How does technology which is sailing along, happily dominant, suddenly find itself struggling to hold onto its market share? That’s a question we have struggled with throughout the existence of Faultline.
Is it a case of continuous innovation where one company or camp merely outstrips another? Is it a design capability that gets things just right? Or is it a technology that has found its time?
In our second edition in April 2003 we talked about a term that was very popular at the time, discontinuous innovation. Sometimes we also call this disruptive innovation, although some would argue this is a different thing entirely.
That term came out of a book which remains a classic today, entitled the Innovator’s Dilemma authored by Harvard Professor Clayton Christensen. And it describes the problem with all large companies, namely that they are resistant to innovation.
We continue to see this today with Microsoft in particular unable to shake off its belief that Windows is the lever that will unearth every new market. Even though it has been shown time and time again that Windows is not the answer to the handset or gaming market, or IPTV or internet search, Microsoft spends a disproportionate amount of its R&D dollars on the one area where it cannot be beaten ‘ on Windows, competing for most of the time with Linux, a free system. As a result Windows has become bloatware and is now under genuine threat as we have outlined over the past months.
Companies like Microsoft argue that their top 100 clients want them to continuously improve their products in response to customer requests. Design by customer wishlist is a death knell. How would the iPhone have ever come into being using that scheme?
It may work quite well for some markets, where the customer actually knows what he wants, but not for high tech, where what’s possible is always changing.
In technology, markets undergo revolutionary changes. But sometimes those revolutions fail to materialize.
For instance we know that touch screen capability has been around for about 30 years, and was even planned as a feature in certain LG handsets before Apple ever decided to adopt it. But what Apple did with the touch screen would never have been possible if the 30 year old technology had not been incrementally improved by believers who hoped and hoped for a breakthrough. Touch sensitivity and accuracy climbed slowly over those years, as a handful of engineers made ‘touch’ their life’s work ‘ then Blam ‘ Apple suddenly knew what to do with it.
What designers need to do is take a step outside of the gradual improvement curve for products, but to do that they need to be in fluid management structures, where the impossible happens daily and organizations are used to adapting to accommodate it.
In established management structures, employee habits force big organizations to resist the process of commercializing new technologies. So Microsoft has almost certainly had more good ideas than Apple formed in its corridors, it’s just that the management shape has crushed the originality or speed to market and the excitement out of them.
You may have heard the grim expression of ‘Eating your own children,’ what this refers to is launching a product that will have a financial impact on an established, cash cow business. Naturally this goes against the grain and if companies did it in the current financial climate, their shareholders would have every right to throw their managers out.
So real innovation has to be left either to newer or to smaller companies, even where they have not invented the technology themselves.
Disruptive technologies have certain things in common.
From a base in a small early market they begin to grow faster than their higher margin competitors.
The standard defense against such innovators make the problem worse when it comes along in a rival. Good management push for better planning, harder work and being more customer driven at a time when designers need to step outside the box.
It is why IBM lost the PC wars, why RAID replaced disk in servers, why Windows replaced Unix replaced DEC’s VMS. It is why the Internet took off.
Back in 2003 we coined the idea that this kind of disruption occurs when products emerge which are half as good as existing products, but at a tenth of the price.
Think about it, if a car was available which would only go 55 miles per hour, rather than 110 mph, and it cost just $1,500 brand new, it’s not a matter of whether or not you would buy one, but how many you would buy.
Let’s take the humble browser. It was twice as good and it cost nothing. Now 5 billion people use one. That’s a case of beating the parameters of our new rule of thumb.
But the question is, how does this situation come about. So let’s look at a couple of changes we know about, and a couple on the near horizon.
The iPod was a good example. It was announced in 2001, and sold virtually none. It had the addition of the iTunes software in 2002, and sold virtually none. Then it launched the iTunes music store in 2003 and overnight it was disruptive.
In its first 18 hours of operation it sold 275,000 songs, and established a rate, if kept up, which made it a $128 million business overnight on Apple Macs alone. Extrapolating, once it moved to PCs that made it a $4 billion business ‘ overnight. Today it is bigger than that.
Let’s see, before iTunes Music store you had to buy a portable music player, which had been around $500 at the time; you had to buy your music as albums costing $15 each and giving you around 12 songs a time, of which you might actually want maybe three tracks. For a 2,000 song collection (discarding the one’s you didn’t want on the albums) your outlay was around $10,500.
For the rule to work you want something half as good for a tenth of the price. Well the music, a track at a time, from iTunes, would cost $2,000 and the device around $500 = $2,500. But it was better music, not worse. Because it was portable, it was only what you wanted, it generated an eco-system of additional devices that made it just as good as hi-fi. So we would argue it fits the rule. Maybe you adapt the rule, twice as good at a quarter of the price also works quite well, but that’s obvious.
Now let’s look at Linux itself in any format you like. Let’s say as Android. It’s just as good and it’s free. That certainly meets the rule, and this is more like the browser illustration.
The iPhone is a completely different example. First off it has not killed off normal phones nor their suppliers. In fact most of those suppliers, after a particularly tough time for a few years, are now thriving with devices which are very similar to the iPhone.
Here Apple looked at technology which was effectively already available ‘ mass market flash memory, capacitive touch screens, and iTunes music store and blended them initially into a single device. What was operating here was a form of innovation blockade, in that cellular operators had enforced the rules ‘ ‘thou shalt not change the form factor’ because they had each invested heavily in research which convinced them they understood the consumers better than the handset vendors.
