On Wednesday, February the 15th, Justin Vincent and Jason Roberts, co-hosts of Techzinglive did a podcast interview with Paul Paetz, the founder of Innovative Disruption.
The discussion begins with how to accurately identify a disruptive innovator, and why most companies that claim they are, actually aren't. Our ebook "Disruptive Confusion Unraveled", and Innovative Disruption's analytic tool, the Disruption Report Card are mentioned in the discussion.
The podcast goes on to cover a wide range of material, including discussion of Apple's success and how they fit the disruptive model, why it's almost impossible to find a disruptive large company, to suggestions for how to give Justin's product, Pluggio, more disruptive potential.
The discussion centered around the relevance of key factors in achieving disruption, including:
- sustainable cost advantage / pricing strategy
- market segmentation
- targeting non-consumption
- choosing the right competition to position against
- business model
- convenience
- ease of use
- targeting undesirable users
- identifying the "job to be done" for a product
- addressing unmet or underserved needs
Warning: we get down in the weeds with some deep theory and detailed analysis of examples. If you prefer lightweight, breezy material, this isn't for you.
Listen to the podcast here.
In the nearly 15 years since The Innovator's Dilemma was published, the notion of disruptive innovation has grown in awareness immensely, particularly among tech startups, venture capitalists and angel investors.
It has become the holy grail for investors and entrepreneurs, with many funds targeting disruption exclusively. Yet, as strong as this meme has become, it is also one of the most widely misused and misunderstood terms among those same groups.
We can speculate about the reasons why. I think one reason is that the majority of those who talk about it haven't actually read the books or studied the theory. Another is that despite the strength of Christensen's observations and theoretical underpinnings for disruption, the language used to describe disruptive innovation is precise, but highly academic. In the video below, you can listen to Professor Christensen describing his theory in his words:
For many, the theory may make sense, but applying it to real world situations, including decisions regarding investments, business strategy, product design or marketing strategy is anything but straightforward. And, despite the numerous books and availability of online sources like the above recording, it just isn't simple enough.
In a newly published eBook designed to bring clarity and simplicity to the discussion and outline the business significance of disruption innovation from financial, growth, investing and risk perspectives, Innovative Disruption's CEO, Paul Paetz, describes the 6 most common misconceptions about market disruption. They include:
- All innovation is disruptive by definition
- Innovation has to be breakthrough to be disruptive
- Disruption only applies to technology
- "Disruptive" is just a marketing adjective companies use to imply that their product is more advanced
- Disruptive innovation is a meaningless buzz phrase
- All innovation is overrated, and disruptive innovation isn’t any better or different
Of course, all these notions are wrong.
Get your copy of 'Disruptive Confusion Unraveled' to learn:
why there are so many misconceptions- the strategic importance to entrepreneurial innovators and investors
- what it means to be disruptive and why the definitions matter
- how to recognize and predict disruption and measure its value
There's a question that I'm frequently asked that goes something like "So, I've read/heard about the Innovator's Dilemma and disruptive innovation. I get it -- interesting idea -- we all need more innovation. But what difference does it make whether innovation is disruptive or not? What can I do about it / how can I use it?"
Generally, the question is posed as a challenge -- a conversation starter when people are trying to understand what I do for a living and whether my services have any relevance to them. Normally, I use this space to discuss causes and effects of disruption, and case studies and disruption analysis that (I hope) is instructive and interesting. But my business is more than an intellectual exercise, so today I'm going to address this question head-on, and I hope you'll excuse if a tiny bit of selling creeps in. Hopefully, you won't even notice.
Why We Care About Disruption
In a nutshell, disruptive innovation catches competition off guard, and leaves them without adequate response. If you could design it as an attribute of your business, it is the ideal strategy, because it creates new markets, satisfies needs that are unmet or underserved ("Blue Oceans
") by existing solutions, and determines who the dominant players with the highest margins will be for years to come.
Where They Ain't
"I skate to where the puck is going, not to where it is," is a quote famously attributed to Wayne Gretzky, the greatest hockey player ever. He was explaining to a reporter why he always seemed to be in the right place at the right time, and to have the best and easiest scoring opportunities.
Going where the puck isn't is the essence of disruptive innovation. If you solve the problems that no one else is solving (and that potential customers are willing to pay to have solved), at order-of-magnitude lower cost, and with the highest degree of simplicity and convenience, then you'll generally have a disruptive innovation on your hands.
The trouble is, how do you find those sweet spots in your industry, or in your business? It's easy to see the next incremental step in innovation -- make the 'off button' bigger and red, make the product smaller, add another function (whiteners in your detergent). But going in a contrary direction, or one that others don't see the need to, is a lot harder to do.
Apart from the natural resistance that many have to stepping out of line and being different, this is what is so challenging about disruptive innovation, and why disruption is so rarely initiated from within the industry being disrupted. Regardless, to be disruptive, you have to hit the competition "where they ain't" (see "Wee Willie" Keeler), and do it in a way that isn't possible for market incumbents to match easily.
Identifying the Value
As a disruption consultant, the principle benefits my clients identify with implementing a disruptive business strategy or disruptive business model include:
- creation of new revenue streams
- easier sales
- much higher than average margins
- lower cost of doing business
- larger markets and largest market shares
Coincidentally, when you achieve those things, you also create the positive perception of being a trendsetter, an industry (market and/or thought) leader, and a supplier who is better able to serve your customer's needs. So, those are the simple surface answers to the questions raised in the first 
paragraph, but there is a deeper underlying question of how that opportunity can be leveraged. How do we create value from disruption?
Being Disruptive
I don't want to spend time here describing the services Innovative Disruption offers as a consultancy -- you can visit the pages of our website for that information. Simply understand that creating disruption and leveraging its value is done through a number of deliberate tactics that include:
- identifying "jobs to be done"
- radical simplification (of products especially)
- dramatic improvement in accessibility, flexibility and/or convenience
- change that enables nearly the same product/service to be done (or a "good enough" facsimile) for a fraction of the price
- find ways to bring products to, or service market niches that are undesirable to incumbents
and, these are accomplished with a methodological framework, specialized analysis tools, Disruption Report Cards, and a mentality that (fast) failure is part of the lifecycle of product introduction to be embraced because it is necessary to establishing product/market fit, not something to be punished. Lean startup behavior, in other words, is part of what enables disruption.
Eat, or Be Eaten
To conclude, we increasingly face a world where everyone is on one side of the equation or the other: disrupt, or be disrupted. Modern business allows no escape. If you want to explore these questions more fully, I encourage you to download our ebook "Disruptive Confusion Unraveled".
A lively discussion about the Flip Video camera is happening at The Anti-Marketer. My friend, Sean Howard, began it by guest authoring a post where he described qualitatively why he believes the Flip is probably a disruptive innovation. Although Sean and I aren't in complete agreement about the subjective criteria he uses, we do agree that the Flip is a cool device and I thought it worth running a Disruption Report Card™ to get an objective grade to add to the convo.
The Flip has won rave reviews from many sources and is undoubtedly a hip, timely, exciting and successful product, but it's a common error for many in the tech business to label every successful and/or hip product as disruptive. (Our ebook "Disruptive Confusion Unraveled: What Disruptive Innovation Really Means and Why It Matters to Your Business" shines a light on this misconception and explains in plain English what disruption really looks like.)
It's a fallacy based on superficial understanding of disruption, or a frequent underlying belief that all innovation is inherently disruptive (it absolutely isn't). If it was that simple (or simplistic), disruption theory would have little predictive value in identifying those most likely to upset markets, forever alter their dynamics, and in the process become the new dominant players.
Still, if ever there was an obvious choice to declare a disruptor . . .
Key Features
The Flip Video is the ultimate in simplicity. It is a camcorder reduced to the absolute bare essentials. On, off. Start, stop. Record + store video. Play. And, most importantly, effortless upload to YouTube.
It has a relatively cheap, but decent "point-and-shoot" quality lens, no optical zoom, no flip out screen, no hi-def, no myriad editing and special effects features. Basically, in every way it is a low-end camcorder.
Low-end, but popular. Because it addresses a couple of key issues that most of us have with traditional camcorders.
It is tiny and light, which means you can slip it into a pocket or purse and take it with you anywhere effortlessly. It is painfully simple to use. Anyone, from little kids to your grandparents who still haven't set the clock on their VCR can use it.
Just turn it on, point at what you want to record, and push the big red button to capture. And, when you're done, it has a built-in USB port that flips out and plugs directly in to your PC, with software to make quick edits or directly upload to YouTube built right in to the camera. As brainless as video can be.
And, did I say CHEAP?
The list price for the Flip starts at $119.95, but you can easily find it online for around $100. Compared with an average price of about $350 for a regular camcorder and a few hundred more for high def.
