Urlocker On Disruption

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Guest post by Zack Urlocker

As you may have noticed, my onDisruption blog posts have become less frequent lately as I'm busy with other projects.  I will continue to post the occasional article and provide updates to past stories, but these will be less frequent than before.  For newcomers to the site, here's a list of some of the most popular postings on the site. 

If you're new to disruption this is a good way to start thinking about your own disruptive strategy.  And note that while some of these are classic technology disruptions, many leverage other forms of disruption, whether in distribution, packaging etc. 

So don't fall into the classic Silicon Valley view that disruption is only about new, faster, more complex technology.  Sometimes it's just the opposite. And while disruption is a good model, it's not the only strategy for success.  Apple's iPhone is only marginally disruptive, but its still a huge hit for the comapny.  But when disruption works, the gains can be impressive.  And the benefits accrue not only to the company, but to the careers of the individuals who make it happen and to investors who spot the trend early.

• Dealing with Information Overload
• iPhone a Hit, But Not Disruptive
• Disruption Investing: Picking the Next Apple, Not Vonage
• Who Killed the Record Industry?
• Microsoft Dismisses Google Apps as Inferior
• Are You A Sitting Duck?
• Management Lessons From Rock Guitar Wars
• XBox Guitar Hero Melts Face Off Old School Rockers
• Nintendo Wii Smacks Microsoft, Sony
• Heinken Disrupting the Beer Industry

As you formulate your own disruption strategy focus on the basics:

• What problem are you solving?
• How can you do it better than existing solutions?
• Who is underserved by the incumbents and what are the unmet needs?
• How can you deliver a "good enough" solution to a narrow but growing audience?

Let me know your thoughts on these and other articles.  I hope they will inspire to you let a thousand disruptive flowers bloom.

Zack Urlocker is a software executive and regular blogger on open source technology at TheOpenForce and InfoWorld and about music at GuitarVibe.

Classic Disruption: Why Wal-Mart's Movie Plan Will Fail

Update Dec. 29, 2007:

Wal-Mart shut down its video download service.

Original Post Nov. 29, 2006:

Wal-Mart joins the battle for online videos in a disturbingly familiar way.

In the worst kind of compromise, Wal-Mart is cramming the new thing, movie dowloads, into the old business model, retail store purchases. To download a movie at home, you have to buy a movie at the store, at least to start, according to the Wall Street Journal:

The service represents a sort of halfway solution: The giant retailer will require customers to buy a DVD before providing them a "feature sticker" with instructions on how to buy downloads.

As Wal-Mart explained in the NY Times, it wants to maintain the old:

“We feel like it is really important that the DVD business stays healthy and stays quite central to consumers’ lives,” said Kevin Swint, a divisional merchandising manager at Wal-Mart.

Cramming seldom works for disruptive innovation because it compromises on what consumers want and it restricts the growth potential of the new innovation. Whenever you see an incumbent supplier adopt a new innovation but in a way that severely restrict or impairs its use in order to preserve the old and expensive cost structure, you've got cramming. Look for words like 'hybrid', or 'best of both world's' as warning signs.

Microsoft's early efforts in WebTV and portable devices would be examples of cramming the PC operating system business model in places where it did not fit. Note the absence of success despite years of effort and huge expenditures.

In the case of video downloads, Wal-Mart's new competitors that are not in the business of operating  retail stores would see no reason to restrict themselves with such compromises.

BitTorrent, a pirate download site which today announced legit content deals with Fox, Paramount and several other studios, and Apple Computer, which dominates the download music business, for example, won't worry about maintaining sales at retail outlets the way Wal-Mart does.

For examples of cramming, consider these:

• No record company created a simple buck-a-song download service because they could not see a way to do this without hurting their retail sales. (Apple, free of this worry, succeeded despite the fact that its biggest competitors were free pirate sites like Napster.)
• Nokia crammed wireless email, web, fax relay, phone, SMS and applications into the doomed Nokia 9000 Communicator, a brick of a phone that did nothing well and sold poorly in the early days of wireless e-mail;
• Every major newspaper publisher created online websites that replicated their old business onto the web. Very few have achieved any success.

**Other Views**
Harvard Prof. Clayton Christensen is the pioneer on disruptive innovation and he outlines why  cramming fails in this Working Knowledge paper.

The Disruption Group's site lists the benefits of disruptive strategy including higher-value to customers, new revenue streams and sustainable high return on equity. 

Mathew Ingram says the BitTorrent deal is not important because there is no BitTorrent network to speak of.

GoodMorningSiliconValley says the transition from pirate site to legit business is a difficult one.

TechCrunch says BitTorrent raised $25M bringing its total capital to $34M. The company's big challenge is to stay on the right side of copyright owners.

SeekingAlpha says Apple will eclipse BitTorrent and Wal-Mart's efforts.

Don't bet on BitTorrent, says Andrew Chen. After nine months of trying to commercialize a download service based on BitTorrent, he says it's too complicated for mainstream consumers and it doesn't provide the instant gratification they want.

