Disruptive Innovation

Disruptive Innovation Theory Revisited

26 August 2014

From Off White Papers:

Perhaps it was on the limb-strewn battlefields during the Franco-Prussian war in the 1870s that one disruptive innovation gained great favor with a whole generation of adherents. Young doctors on the frontlines readily embraced Dr. Joseph Lister’s new and rather simple technique for combat triage using anti-septic surgery for life-saving amputations and skin piercing compound bone fractures. Previously almost any large incision resulted in death from infection caused by unsanitary conditions.

Lister’s carbolic acid concoction was easy to use and quite effective at getting the job done even in the field of battle. It prevented infection from what turned out to be airborne microbes. Unfortunately the U.S. medical establishment did not embrace Lister’s radical idea of germ theory even when presented with incontrovertible evidence. They defended the long-standing medical wisdom that bad air or miasma were the source of infection, and not invisible microbes. Germ theory was outright rejected. While there was ample documentation and statistics provided by Lister to the AMA and the establishment, it would take a public outcry after the assassination attempt and the unfortunate, and probably avoidable, death of U. S. President James Garfield to create a serious enough crisis to challenge the entrenched thinking of the old guard. A paradigm shift was at hand.

The medical establishment’s resistance to Lister’s technique is an instructive narrative in trying to better understand innovations that, on the face of things, should catch on and spread rapidly. Yet in certain domains, where entrenched worldviews, attitudes and values are deeply woven into the societal architecture, innovation can come to a grinding halt. This is particularly noticeable in those domains with multiple stakeholders whose identities and livelihoods are being challenged by the threat of innovation. In those situations where simply getting well-defined jobs done a product or service’s utility is the main driver. But in those domains where stakeholders’ identities are being challenged the identity function can often overwhelm the more straightforward utility of the innovation. In turn, the predictive power of disruptive innovation theory is diminished.

. . . .

Inherent in every product or service is both a utility function and an identity function. Understanding each of these functions and the interaction between the two might shed light on some of the anomalies observed in the original theory. It appears that in utility-centric products and services such as mini-mills, semi-conductors, disk drives, MP3 files, Wikipedia, Amazon and the like, the original theory does keep its predictive potency. Consumers and non-consumers with no vested interest in anything other than “getting the job done” will change behaviors quickly and readily with little anxiety. They are simply focused on the product or service’s utility—and the incumbent will be disrupted. All you need to think about is how quickly we “consumers” (or the new “non-consumers” as the case may be) migrated from vinyl to cartridge to cassette to CDs to MP3s on our iPods; from Encyclopedia Britannica to Wikipedia; from Borders to Amazon.

In utility-centric innovations water runs downhill; there seems to be very little consumer resistance to successful adoption and diffusion. Resistance to change, however, does often come from within from industry incumbents whose jobs are dependent on maintaining the existing business model and power dynamics. As Upton Sinclair said “never expect someone to understand change when their livelihood depends on not understanding it.”

. . . .

ITunes successfully introduced modularity to the consumer who could now buy singles rather than an entire album to the dismay of most record industry executives and to the occasional artist protestation. The interdependence created by having to buy 16 songs when you only really wanted four might have been highly profitable for the record companies but over-served the consumer at a cost substantially higher than purchasing the four singles. No wonder, as the original theory neatly predicted, disruption in the music industry was fast and ugly.

In high-identity domains, however, products and services are almost always highly interdependent and successful modular architecture is elusive. Even when the consumer is over-served and the price too expensive, and modular solutions are “good enough” resistance is still encountered.

Link to the rest at Off White Papers

“in certain domains, where entrenched worldviews, attitudes and values are deeply woven into the societal architecture, innovation can come to a grinding halt. ”

Sounds like traditional publishing.

For PG, understanding the difference in disruptive innovation for products that present a utility function vs. those that present an identity function was useful.