And, although you could edit the video files with more sophisticated software on your PC, that $100 includes all the software you need for quick edits and uploading (video editing software can easily cost almost $100!). So cheap that even if you have an expensive, fully-loaded hi-def camera, you could easily see yourself buying one or two of these -- heck, why not three or four, and give one to everyone in your family?
Then you wouldn't have to worry about missing moments because you don't have your luggable with you. Just like most of us who have expensive digital SLR cameras also have at least one or two cheap "lipstick cameras" that we keep in our pockets and purses.
Disruption Report Card
No point in hiding the grade until the end. This one is pretty obvious -- so much so that you'd almost guess it was made to be disruptive. The Flip Video ranks as an A+.
Strongest Positives Affecting Grade
- targets segments unattractive (initially) to incumbents
- targets non-consumption (users who previously lacked money or skill to use mainstream products)
- "good enough" for low-end consumers, and all those places where you'd never have a full-featured camcorder
- significant cost advantage
- targets under-served needs
- simpler and more convenient to use
Negatives
Surprisingly from a disruption perspective, there are none. Of 37 attributes that the Report Card measures, only a couple are neutral or not applicable. On every other dimension, the Fip Video scores positively. Hence the remark -- you'd think it was designed to be disruptive.
Special Notes
The manufacturer of the Fip Video, Pure Digital Technologies, is still privately held, but has a sterling list of VCs and major capital funding behind it, including Heights Capital Management, Sequoia Capital, Benchmark Capital, Focus Ventures, Crescendo Ventures, Steamboat Ventures, VantagePoint Venture Partners, and Samsung Ventures. AllianceBernstein L.P. and Morgan Stanley Principal Investments (MSPI). Inc. provided $40M in additional investment at the introduction of the Flip Video to market to assist with growth and product distribution.
Given the explosive growth and popularity of the Flip Video cameras (over 1 million sold in first year, and capture of 13% of camcorder market share), ordinarily we'd expect a forthcoming IPO, but with current economic conditions, that's hard to predict. Nonetheless, we'd expect Pure Digital to be near the front of the line to go public once market liquidity and positive buying sentiment returns.
Related Reviews and Articles
'Bean' there before
A little over a year ago, Howard Schultz, then chairman of Starbucks wrote an internal memo lamenting the loss of Starbucks' distinctiveness. He wondered openly whether in the mad rush to expand and grow ever more operationally efficient (as measured by speed and same-store sales increases, rather than quality of experience), the company had lost a bit of its soul.
This memo was reported in all the major business papers and spurred a flood of blog postings from Starbucks critics and fans as Schultz seemed to have captured what was on everyone's minds, although still at that time, a largely unspoken feeling.
I too wrote an article taking a very different slant and documenting how and why Starbucks had allowed itself to evolve from being the market disruptor to the disruptee as a number of major foodservice chains began to compete on many of the now commoditized (and watered-down) features of the Starbucks experience -- better quality coffee, much lower price, more inviting workspaces to stay the afternoon and work or lounge, free WiFi, faster service and so on.
Through the remainder of 2007, it became increasingly clear that the days of heady growth, at least in North America, were indeed over, and that Starbucks competitors were taking direct aim at the weaknesses in Starbucks' business model armor that had crept into their operations over the preceding 10 years.
The company still looked healthy on paper, with year-over-year revenues in 2007 22% ahead of 2006 and record net income (profit). But, trouble signs included dramatically slowing same-store sales growth which had clearly reached a limit, and a large number of customers opting for the improved, more widely available and cheaper coffee solutions of the competition as I predicted in last year's article.
Additionally, by the end of 2007, long-time Starbucks loyalists were increasingly grumbling about what was wrong with the company and voting for change by going less frequently, or going elsewhere entirely.
Hello. My name is Howard. Remember me?
As if sensing that the tide of success was turning against his prodigy, Schultz moved back into the driver's seat at the company he built in January 2008, reassuming the CEO role and announcing a return to the basics of Starbucks vision and identity. While acknowledging that the competitive landscape was different, Schultz asserted that the problems at Starbucks were internally generated for the most part, and that the solution lay in self-examination, putting the primacy of the customer experience first again, and getting back to the core mission that had made Starbucks successful in the first place.
Since January, Schultz has been busy righting the ship with a number of dramatic changes, many of which were easy to predict and well-designed to rally the faithful. Last week, the most significant (economic) announcement was made, with 600 store closings and up to 12,000 layoffs coming, and it caught the attention of the business media, partly as a bellwether indicator of the down economy. Certainly that's the way Starbucks spun it, but is it the whole story (or even the right story)?
Slow train coming
In last year's article I identified several signs of disruption and difficult decisions for Starbucks to avert or at least parry with the competition disruption that Starbucks own mistakes had enabled (although in their defense and viewed from an internal "operations" perspective, these would have been perfectly logical innovations to improve efficiency, profitability and leverage the brand through extensions). These included:
pre-bagging coffee beans to preserve freshness (in the process, killing the distinctive coffee smell of an authentic neighborhood coffee bar, and the sensuality of sounds and sights such as scooping of beans, weighing and pouring them into custom bags, etc.)- expansion of chain to be almost as ubiquitous as McDonalds (turning them into a "true chain" experience, common but still expensive)
- conversion from manual expresso machines to automatic to improve speed, efficiency and consistency of coffee making (at the expense of smells, theatre and "hand-made" quality)
- dilution of brand experience due to rapid expansion, higher staff turnover and lower training standards, resulting in surly and uncaring baristas
- introduction of warmed breakfast sandwiches and other foodservice items as a further brand extension (more brand and customer experience dilution)
- expansion of music retailing operations (more brand and experience dilution)
- expansion of branded non-food and non-music retail operations (more brand and experience dilution)
- new "low end" competitors entering market serving "good enough" coffee options (upgraded coffee roasts, espresso and capuccino, "third place" alternatives) at significantly lower prices
Our recommendations included:
- undoing the conversion of coffee bars into retail emporiums, restoring the "third place" ambiance and experience
- improving training
- getting rid of automatic espresso machines that made Starbucks just equal (in perception) to the lower-priced competitive options for many consumers
- acknowledging that new "low-end" disruptors (McDonalds, Dunkin Donuts, local gas stations) selling fresh-brewed espresso at 25% of Starbucks price changed the game and required a specific competitive response
- closing stores because the "coffee aficionado" market was already over-served (in the US market) given "good enough" competition at much lower price points
It's important to note that a few of these are counter-intuitive (at least to most by-the-book MBAs), and options that most businesses wouldn't consider.
For example, when I discussed the installation of automatic espresso machines last year, it was noted that the original decision to do this had cost millions of dollars. Replacing them would potentially both slow down service and retire perfectly good equipment before it was fully depreciated and had reached its natural end of life. (Although the equipment was a "sunk cost", most businesses that had made such a decision in the first place would not easily reverse it and incur additional expenses to restore an "experience" and recreate the lost competitive differentiation.)
And what has Schultz done?
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source: How Stuff Works
The Clover Coffee Machine will elevate the quality and freshness of regular brewed coffee to the premium level that coffee enthusiasts expect, but not so for Starbucks espresso coffees, which will be even more automated than before with the Mastrena, reducing baristas to button pushers. Click on the image to read how the Clover system works.
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- get rid of breakfast sandwiches by end of 2008 (announced Jan 30), to eliminate strong smells that compete with coffee
- slow pace of new openings and close 100 underperforming stores in US (announced Jan 30)
- stop reporting on year-over- year same-store sales growth (announced Jan 30), which could only be achieved in long term by continued dilution of brand experience through increased retailing options
- upgrade "partner" (i.e. barista, counter clerks, store management) training to re-focus on exceeding customer expectations and improve the overall experience (announced Jan 30)
- acquisition of The Coffee Equipment Company for its Clover brewing system -- a method which creates a vacuum to suck the steeping coffee through a filter to create an individually brewed cup similar to French press (which pushes the filter through the steeping coffee) to create a superior flavored cup of "traditionally" brewed coffee, with enhanced richness and body (announced Mar 19)
- introduce Mastrena espresso makers to replace current generation of automatic machines. (Although Schultz announced this, development of this machine, exclusive to Starbucks, was underway for 5 years.) Billed as enhancing the theater (because you can once again see the barista over its lower profile, and offering more control, it is still an automatic machine whose exclusivity doesn't address the quality and theatre lost with the old manual machines. (announced Mar 19)
- Loyalty rewards added to Starbucks cards. (announced Mar 19)
- Close 600 under-performing stores (up from only 100 under-performing stores in January). 12,000 employees will lose their jobs. (announced July 01)
Overall, the emphasis of these changes is essentially the same as the recommendations I made last year, with the exception of two key points, which I'll discuss below.
