business model

Question for the Soon-to-be-Disrupted: Are You Living in Horseradish?

The finance industry is facing large disruption, and it isn't coming from within. The industry needs to consider the reasons they will be disrupted, be prepared for radical new business models, and look to outsiders who aren't afraid to break the status quo in order to understand why the real disruption is not the incremental tech innovation that they are so enamored with.

Disruption by Design: The Book

Historically, virtually all disruptive innovation has happened by accident. Even though there is a distinct pattern to disruption that the theory describes, before Christensen observed and synthesized the mechanics of the pattern we weren't aware of it, and it certainly hasn't been obvious how to create that pattern on purpose.

After all, if you used theory to build:

  • an inferior product
  • with a low price
  • targeting an undesirable market that incumbents will run from rather than fight for

you'd have a product that bears the hallmarks of disruption as described in The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. But you wouldn't have any guarantees that your product is a disruptive innovation. In fact, it could be that you’ve simply built a crappy product that no one wants.

Strikingly, although many have tried to use Christensen's theory to design disruptive products, it's noteworthy that Clay's books were not written with that purpose in mind. In fact, he writes in the introduction to The Innovator's Dilemma that his research and writing was motivated by the desire to help executives “do what is right for the near term health of their established businesses, while focusing adequate resources on the disruptive technologies that ultimately could lead to their downfall”. In other words, his goal was to help industry incumbents recognize and avoid disruption.

About 2 years ago, I set out to do exactly the opposite.I wanted to create a handbook for entrepreneurs, startup founders, and marketers of potentially disruptive products that would help them to disrupt markets on purpose.

After a long gestation, that book "Disruption by Design: How to Create Products that Disrupt and then Dominate Markets" has arrived. (if you hurry, you might still find some sites selling it at pre-release prices -- take advantage because in a few days, if not sooner, the price will go up significantly).

Disruption by Design is intended to be a self-contained book that guides you through all of the key things you need to know, from a quick review of the most important elements of the theory, to how to predict market disruption, to creation of product and marketing strategy with disruptive potential, to designing a disruptive business model and ultimately, how to go to market, disrupt, and stay on top for the long term.

If you want to build disruptive products on purpose, you need this book

I don't often "sell" in this space, but I did want to let my readers know why I'd been absent for a long while, and also beat my chest a little today. I've worked hard to distill the things I've learned about disruption from working as a consultant in the field into a guide which is easy to read and follow. I did that because if we're ever going to reinvigorate our economy, we need 10x more disruption and we need it 10x faster than we're currently innovating. We need disruptive innovation because it is the economic engine of growth that moves us forward, and creates jobs and wealth.

Over the coming months, I'll be highlighting some of the key ideas from my book in this space, and hope you'll join me in discussing how to create disruptive products by design.

To learn more about the book, visit this page: Disruption by Design.

Update: The People Have Spoken

It's been very gratifying to get lots of positive feedback about my book. The widget below collects review comments from a variety of sites, which I thought might be a useful update to share here. You can click on the profile that's displayed to learn more about the reviewer, and follow or connect with them.

Identifying Disruptive Innovators: Techzinglive Interviews Paul Paetz

On Wednesday, February the 15th, Justin Vincent and Jason Roberts, co-hosts of Techzinglive did a podcast interview with Paul Paetz, 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.

Note to American Idol: Fight Disruption with "Jobs to Be Done" Focus

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 year's 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.
 The Two Davids: David Cook and David Archuleta

The Two Davids: David Cook and David Archuleta

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 underlying 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 newspaper, 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.

Jason -- CATS is sung by cats?! -- Castro

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.

The Disruption of American Idol

Disclaimer: This article is not about disruptive innovation per se, but is more of an entertaining diversion into a different kind of disruption. It does, however, have analogs with the kind of disruption we normally like to explore here, so for fun, I use a similar analytical framework.

american_idol_logo.jpg

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

 Melinda Doolittle: Is She the Best American Idol Singer Ever?

Melinda Doolittle: Is She the Best American Idol Singer Ever?

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?

What explains it? Why did Sanjaya last so long? Sanjaya 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?

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

 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.

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.

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 Alexa "Daily Reach" graph (shown right) 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.

VFTW 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.

 

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?

 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.

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.

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.

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.

 Say it ain't so! The sham: it isn't a real singing competition until we get down to the last 2 or 3.

Say it ain't so! The sham: it isn't a real singing competition until we get down to the last 2 or 3.

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)?

More Conventional Opinions

Sites Mentioned in This Article

Boeing's Big Boo-Boo: Top 6 Innovation Takeaways (Part 3 of 3)

In this 3-part series, we dissect the failure of Boeing's inflight satellite-based internet service, Connexion by Boeing. In parts one and two, we discussed the flawed business model and massive marketing mistakes that inevitably led to nearly $1 billion in losses before shutting down the project. In this 3rd and final article, we ask what could have been done differently, and what lessons should be learned.

