Disrupt This

Paul Paetz On Stage at International CES 2015

Paul Paetz — Wed, 25 Feb 2015 22:18:00 GMT

In January, I had the privilege to be named as one of the top tech authors of 2014 by the Consumer Electronics Association, and to participate in Gary's Book Club at the International CES 2015 conference in Las Vegas.

Sean Murphy, Sr. Manager, Industry Analysis for the CEA interviewed me on stage about the state of innovation and my book, Disruption by Design. The video below is a recording of that event.

Speaking of my book, if you haven't bought one yet, I've created a promotion through Goodreads to give away 10 copies. Although I just set up the offer a few hours ago, there are already more people clamoring to get a free copy than I'm giving away. Fortunately, it isn't first come, first served -- winning entries will be selected by Goodreads on March 23, so you have until then to register for your chance. Click the link in the promo box below to find the giveaway offer on the Goodreads site.

On the other hand, if you're an entrepreneur trying to design your company to be disruptive, why wait? There is so much valuable and actionable information in this book that it will pay itself back 100 times over, just from what you'll learn in the first chapter. To save time, get a copy from Amazon today, and you can be reading it by the weekend.

Goodreads Book Giveaway

Disruption by Design

by Paul Paetz

Giveaway ends March 23, 2015.

See the giveaway details at Goodreads.

Enter to win

Disruption by Design: The Book

Paul Paetz — Tue, 16 Dec 2014 15:24:00 GMT

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". 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.

iPhone's 5th Birthday: Most Successful Disruptive Innovation, Ever.

Paul Paetz — Sat, 30 Jun 2012 15:28:00 GMT

Five years ago Apple introduced the iPhone. On the eve of it's introduction, I published a blog article predicting that it would cause massive disruption of several industries and the reasons why.

We predicted it would sell beyond Apple's expectations, and beyond what even the most optimistic analysts projected. It turned out that as bold as we were, we weren't bold enough in predicting how successful it would be.

We predicted it would knock the Blackberry from it's perch as the top (business) smartphone. A prediction that many scoffed at -- especially the executives at RIM.

There were other predictions as well which we'll leave you to read if you're interested.

Although these things seem obvious in retrospect, I made these predictions based on disruption theory, and took a big step out of line, disagreeing publicly with my business colleague at the time, Mike Urlocker, with Clay Christensen, the father of disruption theory, and with other notable marketing experts including Al and Laura Ries -- reknowned for their work and books on positioning.

Unbelievably disruptive: iPhone's Accomplishments

While the iPhone today has stiff competition from another disruptor -- Google's Android, and especially the leading purveyor of Android (Samsung), it remains the trendsetter with a list of remarkable accomplishments:

iPhone alone is a bigger business than Microsoft, once considered the unassailable titan of tech based on its Windows and Office franchises. The same Microsoft whose monopoly market power was considered so strong that the DoJ targeted it with antitrust suits that threatened to break up the company. It's also the same Microsoft whose CEO, Steve Ballmer, mocked Apple for thinking anyone would buy a $500 phone. Who's laughing now, just 5 years later?
The iPhone has generated over $150B revenue since its release, and has shipped over 250M units.
At the current run rate, the iPhone will generate about $35B in profit this year. Only one company on the planet (besides Apple) generates more profit than the iPhone -- Exxon Mobil.
RIM and the Blackberry are on the ropes, probably breathing their last. RIM announced they are laying off nearly 40% of their employees yesterday. The same RIM that as recently as two years ago was still claiming that no one would buy a business phone without a keyboard, and that it had an unbeatable advantage with corporations because of its security features.
Nokia is also on the ropes. And, most competitors in the PC business have suffered serious setbacks, including Microsoft, HP and Dell. All either as a direct result of the iPhone, or because of its Trojan Horse effect (which my article in 2007 predicted).
iPhone plus its big brother, the iPad, have made Apple the most valuable company on the planet, completing a 15 year disruptive comeback from near bankruptcy. Sitting on par with Exxon Mobil in market cap just 4 months ago, Apple is now valued at nearly $120B more, and by traditional multiples for "growth companies", could easily be valued at 2 to 3 times more than it currently is. It will likely become the first company in history to have a market cap exceeding $1 trillion within the next 18 months.
Apps, apps, apps. How many companies owe their existence to the App Store and the rest of the iPhone ecosystem? There are over 600,000 apps available in the App Store -- 600,000 products that wouldn't have existed but for the iPhone. As of March of this year, more than 25 billion apps had been downloaded.

On the iPhone's 5th birthday, we hope that Steve's untimely passing doesn't mean the end of Apple's exceptional innovation and market leadership. The world needs more companies like Apple that anticipate what we want and how we want it, even before we're able to articulate it. Companies that push for what's next, instead of simply copying the best of what's out there (Samsung).