The stated purpose has been to:
- bring back the sense of theater
- enhance the Starbucks experience consistent with brand expectations
- put the emphasis back on coffee and hopefully undilute the brand identity
Unquestionably for drinkers of traditionally brewed coffee, the use of Clover machines to individually brew whatever you want from fresh ground beans (rather than chose from one of the three pre-selected coffees of the day) is a large improvement. Closing stores was expected because Starbucks was overbuilt, although Starbucks is blaming closures on the economy.
Is it the economy stupid, or is it really disruption?
For the first time ever, Starbucks has experienced a year-over-year decline in same store sales. The economy explanation has been picked up and widely reported in the media (because it fits the story that they want to report), but we have a hard time believing that Starbucks drinkers are consuming less coffee because of the price of gas.
More likely the economy is providing an incentive to the most price sensitive of Starbucks customers to switch to cheaper McDonalds or Dunkin Donuts alternatives, accelerating a trend that would have inevitably have happened anyway, due to the increasing availability of good enough low-end alternatives. Starbucks claims to have done research that disproves this, but we think they'd be wise to ignore the research, which is harder to prove than this more rational explanation.
The problem with drinking your own koolaid on something as strategic as protecting erosion of the customer base is that once people make peace with the mental switch from a high-end to low-end disruptive product, rationalizing that the low-end low cost alternative is good enough, they rarely go back.
The two things in the list of strategic changes that Schultz has implemented that are still at odds with "undisrupting" Starbucks are the switch to Mastrena ultra-automatic machines and not fully addressing the low-end threat for what it is. While the Mastrena may be an improvement in visibility of the barista, enabling them to participate in the experience for the customer, it is still an automatic machine. In fact, it automates more of the process, not less.
The supposed expertise of the barista is therefore non-evident -- they can't do any more to improve the espresso shot than can the cashier at McDonalds. The emphasis of the Mastrena is on higher volume (operating efficiency), and any qualitative difference in the cup of coffee between it and the Verisimo machine is so minimal, it is unlikely to be noticed by the majority of caffeine addicts patronizing Starbucks.
This is a key element, because in no way does the replacement of old machines with the Mastrenas differentiate the end product or in the consumers' mind justify the higher price for Starbucks versus their competition.
Proprietary is not equal to different, and this is a sustaining innovation that reinforces that Starbucks has overshot the needs of their customers, but yet still underperforms on a key dimension -- the expectation of a quality hand-crafted coffee. An expectation that Starbucks created, but has now walked away from.
Secondly, Starbucks gives the appearance of continuing to be in denial that speed and price are performance criteria that a large percentage of their customers deem important, and that many will sacrifice the brand image of Starbucks to get a good enough cup at McDonalds.
Admittedly, this is a very tough line to hold, since through its chain-store ubiquity, Starbucks has ceased to be a unique neighborhood place, becoming instead the middle-of-the-road McDonalds of premium coffee. The only problem is, McDonalds is better suited and better able to be the McDonalds of premium coffee.
How then can Starbucks respond? Can it be different enough to continue commanding a huge price premium over its competition? If not, will business continue to siphoned off by low-end disruptors?
Is there a counter-disruptive response that allows Starbucks to not concede the low-end to McDonalds and Dunkin Donuts while maintaining its higher end niche for hard-core loyalists? Will Starbucks realize that the Mastrena is masking the real problem and that by positioning it as an improvement to the coffee experience, may actually lose more customers as it rolls out (if there is no taste difference, has Starbucks reached the limits of innovation in the core experience).
Will they recognize that purists want a manual shot pulled, or minimally a semi-automatic (because the barista has more control than with a fully automatic)? Can all these needs co-exist?
While we must praise Schultz for the aggressive return to Starbucks origins and a stronger vision, the question now is has he gone far enough, or is the past year a harbinger of much greater disruption to come? Or, has he recognized that disruption is the problem, and there are more surprising announcements to come as a result?
More importantly for investors, is this the end of Starbucks as a growth stock (SBUX - click to see performance over past year compared with Dow Jone and S+P 500), or at about 1/2 the valuation of a year ago, and still dropping, is it a buying opportunity?
Wall Street has been betting against a return to the days of heady growth, but does it have to be that way? I don't think so, but it requires disruptive imagination to see a way out. Perhaps Schultz sees it too.
What do you think?
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My old guilty pleasure, American Idol, ended a few weeks ago, and I got to reflecting on the dynamics of the show itself and whether an article I wrote just before last year's finale would prove to be prophetic on review.
Last years analysis discussed how AI was being disrupted, and whether the producers were either ignoring the problem, or didn't get it. In my review, I suggested some prescriptive changes that they needed to undertake to avoid an otherwise inevitable fate.
So, how did I do?
Last Year's Analysis and Predictions, Issues and Opportunities
- American Idol rules the roost; as #1 rated show, it has become complacent and resistant to necessary change and highly susceptible to disruption
- Any changes have become largely cosmetic (incremental "sustaining" innovations), and they've "overshot" the audience needs on the "slickness dimension" and no longer approximate an "authentic" experience
- The reality that creates ratings for Fox is that only a couple of the top 12 are actually good enough to have a chance at winning. The rest are there to become the train wrecks we want to vote off, to sass back at Simon, to sing gloriously out of tune and make us laugh, to impress with their self-absorption or self-delusion or just plain wacky personalities, to do whatever they do with Paula, and most of all, to give the audience time to get to know the eventual winner and build a following to buy their records.
- The ruse being perpetrated is that the show is really a singing competition, when in reality the producers have constructed a promotional stage which sells lots of advertising (because of the entertainment value in seeing train wrecks get voted off the island) and a vehicle for selling pop records, crafted in the form of a quasi-reality show
- A large minority of the audience has seen the wizard behind the curtains and tired of the deception, and using the power of the web, started to turn the tables on the show's producers, exposing the sham and actively working as a block to "Vote for the Worst", keeping the train wrecks going as long as possible at the expense of singers that the judges and producers actually wanted to "win". Last year, this resulted in the best singer (by any objective measure) being voted off early and two mediocre performers making it to the finale. The resulting winner's album was awful, and sold miserably (opening week sales for Jordyn Sparks first AI record were less than 1/2 same stat for Fantasia, the previous worst-selling AI winner, and only about 40% of the same stat for Taylor Hicks, who was generally considered a bomb and was dropped by his label).
- The voting system that Idol uses is suspect to begin with. By asking the audience to vote for their favorites, and as many times as they want, they have created a system which generates revenue but can't reliably identify either the best singer or the audience favorite(s). Even superior voting systems (audience votes for the worst and the person getting the most negatives is eliminated, one vote per person, one ballet with yays and nays for all contestants tabulated, it is open to manipulation, but the way it is, the best singers and performers are routinely voted off several weeks too early.
- Because of the above, the grand prize of a recording contract has become meaningless, and even a bit of an albatross. The contestants voted off early routinely get recording contracts and outsell the winners, because they a) can sing better, b) have more control over their albums (AI doesn't dictate what they can sing or how it gets produced), and c) therefore better songs, or at least songs they are better suited to sing, get on their albums.
Note that to try to deal with the last point, the judges practically fell over themselves this season to tell the voting audience as bluntly as possible who they thought needed to go and who should stay in an apparent effort to ensure that one of their favored singers actually won this time. They became so transparent about it, that Paula got caught offering judgment about a song that hadn't yet been sung, casting the wizard's curtain wide open.
Our conclusion: the above factors are causing audience disenchantment, and eating into viewership. The cynical business model that AI uses to milk the show for maximum revenue was easily disrupted by a little website exposing the underlieing deceit.
The Results Are In
So, are these predicted results actually happening? If so, how are they manifesting?
- Viewership in 2008 was down an astounding 7% from 2007
- In a year where the two stars were considered "hot" guys, the primary viewing audience of women aged 18 to 34 was down by 18%
- The median age continues to skew ever upward, from mid 30s a few years ago, to 42 today. Hardly the prime music buying age group.
- The over 50 age group has increased in viewership.
All this suggests increasing irrelevance to the trendsetting youth audience, boredom among core fans, and disenchantment and disenfranchisement from the process. Typically when this sort of thing begins, it is irreversible because by the time executives acknowledge it is a serious problem (whether the product is a tv show, a newpaper, or a me-too generic cell phone, it's too late to make the major changes necessary to right the ship.
