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Stories filed under: "disruptive innovation"

Facebook's Failure To Stop TikTok Shows, Once Again, That Big Companies Often Can't Just 'Copy' Disruptive Upstarts

from the it-ain't-that-easy-folks dept

With all the recent talk of breaking up big tech in the news again lately, one of the most common refrains is that the big internet companies (mainly Google, Facebook, Amazon, and Apple) are so big and so dominant that no upstart competitor can possibly succeed against them, in part because if they get too big, those giants will just “copy” the competitor and put them out of business. This narrative has gotten a lot of support from the story of Facebook effectively copying SnapChat a few years back. But, it’s important to note just how rare this actually is. The history of tech innovation is littered with disrupted giants which often tried, but utterly failed, to “copy” the upstart.

For many, many years, we’ve talked about this. Part of the problem is that “copying” features or or services is what we’ve referred to as cargo cult copying, where you’re really just copying the tacit, visible features, but without a deeper understanding of why people really use a tool or service. It’s why Microsoft failed in trying to just copy Intuit out of business. It’s why Facebook failed when it tried to just copy GroupOn (back when people thought GroupOn was a disruptor to Facebook’s local ads). It’s why smaller companies frequently out innovate giant, dominant incumbents. Part of it is that the incumbents don’t notice the innovation until it’s too late, but more often because they don’t really understand why an innovation is so disruptive — often because it attacks their position in a tangential way. That wasn’t the case with SnapChat and Facebook, where the competition was more direct and more core to Facebook’s business.

But the difficulty in “just copying” is driven home by a really great recent article by Josh Constine at TechCrunch, talking about how Mark Zuckerberg totally misunderstands TikTok and why it’s a threat to Facebook. TikTok, of course, is a giant in its own right (part of Chinese internet giant ByteDance, which creates its own problems). However, in recently leaked recordings of Mark Zuckerberg addressing Facebook employees’ questions, he notes that TikTok is a threat, and how they’re trying to copy its service in markets where TikTok doesn’t have a hold yet.

Are we concerned about TikTok?s growing cultural clout among teens and Gen Z, and what is our plan of attack?

MZ: So yeah. I mean, TikTok is doing well. One of the things that?s especially notable about TikTok is, for a while, the internet landscape was kind of a bunch of internet companies that were primarily American companies. And then there was this parallel universe of Chinese companies that pretty much only were offering their services in China. And we had Tencent who was trying to spread some of their services into Southeast Asia. Alibaba has spread a bunch of their payment services to Southeast Asia. Broadly, in terms of global expansion, that had been pretty limited, and TikTok, which is built by this company Beijing ByteDance, is really the first consumer internet product built by one of the Chinese tech giants that is doing quite well around the world. It?s starting to do well in the US, especially with young folks. It?s growing really quickly in India. I think it?s past Instagram now in India in terms of scale. So yeah, it?s a very interesting phenomenon.

And the way that we kind of think about it is: it?s married short-form, immersive video with browse. So it?s almost like the Explore Tab that we have on Instagram, which is today primarily about feed posts and highlighting different feed posts. I kind of think about TikTok as if it were Explore for stories, and that were the whole app. And then you had creators who were specifically working on making that stuff. So we have a number of approaches that we?re going to take towards this, and we have a product called Lasso that?s a standalone app that we?re working on, trying to get product-market fit in countries like Mexico, is I think one of the first initial ones. We?re trying to first see if we can get it to work in countries where TikTok is not already big before we go and compete with TikTok in countries where they are big.

We?re taking a number of approaches with Instagram, including making it so that Explore is more focused on stories, which is increasingly becoming the primary way that people consume content on Instagram, as well as a couple of other things there. But yeah, I think that it?s not only one of the more interesting new phenomena and products that are growing. But in terms of the geopolitical implications of what they?re doing, I think it is quite interesting. I think we have time to learn and understand and get ahead of the trend. It is growing, but they?re spending a huge amount of money promoting it. What we?ve found is that their retention is actually not that strong after they stop advertising. So the space is still fairly nascent, and there?s time for us to kind of figure out what we want to do here. But I think this is a real thing. It?s good.

However, as Constine points out, this shows that Zuckerberg totally misunderstands why TikTok is so successful.

TikTok isn?t about you or what you?re doing. It?s about entertaining your audience. It?s not spontaneous chronicling of your real life. It?s about inventing characters, dressing up as someone else and acting out jokes. It?s not about privacy and friends, but strutting on the world stage. And it?s not about originality ? the heart of Instagram. TikTok is about remixing culture ? taking the audio from someone else?s clip and reimagining the gag in a new context by layering it atop a video you record.

That makes TikTok distinct enough that it will be very difficult to shoehorn into Instagram or Facebook, even if they add the remixing functionality. Most videos on those apps aren?t designed to be templates for memes like TikToks are. Insta and Facebook?s social graphs are rooted in friendship and augmented by the beautiful and famous, but don?t encompass the new wave of amateur performers TikTok elevates. And since each post to the app becomes fodder for someone else?s creativity, a competitor starting from scratch doesn?t offer much to remix.

That means a TikTok clone would have to be somewhat buried in Instagram or Facebook, rebuild a new social graph and retrain users? understanding of these apps? purpose?at the risk of distracting from their core use cases. T

This is the same exact story that we’ve told a bunch of times in the past (including a few of those links above). Even if Zuckerberg recognizes (correctly) that TikTok represents a competitive threat, the company can’t just copy its way out of that competition. Because TikTok’s entire approach and audience is different, and the core reasons why people use TikTok are fundamentally different than the reasons they use Facebook or Instagram even if they look similar on the surface. As Constine astutely notes, Facebook could easily offer the same features as TikTok, but that wouldn’t lead to usage.