He would suggest that for most readers, books serve a utility function. Whoever can provide the reader with a book that pleases the reader most efficiently will get the reader’s business.

On the other hand, for publishers and agents and booksellers and many traditionally-published authors, books are definitely the basis of identity and serve an identity function. “Literary culture” is a pure identity construct.

Clearly, the value of the identity as an author whose books are the product of a well-known publisher outweighs the increased monetary value that self-publishing presents to a significant number of traditionally-published authors. Hence, some tradpubbed authors feel impelled to vociferously trash indie authors to protect the value of their identity. Indie authors are breaking the rules that underlie that identity.

The identity function is also prominent in the rapturous descriptions of the joys of purchasing physical books in an physical bookstore. For a reader who finds a basis for identity in being a “book person,” as well as for booksellers and producers of physical books, the physical-bookstores-for-physical-books meme, complete with deep conversations concerning the merits of one book over another, Amazon is anathema. Clicking “Add to Cart”  just doesn’t bring on the rapture for these people.

However, pursuing the book-person identity as a reader requires access to a bookstore and a decision to devote time to the browsing/discussion/purchasing pursuits instead of competing pursuits like making a living, family life, GOT or actually reading books.

PG suggests that the Amazon vs. the rest of the world battle will be fought and won with readers and that, for the vast majority of readers, books serve a utility function. For utility-focused readers, the combination of ebooks and Amazon’s convenience and pricing are the clear winner, disrupting and replacing the traditional world of books.

The book identity group is simply unable to impose its will on the online Amazon market at least in the United States. We do see organized attempts by book identity people to hamstring Amazon with pricing, taxation and other impediments in some non-US jurisdictions, but PG believes any success in these attempts would be a Pyrrhic victory because interfering with the tremendous reader benefits of ecommerce coupled with ebooks with lower prices would result in fewer readers buying fewer books.

No one has compared Jeff Bezos to Joseph Lister, but PG suggests Amazon’s efforts to make books cheap and easy to purchase is, in its own way, just as life-saving for literature and reading in the 21st century as carbolic acid was for the wounded combatants in the Franco-Prussian War.

And ebooks smell a lot better than carbolic acid does.

Publishing Is Not Dying

25 August 2014

From The Harvard Business Review blog network:

If marketers want to produce content, they need to think like publishers. After all, content isn’t an extension of marketing, it’s an extension of publishing.

I am hardly the only one to make that case, but skeptics are still vocal in their disagreement. “Aren’t publishers failing?” they say. How can I hold up a struggling industry as a model? If publishing is a viable model, why aren’t publishers making money?

These sentiments are common, but they are not based in fact. In truth, publishing is flourishing, creating massive new fortunes for entrepreneurs and more choices for consumers.

. . . .

First, the obvious: a new breed of online publishers has been generating hundreds of million dollars of value in very short periods of time. “Mommy blogs” created an entirely new category. Bleacher Report was sold for over $175 million in just five years. The Huffington Post was sold for $315 million in just six years. And it’s not just the financial results that are impressive — Huffington Post has won a Pulitzer Prize, as has Politico, a news organization launched in 2007.

. . . .

Sure, you may say, tech-savvy startups are doing great, but old-line publishers, like magazines and newspapers are doomed. Aren’t they?

It’s true that magazines in the U.S. were more profitable in the pre-digital age because of the fragmented broadcasting market, but they do make money today. Magazine consultant Jay McGill estimates that profit margins in the industry have dropped off from a stellar 20–25% to a more earthly, but still healthy, range of 12–15%, which is pretty close to the average for the S&P 500.

. . . .

The reason why many publishing businesses continue to make money is simple: they’re selling a product that people want and need. As long as people want to be informed, entertained, and inspired, there will be profitable opportunities in publishing.

Yes, some old-line publishers are faltering and clearly there are challenges ahead, but that can be said about any incumbent industry.

. . . .

The key is for publishers to stop trading digital dollars for analog dimes.