The iPhone isn't just the most disruptive innovation ever, it is symbolic of a state change in what we expect from technology and how we interact with it. It's hard to imagine how different the world was six years ago, almost as hard as it is to remember how we survived without the internet and email.

What does the future hold?

Looking forward another 5 years, we wonder:

whether Apple can continue its remarkable run of industry-disrupting innovation without Steve?
if the iPhone will still be on top, or will Android catch and pass it?
what new innovations are still waiting to come out of Apple that will change the world as we know it -- is there a TV coming? what about home automation? cars? social media? Or, is the era of great new things from Apple over?
who will pick up Steve's baton and run with it?

What do you think?

Updates

Is Febreze disruptive? It depends what job you hire it for

Paul Paetz — Thu, 23 Feb 2012 04:05:00 GMT

I often start by reminding clients and prospects -- anyone who will listen -- that an innovative technology is a nice thing to have, and can certainly enable market disruption if it uniquely enables a large sustainable cost advantage, or a new way of doing things that is easier or more convenient. But technology is neither necessary, nor sufficient for disruption to occur.

Disruptive innovation is not about technology

Netflix was a good example in their early days. Yes, you placed orders for movies through a website, but there was nothing about the website that was novel or necessary in order to disrupt Blockbuster. In fact, they were considered a tech play because of the website, but there was nothing about technology that made Netflix successful (something they would have done well to remember when they tried to force an ill-advised price change on customers last year to combine streaming video and mailed DVDs). When Blockbuster added their own website and copied much of the mechanics of Netflix's ordering, it made no difference to their survival and did not enable them to prevent being disrupted.

Netflix's disruptive innovation was driven entirely by their business model. Apparently inferior to Blockbuster in the lack of physical presence to visit and browse movies and take something home to watch NOW (at least that's how Blockbuster positioned themselves against Netflix), they identified unmet and underserved market needs and created a new business model to serve them. By sending DVDs mail order from a central location, Netflix eliminated the huge cost of stores, and having inventory where it wasn't needed, and in the process enabled:

limitless catalog
convenience of not having to make a trip to the store either to pick up or return videos
low cost for high volume renters aka the best customers (flat subscription pricing rather than per video)

and removed friction in the rental process:

no late fees -- the number one complaint against Blockbuster and traditional video rental models
frustration when a desired title wasn't on the shelf

Dramatically lower costs could be passed on to consumers (and sustainable cost advantage is one of the key drivers of disruption), enabling rapid growth, and strong word of mouth helped Netflix avoid big marketing costs to grow.

What does this have to do with Febreze? Well, I started with Netflix because it is an example commonly misunderstood to be a technology-based disruptive innovation, when it really has nothing at all to do with technology, but is entirely about the process, the business model and the marketing. It's a company that most of us are familiar with, especially after its recent missteps, and it helps us make the leap to talking about a disruptive innovation that doesn't have any "tech" in it at all.

How the heck is an air freshener in a crowded marketplace an example of disruptive innovation?

Febreze is fascinating, because it started its life doing everything wrong, the way most "big company" new products are introduced to market. It was a product designed to be sprayed on draperies that reeked of cigarette smoke, a smelly sofa that was frequently inhabited by a wet family dog, or a room where cats had done their thing on the floor. It's purpose was to neutralize the odor.

The problem was, this was a made-in-the-boardroom problem. Although it seems reasonable to imagine that people are embarrassed and repulsed by these smells and would want to get rid of them, in the real world, the people who most needed to fix this problem didn't believe that they had a problem to fix. In the real world, people build up tolerances to smells the more they are exposed to them, and may even associate that "wet dog" smell with positive feelings. So, while any visitor to such a home might be hit in the face with detestable odors and wonder how people could live that way, the person who lives there has masked the smells in their mind and has no idea that their house smells like smoke, or like cat pee. And, even if they smell it a little bit, they certainly don't perceive their house to be unclean and in need of yet another kind of air freshener product.

So, when P&G launched Febreze as an odor-killing unscented spray in the mid-90s with ads targeting the homeowner's love for their pets, but hate for their smell, there was no resonance in the market with this messaging (might they have done better to target visiting friends instead?), and it was a complete dud in the market, with sales falling each month, rather than growing.

This scenario is laid out in a New York Times article (see pages 4 and 5 for the bit about Febreze) that details the work of behavioral researchers in understanding habits to influence purchasing decisions. The company was perplexed and sent researchers out to the field to try to understand what was happening with happy users of Febreze who were using lots of it, and what was different about them. Did they have more sensitive noses? Were they more anal about cleaning? Were they more socially embarrassed about the smells when visitors came over?