Again, that would just be cargo cult copying: copying the visible parts, without being able to understand or effectively copy the real reasons why TikTok is so successful, which is the cultural, community aspects of what makes it such a big deal. This is not a unique story. It’s what happens time and time again. Cargo cult copying is easy. It’s easy to see certain features or a certain app and make a clone. But that won’t make people use it. This same issue was explored quite well by Ben Thompson in a recent Exponent podcast, in which he notes that Zuckerberg, for all his success, still doesn’t seem to fundamentally get what makes Facebook, Facebook — and this could lead to significant problems down the road.

Facebook is large and powerful — there is no doubt about that. But the idea that it can simply copy any upstart competitor and put them out of business is a premise that is not supported by history at all.

Filed Under: competition, copying, disruptive innovation, mark zuckerberg, social media
Companies: bytedance, facebook, tiktok

Techdirt Reading List: The Disruption Dilemma

from the disrupting-disruption-theory dept

We’re back again with another in our weekly reading list posts of books we think our community will find interesting and thought provoking. Once again, buying the book via the Amazon links in this story also helps support Techdirt.

As regular readers likely know, I’m a big fan of Clayton Christensen’s famous book The Innovator’s Dilemma and the concept of disruptive innovation put forth in that book (more accurately, I became a fan prior to the book coming out, when the Harvard Business Review article discussing the innovator’s dilemma came out prior to the book). Many years back, I even tried to explain Christensen’s concept in just two minutes at a whiteboard.

Of course, over the years, the popularity of “The Innovator’s Dilemma” and the phrase “disruptive innovation” has meant that many people like to use the phrase without having any understanding of what it really means. Many people seem to think that “disruptive innovation” just means “breaking shit” or “ignoring all the rules.” That’s not what it actually means. Earlier this year, Joshua Gans released a book called The Disruption Dilemma that is both something of a critique / update on Christensen’s work, but also providing some useful ways of looking at and thinking about innovation. If you’re a fan of disruptive innovation and want to better understand it, this is a worthwhile read.

Filed Under: disruption dilemma, disruptive innovation, innovator's dilemma, joshua gans, reading list, techdirt reading list

Utah Wants To Kill Zenefits For Giving Away HR Software For Free

from the no-disruption-allowed dept

Another day, another example of regulators protecting legacy businesses and trying to shut down quite useful disruptive innovations. Zenefits is an incredibly fast growing company that has become the rather de facto standard for HR software for startups in Silicon Valley. Part of the key? It gives away the software for free — software that, from competitors, costs quite a lot (to the point that many startups don’t adopt HR software until much later in their lifecycle). A great NY Times profile from a few months ago detailed the rise of Zenefits and how its business model developed. In short, Zenefits had started building some online HR software, and was trying to figure out a business model, when it realized that it could give away the software for free and just get commissions by also acting as an insurance broker. The full story is much longer (and fascinating), but here’s a snippet from that profile:

When businesses buy health coverage for their workers, they often go through brokers, who play the role that travel agents once did for the airlines. They are middlemen who figure out the best fit between buyers and sellers of health care, then take a percentage of the sale. And the commissions can be quite hefty. After connecting a small business with a health care provider, a broker collects a monthly fee of about 4 to 8 percent of a company?s health premiums.

The commission rates are set by care providers and aren?t usually disclosed to the small-business purchasers. But the fees amount to several hundred dollars or more per employee annually, and they generally continue for as long as a business keeps its health coverage. The broker collects the monthly fee from the care provider even if the business never talks to its broker again.

?I was thinking, wait a minute, that is a ton of money, and these guys don?t do very much for it,? Mr. Conrad said. This presented an obvious business model for Zenefits. It would become a broker itself. Thanks to the Affordable Care Act, health insurance providers now publish set rates. This meant that Zenefits could offer brokerage online, letting small businesses buy health insurance pretty much the same way people shop for airline tickets.

From there, the “software” just became a hook and a selling point. Yes, it’s still the core of the actual “business,” but it’s just an insanely effective promotion for the insurance brokerage part, which the company has also made super simple. Businesses pay the same exact price they would normally pay for their health insurance — but they get this great HR software as part of the deal (and Zenefits collects the commissions that traditional insurance brokers would have collected for doing much, much less). Of course, as the article also notes, it’s not easy to become a brokerage, but Zenefits put in all of the effort to become a registered insurance broker in various states to make this work — and it’s made the company grow like gangbusters.

And… of course, traditional insurance brokers absolutely hate it. The NY Times article noted that brokers have complained to regulators in four states, including Utah. And that brings us to the latest story. While the investigations in Texas and Washington went nowhere, in Utah, the Utah Insurance Department — which is run by a former insurance broker named Todd Kiser (founder of Kiser Insurance Agency) — has told the company that it has violated a bunch of rules for daring to give its software away for free. Specifically, the Insurance Department calls out [pdf] the fact that the free software somehow violates rules against “inducements” or “rebates” for insurance.