Link to the rest at HBR blog network and thanks to Paul for the tip.

Print Is Down, and Now Out

18 August 2014

From The New York Times:

A year ago last week, it seemed as if print newspapers might be on the verge of a comeback, or at least on the brink of, well, survival.

Jeff Bezos, an avatar of digital innovation as the founder of Amazon, came out of nowhere and plunked down $250 million for The Washington Post. His vote of confidence in the future of print and serious news was seen by some — including me — as a sign that an era of “optimism or potential” for the industry was getting underway.

Turns out, not so much — quite the opposite, really. The Washington Post seems fine, but recently, in just over a week, three of the biggest players in American newspapers — Gannett, Tribune Company and E. W. Scripps, companies built on print franchises that expanded into television — dumped those properties like yesterday’s news in a series of spinoffs.

. . . .

For decades, investors wanted newspaper companies to become bigger and diversify, so they bought more newspapers and developed television divisions. Now print is too much of a drag on earnings, so media companies are dividing back up and print is being kicked to the curb.

Setting aside the brave rhetoric — as one should — about the opportunity for a “renewed focus on print,” those stand-alone print companies are sailing into very tall waves. Even strong national newspapers like The Wall Street Journal and The New York Times are struggling to meet Wall Street’s demands for growth; the regional newspapers that make up most of the now-independent publishing divisions have a much grimmer outlook.

As it turns out, the journalism moment we are living in is more about running for your life than it is about optimism.

. . . .

The people at the magazine business Time Inc. were not so lucky, burdened with $1.3 billion in debt when Time Warner threw them from the boat. Swim for your life, executives at the company seemed to be saying, and by the by, here’s an anchor to help you on your way.

. . . .

In the main, it’s been like one big, long episode of “Divorce Court,” with various petitioners showing up and citing irreconcilable differences with their print partners. It’s not that television is such a spectacular business — there are plenty of challenges on that front — but newspapers and magazines are clearly going to be smaller, less ambitious businesses and journalistic enterprises regardless of how carefully they are operated.

. . . .

Newspapers will be working without a net as undiversified pure-play print companies. Most are being cut loose after all the low-hanging fruit, like valuable digital properties, have been plucked.

. . . .

More ominous, most of the print and magazine assets have already been cut to the bone in terms of staffing. Reducing costs has been the only reliable source of profits as overall revenue has declined. Not much is left to trim.

. . . .

So whose fault is it? No one’s. Nothing is wrong in a fundamental sense: A free-market economy is moving to reallocate capital to its more productive uses, which happens all the time. Ask Kodak. Or Blockbuster. Or the makers of personal computers. Just because the product being manufactured is news in print does not make it sacrosanct or immune to the natural order.

Link to the rest at The New York Times and thanks to Tom for the tip.

Paper newspapers are toast, but paper books! Nobody will ever give up paper books!

Silicon Valley And Legacy Payment Companies Are Locked In A Battle To Control The Store Register

18 August 2014

It’s not just publishing that’s experiencing disruptive innovation.

From Business Insider:

Silicon Valley is gunning for the market controlled by traditional payment terminals, the clunky countertop systems still in use at retailers everywhere.

Startups and tech companies like Amazon and PayPal are creating a new crop of solutions, including mobile payment hardware, credit card readers that attach to smartphones and tablets, as well as merchant-side payment apps.

. . . .

Low or negative countertop terminal shipments growth in Europe and the U.S. are an early sign of payments industry disruption from mobile-based solutions.

. . . .

The greatest disintermediation threat to the overall terminal business, including mobile terminals, is not from mobile terminals themselves, but from apps. Software-based tools like OpenTable that now allow users to conduct physical world transactions entirely within their phones, without the need for scanning at a terminal.