Will American Idol will take my advice? There's no doubt they have to do something and we're highly likely to see some changes next year, but the question is, how will they diagnose what's going on, and therefore come up with appropriate solutions. (It's at this point that I should helpfully point out that if they want to get the skinny on how to counter this disruption before it kills the show, I'm available as a consultant.) Here's a little free advice:
- The dynamics are old, and some highly visible changes are necessary. First to get the shake up should be the judging crew. Only Simon is core to the program -- it's time for Paula and Randy to go. Besides, the show needs more authenticity, and you can always count on Simon to say what he thinks in an entertaining way.
- Sacrifice some of the revenue stream from voting to create a system that isn't as vulnerable to manipulation (people need to believe that their votes are meaningful if they're going to keep paying attention and spending money to vote).
- Recognize that music trends don't stay the same forever. There was a minor nod in this direction this year as David Cook got more kudos and promotion from the judging crew as the show progressed. The interesting thing about him was that he already sounded like a lot of what's on the radio, and his looks and personality didn't hurt either, so it was easy to imagine him as the winner.
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Most of the material that gets sung on the show is from a time before these kids were born (was it such a big surprise that Jason didn't know that CATS showstopping Memory was sung by an old dying female cat?), so it isn't that surprising that it's more popular with people older than 50 than with teenagers and 20 somethings. It would help the producers to look at this from a "jobs to be done" perspective, rather than a "what we want to sell" perspective. The job to be done is to engage the youth audience (primary music buyers), identify a new "star" that they relate to, and create records that are current and interesting to that audience. Like Chris Daughtry did (but then, he had the advantage of being voted off and picking his own band and music -- hmmmm.)
Understand that superstar singers and bands sing hit songs. After spending most of the season telling contestants that song selection is critical, how much sense does it make to give your winner songs which don't fit their style (make a blues guy sing a sugary pop song, for example), or which are simply crap (letting amateur song writers write stuff that is total trash musically and lyrically) and then asking a newly minted winner to make it a hit song is absolutely nuts.
One possible voting system that could work better would be to count song downloads from iTunes in the 24 hours following the performance show. Even if it cost the same as texting in a vote, the fact that you get the song with it would be a big discouragement to VFTW, and iTunes doesn't let you buy the same song twice (at least not easily).
These are some easy big things that would make things more authentic, freshen things up, and introduce some sustaining innovations to counter the disruption to American Idol's artful guise. There are several smaller things as well, but the above would be a healthy start. If not, watch for even bigger declines next year, and a franchise that may not recover from disruption.
Warning: This is a long tale of real disruption.
A few weeks ago I managed to break my foot by doing nothing more extraordinary than walking on it. I wish the story was more exciting, but I can't imagine a more dull and uninteresting way to break a foot.
There I was, packing for a business trip to Toronto when I stepped towards my suitcase and heard a loud, sharp crack, like a good-sized branch breaking, and next I knew I was on the floor in a lot of pain.
So, we went to emergency, spent about 4 or 5 hours to have a nurse practitioner confirm after looking at x-rays -- "Yup. You broke it", and then bring me a pair of crutches and a goofy looking styrofoam shoe, with instructions to see a foot doctor in the next two days. And, for all their trouble, they sent me a bill for over $2,000.
Now, don't you wish your product or service had demand that was so inelastic that you could charge virtually anything for doing almost nothing?
Alert: Healthcare Industry Ripe for Disruption
So, I got home around 2:30am, and still had to finish packing to get to the airport first thing in the morning. You see, it wasn't just that it was too late to call anyone and postpone the trip, but it was an important strategy meeting, and people were coming from Ireland, so it would have been very costly and aggravating for everyone to cancel. Anyway, it gave me an excuse to do what I thought was the right thing.
On to Toronto
I'm going to skip the gory details of travelling with a broken foot that isn't in a proper cast yet. Suffice it to say that I suffered incredibly miserable service from an assortment of airlines (not just to Toronto, but in a subsequent trip to Portugal as well). It was a real eye-opener about how poorly people with a handicap are treated.
Alert: Airline Industry Ripe for Disruption
I'm quite fortunate that in a few weeks, I'll be back to normal -- for many this is a permanent way of life. I had no idea how frequently the needs of people with handicaps are either simply ignored, overlooked and disregarded, or, that there's a seamy underside that looks to take advantage of people who need help. Not sure who needs to be disrupted to fix this, but we could all use a wake-up call.
So, in Toronto I learned to use the crutches, and narrowly avoided a face-plant on freshly cleaned marble floors thanks to the strong arms of two guys that were walking with me. Strangely, although marble is one of the most deceptive and slippery surfaces when wet, the cleaning staff apparently didn't see the need to put out signs warning that the floors were wet. Hmmmm.
Basically, Toronto was a dry run for what it would be like flying to Portugal the following week to do a keynote address at the International Marketing Congress. I survived with the sponge slipper for a couple of days, and didn't break anything else, so we'd have to say that was a successful trip.
Oh yes, the meetings were good too.
And then Portugal
As soon as I got home from Toronto, we got to a doctor and had the foot looked at. Surprisingly, he too confirmed that the foot was broken and charged me an additional $360 for that information.
He wanted to put me in a full cast right away, but when he heard that I needed to travel to Portugal, he shook his head (I think in disgust and disbelief -- obviously he thought it was a mistake and that I should simply accept my fate and be immobilized for 6 weeks right then and there) and offered a temporary Air-Cast, which for all the world looks like a Robocop appendage. See picture above.
Oh yes, and another $250 in the meter for that.
Neat contraption, in that it allowed me to deflate the airbags inside and/or loosen the straps as my foot and leg swelled on the plane. They advised me that if I didn't do this, there was a good chance my leg would need amputation by the time I got to the other side, and that was the reason not to put a proper cast on at that time.
When all was said and done, we'd spent another half an hour, and another approximately $800 for almost nothing. Who needs the mafia when we can simply visit a doctor?
Alert: Healthcare Industry Seriously Needs Disruption
The Air-Cast did make me a little more mobile, and certainly protected my foot better than the sponge slipper, but it was truly a hulking and inconvenient thing to have to wear.
Of course, the whole point of this story was to get to Portugal. It was my first trip there, and despite the foot, it was an immensely enjoyable visit. The people were great, the food was great, the wine even better, the seaside was great, my hotel was nice, the culture was very comfortable, my hosts were gracious and welcoming.
In fact, the only downside was the whole airport experience. Have I mentioned that the air travel industry needs some disruption? Although not so much on the cost-saving low end -- this is already a well-served space, and the corners being cut are apparent everywhere. Oh well, a future post.
Disruption Point
Appropriately enough, the conference title was The Disruption Point, and my keynote put forward the thought that Disruptive Innovation doesn't happen without Disruptive Marketing, using some case studies and graphed results from The Disruption Group's disruption scorecard tool.
As I was delivering my talk, I had an out-of-body sort of experience (I promise, it wasn't the Vicodin) when it occurred to me how ironic/appropriate it was that I was delivering a talk about innovation, marketing and disruption while I was disrupted in a wheelchair. And, how unique.
I don't recall ever seeing a keynote address done from a wheelchair before, although I'm certain someone has at some point, if only at a conference for those bound to them. I suspect many speakers would have cancelled, but I had put a great deal of thought and effort into this and wanted to see how the audience reacted. I also wanted to go to Portugal, so the location definitely benefited the organizers.
What was especially interesting for me was to get a European view of disruption and innovation. The growing strength and especially the single market opportunity for the EU seems to have spawned a new spirit, willingness to take chances, ambition to grow, recognition of opportunities at home and around the world.
In short, European capitalism seems to have new life and there is some great energy over there, and desire to learn and try new things. In contrast, the US seems to be a litte bit on the ropes by way of comparison.
I think we are weary of the Iraq war, the falling dollar and rising prices, especially for oil, fighting terrorism, dealing with airport hassles, the hangover from all the corporate fraud and Sarbanes-Oxley compliance, the failing mortgage market and the toll it is taking on banks and homeowners, encroachment on freedoms that we have always taken for granted in the name of "enhanced security'" (an oxymoron if ever there was one).
Basically, virtually everything is in the dumps at the same time. We need a good recession and some political and economic housecleaning to clear out the fog and get back on track.
But, I digress.
One of the more interesting people that I met was Francois Laurent, president of the French National Marketing Association. He is a crusty guy with a train of thought at least equal to the controversy I cause, as you might discern from his blog and upcoming book title "Marketing is Dead". Here's what Francois had to say about the conference (automatic translation to English version here).
My presentation was well-received and despite the disruption, the trip to Portugal was very worthwhile.
Home of Disruption
So now I'm safely home, have a full cast on my foot, and am already chafing to get rid of it. It's certainly no fun trying to do anything from visiting the restroom, to going up and down stairs, to getting dressed, to bathing, to going out anywhere.