The full letter is an astounding example of regulations designed to protect incumbents over innovators. First it attacks the use of free software, despite the fact that the end result is better for companies:

Zenefits’ providing free software use of its electronic platform and dashboard violates Utah’s inducement and indirect rebate insurance laws. By Zenefits offering clients the free use of its electronic platform and dashboard, by which employers can control and coordinate payroll functions and manage tax-related elections; generate tax forms; access FSA, HSA, and accounts; and administer 401k retirement savings plans and stock options; Zenefits has created a significant free inducement for clients to purchase insurance products through Zenefits. This software use is neither part of the insurance contract nor directly related to the insurance contract. Also, Zenefits connecting of the various HR benefits and insurance together creates advantages for customers to have a single internet access site to manage all HR and insurance needs; however, again, because Zenefits does all of this for free, it creates an violating inducement and indirect rebate for clients to purchase insurance through Zenefits.

Nowhere does the Insurance Department appear to recognize that it’s basically saying “offering a better product is illegal.” Instead, later in the document, it flat out admits that its goal here is to protect the legacy players who didn’t innovate:

Concerning Utah’s insurance public policy and State interest, the Utah Insurance Department has the important responsibility to maintain a fair, competitive insurance business environment for all licensees. Some of the main purposes of the Utah Insurance Code are to ensure not only that insurance consumers are protected and treated fairly, but that licensees are also treated fairly within a financially healthy and adequate insurance market that is not only characterized by innovation, but also by fair conditions of competition for all insurance licensees. See Utah Code Sec. 31A-1-102. For these reasons, Utah’s specific unfair inducement and rebating laws are strongly enforced.

In short, disrupting the old way of doing business is illegal, because the non-innovators can’t keep up. The Utah Insurance Department further makes it clear that innovation that offers a better solution for companies who buy insurance is flat out not allowed under Utah law:

Insurance Department Bulletin 2010-7 emphasizes that a licensee that provides a benefit that is not specified in an insurance contract offered to an insured or potential insured is a violation of state law. This includes offering benefits not specified in the insurance contract at no cost or at a cost below fair market value. Also explained is the fact that providing other value added services not specified in an insurance contract are also insurance violations.

In short: offering insurance buyers a better deal is illegal. The state then says it will fine Zenefits and that the company needs to stop “violating” these rules, and instead come up with a “compliance plan.” Of course, for Zenefits, the only really sensible solution is to not do business in Utah, meaning that Utah-based businesses are objectively (and significantly) worse off. That’s crazy — but it’s the sort of ridiculous regulatory attacks presented to disruptive businesses all too frequently.

Filed Under: competition, disruptive innovation, incentives, innovation, insurance, rebates, regulations, todd kiser, utah, utah insurance department
Companies: zenefits

Disrupting The Misinterpretation Of Disruptive Innovation

from the the-innovator's-dilemma-dilemma dept

There’s a lot of buzz and talk in various communities lately about a new New Yorker story by Jill Lepore, in which she seeks to dismantle Clayton Christensen’s famed concept of “the Innovator’s Dilemma” and its corresponding concept of disruptive innovation. It’s no secret that I’m a big fan of the concepts put forth by Christensen, and five years ago, as part of a sponsored set of videos, I did a quick two-minute white board video explaining the concept.

The concept of the Innovator’s Dilemma and disruptive innovation became so big so fast that it has, reasonably, come under some attack of late. Part of this is just the inevitable backlash that comes with a popular idea. An even bigger part of it is that many have jumped onto the bandwagon without really understanding it. And, many of those are selling snake oil: the idea that companies can actually “beat” the innovator’s dilemma. However, as we noted last year, the very reason why disruptive innovation is so disruptive is because the incumbents don’t see it as innovation. Part of the problem with the concept of disruptive innovation is the idea that, when graphed out simply, it always feels like the incumbent can see what’s coming. They just have to recognize the “cheaper, not quite as good” offering, and realize that it can disrupt their business.

But that’s wrong on multiple accounts. First, truly disruptive innovation usually is barely even on the radar of the incumbent players. It’s not that they don’t think it’s disruptive, it’s that they don’t even see it as innovation or being in the same realm. Craigslist disrupted the newspaper business, and many in the newspaper business still don’t realize that. Disruptive innovation doesn’t always come neatly “up from the bottom” as the graphs show. They often come in orthogonally from a different dimension entirely.

Second, industries that are disrupted often face a whole bunch of potentially disruptive competitors — and (in part because of the point above), it’s very difficult to tell which one(s) will actually be disruptive. Economist Joshua Gans has a fantastic explanation of this, noting that disruptive innovation has to fulfill two criteria: perform “worse” than incumbent technology on certain metrics and also be on a fast path for improvement (though I don’t agree with Gans’ claim that the improvement has to be on those same metrics — in many cases, I’d argue it’s actually on the metrics the customers truly value, rather than the ones they claim to value, which are not always the same). The issue is that it’s easy to pinpoint technologies that meet the first criteria, but nearly impossible to spot the ones that meet the second criteria. Thus, you end up with lots of potentially disruptive technologies, but actually spotting the actually disruptive technologies isn’t so easy.

That’s why Lepore’s complaint about companies that tried to disrupt themselves and failed goes wrong.

Time, Inc., founded in 1922, auto-disrupted, too. In 1994, the company launched Pathfinder, an early new-media venture, an umbrella Web site for its magazines, at a cost estimated to have exceeded a hundred million dollars; the site was abandoned in 1999. Had Pathfinder been successful, it would have been greeted, retrospectively, as evidence of disruptive innovation. Instead, as one of its producers put it, “it’s like it never existed.”

Lepore isn’t really attacking the nature of “the innovator’s dilemma” or “disruptive innovation” at all. She’s really — rightfully — attacking the idea that incumbents can successfully recognize and fight it off. In the history of technology innovation, the list of companies that have truly recognized and responded to disruptive innovation is a fairly short list. I can think of Intel flipping from making memory to making microprocessors and possibly IBM flipping from focusing mainly on big hardware to services (though, even that one’s a bit fuzzy). There may be a few other stories here and there, but for the most part, big companies miss disruptive innovations by a long shot.