Link to the rest at Business Insider

Reading Disruption

14 August 2014

From Inside Higher Ed:

A technological visionary created a little stir in the late ‘00s by declaring that the era of the paper-and-ink book as dominant cultural form was winding down rapidly as the ebook took its place. As I recall, the switch-off was supposed to be complete by the year 2015 — though not by a particular date, making it impossible to mark your day planner accordingly.

Cultural dominance is hard to measure. And while we do have sales figures, even they leave room for interpretation. In the June issue of Information Research, the peer-reviewed journal’s founder T.D. Wilson takes a look at variations in the numbers across national borders and language differences in a paper called “The E-Book Phenomenon: A Disruptive Technology.”

. . . .

He notes that the Book Industry Study Group, a publishing-industry research and policy organization, reported last year that ebook sales in the United States grew by 45 percent between 2011 and 2012 – although the total of 457 million ebooks that readers purchased in 2012 still lagged 100 million copies behind the number of hardbacks sold the same year. And while sales in Britain also surged by 89 percent over the same period, the rate of growth for non-Anglophone ebooks has been far more modest.

. . . .

Some 200 million people around the world use French as a primary or secondary language. But the pace of Francophone ebook publishing has been, pardon the expression, snail-like — growing just 3 percent per year, with “66 percent of French people saying that they had never read an ebook and did not intend to do so,” according to a study Wilson cites. And Japanese readers, too, seem to have retained their loyalty to the printed word: “there are more bookshops in Japan (almost 15,000 in 2012) than there are in the entire U.S.A. (just over 12,000 in 2012).”

. . . .

Disruption, in Christiansen’s usage, refers, as his website explains it, to “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” An example he gives in an article for Foreign Affairs is, not surprisingly, the personal computer, which was initially sold to hobbyists — something far less powerful as a device, and far less profitable as a commodity, than “real” computers of the day.

. . . .

How closely the ebook may resemble the disruptive-technology model is something Wilson doesn’t assess in his paper. And in some ways, I think, it’s a bad fit. The author himself points out that when the first commercial e-readers went on the market in 1998, it was with the backing of major publishing companies (empires, really) such as Random House and Barnes & Noble. And it’s not even as if the ebook and codex formats were destined to reach different, much less mutually exclusive, audiences. The number of ebook readers who have abandoned print entirely is quite small – in the US, about five percent.
But Wilson does identify a number of developments that could prove disruptive, in Christiansen’s sense. Self-published authors can and do reach large readerships through online retailers. The software needed to convert a manuscript into various ebook formats has become more readily available, and people dedicated to developing the skills could well bring out better-designed ebooks than well-established publishers do now. (Alas! for the bar is not high.)

Link to the rest at Inside Higher Ed and thanks to Nirmala for the tip.

Amazon Book Battle Is Yesterday’s War

12 August 2014

From Bloomberg View:

The pitched battle being fought by Amazon.com Inc., authors and publishers over the price of books is sad to watch. What they fail to recognize is that in the world of digital literature, book ownership will soon be an anachronism.

. . . .

Readers are getting a raw deal from everyone. Amazon’s tactics are interfering with book availability: Foraging elsewhere for the title you want can be a chore if you use a Kindle or are accustomed to buying from Amazon. Also, it’s true that prices are unjustifiably high given the cost of producing e-books. In Russia, for example, where book piracy is much more of a threat than in the U.S., electronic bookseller Litres.ru manages to sell nonpirated e-books for half of what Amazon charges.

. . . .

[T]he book market is following the music market’s technological development path. It progressed from hardcover and paperback books — analogous to vinyl LPs and CDs — to Amazon’s Kindle, which could be used to purchase books from Amazon the way Apple Inc. sold songs to iPod users through its iTunes store. Now even the Kindle model is obsolete: People read e-books on smartphones and tablets and download them on ever-present data connections. So Amazon and other companies such as Oyster and Scribd are offering a subscription model in which customers pay a flat fee for access to a large quantity of books.

. . . .

