Urlocker On Disruption

Update: Satellite Radio Disrupted by iPod

Update: Feb. 17, 2009

NYT: Sirius XM averts a close brush with bankruptcy, for now...

Things looked irretrievable only a few weeks ago.

Sirius XM Prepares Bankruptcy Filing

Meanwhile, equity investors have already been effectively wiped out in the past two years, losing more than 95% of their value.

Original post: Dec. 5, 2006

Satellite radio broadcasters are reporting unexpectedly slower sales for Christmas, causing the stocks to continue their descent to earth.

In Contrast, Apple's iPod is expected to sell its best quarter ever, with 16-20 million units to be sold this quarter alone, which is more than the total 12 million satellite industry has racked up in five years.

Sirius Satellite Radio Inc. had this to say in the Wall Street Journal today to account for the slower outlook:

Sirius said it wasn't sure why retail numbers weren't stronger, given increased awareness of the product and more Sirius radios in stores compared with last year.

What's going on?

It would appear that the two satellite broadcasters, Sirius and XM Radio, are being disrupted by the iPod. After all, iPods solve the same problem, of providing a large variety of music content to people on the go. 

Here are two important new indicators of the likely sustained success of the iPod:

• 70% of 2007 U.S. model cars will come equipped with iPod connectors
• Six major airlines announced last month that they would equip passenger seats for iPod connection as well

Meanwhile the satellite broadcasters have each more than $1 billion in debt and are still losing money.  Stocks are off 40-50% this year.

Apple's total cumulative iPod sales tracked on WikiPedia will cross 80 million shortly.

**Other Information**

Unless satellite broadcasters start by inventing new profitable niche services, they may not survive. Read my full column from the Financial Post, Satellite broadcasters face grave challenge from iPod (pdf).

Complete archive of On Disruption columns from The Financial Post.

The Cranky Consumer says the problem is that satellite radios are hard to install and  suffer distortion.

PopSurfing says Sirius and XM need to merge, which echoes the public musings of Sirius's CEO Mel Karmazin last week but certainly won't solve the iPod problem. 

Mergers are a typical warning sign of an industry in disruption.

M&A Deal from Hell: Alcatel + Lucent Bombs Again

  More bad news from telecom maker Alcatel-Lucent this morning: The third earnings warning so far this year.

The Wall Street Journal says the company is facing increasing competitive pressure from Ericsson and from emerging Chinese companies Huwawei and ZTE.

Clearly the merger of Alcatel and Lucent has proved a bust, which is what we warned back when reports of a pending merger emerged in early 2006 in one of our first investment-oriented postings.

"If you merge two non-disrupting companies, each saddled with commoditized products in non-growth markets, do you get a better company as a result?"

Why most mergers fail:

• They don't create new services or products
• They don't create new customers
• They focus management on financial engineering or deal-making rather than customers

How to boost your chances of merger success (pdf) using a disruptive approach.

**Other views**
Denial is a CEO's worst enemy:  Alcatel-Lucent CEO Pat Russo, interviewed by WSJ: "We're seeing a bit of softness... that may or may not have something to do with what's  going on in the U.S. economy: homestarts, home buildings... It has nothing to do with the merger."

This article in Industrial Distribution magazine says there are five rules of successful M&A based on management guru Peter Drucker's writings.

NY Times: Alcatel-Lucent tumbles on outlook

Disruption Investing Part II: A little goes a long way

Would you invest in a company with inferior and incompatible products, marginal customers and a strange business model?



Those are among the characteristics of BlackBerry maker Research in Motion back in early 1999 when its stock was trading at under $2 split-adjusted vs. a recent high of $85.

Spotting the patterns of disruptive competition can put investors ahead of the stock market because most investors are not looking for these patterns.

Let's look at another case in which we identified similar disruption patterns ahead of the market:

McDonald's vs. Starbucks, which we published in March 2007 based on anti-marketer Paul Paetz's ideas.

The results surprised me by showing a little disruption goes a long way in the stock market -- and delivers outsized returns faster than expected.

Read the full article published in The Financial Post (pdf)

Financial Post archive

This article is an excerpt from The Disruption Group's latest newsletter. Sign up for our newsletters here.