Recap: A 6-Year Long String of Failures

After looking at the cost structure, revenue models, poor assumptions about market size and demand, pricing, scale of operations and marketing strategy, the inescapable conclusion is that almost everything that could have been done wrong to bring Connexion by Boeing inflight internet service to market, was. Like so much other big company innovation, it was clear that Boeing had no idea how to go about launching and driving market adoption of this service, or how to design a business model that had a chance of working.

Part 3: What could they have done differently?  (Hint: Next time pretend you're a startup.)

Although not in any way a disruptive innovation, or even one with potential to disrupt, the Connexion by Boeing service could have learned a lot from how disruptive innovations are successfully brought to market and how startups launch products.

Here are some of the things they could have done differently and lessons that can be learned from Connexion's failure.

1) Business Model Design

The cost structure that this service was saddled with, from satellite bandwidth licensing to having a business unit with 560 people to incredibly expensive technology needed on each plane, boxed Boeing in. To get the service available in a large enough number of planes and at the right price point to make it economically viable, Boeing ought to have used a strategy more akin to the early dotcom successes like Amazon and Yahoo and Google.

If your product depends on a mass market to be affordable, then you have to seed the market to bootstrap it. That means pricing low -- even giving it away for the first year (like Skype is doing) to get people on the grid and addicted.

Ultimately, the pricing strategy needs to recognize what the average or downmarket consumer considers good value, not be a skimming strategy dependent on only those willing to pay the maximum.

Lesson 1: There are many possible variables in designing a business model, and what works in one scenario doesn't always work in another. Don't assume you got it right the first time, and don't scale your business before you know that it's viable.

    2) Fast Failures

    Boeing assumed that the service they wanted to deliver at the price they wanted to sell it for was the service that the potential customers wanted and were willing to pay for. There was no small scale testing of this before scaling the business into a 560 person business unit, locked into very expensive satellite bandwidth contracts, targeting availability anywhere in the world.

    Fast failure is a necessary part of startup methodology. The objective is to test the constraints, minimum viable product features and alternative business models, and assumptions about the target market. You expect to fail multiple times but learn from each failure until you arrive at the right configuration or determine that there is no product/market fit or viable business model.

    Big companies tend to see failures as something to penalize rather than something to learn from, which means when they fail, they fail big, just as Boeing did.

    Startups without the luxury of Fortune 500 cash backing them are forced to do things in a more lean fashion, and to test all their assumptions before committing them to the business model. This little bit of common sense might have been enough to work out the kinks without blowing a billion dollars, maybe even hitting profitability within months of operation.

    Lesson 2: Failing is a good thing in a startup if you do it fast, learn from it and pivot. In fact, it's a necessary component of identifying the right business model design and optimizing for success. It also costs a lot less than assuming you're right and failing slow.

    3) Cost Structure

    Lean startups need to keep their cost structure pared to the bone until they demonstrate that they have a business model that can scale because VCs wouldn't have it any other way. As noted above, Boeing built an outrageously costly platform making it virtually impossible for the service to be profitable unless every unrealistically optimistic projection came true, and boxing themselves into a price model that customers wouldn't buy into.

    Disruptive innovations tend to have the lowest cost structure, often by an order of magnitude. Boeing choose to implement almost the highest possible cost structure. This left the service vulnerable to lower cost technology advances (e.g. onboard conventional wifi from ground transmission stations and/or plane-to-plane daisy-chaining) that could be expected to compete in the future, undercutting and undermining Boeing's business model.

    Lesson 3: Always try to achieve the lowest possible cost that delivers a product/service that is "good enough" to satisfy your target market, and be conscious of technology advances that could obsolete your innovation using cheaper components or lower manufacturing and assembly costs.

    4) Network Effect Potential?

    One of the factors that strongly favors disruptive innovation is the existence of a potential network effect. In this case, there was a weak potential network effect that could have been exploited, which favored convenience and usability and faster time-to-critical-mass.

    Had Boeing promoted Connexion directly to consumers with a message that they could now get affordable (assuming the price was affordable, which in their model, it wasn't) internet access in the sky, using a single account with a single sign on and promoting the carriers that offered it, and gained a large subscriber base quickly, the other airlines would have to get on board or be left out of the game.

    Achieving this potential network effect / sole supplier status depended on having the right business model to begin with, and getting out of the starting blocks fast once product/market fit was established.

    Lesson 4: Always ask whether there is a possible network effect, and if there is, what you need to do to enable it. Don't get greedy in the early days, because networks can easily stall before reaching critical mass if you overprice or enable alternatives to establish viability.

    5) Customer Development

    The key idea here is that ideas about customer needs formed in a laboratory and without talking to customers are hypotheses, not an accurate description of real needs. The only way to uncover real needs and gain an understanding of who the market is and what its members are willing to pay for with a service of this nature is to go out in the field with a prototype/working model and observe and talk to them. Customer Development is the methodology most commonly used by successful startups to establish what the real needs are and get to Product/Market Fit.