As I wrote in a recent email, I can't believe that we can send miniature cameras inside someone's heart and do robotic surgery controlled by a doctor 1,000 miles away, yet when it comes to healing a broken bone, we still have this archaic and inconvenient 150 year old technology to fix things. I could have arthroscopic knee surgery, or laser eye surgery, and be back to 100% in a few days, but break a bone, and your life will be disrupted for at least 6-8 weeks.
Consider me broken and disrupted.
A collection of disruptive thoughts, observations, and small items not big enough to rate their own articles:
iPhone Predictions Already Exceeded
The day before its launch, we wrote a lengthy analysis of the iPhone's disruptive potential and published our predictions of its likely popularity. Many disagreed, but our expectations were pretty close to bang on, with Apple announcing 1 million sold just 74 days after the initial release.
Some fanatics might have suggested even better sales possible, but this is about the top end of what one would expect for a disruptive product. The usual pattern is to seep into the market relatively slowly and then really take off as subsequent versions add features and correct problems, becoming good enough for more and more people until they reach the tipping point and explode into mass market consciousness.
With the unparalleled hype about the iPhone, it's not surprising that it was strong out of the gate, despite many noted complaints about all the ways it wasn't up to snuff (also very common for new disruptive products).
And a New iPod Too
We also discussed the likelihood of a family of mobile handhelds using the iPhone platform, and already we have the next generation iPod, which not surprisingly is an iPhone without the phone.
Along with that new product came a brilliant move of partnering with Starbucks to offer free Wi-fi access at any of their locations. It's actually pretty smart for both sides, because the days of charging for a Wi-Fi connection are almost over, and this is a way for Starbucks to be a bit ahead of the curve and benefit from the glow that surrounds the iPod and iPhone.
Watch for iPhone Sr. coming soon to an Apple store near you -- I expect it will be outfitted as a true business-oriented handheld, with connectivity to corporate systems, better security, more horsepower, a suite of office applications (note that Apple's iWork product was also upgraded over the summer to offer a spreadsheet tool for the first time and integration with Office 2007.
With the "holy trinity" of word processing, presentations and spreadsheets now covered, the Mac becomes a lot more viable as a PC replacement, and will suddenly be "good enough" for many who've been waiting for a real Microsoft alternative, and the iPhone also gets closer to being a viable substitute for the notebook, especially for road warriors tired of airport security hassles. Don't know if we'll get it before Christmas, but I promise, the writing is on the wall.
Office 2007 UI Mistakes: What Were They Thinking?
Microsoft is probably wondering about some of the horrible mistakes made in Office 2007, such as imposing the "Ribbon" interface on power users who not only don't need it, but find that it slows them down. Personally I don't like it because it is a big keystroke waster, makes it hard to find all the things you knew, and it wastes a ton of screen real estate. Not offering an option to use the old menus or the keyboard interface was a really bad idea.
Microsoft's Office 2007 "ribbon": Seriously, someone thought this inelegant, productivity-sucking mess was an improvement!
Although the XML underpinning was a great idea, it also makes it easy for someone like Apple who is better at tools to eat Microsoft's lunch, and with such a huge change in the interface, there's plenty of incentive, and what has anyone got to lose by giving Apple's products a try?
It's a classic case of overshooting the users' needs on the one hand, and not fulfilling them on the other. And, it's the kind of arrogant decision that could only come from going so long without real competition. Ripe for disruption indeed!
Relationships
For many, summer is a time to re-connect with family and think about relationships. Of course, we did that too, and got to attend that rarest of events -- my parents' 50th wedding anniversary. Even more amazing, my wife's parents celebrated their 50th a couple of years ago.
How many people can say that their parents and in-laws are not only still all alive, but have both managed to stay together for 50 years? There must be a pot of gold at the end of a rainbow somewhere.
And, check out the picture. Gotta love the skinny people and skinny ties. They just don't make them that way any more.
Disruptive Marketing
In the category of "growing realization of the obvious", there's another sort of relationship that comes to my mind. Namely, the relationship between marketing and disruptive innovation. With a couple of decades of technology marketing experience behind me, and my focus on disruption, you'd think I would have spent more time considering the connection. It's a relationship that's lived in my head without expression.
Strangely, Christensen comes close to alluding to it a few times in his books, but never really addresses it. In fact, it's almost as if all those innovations that he describes were so obviously fantastic products that they grew to dominate markets without anyone making the smallest effort to target the right niches and make them appealing to customers.
I've been developing some hypotheses about that relationship, and gathering evidence and observations to test them. It's a simple but profound notion. Namely, that disruptive marketing is the secret sauce that takes the potential of a disruptive innovation and turns it into a reality.
Yes, there are accidents along the way, and occasionally disruption happens without intent, but it's become increasingly clear to me, both by looking at missed opportunities for disruption, and at products that succeeded in turning the tables, even against the odds, that disruptive marketing is a necessary component.
I will be delving into this idea in more detail in future posts with case studies, examples, definitions, and description of how disruptive marketing works. I hope to elicit a healthy discussion around this idea and get "war stories" from marketers about how they did it, and what disrupts versus what is plain vanilla.
Upcoming Presentation
Carrying on with this idea, I will be making a keynote address to the International Marketing Congress in Lisbon in a few weeks. The conference theme is The Disruption Point, and I will be addressing the connection between Disruptive Innovation and Disruptive Marketing. This will be the first public forum where I will be presenting my theories and observations, and I'm looking forward to a great discussion and debate.
Books
Several books crossed my desk this summer, and I know that I fell asleep reading at least three of them (that's a good thing). No time to review at length, so I've simply provided a list with letter grades that are indicative of quality/value/insight/readability. Cick the links to order your own copies at Amazon if you're interested.
Two days before the official launch of the iPhone, the pitch of media, pundit and public anxiety over perhaps the most anticipated new product since Windows 95 has reached a level only Steve Jobs could properly describe -- Insanely Great! And here I am, contributing to the noise, raising it even a decibel louder if that's possible.
iPhone Debut Rivals Harry Potter Mania, But Will It Last and Why?
How loud is it? As I finish writing this post, Technorati says that there are nearly 189,000 blog postings (in English -- there are nearly 305,000 in all languages) that talk about the iPhone.
Compare that with 39,170 that mention Motorola's RAZR, a phone that was the previous biggest smash hit and which literally put Motorola back in the cell phone business after years of decline. Nearly 6 times the level of mention of a phone which has been exceedingly popular, a design hit, has been in the market since 2004 and which exceeded all other flip phone sales within one year of its release.
And, the number of postings that include mention of the iPhone has been rising by over 1,000 every 4 hours today, and you can count on it growing even faster until the pent up hysteria is released at 6pm on Friday. And, the chatter certainly won't stop then.
Every major media outlet has weighed in. The Wall Street Journal, New York Times, USA Today, every computer or telecom related industry trade journal has reviewed it. Virtually everyone who's been privileged to receive one of the media samples for review has said it's cool -- so cool it almost lives up to its hype.
Like the mania for video game consoles or Harry Potter books, prospective customers started waiting in line outside flagship stores in New York Tuesday morning. Unprecedented for a phone.
Think about it -- the entire country seems locked in a heat wave, with most major cities experiencing temperatures in the mid 90s or higher. Yet, people are so lustful of being one of the first to own an iPhone, that they will camp outside a store for 4 days in the sweltering heat to lock in to a 2-year service commitment from AT&T, the worst service provider in the business (more on that later).
So, does all this mean runaway success -- the game is already won? Or, will there be an equal and opposite reaction when possibility and excitement about the future gives way to reality, and inevitable issues with service, availability, bugs in functionality and unfulfilled expectations?
Apple fanatics say it will be successful because it is ultra-cool, easy-to-use, a breakthrough in design elegance and software sophistication. Naysayers say nothing could live up to this level of hype, and that when things die down, sales will appear lackluster no matter how good they are.
Virtually everyone notes the stupidity of getting into an exclusive deal with AT&T and warns that this could be the albatross around the iPhone's neck. Almost all of the speculation and predictions are based on visceral and emotional reactions, and influenced heavily by the reality dispersion bubble that surrounds Steve Jobs, and by the majority belief that "better" wins.
But if we run with that notion reductio ad absurdum, what exactly does 'winning' mean? Assuming that the consensus is that the iPhone is a better phone, does it have to achieve market dominance as a late entrant the way the iPod has in the MP3 player space?
Surely it doesn't have to match iPod's 80% market share within 5 years! There are over a billion mobile phones already in use around the world. Is a 10 or 20% market share strong enough to be considered successful? (The RAZR's share is only around 5%.)
Is this even the right yardstick to use?
The iPhone Will Be a Disruptive Winner
iPhone will be successful regardless of the metrics used. It will be successful beyond the expectations of the most enthusiastic pundits.