Febreze became an innovative market disruptor, almost by accident

It turned out that there were some avid users who had built spraying into their regular cleaning habits as a reward for finishing, so when the bedroom was finished being cleaned and tidied, a quick spray of Febreze on the comforter was the icing on the cake. When the laundry was clean, a spray of Febreze confirmed it. When the living room was cleaned and the sofa vacuumed off, Febreze was the finishing ritual. It wasn't that they perceived their homes to be dirty or in need of de-smelling, but that the spray at the end was a finishing detail to signal completion and get that little endorphin high that comes with completing something.

The happy ending is that P&G discovered this counter-intuitive behavior, and built this notion into their marketing. Sales exploded, to the point that it is today a best-selling $1B franchise. The now familiar ad template shows a giddy, self-gratified housewife who has finished the cleaning, gives it a shot of Febreze and closes her eyes to breathe in the warm fuzzy feelings. Or, more prosaicly, a quick spray when finished the task was the reward for finishing - the idea being to associate the product with habit formation and the good feeling of being done with the work and knowing that things were clean. In other words, rather than promoting it as a cleaning product, they are promoting it as something you should do after cleaning was complete.

So, the NYT article is about how statisticians and behaviorists are decoding habits and using them to sell to us, and the Febreze story is just a small piece of it, but it got me to thinking. What's interesting is that the original launch of Febreze was supported by conventional wisdom and conventional marketing. I'm sure they did research that confirmed everyone would like their homes to smell cleaner (a common symptom of bad market research is "confirmation bias", where people selectively remember things that confirm what they already believe to be true, or in this case, remember how much they dislike the smell in everyone else's home even when they don't recognize it in their own). Febreze would have been just another incremental and sustaining cleaning innovation, but for the discovery of this anomalous behavior of a few avid users. It may even have been cancelled for lack of sales had behavioral researchers not discovered the pattern of women using it when finished cleaning a room, rather than as a way to deodorize pet smells.

But hidden in the research story is that Febreze's ultimate success points to some critical factors that all "new market" disruptive innovations exhibit. Most notably:

job to be done. Early on, marketers positioned Febreze as an air freshener because they didn't understand the "job" that consumers were hiring it to do. It turns out that people didn't believe they had a smell problem. But, a quick spray at the end of cleaning a room created a habit-forming ritual that said "I'm done. This is clean and fresh and I can move on to the next room." A reward, and a signal of being clean, rather than a coverup of something shameful. Had the real job not been discovered, Febreze likely would have failed in the market as one of thousands of similar cleaning product innovations. By precisely targeting the job that the consumer identified with, they created positioning that is virtually impossible to dislodge them from. (Download this classic article which describes why identifying the job to be done is so important.)

target non-consumption. There were a small number of people who felt they needed a bandaid solution to mask disgusting smells. However, most people didn't recognize or agree that their house smelled bad, but did see a quick spray as a finishing touch -- almost like putting some sparkle on their lip gloss. By targeting the larger market of people who did not think their houses stunk and needed air fresheners as masking agents, but who did clean their houses, Febreze was able to identify a unique niche to dominate and grow from (now, people do buy Febreze as a quick fix to mask unpleasant odors, but that came later).

serve an unmet need. There was clearly an unmet need to signal "I'm done" and have a little celebration before moving to the next room. I suspect we all have this little celebration, whether we use Febreze or not, we step back and admire our work, smell the air. Febreze sprinkles the fairy dust that completes the job (that's how the ads seem to portray it). Originally unscented (because it was to mask odors, not replace them), Febreze now comes in many perfumed scents to leave behind the smell of "being done".

identify a new market. The new market for a deodorizing spray was people who viewed it as a finishing tool for cleaning. The people who it was originally designed for (those with smelly houses) didn't think they needed it, so the only way to sell it was to identify a new (adjacent) market where there was an unmet need.

Startups who are designing groundbreaking technologies that they believe are "disruptive" do well to remember these lessons. Disruption is a theory about marketing, not about product development or technology. To disrupt a market, you must be able to articulate a "job to be done" for which your target audience believes there is no better solution. You must meet an unmet or under-served need -- it's easier to sell to people who aren't part of the existing market (non-consumers who have opted out, and indicated that no available solution either satisfies the "job to be done" or is priced affordably), than to compete against incumbent solutions claiming to be better. And, you either need to be a "low-end" disruption (one which is targeted at the least demanding market segments based on pricing and sustainable cost advantage) or a "new market" disruption (create a market where none existed before).

Marketing and business strategy drive disruption

None of these characteristics have anything to do with building technology, but everything to do with appropriate segmentation, product positioning, messaging, and the compelling reasons why I would select your solution over all other available alternatives (which aren't necessarily products in the same "category"). Febreze ended up being a disruptive innovation because it succeeded (albeit after the fact) in marketing strategy, not because of how the product was designed.

Your thoughts?