WSJ: Wal-Mart Disrupted?

The Wall Street Journal ran an eye-opening front page that explored the demise of Walmart (full story).  It's a great read and the major points are:

• Consumers are changing: Price may matter less
• Quality may matter more
• Big consumer goods suppliers are turning away from Wal-Mart
• Growth at competing stores is outpacing Wal-Mart

And from an investor's point of view, two clear warning signs:

• The stock has collapsed in the past five years
• There's more downside

Is Wal-Mart being disrupted? Clearly the company has continued to play the same game in a changing environment. And the results have not come through. Here are a few questions for retailers to consider:

• Is it time for a "Buy USA" retailer that supports domestic suppliers over cheaper, usually Chinese-made goods?
• Are there signs that consumers are ready to move in that direction?
• DId your view change following the Chinese-made recalls this year?

**Other sources**
Not everyone agrees that Wal-Mart is so easily undone.

SeekingAlpha has a good take with commentary.

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.

Ignore the Dot-Coms, Disruption is Hard Work

Guy Kawasaki has an interesting posting by the CEO of Redfin, a company that is disrupting the real estate business by cutting out traditional real estate agents in a handful of U.S. cities.

If ever there is a sector ripe for disruption by the internet, it is real estate sales:

• High fees - 6% in U.S. markets
• Proprietary access to MLS database of non-proprietary information
• Little price competition
• Little differentiation of suppliers or services

In contrast to one or two dot-com entrepreneurs -- the guys who make millions working from home in their spare time -- Glenn Kelman, who joined Redfin in 2005, says hard work is the true driving force behind successful entrepreneurs:

"Lately I've been thinking how hard, not how easy, it is to build a new company. Hard has gone out of fashion. Like college students bragging about how they barely studied, start-ups today take care to project a sense of ease. Wherever I’ve worked, we’ve secretly felt just the opposite. We’re assailed by doubts, mortified by our own shortcomings, surrounded by freaks, testy over silly details."

Kelman lists the top 10 ways a startup can feel deeply flawed without really being flawed at all. A few from the list:

• True believers go nuts at small provocations
• Startups are freak-catchers
• Good code takes time
• Everybody has to rebuild
• Fearless leaders are often terrified
• Competition starts at $100M in revenue

**Other Information**
60 Minutes segment on Redfin looks at the high efficiency of Redfin sales agents and some of the hardball tactics established suppliers used to squash new entrants like eRealty and Redfin.

Podcast with Glenn Kelman on the "feaky addictive" nature of real estate web sites.

Cellphone Video Works, But Does it Get the Job Done?

Today's Wall Street Journal has a story about how new services offer video on cellphones such as MyWaves, CellFish Media and 3Guppies.

These services are typically ad-supported and allow consumers to watch short clips such as music videos on their cellphones. Some allow you to upload your own videos onto your cellphone or to store videos from YouTube and other sources as well.

I have also experimented in the past week with a few other technologies to load video on my BlackBerry, including from Mobiola as well as BlackBerry video converters from Seabyrd Technologies and MediaCell.

And yes indeed, I loaded and watched a handful of videos on my BlackBerry, including a conference speech on disruption, a few music videos and (allegedly a techie's holy grail) full-length TV shows.  In some cases there were some problems with file-format errors or screen-resolution, but generally video on cellphones works.

But does it do a job?

Or put another way, does adding video to cellphones create any real business value or is it just a technology exercise in search of a customer need? Is this just another random splatter-campaign to create new (smaller) advertising venues to replace larger failing advertising venues such as broadcast TV?

Glancing at the websites for the various suppliers of these services and technologies, it doesn't appear that anyone has figured out a market for whom this works. For video on cellphones to be valuable, it must solve a customer problem that is:

• An important problem
• A frequent problem
• A problem that customers are trying to solve today but can't

In tech-land when new technologies struggle without a valid market, observers sometimes bemoan the absence of a 'killer-app." They are highlighting the same issue. Remember the video phone of 1964... or in 1992...or in 2002 or again from Vonage in 2005?

Nobody wanted it.

To find real economic need for cellular video --where people will actually value and pay for the service -- requires a re-think. 

I don't have answers on this, but I do have some questions that can help. Rather than chasing the mass market, video suppliers should ask questions along these lines to identify where the initial needs for this technology are strongest:

• Are there places where people can't afford full sized TVs but a lower-cost cellphone video service makes sense?
• Are there occasions when a video on a cellphone is 'good enough' because it is not convenient  or appropriate to fire up a DVD or TV, but a cellphone is ok?
• Is it possible to use a cellphone to give people access to important programming that they can't get through any other source?

**Other Sources**
This blog from Japan refers to "consumer confusion" about mobile video...Always a dark warning sign.

Monte Silver at Podcast Alley refers to the billions spent on mobile TV to no success, and concludes that podcasts --not commercial video-- will be telephone companies' salvation.

VIDEO: Should We Cannibalize Our Business?

The question of cannibalizing your own business is one of the most critical decisions any executive can make -- but most avoid the issue or dismiss it out of hand. 