For readers, a better model might be an enormous digital library in the cloud, where any book could be borrowed — made available for a time — for a smaller fee than its current purchase price at Amazon. Owning books makes about as little sense these days as owning music files, but paying the full price for lifetime availability could be an option. Any of the big cloud players — Amazon, Microsoft Corp., Google Inc., Oracle Corp. — or an ambitious startup renting cloud capacity from them could make such a service available. In this model, publishers would work mainly as promotion agencies, or authors could do their own marketing.

This model can’t become a reality, however, while industry players are still arguing about the economics of the previous iteration. By the time they’re done, the concept of book ownership may become as alien to most consumers as music ownership already is.

Link to the rest at Bloomberg View and thanks to Marc for the tip.

Movie Film, at Death’s Door, Gets a Reprieve

31 July 2014

From The Wall Street Journal: :

Faced with the possible extinction of the material that made Hollywood famous, a coalition of studios is close to a deal to keep Eastman Kodak Co. in the business of producing movie film.

The negotiations—secret until now—are expected to result in an arrangement where studios promise to buy a set quantity of film for the next several years, even though most movies and television shows these days are shot on digital video.

Kodak’s new chief executive, Jeff Clarke, said the pact will allow his company to forestall the closure of its Rochester, N.Y., film manufacturing plant, a move that had been under serious consideration. Kodak’s motion-picture film sales have plummeted 96% since 2006, from 12.4 billion linear feet to an estimated 449 million this year. With the exit of competitor Fujifilm Corp. last year, Kodak is the only major company left producing motion-picture film.

. . . .

In the agreements being finalized with Kodak, studios are committing to purchase a certain amount of film without knowing how many, if any, of their movies will be shot on the medium over the next few years.

. . . .

Film and digital video both “are valid choices, but it would be a tragedy if suddenly directors didn’t have the opportunity to shoot on film,” said Mr. Apatow. director of comedies including “Knocked Up” and “The 40 Year-Old Virgin,” speaking from the New York set of his coming movie “Trainwreck,” which he is shooting on film. “There’s a magic to the grain and the color quality that you get with film.”

. . . .

Industry experts say the roughly $1 million cost of renting cameras and recording equipment on a movie is roughly the same for film and digital, but that the latter allows for faster movement through the visual effects and post-production processes.

“I’m a huge fan of film, but it’s so much more convenient digitally,” said producer Ian Bryce, whose recent “Transformers: Age of Extinction” was shot primarily on digital cameras.

. . . .

It remains to be seen whether film will find enough adherents to remain economically viable in the years to come, as few young directors still use it. Elizabeth Daley, dean of the school of cinematic arts at the University of Southern California, said only one class at her school, advanced cinematography, still trains students to use film.

Link to the rest at The Wall Street Journal (Link may expire)

One of the side effects of a technology disruption of an existing business is that the product costs of the legacy business go through the roof as customers move to the new technology

Mobile-Ad Spending Leaps, but Trails User Growth

22 July 2014

From The Wall Street Journal:

After less than a decade of existence, smartphones and tablets this year will draw more money from advertisers than the centuries-old newspaper industry or the nearly century-old radio sector, a sign of just how rapidly technology is transforming media habits.

. . . .

Research firm eMarketer estimates that spending on mobile advertising, which includes both smartphones and tablets, will soar 83% to nearly $18 billion in 2014. Newspapers will draw nearly $17 billion, while radio will bring in $15.5 billion.

“As more eyeballs are going there in larger numbers, the dollars are starting to follow,” said Cathy Boyle, an eMarketer mobile analyst.

Still, the imbalance remains stark: American adults now spend almost a quarter of their media time on mobile devices, eMarketer estimates, yet this year’s spending growth will raise mobile’s share of the ad market to only 9.8%. By contrast, American adults spend only 2% of their media time reading newspapers but ad spending for the sector hangs just under 10% of the overall market, eMarketer estimates.

. . . .