Is Disruptive Innovation important to your business strategy? Download a free copy of the eBook 'Disruptive Confusion Unraveled' to learn:

how to measure the market value of being disruptive
the 6 most common misconceptions about disruptive innovation
why disruptive innovation is the primary driver of market growth
what it means to be disruptive and why the definitions matter
how to recognize and predict market disruption

Identifying Disruptive Innovators: Techzinglive Interviews Paul Paetz

Paul Paetz — Sat, 18 Feb 2012 20:30:00 GMT

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.

The 6 Most Common Misconceptions About Disruptive Innovation

Paul Paetz — Wed, 10 Aug 2011 15:12:00 GMT

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

Solving the Innovator's Dilemma: Disrupt, or Be Disrupted

Paul Paetz — Thu, 28 Jul 2011 11:02:00 GMT

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".

Disruption Report Card: Flip Video Scores High

Paul Paetz — Tue, 14 Oct 2008 00:33:00 GMT

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.

Has Starbucks Gone Far Enough: Fighting Back Against Disruption

Paul Paetz — Wed, 09 Jul 2008 13:53:00 GMT

'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?

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.

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?

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

Paul Paetz — Thu, 26 Jun 2008 22:10:00 GMT

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.
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.

Broken and Disrupted

Paul Paetz — Mon, 12 Nov 2007 17:34:00 GMT

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.

Disruptive Tidbits: iPhone, Office 2007, Disruptive Marketing, et al

Paul Paetz — Mon, 08 Oct 2007 14:14:00 GMT

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.

Dealing With Darwin: How Great Companies Innovate at Every Phase of Their Evolution (D)
Beyond Disruption: Changing the Rules in the Marketplace (B-)
Creative Destruction (A)
What Customers Want (A)
Blink (A+)

Disruptive Business Strategy: What is Steve Jobs Really Up To?

Paul Paetz — Thu, 28 Jun 2007 13:40:00 GMT

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.

WSJ iPhone Review

NY Times iPhone Review

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?

It's a handheld one of these

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).

The Disruption of American Idol

Paul Paetz — Tue, 22 May 2007 18:10:00 GMT

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.

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.

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.

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.

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)?

More Conventional Opinions

Sites Mentioned in This Article

Starbucks: Ripe for Disruption, or Already Disrupted?

Paul Paetz — Wed, 07 Mar 2007 13:41:00 GMT

I suspect most people have heard by now of the kerfuffle about an internal memo, leaked through a popular Starbucks fan blogsite and ultimately covered by BusinessWeek, The Wall Street Journal, Forbes, CNN, etc., which was penned by the founder and chairman of Starbucks, Howard Schultz. Certainly the blogosphere is a-buzz with the come-to-Jesus nature of Schultz's personal revelation that Starbucks may have lost its mystique. I counted hundreds of blog postings - right up there with Britney Spears haircut and Anna Nicole Smith in popularity.

The memo itself was an interesting document that raises eyebrows and questions: although addressed to the president and other senior execs, was it always intended to be leaked via social media, into the mainstream press and back to the blogosphere? It has certainly created a lot of passionate commentary and free advertising for Starbucks.

Was it really intended to tell the public that Starbucks knows that people are complaining and that the competitive sands are shifting? Was it a message to investors that the company needs to slow growth and fix the experience to save the brand and that it's going to cost a bundle?

Or was it just the confessions of a founder and Chairman, purging feelings of guilt about a loss of soul, and a plea to executives for salvation? (Which, incidentally made Starbucks look good while rallying those who are still passionate about the brand experience to Starbucks' defense?)

No matter which of these it was, it was a brilliant document, but it may be too little too late.

Too Little, Too Latte? Starbucks is the World's Pre-eminent Coffee Brand: How Can it Be So?

It really depends on whether the executives realize that disruption is afoot, and that there's much more going on here than the diminution of brand experience. To properly address this question, and explain why disruption is the real problem, it helps to go back to the beginning, and define the innovation that led to Starbucks becoming a household name approaching 15,000 stores around the world.

What problem did Starbucks solve for its customers?

Anyone who travelled in Europe BS (Before Starbucks) would have marvelled at the quality and variety of coffee, and the cafe culture there. Especially in places like Italy and France.

The coffees were strong, but fresh, well-prepared and a perfect complement to a day of sitting on a sidewalk under an umbrella people-watching, or to end a perfect meal, or a delightful jolt to start the day with a pain chocolat or even just toast and eggs. You would have wondered how everywhere you went, coffee could taste so strong, yet be so delicious and universally good.

On this side of the pond (outside of your favorite Little Italy restaurant), it was almost impossible to get a decent cup of coffee, and especially to get a strong cup that was drinkable. I remember wondering after every trip why it was that good coffee on our side of the pond was an oxymoron whilst on their side, it was impossible to get a bad one.