Beyond the reasons listed above, the other big reason why incumbents fail to react properly to disruptive innovation is that they overestimate their own ability to “catch up later,” while missing the key reasons why a disruptive innovation is so successful. For years, for example, I’ve heard execs in the entertainment industry insist that when the internet was really important, then they could really start investing in an internet strategy. But, of course, by then, it’s often too late, and they’re playing catchup. Not only that, but they’re playing catchup in a realm that they don’t fully understand, often mimicking the superficial innovations they see, while completely missing the true innovations under the surface.

To be clear, Christensen may be a reasonable target here. As Tim Lee rightfully notes, Christensen himself has built up a pretty big and profitable consulting business trying to “help” big companies successfully navigate disruption. And there are hundreds to thousands of consultants out there pretending they can do the same thing. And, in some cases, those folks may have the right idea, in general. Hell, in the video above, I, too, am guilty of suggesting that companies can sometimes out-innovate disruptors. It’s very tempting to believe that understanding this theory is useful in successfully avoiding the disruption wave. But, the combination of it being nearly impossible to figure out which disruptive innovation is really disruptive, combined with general corporate inertia, makes it nearly impossible to predict precisely which disruptive innovation matters.

But that doesn’t (and shouldn’t) take away from the importance of the underlying concept and trajectory of disruptive innovation as a whole. The fact that you can’t precisely predict which innovations will be disruptive doesn’t mean that there aren’t any disruptive innovations, or that the theory isn’t useful in understanding what’s happening in the market. It’s just not great as a predictor of “this company will beat that company” — which is where Christensen himself often runs into problems.

But, in terms of understanding wider trends, where incumbent companies are likely to go wrong, and even in pinpointing opportunities for disruption, the concepts behind the Innovator’s Dilemma are of massive importance. The lack of exact predictive power of “this technology will disrupt that incumbent in this way” doesn’t rid the entire concept of value. Understanding disruptive innovation is a very powerful and very important tool in recognizing and understanding innovation trends. That doesn’t mean it’s useful in saying Startup A will definitely disrupt Incumbent B. More importantly, it doesn’t mean Incumbent C will be able to recognize or prevent disruption to itself. But if that’s what you’re trying to do with it, you’re using the tool wrong.

Bonus reading: Check out disruptor Will Oremus applying the theory of disruptive innovation to dismantling Lepore’s article directly.

Filed Under: clayton christensen, disruption, disruptive innovation, innovation, innovator's dilemma, jill lepore, predictive value

Microsoft Buying Nokia Reminds Us That Dominant Tech Companies Can Disappear Quickly

from the bye-bye dept

So, yes, everyone in the tech world is talking about Microsoft finally buying up the key parts of Nokia for $7+ billion a couple years after Nokia basically wed itself to Microsoft anyway. There’s all sorts of good analysis about why Microsoft is doing this and plenty of snark as well about two also-ran companies trying to come together to revitalize damaged brands (including some folks pointing back to the infamous “two turkeys do not make an eagle” quote once uttered by a Nokia exec).

But here’s the thing that I find most fascinating about this: it’s a reminder of just how quickly and completely a “dominant” tech firm can almost disappear off the face of the earth. Go back to 2007 (also known as The Time Before The iPhone) and Nokia absolutely and totally dominated the mobile phone market. In fact, I remember making a joke around 2005 or so mocking another company for suggesting that it could pass Nokia in the market (I can’t remember which company, but it may have been Samsung) and a telco analyst much wiser than myself scolded me, reminding me how quickly the market can change — and he was totally correct. Two quick images tell the story. The first, put together by the Guardian using Gartner data, shows how Nokia (via Symbian) basically owned the smartphone market for quite some time. And then its lead disappeared:

Or, if you look at it from a profit share realm by vendor, as Asymco did last year, you get an even more dramatic story, where Nokia’s ability to profit from mobile phones went away.

Even its overall lead in selling all kinds of phones (going beyond the smartphones and into cheaper phones around the globe, a market that it absolutely dominated) was lost a bit ago to Samsung. Just a few weeks ago, Mobile Unlocked put together an astounding interactive chart showing overall mobile phone sales quarter by quarter going way back. This static image below doesn’t do it justice. Check out the full thing:

No matter how you slice the data, it’s undeniable that Nokia absolutely and totally dominated the market. Plenty of people (as noted, myself included) thought that lead was more or less insurmountable. While many may argue otherwise today, at the time it was very, very difficult (unless you were that prescient analyst I talked to) to envision a world in which there was such a major market shift that would take Nokia off its game so totally. And then, along came the iPhone. And Android. And the world changed. And Nokia clearly wasn’t ready for it, didn’t recognize where the world was heading and was unable to respond in a timely fashion. It tried to shift much later in the game, but it was way, way, way too late.

In fact, it could be argued that its own success was part of the problem. Nokia was heavily invested in Symbian and had committed to following that path. This is actually something that’s not uncommon with dominant players. In some ways, they’re a victim of being there first. When a disruptive innovation comes along, they can’t shift on a dime, and the innovations effectively leapfrog right over them. Yes, you can ride out cash cows for a long time — and Nokia has done so (as, it appears, has Microsoft…) but eventually the music stops.

I bring this up because we seem to go through this quite often — with people fretting about certain “dominant” tech firms, and how something has to be done to stop them or they’ll have too much power. But, as we see time and time again, it often seems that “something” is done in the form of regular competition and innovation from others, who can come out of nowhere and completely take down a giant in a very, very short period of time.