Video: Two Case Studies In Competitive Disruption

Setting out to create the next great thing? Some crucial lessons from successful competitive disruptors are discussed in this video (7:54 min) in which I look at some case studies:

• RIM's BlackBerry: Why Nokia and Ericsson dismissed RIM's BlackBerry as an ugly toy for a niche market;
• Why Metro International's 'inferior' tabloid newspaper attracts 20 million daily readers;
• How declining profits of the New York Times prove that successful competitive disruption does not emerge from superior quality products or large resources.

This is the third of three video excerpts from the Conference Board's change management conference, held earlier this year.

• Part 1: The benefits of competitive disruption: New revenue growth; Higher margins; Faster time to market.
• Part 2: Should we cannibalize our business? Two management tools to disrupt markets.
• Part 3: Two case studies in competitive disruption: RIM's BlackBerry and Metro International.

Check out The Disruption Group's video playlist which includes news interviews on competitive disruption and an interview with Harvard Prof. Clayton Christensen on the Charlie Rose show.

Disruption Investing: Picking the Next Apple, Not Next Vonage

I have been experimenting with a new approach to stock picking for much of the past two years and I thought I would share the results.

Using the Disruption ScoreCard (.xls file), which grades companies or projects according to how disruptive they are, I have been ranking companies.  Sometimes I publish the results here on this blog and sometimes in the Financial Post.  Results:

• Companies with high Disruptions Scores were great stocks to own: Apple (A- Disruption Score (pdf), stock up 140% in the past year) and electric car maker Zenn Motor Co. (B+ Disruption Score, stock up 250%)

• Companies with middling to low Disruption Scores were awful stocks to own: Vonage (C Disruption Score (pdf), stock down 80% since its hyped-up IPO last year, JumpTV (B- Disruption Score (pdf), down 58% from a share issue in February this year), for example

• In the rare circumstances where I could identify one company that was disrupting another, the pair-trade (long the disruptor, short the disrupted) paid off both ways, although sometimes you need to apply careful timing to maximize results. Examples include Nintendo vs. Sony, and Apple vs. satellite radio broadcasters (pdf).

To me it is quite startling that nobody else has used Clayton Christensen's principles of disruptive innovation and applied them to investing.

Read the complete column on the Disruption Score and its stock picks in the Financial Post.

Other tools to manage disruption.

Wii Will Rock You: How Nintendo Beat Sony

Fortune magazine's cover story for the Asian edition highlights how Nintendo's new entry level gaming system Wii is whupping the tar out of gaming industry heavyweights Sony Playstation and Microsoft Xbox.

"The answer has something to do with reinvention... Nintendo has shown a knack for leapfrogging its industry.  The company rarely fails to surprise. And if the Wii shortage demonstrates anything, it's that this time, in changing perceptions of gaming, Nintendo has surprised even itself."

How did Nintendo do it?

• Nintendo made games more accessible to non-gamers
• Nintendo created a new economic model where consoles and software titles are more profitable
• Nintendo did not incrementally improve games by making better graphics, as do its competitors
• Instead, Nintendo offered lower quality graphics, but superior interaction through a $2.50 analog motion-detector chip

And, strangely, Nintendo's CEO Satoru Iwata told the world that competitive disruption was what he planned to do long before the product was released. Of course, few believed such a strategy would work.

That is the beauty of a disruptive strategy:

• Customers love you
• Competitors ignore you
• You make money immediately
• Imitators seldom cause serious competition

**Does this apply elsewhere department?**

• Could a telephone company offering a me-too television service apply some disruptive lessons from Nintendo?
• Could new cellular network operators inject a level of disruption to be more effective competitors?

**Blast from the past**
We ran a guest post by software industry exec Zack Urlocker that predicted the success of the Wii last year.

Business 2.0  in April showed why Wii is creaming the competition. Nintendo "zeroed in on two troubling trends: As young consumers started careers and families, they gradually cut back on game time. And as consoles became more powerful, making games for them got more expensive."

**Other sources**

BagleTurf has a chart that shows the steep sales climb of Wii vs PS3 and Xbox 360.