It wasn't just that most (North) American coffees were made from Robusta versus the superior Arabica beans. It also had to do with poor roasting, poor quality control, and the fact that we got used to crappy coffee during the second world war when everything was rationed and/or watered down.

By the 50s, everything was about speed and automation, and so we made matters worse by going from percolated to instant to freeze dried to Coffee-Mate powdered creamer (another oxymoron). We drank it by the gallon, rotting our stomachs, taste buds and brains in the process.

It was purely about the caffeine and the speed. (Wonder why we never distilled out the caffeine and dispensed it straight via injection?). Yes, in a few big cities, you could find that rare place that would serve a great European-style coffee, and sometimes even with a bit of the ambiance, but that was so small a percentage of consumption that it barely qualified as an exception to the rule.

The story is apocryphal, and published on Starbucks website, and in Schultz's book, about how Schultz felt exactly this way on visits to Milano, and decided that it was time Americans got to upgrade their coffee experience. And, not just create a better cup of coffee, but the same smell and feel and cultured experience and ambiance that you felt in a great Italian coffee bar. That was the beginning of Starbucks as we know it.

We'd been upgrading the experience for ourselves, as much as we could with drip coffee becoming more the norm in the 70s and 80s versus instant, but the vast majority of Americans had never had a quality cup of coffee nor enjoyed the sensuality of the European coffee culture. So, when Starbucks hit Seattle, we were ready for something different.

So What About Disruption?

Disruption theory says that products or services evolve incrementally to better meet the needs of the most demanding customers, but eventually overshoot the needs of most consumers. In this process, the incumbents that dominate the existing market build processes and operational efficiencies that enable them to maximize profitability and continually introduce new "sustaining innovations".

In the short term, these series of decisions that improve processes and efficiency are seen as good management, delivering better profits. In the long term, however, they create the opportunity for a disruptive innovator to enter the scene.

At the time when Starbucks began, the big coffee suppliers had enormously overshot the needs of their customers for a cheap, fast cup of coffee. Yet, each "innovation" they introduced kept on making the product either cheaper or faster to prepare, stripping the product of the original reasons we became addicted to it - its flavor first and foremost, but also its ability to facilitate social interaction, savor a great meal, sit and relax, etc.

So Starbucks was a disruptive innovator. It brought flavor, a friendly social setting (the "third place"), quality, plus the consistency that only a chain can do. They brought back the smells, the sensuality, and introduced to Americans a "European experience" -- and, what Schultz has described as the sense of theater.

But isn't disruptive innovation "low-end"? How does a $5 cuppa disrupt?

But, you might be saying, Starbucks introduced a high-end innovation -- disruptive innovations typically are aimed at the low-end markets and low-end needs. Well, you'd be right, usually, but the question is: what needs were low-end, or more accurately underserved?

The characteristic that initially made Starbucks a small niche disruption was the speed. The big producers were optimized for speed above all else, not flavor and certainly not the organic pleasure of a gathering place with great smells where you hang out with your friends.

The characteristic of Starbucks' innovation that was just good enough for the original niche of coffee culture appreciators was the speed. They were happy to sacrifice the speed of picking up a pot of coffee off the Bunn burner (ironic that they called these things burners, because that's what they did/do to most pots left longer than 5 minutes) and pouring it straight to the cup and from there to the lips, in order to drink something they truly enjoyed, and to experience the coffee bar ambiance.

Initially, potential competitors to Starbucks ignored them because the market wasn't big enough for Dunkin Donuts or McDonalds to care about. To them, Starbucks coffee drinkers were aficionados -- a tiny specialized segment that had nothing to do with the mainstream, who they perceived still mostly wanted speed.

This ignorance is typical (and logical) to mainstream vendors who aim to maximize profit by serving the largest market as efficiently as possible. It also allowed Starbucks to "fly under the radar" for a long time -- over 20 years of strong growth -- allowing them to build their market unimpeded by real competition.

Yes, there are smaller chain coffee brands, like Caribou and Peets, etc., but their presence serves to expand the market for all specialty coffee vendors, and benefits the leader, i.e. Starbucks, disproportionately. But, Starbuck has become mainstream, and they can no longer hide -- they are officially perceived as a real threat to the foodservice business of other big companies.

But Starbucks is the leader and still growing. Are you seriously saying they might be "disrupted"?
By who, and how?

As noted, disruption can take a long time to play out, and the seeds are sown long before the heavy damage is done.

As Starbucks has grown, they have focused on operational efficiencies to grow faster and more profitably. Efficiencies such as automatic espresso machines, flavor-sealed packaging (which eliminates the great smell of a real coffee shop), and expanding merchandise options ("would you like some fries with that doppio mocha latte half-caf with low fat milk?") to extract every last penny of same-store sales growth.