Apple came to the market with a reputation for surprising the consumer, and simply refused to obey the anti innovation rules of the operators. It must have been hugely irritating for the handset vendors to be kicked back and told their ideas for designs were not interesting, and then to get into the habit of not introducing any changes except those dictated by operator business models and components.
Operators said they wanted location data, but network operators who might have introduced this themselves using triangulation software, ended up waiting for a viable GPS chip. Operators said they wanted a browser, but only allowed screen sizes which made it ridiculous. Apple swept all that away and as a result has a legacy of being allowed to innovate, which the handset vendors are still not trusted with. Hence the App Store (a very old idea which Apple was trusted with, while Nokia several years earlier was told not to be cheeky this is operator territory and anyway it won’t work).
As a result there is nothing out there in cellular yet which is a tenth of the price and half as good except for mobile Skype and it has taken years to be accepted by any cellular operators.
On the near horizon we have the question of whether or not Intel will survive the chip onslaught from ARM based chip designs, and here the influence of price is important. Whenever an architecture scales to billions of chips, and is in competition with one that only scales to 100s of millions, economies of scale favor the more widely produced silicon. It’s not that Intel has any less engineers than ARM, but that the total number of engineers working on ARM implementations and all its variations may be greater than Intel. That will now include people in the Intel acquisition of the wireless portion of Infineon, but obviously all the Qualcomm, Texas Instruments, Samsung and Apple engineers who are piling ideas into ARM designs and attracting further eco-system partners.
The actual technology edge is that the device processes more instructions for less watts of energy. So ARM architecture is better suited for battery powered devices so its better (for some things) and cheaper.
There are two points of resistance here. Intel has more applications and ARM chips cannot do as much work per cycle as Intel chips.
Well it only took a year of Apple’s App Store before there were in fact more applications, many of them trivial, on an ARM architecture than there are discreet apps for Intel chips and anyway once you measure the number in 10s of thousands, there is no longer a clear developer edge either way. And ARMs are more developed at being building blocks ‘ you can make ARM cores do what you want by stacking 4 or 6 or 8 together on a single or multiple chips, so Intel can be bested in its own performance backyard as long as Watts Per MIP are a consideration ‘ i.e. on a portable device with batteries.
But this is not a case of disruptive innovation, it’s more horses for courses.
Take a look at the iPad. It is taking off faster even than the iPhone. But this is surely about taking an established architecture and improving it. It IS but not if you consider it the nemesis of the Netbook and notebook or even the PC.
A disruptive influence on the notebook, using our rule would either mean something which is better than a Notebook (better in the fact that it is lighter, had an App Store or that it has a longer battery life) or is half as good and considerably cheaper. Right now the iPad does not qualify, but the overall concept of ARM based Tablet devices with ten hour battery lives, could be considered disruptive and the nemesis of the Notebook. Because devices could end up considerably cheaper once other manufacturers begin to supply them. We have seen Tablet devices for $150 already, including some which attach to a recognized App Store.
Then there’s the area of video. And that’s really what we wanted to apply this rule to. Can video on a handset, or OTT video or internet video or all of them being brought together, act as a disruptive influence on TV as we know it?
Around the world that’s really two separate systems ‘ broadcast free to air TV and Pay TV.
There are increasingly more and more ways that video can get into a TV. It can be copied from a PC or a handset, it can come over the internet, and a DVR can hold the video. DLNA devices are now emerging and they will make it easier to offer video to many new TV sets using systems such as Wi-Fi.
In free to air broadcast TV, it’s tough to apply the rules of disruptive innovation. In a way they have already been applied in reverse in the creation of Pay TV. Ten times as good at a price, whereas Broadcast is free, but comes with perhaps more advertising interruption.
The nice thing about any TV service that is delivered from the cloud is that the advertising it carries has the power to be both interactive and selected to be more appropriate to your demographic or to your particular family. Advertising can be less interruptive also, as search advertising can come into its own. Someone like Google could perhaps mount a challenge to free TV, because it might come up with a form of advertising which is cheaper, in the sense that you don’t have to be interrupted by it and it is more relevant, for the same or better viewing service. But the uptake would surely be slow, because in essence it is not disruptive. It is also likely that people would continue to use broadcast TV and support broadcast advertising even after buying into an intelligent TV advertising model.
It is only pay TV which brings us the possibility of perhaps disruptive innovation, because there is a real cost in terms of a percentage of monthly household incomes. The workers in an average household may earn just over $50,000 annually, and after taxes each month may be left with $3,000 or so, making a $75 a month pay TV subscription (Comcast’s ARPU), just under 3% of household income. It is much the same around the world varying as low as 1% and above 5%.
So for an offering to be disruptive (for instance such as Apple TV launched last week), it needs to offer genuine savings, and be perhaps as good, or half as good as Pay TV services, and cost at the very least half of that $75 a month, preferably more like under $10.
This is where we see the Netflix and Hulu deals, where $9 to $10 a month will buy a pay video service which doesn’t yet replace TV, but which is making inroads. But does Apple TV fit this? Assume your family watches less TV than most Americans, at around 3 hours a night, so 21 hours a week. Assume that at least half of that are films from Netflix and that still means to watch the rest using Apple TV at the lowest price of $1 per hour, and that’s $10 a week or $40 a month, without the price of your Apple box and the price of your Netflix subscription. And yet you have given up the concept of TV channels and will have to use social networks and recommendation software (there is none on Apple TV yet) to tell you what TV is cool. TiVo continues to make more sense. Google TV once it has more TiVo like features, might make sense. But this is why most analysts are not holding their breath for a mass take up in OTT pay TV services from Apple, not until there are some bulk channel subscriptions and this is why people are writing off Apple TV, the third edition, yet again.