Filed Under: competition, disruptive innovation, dominant firms, innovation, mobile phones
Companies: microsoft, nokia

Google Being Pressured Into Crippling Self-Driving Cars

from the disruptive-innovation dept

One of the most common results of disruptive technologies is that the legacy players scream to the heavens (or, rather, the politicians) about how dangerous the new technology is and how people will die if that new technology isn’t crippled. One of the most ridiculous examples of this — from over a century ago — was with the introduction of automobiles. Some transportation competitors raised such a stink about how dangerous cars were, that a few governments passed so called red flag traffic laws, that required someone to walk in front of any car, waving a red flag to warn people of what was coming. One of the most famous, in the UK, included this:

… one of such persons, while any locomotive is in motion, shall precede such locomotive on foot by not less than sixty yards, and shall carry a red flag constantly displayed, and shall warn the riders and drivers of horses of the approach of such locomotives…

Of course, those who were once the disruptors often become the incumbents, so it should be little surprise that automakers are on the other side of things when it comes to the eventual roll out of Google’s self-driving cars. The Wall Street Journal is reporting that politicians and automakers are pushing Google to cripple their self-driving cars while also delaying the roll out.

Google Inc. , under pressure to slow down development of driverless cars, may crimp the capabilities of the first auto products that it brings to market, people close to the company say. That may mean that cars using Google’s software may not drive faster than 25 miles per hour and may feature a foam front end to limit the extent of damage caused in the event of a collision.

Yes, there are some irrational fears about self-driving cars. Undoubtedly, there will be some malfunctions and accidents. And a lot of legal issues are unsettled. However, crippling the cars to the point that they’re almost useless seems rather silly. Regular, human-driven cars are notoriously unreliable and subject to accidents. It’s quite likely that as more self-driving cars are on the road that accidents will decline massively, as the technology will actually make the roads much safer.

While the article highlights the potential legal concerns and “public perception” of self-driving cars as a reason to cripple the first round of those cars, there are also, not surprisingly, competing automakers and tech companies in the mix, with their fear that Google’s willingness to keep innovating may leave them all far behind:

Auto makers and technology companies have made significant investments in the development of self-driving cars, although they favor a much more cautious, step-by-step approach than Google’s leadership does. How the car research plays out will say a lot about how Google’s innovative process will work as the company continues to mature and enter huge new markets such as transportation. It has run roughshod over the wireless phone industry for the last few years, quickly establishing the dominance of its Android operating system. But the auto industry has seen that story unfold, and doesn’t want to be cast unwillingly in a sequel.

In other words, spreading FUD about self-driving cars means Google can’t be as aggressive in pushing the envelope, and maybe we can hold back the tide for a few more profitable years of the old, more dangerous, kinds of cars.

Filed Under: disruptive innovation, innovation, self-driving cars
Companies: google

Is The 'Innovator's Dilemma' About To Get Disrupted By 'Big Bang Disruption'?

from the perhaps-an-evolution dept

As some of you know, I’m a big believer in the concepts behind Clayton Christensen’s Innovator’s Dilemma, which explain how disruptive innovation almost always takes incumbents by surprise. A few years ago, I even did a two minute video in which I tried to succinctly explain the innovator’s dilemma (an explanation later endorsed by Christensen himself). The basic idea, if you’re unfamiliar with it, is that disruptive innovations often hit the market by appearing to be “worse” than the legacy product, and thus the incumbents tend to ignore it. They brush it off as being too crappy or too small or too low end or whatever, and they focus on the “high end.” What they often fail to take into account are the basic trend lines. The disruptive innovator tends to improve their product at a much faster rate, and, at some point, hits the quality level where, even if it’s still worse (or possibly significantly worse) than the incumbents’ offerings, it’s actually good enough for their needs. When you look at innovative markets through this prism, you can see it happening over and over again.

So, I read, with much interest, a new piece by Larry Downes (a friend, and someone who has posted here on occasion) and Paul Nunes in the Harvard Business Review about Big-Bang Disruption, in which they argue that the old Innovator’s Dilemma model may be somewhat obsolete. This is due to a variety of factors, focused around the fact that disruption comes faster than ever before and, these days, frequently comes out of left field — from someone that people didn’t even think was a “competitor.” It’s a really good read that basically says that a combination of factors, mainly centered around the ability to build new products and services in almost no time and requiring almost no resources, has allowed for a world in which lots of people are rapidly innovating experiment after experiment, and some of those catch on and go viral in an instant — frequently disrupting existing players, who never even had a chance to see the disruption coming.

It’s a great piece that I highly recommend for folks who are interested in the nature of disruptive innovation — though I’ll push back on one point. I really don’t see how this conflicts with or is any different than the innovator’s dilemma. It just shows the same basic thing happening more quickly. The main argument that Downes and Nunes use to argue that this is different doesn’t so much focus on the innovator’s dilemma, but rather focuses on how incumbents should respond to disruptive innovation. In the past, it has been argued, that if you understood the dilemma properly, you could spot the disruptive innovator’s early, and then move to buy them out or build a viable competitor quickly. In practice, however, we very rarely see that happen. The number of legacy players, who have succeeded in responding to disruptive innovation, remains an astoundingly small list. And I’d argue that part of that is because disruptive innovation always seems to come out of left field and always seems to come much faster than incumbents expect.

That doesn’t detract from the main point of the article, however, which does show how these things are happening faster and faster, and a lot of that is because of the ability to just throw something out there for fun, rather than investing millions of dollars early on in an idea that might never even work.