In the process, they have incrementally sacrificed seemingly small parts of the experience -- the smell, the theater, the ambiance (who wants a line snaking around the tables while you're trying to relax or have a conversation over a cuppa?), the service quality (rapid growth almost always comes with higher turnover and poorer training -- by now, we've all experienced the surly baristas who won't go the extra mile, but still make too many mistakes), etc.

The endgame: they've reduced themselves to serving a pretty-good-but-not-outstanding cup of coffee, too slowly and at too high a price. And, more importantly, they've overshot the needs of their customers, and are ripe for disruption.

To speed up coffee service in order to sell everything else too, they installed automatic machines. Automatic machines can be more consistent, especially for inexperienced operators, but they also reduce the flavor and the authenticity of the experience, and show competitors how they too can produce a cup just as good as Starbucks (i.e. open themselves to commoditization). This was an unnecessary and ill-advised "innovation".

Customers didn't ask for it, would probably agree that they didn't need it, and in general would feel that they are getting less for their money. Do I really need a bacon and egg (McMuffin) breakfast with my espresso?

Again, the more I overlap with my competition, the more I illustrate to them how to compete with me. And now I smell eggs cooking, not coffee beans and fresh espresso. Not wise.

Most fanatical customers who still are, were more fanatical 10 years ago, so what have these innovations added?

In becoming ubiquitous, the mystique is demystified, the coffee which was the central feature has become a means to sell myriad other food items and irrelevant merchandise (t-shirts anyone?), and the taste and smell and comfort have all been diminished. Yet, the high price remains. And, therein lie the seeds for potential disruption.

Because now, wanting a good cup of coffee has become mainstream, and Starbucks has become focused on speed (but not really), and efficiency, and foodservice, and add-on sales and rapid growth, they now face a new reality.

It's easy to add a pretty good cup of coffee to the menu. Especially for companies like McDonalds and Dunkin Donuts who already served coffee. All they have to do is add middle-of-the-road or better automatic machines to their operation, and they're almost as good.

But, they excel at real speed and efficiency, and are optimized to process customers in seconds or at most a minute or two, whereas Starbucks will never get that fast without redesigning every store and adding a lot more baristas. Moreover, they are value-oriented -- i.e. cheap. For McDonalds, $1.25 for coffee is an improvement in margin, but for Starbucks, it's impossible to go that low.

So, if I can get something almost as good for 1/3 the price, is that 'good enough'? Heck, even the the local QuikTrip service stations can create a relatively decent cup of coffee or espresso now.

And, more than commoditization, Starbucks' real problem now is that the competition is 'good enough' to be disruptive and undermine their business. But here's the real conundrum Starbucks faces. It will be almost impossible to go back.

Replacing the automatic machines with better quality semi-automatic or manual, and fresh ground and hand-tamped shots means throwing out a lot of expensive machines. It means they will go a bit slower for each coffee, which also means they'll need more people and more space for brewing. And, they'll need to increase their training expense enormously.

It will be hard to explain to investors why all the superfluous merchandise needs to come out of the stores, and why same-store sales will likely decrease. It will be even harder to recognize that for the mainstream coffee consumer, a $1.25 cup of coffee is good enough, even if I can't quite bring myself to visit McDonalds, and so there will be increasing downward pressure on price.

And, if they don't want to compete on price, then they probably already have too many stores, because the average consumer won't continue to spend a premium price for a commodity that is only marginally better than the competition.

Coffee Customization at Its Finest

Coffee art from danyrolux on Vimeo.

To Schultz's credit, he recognizes that all is not well. And, he's recognizing it at a time of apparent strength. Starbucks just announced another record year where revenue grew 23%, 1177 new stores were added, and same-store sales increased 6% over the previous year (although the rate of increase is slowing, these are still impressive numbers for a $6.7B company.

If he can convince his executives and board and investors that a strategic overhaul is required to address the looming disruption, then he may well be able to avert it, but it isn't as simple now as returning to the good old days of better quality machines, better service, less merchandise, whole beans scooped out of bins rather than prepackaged in flavor-sealed bags, more uniqueness in each store, etc. They will need a plan designed specifically to address the disruption Starbucks faces from new competitors, or else the disruptor will become the disruptee.

Acknowledging that the market has changed irrevocably, and is now attracting disruptive 'good enough' solutions for quality coffee, but at a lower price and faster pace, what would you do to re-energize Starbucks and fend off a loss of leadership position in the coming years?

Links for coffee fans

Koffee Korner - coffee history and culture
CoffeeResearch.org - the science of coffee
Wikipedia - coffee history
Wikipedia (2) - all about coffee
Starbucks Gossip - blog that broke the story

There is a follow up article to this post here: Has Starbucks gone far enough?