That mobile still draws a far smaller share of the ad market than of consumers’ media time reflects advertisers’ slowness to change, analysts say, as well as their unhappiness with mobile ad formats.

. . . .

As the measurement tools develop, industry experts say marketers will become increasingly comfortable with shifting more money to mobile.

“I think it’s going to take a very big bite out of all the advertising dollars,” said Yariv Ron, chief executive of mobile ad company Appwiz. “The infrastructure is not there yet. Only now is it starting to take form and shape.”

Link to the rest at The Wall Street Journal (Link may expire)

Riding the Juggernaut That Left Print Behind

21 July 2014

From The New York Times:

Even if you aren’t one of those people worried about media consolidation — there are many in that number — the big bolt of lightning last week that pierced a summer of ennui in entertainment and publishing news was hard to resist.

The unrequited bid that Rupert Murdoch’s 21st Century Fox made for Time Warner Inc. had it all: defensive consolidationstaking shape in both distribution and content production; two like-size media behemoths in an awkward, high-stakes dance; secret meetings; board intrigue; and a naked grab for size and power. Plus, there was the gift that keeps on giving: Mr. Murdoch on the prowl.

It was as if a big train with the word FUTURE emblazoned on its side was revving up. But it was difficult not to notice that one car had been uncoupled and would not be leaving the station.

Even though both companies involved in the merger discussions were built on print franchises — Mr. Murdoch’s newspaper empire, and the storied Time Inc. magazine brand — neither owns print assets anymore. In fact, 21st Century Fox is in a position to make a deal and Time Warner is an attractive target partly because they both got rid of slow-growth print divisions. To the extent that the proposal offered a crystal ball on the future of media, print doesn’t seem as if it will be much a part of it.

Mr. Murdoch moved onto his next quarry only after he had quarantined his own print assets under a separate public company. And Time Warner took on new allure when it shed those dowdy old magazine properties that now trade under their own ticker. Print has lost value in business realms because it has, in fundamental ways, lost traction with you and me.

. . . .

Between the flood of information online and the wall-to-wall television coverage, what is left for print?

. . . .

I am a faithful reader of The Journal’s and The Times’s print edition. Both are built on a wonderful technology for discovering and consuming news, and a large part of their profits still reside in that daily artifact. But when big things happen, I stayed glued to the web, at The Times and other great news sites.

Nothing can compete with the shimmering immediacy of now, and not just when seismic events take place, but in our everyday lives. We are sponges and we live in a world where the fire hose is always on.

Link to the rest at The New York Times

Can the publishing industry do a better job of managing change than the music industry did?

21 July 2014

From Talking New Media:

The news that Amazon had launched a new eBook subscription service, Kindle Unlimited, seemed like the perfect piece of information to pass on to an acquaintance – a verocious (that’s almost a real word) reader of what she describes as mostly trash novels.

“I haven’t bought a book in months,” she told me this morning. “Don’t have the time.”

Another person I know, name withheld, said the same thing about magazines. “I used to subscribe to a bunch of them, but just don’t have the time to read them anymore.”

. . . .

It’s tough to live in a household made up of publishing veterans where the only one actually consuming digital publishing products is the one that writes about them

. . . .

We are in the middle of a revolution in the publishing industry that will prove to be no less disruptive to the industry than what occurred in music over the past two decades.

. . . .

One can look at book publishing and possibly see that it shares much in common with the music industry: the move to digital, from single product sales to streaming, consolidation in retail distribution, new competitors, etc. But with magazines and newspapers there is the added complications that arise when considering the role of advertising.

What we are seeing is many changes occurring at the same time. Reader habits are changing as many readers consider the web and social media formats that challenge for their reading time. At the same time there are platform changes brought only mobile devices and tablets. On top of all this, distribution and retail channels are evolving quickly as book chains fail, digital newsstands and bookstores become publishing competitors, and brands that once depended on publishers become publishers themselves.

Link to the rest at Talking New Media

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