FP: Deal or No Deal? Three Questions to Boost Merger Success

April 5 update: Chrysler takeover is bubbling up but no clear information on a deal yet: "It really depends on what kind of creature the spinoff of Chrysler will be and the crux is the legacy costs," said an analyst.  Is there an opportunity for some of the Chrysler assets to be used in a dramatically differerent way?

April 2 post: Mergers are on the rise again, with news pending on a Chrysler takeover, various newspaper publishers, a handful of software companies and the two major satellite broadcasters.

Yet most corporate mergers fail to deliver value to shareholders, with studies estimating as many as 83% (pdf) of mergers fail by financial measures.

We are in an era of increasing mergers because of the rise of private equity and, in my view, the increasing disruption of industries including telecom, newspapers and television broadcasters.

Here are three simple questions to ponder as executives ask themselves "Deal or No Deal?"

• What are the new services or products that can be created as a result of the merger?
• Who are the unserved customers that will be reached as a result of the merger?
• When the cost cutting is done and scale achieved, does the company have a new different business or is it just a larger business with the same fundamental problems, as is the case for  Alcatel-Lucent?

Read the full article which discusses mergers in telecom, autos and the food sectors, published in the Financial Post.

Full archive of On Disruption columns published in the Financial Post.

**Other Sources**
Ever heard of revenue dis-synergies? Apparently Goldman Sachs has.

Scott's blog on why the Daimler-Chrysler merger failed. Dealscape looks at the options available.

OnDisruption Flashback: Here's a view from last March when talk of an Alcatel Lucent deal re-emerged: "If you merge two non-disrupting companies, each saddled with commoditized products in non-growth markets, do you get a better company as a result? You might be able to cut costs for a while, but by disruption standards, the answer is a clear no."

The Effects of Mergers: U.S. Free Trade Commission Draft Report 2003 (pdf): Excellent roundup of various studies on the long-term impacts of mergers by Paul Pautler.

F.M. Scherer: A new retrospective on mergers. Scherer, who wrote the definitive book analyzing mergers in the 1980s, re-examines the failings of mergers identifying some of the root causes in business schools.

VIDEO: Apple TV System Rates A- Disruption Score

Update II: March 22, 2007: Apple TV now in stores at $300. Gizmodo has a video review by Walt Mossberg of the Wall Street Journal. Walt doesn't do a great job as a video presenter, but his published reviews in the WSJ have great influence: "Part of the secret of Apple TV is that, like most of Apple's products, it doesn't try to do everything and thus become a mess of complexity."

Update I: Jan 9, 2007: Apple announced details on its Apple TV system, previously known as iTV, today at MacWorld: To sell for $299 starting in Feb., featuring a 40Gb hard drive. This is disruptive to mainstream broadcast and cable-TV companies. The iPhone is interesting as a swiss-army knife style device, but the Apple TV seems more disruptive  in our analysis because it does the simple job of showing movies on your TV in a convenient way.

We ran Apple TV through our Disruption ScoreCard, generating an A- rating, which is exceptional.

You can use the Disruption ScoreCard to rate your own projects. (More tools for managing disruption at The Disruption Group's tools page.)

These sorts of evaluations are subjective. Feel free to challenge my input assumptions to come up with your own Disruption ScoreCard.

The following were among the high-scoring inputs:

• Low-end product at $300

• Product superior to early-adopter needs (This score was a leap of faith, based on current iPod users and the fact that they have downloaded 45 million TV shows on iTunes in the past 11 months)
• Customer behavior: Fits with how people watch TV and use their iPods
• Off-shelf standard technology
• New business model relative to TV: Apple earns on hardware and downloads

The following were lower-score inputs:

• Public company: Most public companies are severely challenged to disrupt
• New channel: Unclear whether Apple will create a new channel or piggyback on existing Apple and home electronics channels
  
• Not an independent corporate structure for iTV

Download the full Apple iTV Disruption ScoreCard plus some charts showing iPod and TV trends.

** Other Views **
NY Times' David Pogue says Apple TV is a winner and that because of its simple design, it stands out vs Netgear's device and Microsoft's Xbox 360. "It’s a computer-to-TV bridge for the rest of us."

O'Reilly Mac Dev Center's Chuck Toporek says he won't buy the iTV device because it won't record shows.