Don't make the mistake Sony made.

In this video excerpt (8:10 min) from a presentation to the Conference Board's change management conference, I discuss two tools to manage competitive disruption. I look at a case study of why Sony Records, the company in the best position to create and dominate the downloadable music business, couldn't capitalize on the emerging trend towards downloading because of conflicting values.

This is the second of three excerpts from the conference. Part 1.

Rolling Stone Asks Who Killed The Record Industry?

Rolling Stone has a great article on the decline and pending death of the record industry.

It's the first in a two-part look at the record industry including numerous candid inside comments from industry players:

"The record companies have created this situation themselves," says Simon Wright, CEO of Virgin Entertainment Group, which operates Virgin Megastores.

"They left billions and billions of dollars on the table by suing Napster -- that was the moment that the labels killed themselves," says Jeff Kwatinetz, CEO of management company the Firm.

"The record companies needed to jump off a cliff, and they couldn't bring themselves to jump," says Hilary Rosen, who was then CEO of the Recording Industry Association of America. "

"A lot of people say, 'The labels were dinosaurs and idiots, and what was the matter with them?' But they had retailers telling them, 'You better not sell anything online cheaper than in a store,' and they had artists saying, 'Don't screw up my Wal-Mart sales.' " Adds Jim Guerinot, who manages Nine Inch Nails and Gwen Stefani, "Innovation meant cannibalizing their core business."

This is a classic case of disruption in six easy steps:

• Early download technology initially looked inferior
• Industry can't see a way to embrace the new thing without hurting its current business partners and destroying its business
• Industry barricades itself with high-margin products and new proprietary technologies
• Apple iTunes has an entirely different business model  without support initially from major record labels
• Eventually the bottom drops out on the old market
• The new market is hugely profitable and large for the disruptor.

The Rolling Stone analysis is correctly framed as a post-mortem because the disruption actually occurred several years ago.  Are other industries facing similar disruptions also in denial?

• Newspaper mergers would not seem to cure the 40-year decline of readership or relevance of newspapers
• Advertisers are increasingly turning away from television because its audience is shrinking
• WiMax technology is deemed too low quality to replace cell phones and landlines so most telcos ignore it

**Other Information**

Ain't nobody at Apple complaining these days. Wikipedia has a great chart to track iPod sales.

Shelly Palmer says look for TV stations to reformat and automate the way radio did in the past 20 years. Fox's plan to sell 9 of its 35 profitable local stations may be the early warning sign. "One can easily imagine a vast network of fully automated television stations across America with most of their revenue coming from the use of their new government granted digital spectrum."

Forrester Research has a good take on the shrinking of network television: "The top of the pyramid is getting narrower -- fewer big audience hits. And the bottom is getting broader -- more videos on YouTube and its brethren. The real problem happens next -- in this big morass, how do you find what you're looking for?"

A reader emailed in this comment: Remember when the Vinyl album industry was fighting off the dreaded eight-track menace of the 1970s? Look at this...

 

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.

Boost Profits by Escaping the Land of a Thousand Features

In many industries, competitors barrel ahead into a features-war. After all, if customers want features shouldn't we lard them on?  And this is not just in the obvious spots like consumer electronics, where for example VCRs and TVs routinely carry dozens of features that very few customers use or know how to use. 

The same problem extends into other fields: Think of Starbucks, now deep into a midlife crisis, partly created by a distracting proliferation of new products: CDs, books, sandwiches, ice cream, liqueurs, etc. Starbucks share are declining for the first time in many years vs. a steady rise in more-focussed, simpler Tim Hortons.

Another example...Here's a sharp contrast between two telephone companies:

• Cingular offers a choice of more than 200 cell phones, 50 pricing plans and 43 choices of various optional services, bundles and discount packages.
• CBeyond, a smaller company focussed on small business, offers a choice of four cell phones and eight service options.

The financial performance of the companies shows an interesting gap. CBeyond, although smaller, is generating higher growth and much higher margins:

• Cingular revenue grew 10% in Q4 of 2006 and normalized operating profit grew 38%. (Cingular no longer reports financials because the company is now 100% owned by AT&T.)
• CBeyond revenue grew 32% YoY in the first quarter of 2007, while operating profit grew 68% and gross margin rose 2 points to 70%.

The gap, of course, could be attributed to the fact that CBeyond is still a small company.

But that would be to overlook some crucial differences in the company's business model. By offering a limited menu of service choices and by focusing on a narrow segment which is typically underserved by the large telephone companies, CBeyond has an ability to reap profit through simplicity. Fewer choices means fewer operating costs and more focussed selling. The 70% gross margin tells the story of competitive disruption.

**Other Thoughts**

The Wall Street Journal's Informed Reader blog says many consumer devices suffer the same sort of feature creep that Cingular wireless customers are drowning in: “The strange truth about feature creep is that even when you give consumers what they want they can still end up hating you for it.”

Reason Magazine looks at what it calls 'consumer vertigo': Too many choices scare off customers