Right now, at Silicon Valley companies large and small, engineers and product developers are getting together late at night in what are popularly known as “hackathons.” Their goal is to see what kind of new products can be cobbled together in a few days. You know, for fun. The innovators are not even trying to disrupt your business. You’re just collateral damage.

Twitter, for example, began its commercial life humbly at the 2007 South by Southwest conference, following its invention at a hackathon the year before. Its developers wanted to test sending standard text messages to multiple users simultaneously, an experiment that required almost no new technology. Today the company boasts more than 200 million active users and half a billion tweets a day. Twitter has destabilized everything from the news and information ecosystem to unpopular national governments.

While I think the article underplays this somewhat, a big part of why these Big-Bang Disruptions can succeed in this way has a lot to do with the fact that not only can ideas hit the market incredibly fast, but they can also fail fast. We’re in an environment where so much innovation for new services can not only be built quickly but people can learn and adapt or even shut down just as quickly. One of the biggest reasons why many people believe Silicon Valley remains the home of so many innovative companies is because there’s very little stigma associated with failing. In many circles it’s a badge of honor. But, in this environment, where it’s so easy to create, that means that innovators also get to test a lot of ideas quickly, to throw out the bad ones, and to focus on the winners. This is so much more productive. On top of that, Downes and Nunes point out that each of those failures might not really be “failures” so much as priming the demand pump by teaching the market what’s possible.

The adoption of disruptive innovations is no longer defined by crossing a marketing chasm. Instead, the innovators collectively get it wrong, wrong, wrong—and then unbelievably right. That makes it even harder for businesses wed to today’s products and services. All those failed experiments seem like evidence that the emerging technologies just aren’t ready. In reality, in today’s hyperinformed world, each epic failure feeds consumer expectations for the potential of something dramatically better.

The one other bit of insight that I pulled from the article was that this ability to build things quickly and cheaply, but also to do so online, where one can make use of a variety of tools to have a direct relationship with a community, users, customers, etc., means that companies can burst out of the gate with amazing products that aren’t just disruptive by being worse than the market leader, but they can actually hit the market while being better than the leader. The authors write about how various strategy experts in the past have suggested that innovators need to focus on a specific value: be cheaper, be more innovative or be more custom (i.e., most customer focused), but that trying to hit on more than one category will dilute the message and the product. However, thanks to a variety of new services and products, it’s absolutely possible to hit the market while being cheaper, more innovative and more closely connected to the customer. And that certainly makes it tough to be an incumbent.

In a separate piece, Downes goes further in explaining the policy implications of this argument, focusing on how these “big bangs” suggest that regulators need to tread even more lightly, as new disruptive services can completely change a market in a very short period of time — in fact, in time frames that many regulators might not even be able to properly comprehend.

Quickly and efficiently, a predictable next wave of technology will likely put a quick and definitive end to any “information empires” that have formed from the last generation of technologies.

Or, at the very least, do so more quickly and more cost-effectively than alternative solutions from regulation. The law, to paraphrase Mark Twain, will still be putting its shoes on while the big bang disruptor has spread halfway around the world.

All in all, a very interesting theory with some important points that are worth thinking about. I look forward to the eventual book on the subject by Downes and Nunes, though I still think that setting it up as somehow a rethinking of the Innovator’s Dilemma doesn’t quite make sense, as I believe that what they’re describing really is just a more detailed explanation of how current tools and technologies have accelerated the innovator’s dilemma. It does, potentially, upset the businesses of those who claim they can train incumbents in how to avoid the innovator’s dilemma, but I’d argue most of those efforts were never that successful in the first place anyway.

Filed Under: big bang, big bang innovation, clayton christensen, disruptive innovation, innovation, larry downes, paul nunes, speed

from the and-then-they-look-silly-for-it-later dept

People are notoriously bad at recognizing important trends in innovation. It’s most commonly seen in people dismissing some new technology or service as being unimportant. Over and over again, people seem to think that the world is static and thus, people “won’t need” certain technologies in the future. There are statements like Ken Olsen’s from DEC claiming that “there is no reason anyone would want a computer in their home” (which he has since claimed was taken out of context) or Charlie Chaplin claiming: “The cinema is little more than a fad. It’s canned drama. What audiences really want to see is flesh and blood on the stage.” Those are both from this excellent list of failed technology predictions — including a bank telling Henry Ford that “the horse is here to stay” and that the car is just “a novelty — a fad,” and multiple people arguing that there is no need for the telephone, including the head of the British Post Office, noting (helpfully) “we have plenty of messenger boys.” Oh, and “Television won’t be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.” That’s from someone who worked as a movie producer for Fox.

There are many more at that link, and I imagine in a few decades or so, the prediction from TechCrunch that “there is no reason for any individual to have a 3D printer in their home” would fit nicely among those other ones. There’s just something about new and disruptive technologies that causes otherwise intelligent people to completely dismiss them. I still chuckle at people who thought that cameraphones were just a fad because their initial quality wasn’t that good.

Technology advances and gets better and better. And a disruptive technology’s best trick is that it does something completely new that you couldn’t have done before. And that’s the part that seems to trip people up. You don’t need 3D printing in your home now, the thinking goes, so it’ll never be worth having in your home. Entrepreneur Mark Birch has a really good response to the TechCrunch claim, noting that a lot of people completely miss disruptive trends when they start:

It is easy to miss the disruptive trend when it is first happening. Because it is often the nerds that are leading the charge, no one pays it any mind. There certainly is some initial hype, but it usually fades quickly because there is nothing for the mainstream to latch onto. They need to see and touch something and thus it is hard for non-geeks to make the mental leap in how the novel technology could be important for their everyday lives. People are looking for applicability when that does not exist in the early days.