It will be successful beyond what Steve Jobs thinks. It will be successful in spite of the apparent deficiencies that have already been noted in the reviews. It will be successful despite partnering exclusively with a single carrier, and the one most despised in the industry -- although this will be the biggest road bump the iPhone faces.
It will be successful because it will change the game -- actually, it will change many games, and therein lies the secret of its success. It will do all this because it will be disruptive.
But, predictions are dangerous. And, mine disagree with those of many people whose opinions I respect and whose theories I borrow from. Even though I'm siding with the majority who believe the iPhone will be a big winner, how do I arrive at that conclusion and what exactly makes it disruptive?
Who Disagrees With Me
Before explaining what the highly respected experts are missing, let me first say who some of them are and try to summarize their positions.
Innosight
Innosight is the consulting company formed by Clayton Christensen to sell management services around disruptive innovation. Clay developed the original ideas and theoretical framework that underlies disruptive innovation in his series of books - The Innovator's Dilemma
, The Innovator's Solution
and Seeing What's Next. Saying he (or his minions) have it wrong is like saying that the pope isn't Catholic.
In January, after the original announcement of the iPhone, Innosight consultant Jonathan Barrett said:
- at $500 or $600, the price is too high
- Cingular (now merged into AT&T) is incapable of providing the same high quality, seamless user experience that Apple customers expect
- iPhone won't work on 3G high speed data networks -- only EDGE or Wi-Fi is supported -- so there won't be anything unique or distinctive about the wireless service
- the deficiencies plus high price point will prevent iPhone from finding a market sweet spot
- the approach of Apple is a "sustaining strategy" (i.e. incremental innovation of the cell phone), not a disruptive one, positioned against deep pocketed, long time industry incumbents who have a lot to lose if Apple wins and will fight fiercely for share
He reaches his "not disruptive" conclusion while still finding many things to like, such as lack of keyboard, design beauty, novel interface, thinness and coolness factor.
Mike Urlocker
My colleague, and the CEO of The Disruption Group, has a stronger technology, industry and investment background when it comes to the iPhone, having been the original analyst at UBS to identify the RIM Blackberry as a disruptive product and the first to recommend RIM as a strong buy. Mike has worked for and advised software companies on marketing strategy, and at UBS he was executive director and member of the global technology and telecom teams.
In his Disruption Scorecard evaluation of the iPhone, again shortly after the original announcement in January, Mike rates it a B-, and labels it likely a hit, but not very disruptive. He reasons that the product appeals to people who want status and high design (the coolness factor) and are willing to pay for it, but that it doesn't have much potential to change the game like Blackberry did, or upset incumbent rivals such as Nokia, Motorola or Samsung.
Laura and Al Ries
Branding and positioning experts Laura and Al Ries (Al Ries and Jack Trout wrote the original book that defined the concept of positioning
) take a different tack, identifying the iPhone as a "convergence" product, and the iPod as a "divergence" product. The concepts of divergence and convergence come from Evolution Theory -- basically, the idea is that there is a common origin to all species, but that over time the "tree of life" diverges as natural selection creates specializations to adapt to the environment.
Similarly, Al and Laura (and other pundits too) argue that the natural trend for all products is towards divergence and specialization to better suit consumer needs.
They claim the iPod was successful because it was a divergence product. Moreover, they argue that most "convergence" products fail -- convergence being when multiple feature categories are combined in a single product (in iPhone's case, an iPod, cell phone and PDA).
Their position is that consumers prefer products that are optimized to do one task well, rather than a lot of tasks poorly, and they further claim that the iPhone has been over hyped and most over hyped products fail to live up to expectations, therefore the iPhone will be a failure.
Hmmmmm.
Most of the others who claim the iPhone will be a failure base it on their own personal biases rather than what the market as a whole is likely to do and why -- "I'm not going to get one because . . .". Name your complaint here. Price, lack of keyboard, slow data network, AT&T as carrier, touch screen keys too small to hit accurately, it will have bugs in version 1.0, etc.
So, what are they all missing, and more to the point, what is Steve Jobs really up to?
The Label Problem
One of the problems with evaluating anything analytically is that we get hung up on labels rather than thinking about what the labels mean and why the rules of thumb associated with them usually work. In the case of the iPhone, there are many labels and definitions being applied that are throwing people off the scent of what's really happening and my belief is that this is deliberate.
Yes, Steve is trying to fool the experts and fly below the analytical radar, ironically while mounting one of the most pervasive and successful hype build ups of all time.
To start with, the name iPhone is a mislabeling. While iPhone does indeed have phone capability in it, it is not a phone. Suspend disbelief for a second, walk with me a little, and it will all make sense soon.
Is your laptop PC a phone because you can make GoogleTalk or Skype calls using it? If not, why not?
Does it matter that it isn't the only thing you do with it? What if that was the most important thing you did with your PC, because you make a lot of calls to India, and free long distance service is worth a lot to you? Still not a phone?
Well, if your PC isn't a phone, is it a typewriter? I know that the primary purpose for my PC is typing documents, blog posts and html. I print a lot of those on paper. Mine is definitely an evolved typewriter.
Or maybe your PC is really a gaming console, or a mobile email device because you use it at home, at work, at Starbucks and at hotels and other wi-fi hotspots around the world to send and receive emails. Or, maybe it's just another example of a highly unsuccessful convergence device?
Or, do you still think your PC is something else?
The iPhone is Definitely Not a Phone
So, if you were willing to suspend disbelief and suppose that the iPhone might not be a phone, what is it then? Let's start with why it's called an iPhone.
iPhone is both sales positioning and a ruse. iPhone is positioned as a phone because Apple knows that in that niche, the market is sorely lacking for a stylish, easy to use, fun, visual, well-designed and well integrated device. It is a first if only because of its elegance. Don't believe me?
Then why isn't it really an evolved iPod? One with a really big screen, beautiful graphics and music navigation, and by the way, it includes the ability to make phone calls?
The reason is because Apple believes this is the purpose that you will understand out of the starting gate, and for which it can convince people to shell out $500 or $600 to get the most stylish and coolest gadget on the block. Therefore it is positioned as a phone, and that's the basis on which everyone is analyzing it, and writing glowing reviews. But it isn't a phone.
It's also a ruse, because Mr. Jobs has a much higher goal in mind than selling the world's coolest phone. But this is an effective way to divert attention from the real disruption that is happening until it's too late.
Why This Makes Perfect Sense
Let's get a historical perspective to make a little more sense of this. When Alexander Graham Bell invented the telephone and tried to sell his patents to Western Union in the late 1870s, how do you think he described what it was?
No one had a framework to describe how revolutionary the phone would be as a communications tool. If you wanted to talk to someone, you went across the street, knocked on their door, and if they were at home or in their office, you could talk.
Initially, outside of the securities industry, people couldn't even understand why they would want a phone. Especially since the first version could only work over short distances due to signal loss on the wires. There was no network, there wasn't any need for communications to be sped up that much and nobody else had one, so how much use was it?
Bell considered the telephone to be a way to transmit voice over the telegraph, and that's why he thought Western Union would buy his patents. Bell viewed the telephone, perhaps one of the most disruptive technologies of all time, as an incremental ("sustaining") innovation over telegraphy.
Western Union, on the other hand, viewed it as being worth less than $100,000 since they rejected the offer to buy the patents for that much, although they later tried to buy them for $25 million.
Do you consider your telephone today to be a highly evolved telegraph? If you can imagine that, what about your cell phone, or is it different because it's mobile? What then of the iPhone? Just a space age telegraphy device with no keys or dials?
The important thing to note here is that in the early days, it is difficult to imagine the application and importance of disruptive innovations if they really are, because no one has a framework to understand its value.
That's why the car was positioned as a horseless carriage. That's why TV was radio with pictures. That's why the first computer was called ENIAC -- or the Electronic Numerical Integrator and Calculator.
That's right, the first computer was just a calculator that cost 200,000 man hours to build, $486,804 in 1946, and used $650/hr worth of electricity to sit idle. Some times the original naming belies the importance of an innovation.
So, positioning of an innovation in the short term is not the same as long-term recognition of value and the salient characteristics that define its use. If not for the need to calculate missile trajectories more quickly and accurately during the war, the first computer might never have been built.
And what of convergence versus divergence? Most consultants and branding experts will tell you that convergence as a strategy almost always fails, because the more things you combine into one, the more compromises you have to make in design, and each individual function is sub optimized at the expense of the whole.
In disruption theory, a parallel idea says that as companies continually add sustaining innovations to better meet the needs of mainstream consumers and/or differentiate their products, they eventually overshoot the needs of most of their customers. Convergent products usually exceed the needs of all but a small minority of any prospective customer base. After all, who needs every tool on a Swiss Army knife?
