Tuesday, June 06, 2006

Part 3: Disruptive Innovation viewed as a Maturity Model | by Adrian Cockcroft | June 6th, 2006

This time I'll take a more abstract view of a maturing market as each phase evolves, and refer to the development of in-home movie watching as an example.

  1. An emerging market is characterized by competition on the basis of technology. Early adopters like to play with new technology and are able to cope with its issues. Many different products are competing for market share on the basis of "my features are better". Think of the early days of the VCR, with VHS vs. Betamax. In a mature market, few people worry about features, most VCR or DVD players have the same feature set and very good picture quality at a very low price. If you want to be sure you get a good one, you are most likely to buy using brand name (e.g. Sony) rather than poring over detailed specifications. Margins are low, but volume is high and margins can be better if you won the brand battle.
  2. The next phase in the market is characterized by competition on the basis of service. Think of the video rental store as a service. You visit the store and pay rental according to how much you use the service. As an emerging service, anyone could setup to rent videos and DVDs. As the market matured, larger stores with a bigger selection and more centralized buying power provided a better service, and video rental chains such as Blockbuster took over the market. Again, the power of a dominant brand became the primary differentiator as the service market matured.
  3. The third phase in the market is the evolution of a service into a utility. A utility provides a more centralized set of resources, and a regular subscription or monthly bill. It can provide similar services, but in a more automated manner. NetFlix is my example of a utility based DVD provider service. You pay a monthly fee which encourages steady consumption, and NetFlix have automated the recommendation system, which replaces asking the counter clerk in a video rental store for advice. The recommendations are the result of many peoples opinions, so are likely to be less biased and better informed, but the most important difference in the utility approach is that it doesn't need people to provide the service directly to the customer. This makes it fundamentally cheaper. Many traditional services were transformed into utilities by the arrival of the Internet, which allows consumers to access information based utilities in a generic and efficient manner. The network effect benefit of having a large user base also causes dominant brand names to emerge. NetFlix leads mindshare in this space, despite attempts by BlockBuster to copy their business model, NetFlix can grow faster with fewer people as a pure utility.
  4. The final phase in the evolution of a market occurs as the cost of replication and distribution of the product approaches zero. For digital content the end customer already has a computer and an Internet connection. There is no additional cost to use it to download a movie. A central utility such as YouTube can use a mixture of advertising and premium services (for a minority of power users) to offset their own costs. Peer to peer systems distribute the load so that there is no central site and no incremental cost in the system. The only service that is needed is some kind of search, so that peers can find each other's content to exchange it. PirateBay is primarily a search engine, and search engines become dominant when the brand gets well known, and they find what you are looking for because they have a comprehensive index.
So the evolution of a marketplace goes from competing on the basis of technology, to competing on service, to competing as a utility, to competing for free. In each step of the evolution, competitors shake out over time and a dominant brand emerges.

To use this as a maturity model, take a market and figure out whether the primary competition is on the basis of technology, service, utility or search, and consider whether a dominant brand has emerged in that phase. The model should then indicate what the next step is likely to be, so you can try to find the right disruptive innovation to get you there. Good luck!

1 comment:

  1. Hi,

    After reviewing some of the articles left on my consumer reviews
    website, I still cannot understand: Who is winning in online DVD Rental business?

    Blockbuster Service Reviews

    Here are some of the Blockbuster specific examples:
    Blockbuster Books, Records, Videos and DVD rentals
    Blockbuster Video Stores and Online service
    Blockbuster Late fees

    Netflix Service reviews

    Here are some of the Netflix specific articles:
    Netflix Complaints - 3 Movie at a time rental
    Netflix Quality of Service
    Netflix speed of service

    Can someone help me understand, who will come out on top here?