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

Paul Paetz — Fri, 22 Sep 2006 23:03:00 GMT

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 bandwith contracts, targeting availability anywhere in the world.

Fast failure is a necessary part of startup methodology. The objective is to test the contraints, 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 commiting 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, leaving the services 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 are didn't see firsthand customers choosing not to use the service because they wanted to sleep, or to watch a movie, or 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.

Boeing's Big Boo-Boo: A Very Non-Disruptive Innovation (Part 2 of 3)

Paul Paetz — Wed, 13 Sep 2006 22:38:00 GMT

In this 3-part series, we dissect the failure of Boeing's inflight satellite-based internet service, Connexion by Boeing. The first article looked at the laboratory-designed business model that was untested before scaling to business unit size, but based on made-up assumptions and faulty analysis. In Part 2 of this series, we look at the marketing mistakes and myopia that contributed to the colossal failure.

Recap: An Unworkable Business Model

In Part 1, we discussed how Boeing was so sure that this innovation couldn't fail that they invested more than a billion dollars over 6 years with only $25 million in offsetting revenue before folding their tents. We can't say for certain that anything was learned because at the end, Boeing maintained that the tragic events of 9/11 were their undoing, even though clearly this was designed as a "Spruce Goose" from the outset.

The business model was truly unwieldy. Depending on super-high cost satellite service, Boeing needed more than 10x the number of planes that had been outfitted by the time the program was shut down to have the necessary equipment installed, and had they achieved that level of penetration, more than 40% of all passengers on every single flight (assuming the flights were 100% full) needed to pay full price for service just to break even. And, it cost $500,00 per plane to install, and the pricing assumption was that passengers would pay more than the cost of their monthly broadband service at home per hour in the air.

Moreover it required a presence in the US market where internet usage is still the highest and the majority of commercial flights begin and end. But even on the carriers where Connexion was deemed a success, usage rates were in the single digits, and Boeing never changed its stance or its business model to encourage greater use.

It brings new meaning to the phrase "what were they thinking".

Part 2: Counting the Marketing Mistakes

"Extensive" market research" by Boeing came up with a definitive statement that "38% of frequent travelers are willing to pay at least $25 per flight for full, high-speed access to the Internet and their corporate network". Clearly, Boeing believed that it they built it, the users would come, and had boxed themselves into a cost structure that embedded this assumption.

Which leads to the first marketing failure: a dependence on MBA-styled market research. Asking dopey questions has never been shown to result in better odds of being successful at innovation than a coin toss would yield (at much lower cost, but then it doesn't seem as scientific), and in this case, not only was the research instrument flawed, but the wrong question was asked.

Consider this: if I had an urgent deadline that absolutely couldn't wait until I landed, I might be willing to pay $25, so I'd probably answer yes just to influence the outcome (so that the service became available), however, the real question should have been "at this price level, how often would you use the service", just to mitigate the built-in bias.

And, whatever answer you got, you'd test it a dozen different ways for validity. At this ridiculous price level and with this billing model, I might use Connexion once or twice a year, but more likely never. Certainly on flights from the US to Europe, most of the time in the sky is overnight, so who is waiting for my urgent communications anyway?

Ignoring all that, and the fact that I represent the prime target market, the really head-scratching fact is that Connexion's business model required between 30 and 40 percent of all passengers on all flights to pay for this service every time they got on a plane, and nearly 10x as many planes carrying the service as had been outfitted.

What's Wrong With This Picture?

What really stands out is the lack of a "gut check". No comparison seems to have been done to the pricing models that have worked for similar services, the rate of adoption that they experienced, or when the growth rates exploded and what triggered them.

Moreover, the obvious comparison to another overly high-priced satellite communication service that was highly touted but also failed miserably, namely Iridium, was clearly missed. Admittedly, a "gut check" is less quantitative, but it can be immeasurably more accurate.

So, they got the pricing wrong, but that's not the only factor that was going to limit uptake. Marketing apparently never considered any of these barriers to adoption in their business model.