    It appears that Boeing failed to understand that the airlines weren't really their customers, just gatekeepers. Unfortunately, for aircraft sales, the airlines are their customers, which complicates this enormously. Boeing probably shouldn't have been in this business, or should have found a way to work around this fundamental conflict.

    For this service to be successful, Boeing needed direct access to the end customer -- the passengers using the service. They needed to have a few market-test planes where the service was fully available, but could be run experimentally with different ways of constructing pricing. They needed to sit beside customers who were deciding whether or not to use the service and to see directly everything about its operation and the user experience, from how the customer pays to price barrier resistance to difficulties signing on to how it was communicated by flight crew to passengers.

    These and many more attributes needed to be known so that an affordable, easy-to-use, properly communicated and desired service could be introduced. Because this wasn't done, none of the obvious objections about usability, availability of power outlets, space to work, price point, etc. were encountered or thought of, creating numerous barriers to adoption.

    Lesson 5: Understand who your real customer is before you launch a service saddled with $1 billion in cost structure and have no way to reach them.

    6) Establish Product/Market Fit

    Establishing product/market fit is the process of identifying the compelling need that your target customer must have satisfied by the Minimum Viable Product, as well as all the assumptions that this is based on and the risk factors.

    If you haven't spoken to real customers, it's impossible to know whether your product/service innovation meets any compelling needs that they are willing to pay for. It's also difficult to uncover the risk factors that will inhibit adoption, or to know which assumptions are valid, and which are invalid.

    Boeing theorized that passengers were willing to pay for inflight internet access, but never validated that assumption with more than a flawed market survey, nor properly established if sufficient demand could be created at the pre-determined price point to have any chance at economic viability.

    They also didn't observe firsthand customers choosing not to use the service because they wanted to sleep, or to watch a movie, or because they lacked sufficient space to get value, or didn't have access to power or sufficient battery life -- they never learned any of the risk factors so that they could act to address/negate them, or pivot their strategy and work around the risks.

    Lesson 6: With any innovation, you must know how customers view the product, what the risk factors to viability and adoption are, what alternatives exist (to using your product -- they don't have to be direct competitors), what segment(s) you appeal to and what will motivate them to a purchase. You have to get out in the field with customers (not imagined customers) and see it yourself.

    Other Issues

    • Traditional market research instruments and focus groups are useless for designing non-sustaining innovations. They cannot uncover real needs and market drivers. The most you can expect from research with end-users is that they tell you their pain, not a solution or its value. After they've tried it in a real scenario, they can give lots of feedback about what's wrong with it. The conclusions of Boeing's research indicate that the survey used was an invalid research instrument that asked irrelevant self-serving questions - the sort used to fill press release content, not to determine customer needs.
    • Accessibility and Convenience. Every plane needed to be outfitted ASAP for this service to take off. Amazingly, it was not until this year that the first new plane was built and delivered with Connexion installed. Boeing should have made the decision to include it as a standard piece of equipment, and charge more if the airline said no. This way, there is no retrofit cost barrier to laggard carriers deciding to offer the service -- they could even conduct trials without having to plan years ahead and make big commitments.  Furthermore, the cost to retrofit existing planes should have been made much more attractive, even going so far as to bundle it with major maintenance service intervals at cost of materials, or cost of labor, whichever was lower.
    • Take responsibility for your own marketing. If you need to work through the carrier to reach the customer, do their marketing and business planning for them. A Connexion-in-a-box kit, because if they have to think, you've lost the game.
    • Pricing. What the market has clearly said regarding any communication/network service such as this (think landlines, cell phones, earth-based broadband, Tivo, even text messaging) is that it wants a reasonable (read: relatively low) subscription price which is capped, and which an average user perceives as good value. For example, if it costs me $30 for 2 hours of access, I'll wait until I'm on the ground and connect for free at the airport lounge (not free really, but I already have a subscription that works there). Very little email is that urgent, and I certainly won't pay that for gaming or to watch TV over the net.
    • What about the lack of carrier vision? Indeed there is plenty to pin on the carriers too. They don't get marketing either, at least not in a user-oriented authentic context. For any of the US majors, this would have been a cinch to create brand loyalty, much like frequent flyer miles did when American was the only one doing it. Think of this: a premium flyer package, as an add-on to my Crown Room or Admiral's Club membership.  How about a $15-20/month upgrade to my membership that not only gets me Club access, but gives me unlimited internet access on the plane, higher priority waitlisting for upgrades, a free drink on domestic flights and two freebies on international (if I'm stuck in cattle class), plus phone calls, movies, the whole shebang. It's hard to imagine anyone not buying this, with an associated increase in demand for Club memberships and an extremely sticky preference for a ticket on that carrier. Ironically, I would probably pay $30-40 more for a ticket on a carrier where I had those privileges, and that level of increased ticket price is well within most business traveler's discretion at time of purchase.

    In the end, it's about being sensitive to customer needs and perceptions, and offering a product and packaging that removes barriers to adoption, rather than erecting them.

    And carriers, please, power access in every seat should have been done 15 years ago.