Real innovation, not false bravado, disrupts markets

From cable TV to taxi cabs, innovative disruption is shaking up markets and changing people’s lives

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I get tired of hearing fledgling entrepreneurs in Silicon Valley boasting that their every app, widget, or service is "disruptive." Mostly, they’re not. And simply because a product is disruptive, it doesn’t mean it will "change the world" for the better. In fact, it might make the world worse.

But sometimes technology is truly disruptive, and in the last few weeks we’ve seen what it means to disrupt a market -- even the social order.

As streaming video becomes richer in content and easier to use, the market for pay TV is starting to unravel. In the third quarter of 2014, the top pay-TV providers -- which account for 95 percent of the market -- lost about 150,000 video subscribers, compared with 25,000 in the same quarter last year, according to Leichtman Research Group.

Uber, meanwhile, is getting a good deal of grief for the arrogance of its executives and its allegedly slipshod screening of drivers. But the ride-sharing service and its competitors have upended the market for taxi services. Because fewer people are taking cabs, the average price of an individual New York City taxi medallion fell to $872,000 in October, down 17 percent from a peak reached in spring 2013, according to an analysis of sales data by the New York Times.

The disturbing images of the death of Eric Garner, captured on a handheld camera and sent across the world on social media, illustrate yet again how profoundly those tools have disrupted the traditional business of gathering and distributing news. Citizen-created video, not professional journalists, shaped a national reaction.

Innovative disruption didn’t start in Silicon Valley

Disruptive innovation, a term coined by Clayton Christensen, describes a process by which a product or service takes root -- initially in simple applications at the bottom of a market -- then relentlessly moves up market, eventually displacing established competitors.

It’s a process that’s centuries older than the printed circuit board, and it involves inspiration, team building, and distribution.

You could argue, for instance, that the world’s first tech startup was the printing shop of Johannes Gutenberg in the medieval German city of Mainz. Like a modern entrepreneur, Gutenberg began with an inspiration (movable type), raised venture capital, built a team, and eventually disrupted the market for books produced one at a time by scribes. (You can read an account of that startup in the novel "Gutenberg’s Apprentice.")

Gutenberg didn’t succeed until he and other printers overcame the social barriers to printing (the Catholic Church wanted to control it) and distribution.

Uber and Lyft are in a similar position, although they didn’t invent anything tangible. Their founders realized that the taxi market was inefficient, was unwilling to innovate, and provided terrible service. (Try to get a cab in the rain sometime.) It was an industry practically begging to be disrupted.

By leveraging the broad availability of smartphones and the growing numbers of young people looking for part-time employment, they created a new business model: on-call ride sharing. It’s a model that works; ride-sharing services are generally cheaper than cabs and readily available, so it’s no wonder that passengers are forsaking traditional taxi services and summoning a car from Uber, Lyft, or Sidecar.

As far as I know, the Catholic Church could care less, but ride-sharing services also face social obstacles to success. Uber, in particular, has caught the eye of regulators in many countries concerned that it doesn’t vet or train drivers very carefully and that its insurance coverage is skimpy. (Accusations that an Uber driver raped a passenger in India is the latest black eye for the company.)

Despite their problems, ride-sharing companies have already disrupted the market; there’s no clearer evidence than the falling price of medallions in New York and other cities. Before long, they’ll likely come to terms with reasonable amounts of oversight and the market will continue to morph.

Netflix: A serial disruptor

When Reed Hastings started Netflix in 1997, Americans who wanted to watch a movie at home went to a video store, rented a DVD or VHS tape, then tried to return it on time. The largest rental chain by far was Blockbuster, which at one time had more than 9,000 stores and 60,000 employees.

Hastings had a better idea: Mail the movies. His inspiration didn’t take advantage of new technology, but like Uber it entered a market that had stopped innovating and was dominated by a hidebound company. By the time Blockbuster caught on, it was too late for it and most of its competitors.

Netflix next moved into streaming movies and has recently begun producing its own programs, a path now followed by and others. At the same time devices like the Apple TV, Roku, and Chromecast have made it much easier to stream Web video from a PC to a television.

Like the taxi industry, the cable (and satellite) television companies have become stuck in a business model that their subscribers hate: big, expensive bundles, coupled with crummy customer service. (Good customer service is expensive and cuts into margins.) Until streaming became popular, the only alternatives to cable were the relatively paltry offerings on broadcast TV.

You don’t need a bundle to stream "House of Cards," and customer service isn’t much of an issue with streaming. Young people, raised on YouTube and streaming music services, were the first to cut the cord — and now that streaming is simple, their parents are following suit.

It’s far too soon to proclaim the end of the cable TV model; after all, the last quarter’s defections were a fraction of the industry’s customer base. What’s more, cable giants like Comcast have huge political clout and are more than rich enough to engage in punishing price wars against the upstarts if need be. Indeed, Comcast is trying to disrupt the Internet, although it won’t succeed. 

Nonetheless, disruption has already started. HBO, for example, is uncoupling parts of its service from the cable companies that carry it. The premium service will offer HBO Go as a stand-alone subscription sometime in 2015, and other content providers are likely to follow.

Is the world better because we might not have to take the trouble to hail a cab or pay Comcast to watch "Girls"? Probably not. There’s a real social cost to change, whether it’s cab drivers or newspaper reporters who lose their jobs. But from the market’s point of view, it doesn’t matter.

Real innovation, whether it starts in a 15th-century workshop or a Silicon Valley garage, disrupts markets and the people who participate in them in lasting ways. Bragging that you’ll change the world doesn’t cut it. You need to do it -- and that's no so easy.

Copyright © 2014 IDG Communications, Inc.

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