Disruption ScoreCards and related columns on Apple (A), Vonage (C), JumpTV (B-) as published in the Financial Post.

Archive of On Disruption columns from The Financial Post.

**Other Views**

Inventor and author Shelly Palmer looks at how the broadcast industry is being disrupted in his book "Televison Disrupted" Palmer also writes a blog and a hosts a series of online videos on new media.

Disruptive Marketing: Starbucks - Too Little Too Latte?

Update Sept. 2007: MCD vs SBUX six-month chart

Original Post: March 2007

My colleague Paul Paetz, the anti-marketer, examines Starbucks through the lense of competitive disruption.

Despite the firm's tremendous success, it looks like time for Starbucks to disrupt itself, he says.

"Starbucks was a disruptive innovator. It brought flavor, a friendly social setting, quality, plus the consistency that only a chain can do. They brought back the smells, the sensuality, and introduced to Americans a "European experience" -- and, what CEO Howard Schultz has described as the sense of theater...

...More importantly, they've overshot the needs of their customers, and are ripe for disruption.

Premium coffee has become mainstream. It's easy to add a pretty good cup of coffee to the menu. Especially for companies like McDonalds and Dunkin Donuts who already served coffee. They excel at speed and efficiency, and are optimized to process customers in seconds, whereas Starbucks will never get that fast without redesigning every store and adding a lot more baristas. Moreover, they are value-oriented -- i.e. cheap. For McDonalds, $1.25 for coffee is an improvement in margin, but for Starbucks, it's impossible to go that low. So, if I can get something almost as good for 1/3 the price, is that 'good enough'? 

More than commoditization, Starbucks' real problem now is that the competition is 'good enough' to be disruptive and undermine their business. That's the real conundrum Starbucks faces. It will be almost impossible to go back."

Read the full post here.

Download The Disruption Group's full team biographies.

Spend 3 Minutes To Become More Competitive Than Sony

This post is a crash course in competition, as illustrated by Sony and Nintendo in the electronic game console market. 

Six lessons in Disruption are posted at the end. But here's the market context first:

• Sony's PlayStation has been in the dominant position in the game console market, but is losing money.
  
• Nintendo's Gamecube system was the small fry of the market, with a third-ranked spot below Microsoft's Xbox.
• The game console market is hyper-competitive and the winning position has tended to be won based on technology leadership. Console makers have engaged in oneupmanship based on incremental technology improvements: better resolution graphics, more realistic games, increased ability to play online. 

But late last year, this changed as Nintendo gave up on that approach and instead created something disruptive, as described in detail in this guest column last November.  Instead of making more realistic more expensive consoles with better graphics, Nintendo's new Wii console is lower-tech and is lower-priced. Wii has been dubbed a gaming system for non-gamers. Nintendo also has a dramatically different business model than Sony or Microsoft: By stripping out a lot of the advanced functionality, it actually makes money on hardware sales despite a lower retail price.

But most importantly, Wii has an important new attribute that is winning a new set of fans, a more interactive, more physical set of controls. This video illustrates that attribute:

 

Net results:

Sony profit slips
Nintendo profits surge, with Nintendo consoles outselling Sony PS3 by 60%.

Six Disruption lessons from Nintendo's Wii:

• Nintendo's market disruption is not about better technology;
• Disruption is not about incremental improvements;
• Disruption is about understanding where the customer experience is not good enough;
• Disruption is about making a product more accessible;
• Disruption is about changing the basis of competition;
• Disruption is about a new business model.

Why Disrupt?

• New revenue growth
• New high-value customers
  
• Sustainable, high return on equity
• More cohesive strategy and management teams
   

Download the CEO Guide to the Benefits of Disruption (pdf) from The Disruption Group

**Other Sources**

Nintendo CEO Satoru Iwata gave a keynote speech in 2006 highlighting his company's strategy to return to the top spot in the game industry. Interestingly, at the time some industry pundits said the speech was anti-climactic because it offered few details of the company's next console (codenamed Revolution) then in development, although Iwata said it had a new controller, would emphasize game play, would target non-gamers and would require a new business model. "Good luck to Nintendo, they are going to need it," concluded one report.