy.

There are two major kinds of software platforms incorporated into products these days. TMX Elmo, automobiles, robot vacuums and other standalone products have an operating system that tells the computer hardware what to do. But they don't give you any way to install an application downloaded off the Internet to, for example, make Elmo angry and cuss.

Others have open software platforms that enable developers to write applications that enhance the product. That's the case with the Sony PlayStation, which became successful because of the many killer games that third-party game developers write for it. These open software platforms are the foundation of vast, incredibly rich ecosystems of businesses that provide tremendous value to consumers. They were the secret sauce for Microsoft and what made Bill Gates one of the richest men in the world. The Windows operating system provides code that developers can use to create their own applications and hardware makers can use to make their devices work with computers.

Google's ecosystem is being built the same way. Developers are writing applications that rely on Google Maps to help you find the local Starbucks and order your Frappuccino. That makes Google more valuable to consumers and advertisers--and makes Google a more profitable company for its investors.

Communities of people and businesses coalesce around these platforms. Usually, one group gets to participate for free or at a really cheap price; another group ends up being the main source of profits. Sony makes its profits mainly from charging royalties to companies that write games using its PlayStation platform. Even at $600 a console, Sony isn't making a profit from the folks buying its device. Google doesn't make money from the developers who write add-on programs or even from people who do billions of searches. Advertisers looking for people to click through on the right-hand side are where the profits come from.

Unlike the dot-com busters who gave everything away and hoped to make it up on volume, these successful open software platforms subsidize one side to make profits on the other side. They then create powerful feedbacks between the sides--more searchers get more advertisers get...--not to mention entry barriers to protect the investments.

Software platforms will lie at the center of tomorrow's innovation. With broadband proliferating and more computer power coming in ever smaller packages, businesses have more opportunities to build platforms that bring diverse groups of consumers, developers, hardware makers and content providers together. Only imagination--and the supply of programmers--will limit the offerings to be made and the riches to be had.

And if you want a job as one of Santa's elves, woodworking isn't going to get you in the door anymore. Make sure you've had some computer programming.