The reality of 3D printing is that it is not for everyone right now. In fact, only the most hardcore techie could really get into it and fork over the $1000 for the setup. Very few people can fathom why one would want a 3D printing in his or her home. But people said the same thing when the first dot matrix printers came on the market. They were clunky and slow and expensive and broke down all the time. Plus, who would want to print stuff at home anyway other than computer nerds? Now practically every home has a color printer capable of producing high-quality photos, greeting cards, spreadsheets, novels, and the kid’s homework.

There are plenty of things to be skeptical about, but never underestimate what the geeks are working on. When you get past the hype cycles of “next big thing” and look deeper, you find that all that tinkering and experimenting is leading to something that is pretty remarkable and world changing. It might be hard to see at first, but with a little imagination and time, those early experiments generally lead to entire new industries and to the next generation of great companies.

I’d take it even further. I’d say that if people aren’t missing the trend, then it’s not disruptive. What makes disruptive innovation so disruptive is often the very fact that so many people dismiss it and insist that nothing will come of it. It’s that dismissiveness that often helps the innovation become so powerful, because it gets better and better while people are so busy writing it off. And then, suddenly, it’s ready and the world wants it. And the incumbent players, who dismissed it, all feel taken by surprise.

It’s easy to miss disruptive trends when they arrive — but the long term impact of doing so can be quite disastrous for those about to be disrupted.

Filed Under: disruptive innovation, trends

from the wtf dept

One of the reasons why we live in such an innovative society is that we’ve (for the most part) enabled a permissionless innovation society — one in which innovators no longer have to go through gatekeepers in order to bring innovation to market. This is a hugely valuable thing, and it’s why we get concerned about laws that further extend permission culture. However, according to the former Register of Copyrights, Ralph Oman, under copyright law, any new technology should have to apply to Congress for approval and a review to make sure they don’t upset the apple cart of copyright, before they’re allowed to exist. I’m not joking. Mr. Oman, who was the Register of Copyright from 1985 to 1993 and was heavily involved in a variety of copyright issues, has filed an amicus brief in the Aereo case (pdf).

As you hopefully recall, Aereo is the online TV service, backed by Barry Diller, that sets you up with your very own physical TV antenna on a rooftop in Brooklyn, connected to a device that will then stream to you online what that antenna picks up. This ridiculously convoluted setup is an attempt to route around the ridiculous setup of today’s copyright law — something that Oman was intimately involved in creating with the 1976 Copyright Act. The TV networks sued Aereo, but were unable to get an injunction blocking the service. Oman’s amicus brief seeks to have that ruling overturned, and argues that an injunction is proper.

But he goes much further than that in his argument, even to the point of claiming that with the 1976 Copyright Act, Congress specifically intended new technologies to first apply to Congress for permission, before releasing new products on the market that might upset existing business models:

Whenever possible, when the law is ambiguous or silent on the issue at bar, the courts should let those who want to market new technologies carry the burden of persuasion that a new exception to the broad rights enacted by Congress should be established. That is especially so if that technology poses grave dangers to the exclusive rights that Congress has given copyright owners. Commercial exploiters of new technologies should be required to convince Congress to sanction a new delivery system and/or exempt it from copyright liability. That is what Congress intended.

This is, to put it mildly, crazy talk. He is arguing that anything even remotely disruptive and innovative, must first go through the ridiculous process of convincing Congress that it should be allowed, rather than relying on what the law says and letting the courts sort out any issues. In other words, in cases of disruptive innovation, assume that new technologies are illegal until proven otherwise. That’s a recipe for killing innovation.

Under those rules, it’s unlikely that we would have radio, cable TV, VCRs, DVRs, mp3 players, YouTube and much, much more. That’s not how innovation or the law works. You don’t assume everything innovative is illegal just because it upsets some obsolete business models. But that appears to be how Oman thinks the world should act. Stunningly, he even seems to admit that he’d be fine with none of the above being able to come to market without Congressional approval, because he approvingly cites the dissent in the Betamax case (which made clear that the VCR was legal), which argues that the VCR should only be deemed legal with an act of Congress to modify the Copyright Act. You would think that the success of the VCR in revitalizing the movie industry would show just how ridiculous that is… but in Oman’s copyright-centric world, the rules are “first, do not allow any innovation that upsets my friends.”

Elsewhere, he argues — quite correctly — that Aereo’s design was clearly done with the help of lawyers to stay on the legal side of the line, but he gets the exact wrong lesson out of that:

The Aereo system was not designed for the purpose of speed, convenience and efficiency. With its thousands of dime-sized antennae and its electronic loop-the-loops, it appears to have been designed by a copyright lawyer peering over the shoulder of an engineer to exploit what appeared to Aereo to be a loophole in the law and shoehorn the Aereo business model into the Cablevision decision.

In other words, he’s admitting that the system was designed carefully to remain on the right side of the law… but he’s somehow upset that this is possible. In his incredible worldview, you should not be able to design around the contours and exceptions to copyright law — because anything that upsets Hollywood is, by default, illegal.

Perhaps we’ve learned who put the clause in the ’76 Act that explicitly says that the law should be used to stop disruptive innovation if it gets in the way of the status quo.