That's the theory, but the reality is that when you try to apply simplistic labels to categories or products and then assign attributes or success factors based on those labels, you can miss the forest for the trees. In the case of convergence versus divergence, this is especially true, since which bucket you assign a product to varies based on whether the combined elements are truly synthesized in such a way that they cannot be separated and provide the same benefit, or whether they are just bolted together and not really integrated to optimize overall performance.
Ask yourself whether the combination of radio technology, speakers and a cathode ray tube to make a TV represents convergence or divergence? Is it the evolution of radio, or are the elements synthesized in such a way that they create something truly new?
If I turn on the TV, but listen to it from another room, is it still a TV, or is it a radio? Did the TV fail because several technologies converged? What about personal computers?
So what is the iPhone, and what is Steve really up to?
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It's a handheld one of these
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The iPhone is disruptive because it isn't really a phone, or for that matter, an iPod. If it was either of these, then as cool and elegant and nicely designed as it is, it would still just be an incremental or "sustaining" innovation.
Remember that the iPhone has a complete version of the Mac's OSX operating system embedded, plus it lacks a keyboard and has a truly novel interface with seamless integration between different functions. With all that, it can be considered as the first truly personal handheld entertainment and communications computer.
It can also be considered the first handheld business computer powerful enough to replace a notebook for road warriors tied of lugging all their paraphernalia through airport security. In other words, it competes in a different class of products -- not as a phone, not as a smart phone, and not as a computer.
It serves the un- or underserved need for lightness, simplicity, ease of use, true integration and is simple enough that my mother could use all the features without thinking about each being a different application or device. Competing against laptops, it doesn't yet have all the applications my PC has, but it is "good enough" that many will be ready to give it a try.
And, there are already numerous applications you can download to enhance the functionality for your needs, and many more business applications (especially things like bluetooth connectivity to a real keyboard, document editing, spreadsheets and presentation capability) which will run in Safari are likely to come.
And, when compared to a laptop, it is disruptively inexpensive. Analogous statements are true if you evaluate it as a personal communications and entertainment computer.
This is, I think, what the huge excitement is about. People innately sense that this is much bigger than a phone, they just aren't yet able to articulate what is significant about it, and how we'll look back on Friday June 29, 2007 as one of those days when everything changed.
And, it looks really cool and I desperately want one.
Steve's End Game
The iPhone is a trojan horse.
Steve lost the first battle between the PC and the Mac because he was less sophisticated as a business person in those days, and didn't fully appreciate how difficult it would be to convince the masses that they needed an expensive personal computer before they had even used one at work. In 1984, the Mac exceeded the needs of most potential customers, and looked like a toy to business (unless your business was about graphics or publishing).
The DOS-based PC was the "good enough" disruptive innovation of its time because it catered to mainframe users used to buying computing equipment from IBM and used to looking at green-screen character-oriented terminals.
This time it's different. Almost all of us use PCs daily. And, most of us are tired of the now clunky-seeming interface which isn't much different or easier to use than the initial Mac interface of more than 20 years ago.
And, we desperately need a single, small pocket-sized device that can handle all our business needs while on the road and enable us to leave our 10 pound paperweights at home. Something that's easy to get through airport security, and makes my life less complicated.
Moreover, at the price point of $500 or $600, this is something that every road warrior can afford today, if only as a style accessory. So, the decision won't be made or inhibited by corporate IT departments.
Sure, they'll try to block connectivity to their servers on security grounds -- they always do, because they think computers are about them, not about the users' needs. Of course, the iPhone includes VPN connectivity, and most have already got their heads around that. But so many executives will have these that just like the Blackberry before it, corporate acceptance will be very fast. And, once you've adopted the iPhone as your traveling computer, how much of a jump will it be to make your next notebook/desktop for office use be a Mac?
My Prediction
As a phone, the iPhone will be exceedingly popular. If production can keep up with the demand, I believe that Apple will sell more than 2 million before year end 2007 -- if they can scale fast enough and have a new version out in time for Christmas, maybe as many as 5 million.
Steve Job's stated target is 10 million sold by end of 2008. Given that there will probably be at least 2 more versions of this product before that, I believe 10 million is a very low estimate, set so that expectations can be smashed -- again, it will depend how fast production can gear up to handle demand and support several different models, but 20 million should be easily reachable.
As additional business applications start coming online, probably early to mid-2008, expect sales to really take off. We will no longer be judging the iPhone as a phone when that happens, but as a true micro-mini sized PC which revolutionizes the entire tech industry and rejuvenates innovation throughout Silicon Valley. At that point, the iPhone will disrupt Blackberry, Nokia, Motorola, Microsoft, Samsung, and maybe even Nintendo (to name a few).
see Seth's Prediction Page
Postscript
And, what about AT&T? Well, that truly is the fly in the ointment and Steve's Achilles Heel. AT&T is brutish about customer service, slow to innovate and slow to reform. They will try to extort every possible advantage in pricing and contractual obligation that they can. AT&T knows nothing if not how to exercise a monopolistic advantage.
Moreover, AT&T lacks the broadest service coverage, and no single carrier (in the US, at least) is right for everyone. We all know that signal strength and dropped calls vary based on where you spend most of your time.
So, if you live in an AT&T dead zone, tough luck. Their EDGE network is slow, and they don't have anywhere near complete enough coverage with their 3G services (which aren't built into this version of the iPhone anyway).
It's hard to understand why Job's wouldn't let the market decide if he wasn't going to lease his own service. With a single carrier that many will be unhappy with, Apple will take the brunt of service complaints -- if I could go anywhere, I'd blame the carrier, not Apple.
Verizon has the best coverage and fewest dropped calls. T-Mobile has the best customer service, best rates, and happiest customers. 
Maybe AT&T (Cingular at the time) was the only one willing to play ball on the technology changes that Steve wanted.
Regardless, if service complaints and customer mistreatment stories start hitting the press, expect a negative backlash that could take a serious bite out of sales growth and long term success. On the other hand, wide scale Wi-Max is a technology whose time may well have come -- it would make perfect sense for independent Wi-Max providers to bathe cities in their signal, and then AT&T could become almost irrelevant in the equation (if Wi-Fi VOIP capability exists).
Other Links
Ok, I'll admit it. I too have guilty pleasures. American Idol is one of them.
Back when AI first began, I studiously ignored it. My wife got hooked by the third or fourth show, but I thought the whole idea was dumb and never bothered.
The first show I sat through was the finale of the first season, which I thought was pretty pathetic. I hated both singers. They were too amateurish, and although Kelly Clarkson was clearly better, that was only because her competitor was soooooo bad.
Then came the second season. My suspicions confirmed by the first season finale, I ignored the first 5 or 6 weeks
Then for some inexplicable reason, probably boredom, I sat through a show because my wife was watching it. Then I got hooked.
It was still like watching a train wreck happen for many of the below average contestants who couldn't sing in tune or remember their words, but the Ruben - Clay thing was kind of interesting, and I enjoyed seeing the bad singers get voted off one by one. 
I think that was about when AI started to become the ratings juggernaut and pop star-making phenomenon that it is now.
So, I haven't watched every show since then (not a total addict), but I have come to anticipate my regular fix.
Becoming "The Establishment"
Over the past several years, American Idol has grown in strength, kicking the butt of every show that dares to go against it. America got more and more hooked. Viewership for some regular season shows now approaches Superbowl ratings, and the finale has become so big that it completely encapsulates pop culture
Prince's appearance on last year's finale confirmed the acceptance of AI as part of the establishment and TV royalty. Other than the Superbowl and Y2K New Year's Eve party, what other shows has Prince participated in in recent memory?
Pop stars line up to release new songs or new albums or rejunvenate dead careers on the show. Other TV shows covet the spots before and after AI's time slot, and all FOX has to do to create a new hit is let it follow AI for a few days.
New movies are released by offering boondoggles for Idol participants. Actors with new movies out show up in the audience just to be seen. And, they'll pay anything just to secure a seat in the studio audience if they haven't got something to promote.
The Today Show, the leading morning Infotainment program routinely reports the previous night's Idol results as one of the top three lead news items of the day -- results from a competing network's "reality" show! Virtually every major media outlet now announces the American Idol results on a weekly basis.
Yes, American Idol rules the roost, but trouble is on the horizon.
The Sweet Sound of Disruption
So, with all the money and star power and publicity and seemingly ever-increasing ratings, how can I say that American Idol is being disrupted? Simple -- the best pure singer the show has ever had, with a voice equal to any pops-topper of the past 40 years, was voted off last week. Amazing!
How could this happen?
