An Engineer

The innovator’s dilemma is that when you are an established player, listening to your best customers results in dismissing the disruptive technology that will eventually lead to your undoing.

When I worked at SGI, our best customers were not asking for low-end cheap PC card graphics. But every year those Nvidia and ATI cards got better and better, and eventually, our customers bought those.

Kodak’s best customers in the early 90s were not asking for digital cameras; they were inadequate in terms of quality. And Kodak had a huge chemistry, paper and film business to protect. They were scared that if they offered digital solutions, their traditional businesses would suffer.

When Craig’s list got started, the advertisers of the NY Times classifieds had no interest in the relatively small online audience. As a result, the NY times and other mainstream media outlets missed the opportunity for online classifieds, losing the business to Monster, Hotjobs and Craig’s list, none of whom had been in the classifieds business previously.

The leaders in auctions before the Internet were Sotherby’s and Christie’s. Ebay had no experience in auctions.

Zagats owned populist restaurant reviews but they did not want to cannibalize the sale of their books so refused to do a completely free version on the internet. That opened up an opportunity for Yelp, and the rest is history. Now their book sales are going to zero and they lost the online business too.

In technology and in life, underdogs often drive innovation. This makes sense. People with less to lose take greater risks, and are hungrier. Sequoia capital, the VC behind successful companies like Apple, Google and Cisco, says they prefer first time entrepreneurs because they are hungrier. Many of their most successful founders have been first-generation Americans, with very little to lose.

Steve jobs, in his address at Stanford’s commencement in 2005 talked about lightness of being a beginner after being thrown out of Apple. “Stay hungry, stay foolish” he advised. This is all the same effect, at a personal level versus a corporate level.

I love that entrenched, successful players continue to miss disruptive opportunities. Entrenched players have so many advantages in terms of capital and brand. Disruptive technology levels the playing field, giving promise to the words in the Declaration of Indepence that “all men are created equal.”

In Digital Photography, we are seeing the power of disruptive technologies play out right now.

Panasonic is leading the pack in introducing micro four-thirds cameras that take photos approaching that of an SLR, while dispensing with the mirror, pentaprism and mechanical shutter. Makes sense. Panasonic is an also-ran in digital cameras. You don’t see Canon and Nikon racing to remove the mirrors and put electronic viewfinders in their SLRs. Why would they?

Shutterfly, Snapfish and Kodak all but owned mainstream consumer consumer photo and video sharing with their print-oriented offerings. Then one day they woke up and realized that facebook, something they had not considered photo sharing at all, was the largest photo sharing network in the world. Oops. Did it hurt them they they did not innovate their core sharing capabilities for 5+ years? You bet it did.

And finally, the one nearest and dearest to my heart: smart phones are attacking point and shoot cameras from the low-end. And of course, Canon, Nikon and the other traditional camera companies are mostly ignoring the opportunity because their best customers are not asking for these types of devices.

You can see where this is going. Put a slightly better camera on an iPhone, add video and an LTE or Wimax network connection and smart phones will be better consumers cameras, with more convenience and lower cost (since consumers are all going to carry smart phones) than traditional point and shoot cameras.

The camera companies did not miss the transition from film to digital (well, most did not miss it, Leica and Hasselblad did). It was a fairly straight forward transition for them. Film cameras were becoming increasingly electronic anyway, and digital photography just brought a few more components over from analog to digital.

But the movement to smartphones is a completely different animal. Because these are sold differently. The smartphone is a subscription-based device that runs on the public networks and has a significant service component. The traditional camera companies have no experience providing high quality software and services. It would require a tremendous amount of learning on their part to make the transition, and a hunger to do it.

What does it take to not have disruptive technology put you out of business? It requires vision and the willingness to cannibalize your own business with what will likely be a lower margin product competitor.

Who does it well? The first example that comes to my mind is Amazon. They are ruthless. Knowing that electronic books will someday replace paper books, they entered the electronic book market and had the lower-priced Kindle versions of the books compete with the paper-based books on Amazon’s site. They invested significant money in doing the Kindle development, entering a field they knew nothing about: the design and manufacturer of portable mobile devices with wireless connectivity.

Seeing the possibility that Google could effectively compete with Amazon by selling links to Amazon’s competitors, Amazon sold links to their own competitors right on their pages! Amazon market place sellers who offer a lower price are ranked ahead of Amazon’s own offerings in search results. I bow down before them. They get it.

Everyone likes to bash Microsoft for missing the internet and paid search. True enough, they were protecting their business model of shrink-wrapped software and failed to embrace ad-supported software as service quickly enough.

But Microsoft did see the potential for game consoles to replace personal computers and invested heavily there, building the class-leading Xbox system into a profitable business.

Just happened to be that their vision was wrong there. Turns out that game consoles don’t replace PCs. They are additive to the consumer’s home. It is smart phones like the iPhone, probably in larger form factor, that replace PCs, and that opportunity they did miss. Or more accurately, they invested but could not see beyond the windows paradigm when developing windows CE.

Apple is no underdog, but in smart phones, they were the underdog. They had no business in mobile phones, nothing to protect, and certainly no mobile customers to lead them the wrong way.

I wonder what will get disrupted next? Exxon by solar energy?