Either way, he goes on at length, claiming that his efforts in helping to put together the ’76 Act and his other work on copyright were continually focused on benefiting the copyright holder. He never mentions that this is not the purpose of copyright law. It is the means. But the intent is to benefit the public. Oman does not ever seem to take that into consideration.

Indisputably, Congress drafted the Copyright Act to prevent the creative efforts of authors from being usurped by new technologies. That core principle is at the heart of the Copyright Act. Congressional intent would be undercut by any decision that would sanction the use of technologies which could be used indirectly to undermine its goals. Congress enacted a forward-looking statute that would protect those who create precisely so they have incentives to create.

Actually, that’s quite disputable. The Copyright Act can only be designed to benefit the public. The means of doing so is by creating the ability of copyright holders to exclude, but that is hardly the only incentive to create. Allowing new technologies that disrupt old business models does not necessarily remove the incentive to create. Instead, as we’ve shown over and over again, the incentive to create appears to have increased greatly, even as respect for copyright has weakened tremendously over the past decade. So I fail to see how Congress’ “intent” could possibly be undermined by new disruptive technologies coming along — without permission — and creating new and expansive markets that both help the public and provide new opportunities for content creators.

Filed Under: copyright, disruptive innovation, innovation, performance, ralph oman
Companies: aereo

from the isn't-that-a-problem? dept

A few weeks back, we wrote about a proposal by Rep. Jerry Nadler, which we referred to as the RIAA Bailout Act of 2012 because it sought to change the nature of satellite radio royalties to put them on par with the absolutely ridiculous and unsustainable royalty levels for internet radio. In case you don’t know, there are basically three very different tiers for the royalties that need to be paid to musicians (separate from songwriters) for broadcasting the tracks on which those musicians played. If it’s played on the radio, the stations have to pay nothing to the musicians, as Congress long ago decided that radio play was the equivalent of advertising (a viewpoint that is pretty accurate, given the decades of payola that have shown that radio play is so valuable that labels will pay stations and djs to get their songs played). Then there are the satellite radio guys (basically Sirius XM at this point). They pay a rate that they already think is too high and pass those rates directly on to consumers. In preparation for a new rate-making process, they’re already seeking out legal ways to get away from having to pay statutory rates.

But what the satellite guys have to pay completely pales in comparison to what internet streaming companies like Pandora have to pay. There, the rates are so crazy that it’s become clear that Pandora has little likelihood of ever being profitable unless something drastically changes. Matt Schruers, over at Project DisCo, has an absolutely fascinating look back at why these rates are so bad, and it comes down to this simple, but positively scary point:

When the Copyright Act of 1976 was passed, it was so taken over by regulatory capture by a few key industries, that they explicitly put into the Copyright Act that it should be used to stop disruptive innovation from challenging legacy businesses. I’ve read the Copyright Act many times, but have to admit that I’d never quite noticed this line from 17 USC 801(b)(1)(D), which explicitly states that the role of the Copyright Royalty Judges on the Copyright Royalty Board that sets the rates for internet radio are there:

To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

Yeah. Their job is to set rates that basically kill off disruptive innovation in favor of “prevailing industry practices.” As Schruers notes, this goes against absolutely everything we understand about the importance of disruptive innovation in driving forward the economy:

That’s right: employees of the U.S. Government who dictate price inputs for entire industries are statutorily charged to resist change. While the CRT / CARP / CRB has always had other statutory guidance as well, for example, maximizing availability of works, affording copyright owners a “fair return” and users a “fair income under existing economic conditions”, Congress enshrined this explicit rule that no one be permitted to upset the existing players’ apple cart. There is no pretext here, no cynical appeal to some higher objective that justifies minimizing disruption of the prevailing industry — change is inherently bad. The statute gives no consideration of whether a better business model might come along, and in fact affirmatively discourages any — not only because the statute aims to minimize any “disruptive impact”, but also because this license was limited solely to “pre-existing” services by the Digital Millennium Copyright Act in 1998. New arrivals were out of luck.

How the hell did something so explicitly corrupt and so clearly a form of crony capitalism get directly into the Copyright Act? Take a wild guess:

So how did this “minimize disruption” language wind up in the Copyright Act of 1976, given that it so clearly violated the First Rule of Defending the Status Quo? The “minimize disruption” requirement is a vestige of a copyright legislative process that stretched over many years, starting in the 1960s, at a time when fewer people appreciated copyright and fewer still understood the contours of the legal system that created those rights. Much of the initial drafting of the ‘76 Act was by the Copyright Office, which chaired a series of meetings with prominent industry copyright lawyers throughout the 1960s.

Counsel for publishers, the recording industry, broadcasters, were well represented in these discussions. The future, as the saying goes, had no lobbyist. It is not surprising, therefore, that the multi-factor test that determines the rates paid by services like satellite radio under the Copyright Act’s statutory licenses would reflect the perspectives of the existing parties to the arrangement. The standard from the ‘76 Act remains today (although at the time, the statute was focused on regulating “coin-operated phonorecord players”.)

And… believe it or not, that’s not even the end of the story! That part of the Copyright Act is the part that impacts the satellite guys. But the streaming internet folks? For them it’s even worse, as the statute takes things even further to create even more incentives to further kill off these new innovations — by basically saying that a “proper” license is one with which a “willing seller” is happy. In other words, it sets the statutory rates almost entirely based on the interests of… the existing, entrenched players.

And that’s why Pandora may never be profitable if nothing changes. Because we’ve actually built into copyright law that disruptive innovation is bad and should be minimized at the interests of the legacy players.

Filed Under: copyright, copyright royalty board, disruptive innovation, innovation, internet radio, royalties, satellite radio, webcasting