Why I Might Be Wrong
Before I delve into the analysis demonstrating that disruption is indeed happening, let me first explore why others might say that I'm wrong.
Many will say that the voters are always right. If the two left are the ones who collected the most votes, then they must be the best, or the most exciting, or have attracted the best following. Especially with over 60M votes being cast -- more than the totals for any presidential election ever.
But realistically, is that possible? Or more to the point, why did Sanjaya last so long?
Clearly he forgot words, sang out of tune, and was often just ridiculous. Yes, lots of little girls liked him. Yes, he had a built-in core demographic of Indian voters who had never had one of their own to vote for before. But would that have been big enough to keep him aloft into the top 7?
So what explains it then? Why did Sanjaya last so long?
An unholy alliance, perhaps? The crying little girls were part of it, and so was the Indian demographic. So was a group who truly found him entertaining and refreshing and thought he as a good singer.
But the influence that tipped the balance could only have come from a blog which encouraged its readers to all get behind the very worst performer left and try to keep them alive week after week.
Vote For the Worst
Vote for the Worst was a little subversive blog site that started in 2004. Having all the right qualities to grow with viral explosiveness, it now has a readership that at its peak this season averaged 500,000 hits per day (coincidentally, that peak occurred in the period when Sanjaya seemed to be invincible, and the media started questioning why such a bad singer was able to survive week after week, while better singers were being voted off.
The "Daily Reach" graph from Alexa (below) clearly indicates that votefortheworst.com had the intended affect, and was responsible for ensuring that Sanjaya survived for several weeks past when he should have. They succeeded in having their good fun, and with the vote distributed between lots of candidates and those near the bottom being particularly vulnerable, a small boost in vote is plenty to alter the result and keep the weakest contender alive.
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This graph of website reach statistics from Alexa shows the impact that votefortheworst.com has had during the 2007 season of American Idol.
Readership starts to rise just as the public voting season gets underway in mid-February. Spikes correspond to the Monday to Wednesday period each week. The site's heaviest draw was during the period of mid-March to mid-April when Sanjaya seemed to defy gravity and the odds week and week, until his final performance of Bonnie Raitt's "Something to Talk About" which was so dismal, even the tinniest of adoring teenage girls? ears could detect the poor quality of performance.
The biggest peak almost hits .04 percent of all internet traffic for a single day near the end of March, which is far above the average reach estimated by Alexa of .0475 percent of global internet traffic in a week. Using Nielsen data to estimate visitors, this reach equates to approximately 2 to 3 million US-based readers in an average week.
If we can safely assume that at least this many votes were influenced to "vote for the worst" (who this site identified as Sanjaya), it's more than enough in a close contest to keep an individual competitor in.
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But, What About Melinda
That's a very plausible, reasonable and highly probable explanation for the survival of Sanjaya, but how does it explain the ouster of Melinda, clearly the best and a strong judges' favorite
As the vote totals rise, and the number of finalists goes down, shouldn't that increasingly favor the best? Moreover, what proof do I have that the vote was close?
The extra information we need comes from DialIdol.com.
DialIdol provides software which enables avid voters to speed dial their Idol votes from their computers. In addition to helping fanatical young voters get the maximum number of votes recorded for their choice in the allotted time, DialIdol also records how often a busy signal is obtained when trying to vote.
As we might expect, there is a high correlation between frequency of busy signal and the respective singer's rank in the results show (i.e. the more often the voting number is busy, the more people are trying to cast votes for that singer. DialIdol uses this data to publish predictions of the most likely winner and loser each week. (It's hard to believe we're so obsessed with this that we can't wait a few more hours for the actual results show, but there you have it.)
Close Voting Favors the Disruptor
In the week that Sanjaya was voted off, DialIdol accurately predicted the bottom three, including that Sanjaya would be loser. In all preceeding weeks, he was safely in the middle. Last week, as the "DialIdol Rank Graph" below indicates, the voting was too close to predict vote ranking for anyone. So, either the audience didnt agree with the unanimous assessment of the judges and most observers that Melinda knocked it out of the park, or something was helping the poorest singer to stay alive.
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DialIdol's busy signal statistics show that last week's semifinal was extremely close with all three contestants having almost identical busy signal percentages on their voting lines. When the voting is this close, the margin of error is bigger than the difference between the contestant's votes, making a reliable prediction nearly impossible.
With over 60 million votes cast, and statistically insignificant differences separating first place voting from third, a very small number of votes can make a huge difference, as we saw in the 2000 presidential election where subjective decisions about every hanging chad dictated the outcome. The Alexa graph above shows that fewer people are visiting votefortheworst.com now than when Sanjaya was still alive, but they are still influencing over 1 million votes per week.
VFTW is now supporting Blake as the worst remaining singer. However, like Sanjaya, Blake also has a strong fan base to count on. As the only (somewhat attractive) male left, he draws the majority of the teenage and younger female votes. He is also perceived to be more up-to-date in his musical styling, and more of an "interesting performer" with better stage presence than either of the women.
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Impact of AI Disruption
FOX network at first denied that VFTW was having any impact. Then, when it was clear that they were having an impact, FOX called them "hateful" and "mean-spirited". Ironic accusations from the show that deliberately calls out the most delusional and sometimes mentally-challenged entrants to callously make fun of them in the beginning-of-season reject shows.
But mean-spiritedness is surely what the FOX execs feel who rightly understand that the long-term health of the franchise is at stake, and that the sham that American Idol built upon is being exposed and therefore the business model threatened.
What sham?
American Idol is positioned as a contest to find the best undiscovered young (amateur) singer in America, thereby "discovering" them and making them into a star. But that basic idea is a lie. The audition process is not designed to find the best singers, but the best contestants for a reality show.
Of course, the producers want a decent singer to win at the end, so they put "judges" in place to try to guide and influence the public voting. In any given year, there are about 3 or 4 who are actually good enough singers to deserve a recording contract, so as long as the show eventually whittles down to 2 or 3 of that group still standing, and generates a built-in fan base and familiarity to sell records the producers have won.
In the mean time, the show needs to provide entertainment, and a pure singing competition would get awful boring awful fast. Admit it -- we all watch because we like the train-wrecks, because there are crazies who make things funny, because we like to see bad singers insulted by Simon, and we like to see them insult Simon back and then take their medicine by getting voted off.
But, and this is a very important 'but', it isn't a real singing competition until all but the last 2 or 3 have been eliminated.
Here's another way of looking at it. Does anyone really believe that out of more than 100,000 auditions, there are only 4 or 5 people who can carry a tune moderately well?
In the general population, there are at least 2 or 3 per hundred selected at random who can sing well. If those 100,000 were selected randomly, there should be a couple of thousand potential contestants. But they self-select, which means they either believe they have some talent or just want to be on TV, but that still means that the ratio should be more like 4 or 5 out of 100.
But, the audition process skims most of the crowd, looking either for good personalities for the finals, or oddball personalities for the "audition" rounds, which are highly staged for TV. Either way, it is TV presence that matters, not singing ability
After all, out of 15 to 20 thousand people in any given city, only about 10-15 get on TV, and most of those get the TV spot so we can laugh at how bad they are. But the show would have us believe that outside of the few who are picked for Hollywood, everyone else is mediocre or less.
VFTW exposes this sham.
They recognize that American Idol wants train wrecks in the final 12 to keep the show entertaining while we get to know the "real" finalists. Which is why there are so many in the top 12 who can't sing.
VFTW agree that it's funny, so they want to keep the train wrecks on as long as possible, and in the process they are slowly but surely eroding the premise that the show is based on by exposing the lie that it really isn't about finding the best singer. And, they need almost no resources, no money, little time -- just a small blog to undermine the show's foundation.
That's why poor Melinda lost last week. That's a personal slap at her, but it may end up being the straw that broke the camel's back as far as the show is concerned. AI didn't care who she sang against, but everyone wanted the best singer to be in the final.
So, the real cost of disruption is that America starts to realize there is a wizard behind the curtains trying to manipulate them into picking who they always wanted us to pick, and once we realize we've been fooled, we lose interest, they lose their star-making machine and the billions of advertising dollars and promotional opportunities that the show has spawned.
And the outcome may be that VFTW forces a change in process which makes the show more honest but less interesting. That's a real world example of the power of disruption -- either way it costs and it may kill the target if the response to the threat isn't met successfully.
Nobody said that all disruption was good.
Food for Thought
- Could FOX or American Idol's producers have anticipated this?
- How should they have reacted to the disruptive threat?
- Is there anything they could still do to neutralize it before next season?
- How would you know if the crown jewel of your business was about to be disrupted?
- Can you deliberately create disruption like this to upset your competitors (in an ethical and legal way)?
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