Loss of sleep time. Because most of the travel time on US to Europe flights is overnight, that means the service is competing with sleep time on at least half the potential flights. If I have a meeting first thing on arrival, best case is that I lose several hours of sleep time because of the number of time zones crossed, so unless I'm desperate, I'm highly unlikely to even open my PC. Even if I do work on my PC, the constraint on my available time to use this service is so severe that the cost seems even more ridiculous.
Other activities competing for my time. Movies, food, bathroom breaks, getting up to stretch, drinking, reading, listening to music, watching a DVD, talking to my travel partner, doing PC work that doesn't require a connection - there are numerous things to do that I don't have to pay anything extra for. As my colleague Mike Urlocker is fond of saying,"Don't trust what people say; trust what they do".
Scoble notes that most flights don't have access to power. Oops. Unless I'm in business class, I'm pretty much assured of not having enough battery power to get full value for my connection fee, and even in business class, not all planes have power connections, nor is it easy to know ahead of time if you will have power or not. In the grand scheme of things, as battery life gets longer and longer (mine will go 5 hours at near full power) this is a minor irritation, but it is definitely a nuisance factor that will prevent potential users from plunking down their cash.
Desire to be off the grid. Scoble also notes that many of the techno-geek frequent flyers at Microsoft (if they don't want it, who does?) get some welcome relief from being out of touch for a few hours on their flight. A feeling we can all identify with, I'm sure. And, at the outrageously high price tag, anyone who might otherwise use the service has a good excuse in the high price for not bothering.
Lack of space. Ironically, economy class on long-haul international flights is much more cramped than on domestic flights. I've been on flights where I couldn't get upgraded, and the first thing the passenger in front of me did was recline his seat causing multiple fractures in my kneecaps. As anyone who's been on an older L1011 or a 747 knows, the space between rows is too small to fit in even if the passenger in front of you doesn't recline. Assuming the seat in front of you is in upright position, it is nearly impossible to work on anything other than a micro-laptop, and as soon as the person in front wants to sleep, you not only can't work, your circulation gets cut off too. This is perhaps the strongest incentive to not risk paying the fee and not being able to use the service.
Poor promotion by airlines. In the initial 3-month market test by Lufthansa, the first and most successful airline to offer the service, they claimed an average of 50-80 simultaneous users per flight, 95% of whom were happy with the service. How does this jive with the actual results after launch. How often do you try something once just to see whether it's worth it? Most of us do. But after the first time, value, accessibility and awareness become much more important. Also not disclosed is how many of those users simply logged on to Lufthansa's FlyNet portal, which was a free service. 180 flights per day is a tiny fraction of the actual flights in the air - Boeing noted in their initial announcement of Connexion that there are 41,500 flights worldwide each day. If you were going to be on one of the 0.4% of flights that had the service installed, did you even know it was available and plan your time accordingly? Unlike all the press release hoopla, there was little product differentiation going on in the market, and even less promotion to make people aware when they were going to be on an internet-enabled flight. Even at the gate, there was often no posted notice that you were boarding a Connexion flight. Boeing depended on the marketing efforts of the airlines, and the airlines attitude seemed to be "if we have it, they'll figure it out and use it." At least with Lufthansa, you knew what you were getting because they commited to install Connexion on all long haul flights, and implemented relatively quickly, but their average users per plane (if they were all paying customers) was still only 1/2 what Boeing needed across the system to succeed.
Lack of uptake by US carriers. When the very first announcement of planned service was made in June 2001, Boeing said that American, United and Delta Airlines had signed letters of intent to adopt this service and equip 1,500 planes with Internet connectivity. Of course, on 9/11 that commitment evaporated, and to date, no US-based airlines have signed on. This is a bit of red herring, since if this had gone ahead and all 1,500 planes were outfitted by now, there would still be only 10 times the number of planes that currently have the service, and we've already pointed out that they needed 400x the number of users to make this fly. However, it would certainly have increased awareness, and possibly led to price drops or more innovative business models that would have given this a chance to reach critical mass.
Lack of direct communication with end-users. Connexion considered their customers to be the airlines, although they were clearly dependent on very large scale adoption by the real customers - the end-users. In an utterly amazing statement of 'not getting it' Boeing said "Each of the airlines brings an unprecedented level of knowledge about the in-flight connectivity needs of passengers." as it announced the pending partnerships with US carriers. Right. Just like they understand my need for sufficient room to sit, and my need to pay a fair price for services, and my need to be treated like a customer rather than a filled seat. Boeing, as a near monopoly provider to US carriers also didn't get that if you want a mass market to develop, you can't dictate the terms.

And, I didn't even have to think hard to come up with this list of show stoppers. I'll bet there are others, but since I don't need to think that hard to make the argument that product marketing didn't even do a half-assed job, I'll leave it at that.

Bottom line: the market research was garbage, the assumptions the business model was built on stank, and almost everything about how this was packaged, priced and marketed was wrong. Even if the US carriers hadn't dropped out of the picture, it is highly doubtful that this service had a fighting chance.

In Part 3

In parts one and two, we look at the absurd business model and financial assumptions, as well as the "big dumb company"-styled product marketing and lack of gut check that led to the stillborn Connexion service market failure. In the third and final part, we ask "what could they have done differently", what lessons could be learned, and whether any other approach could have succeeded.

Boeing's Big Boo-Boo: A Study in Self-Disruption (Part 1 of 3)

Paul Paetz — Tue, 05 Sep 2006 13:57:00 GMT

In this 3-part series, we dissect the failure of Boeing's inflight satellite-based internet service, Connexion by Boeing. In part one, we examine the faulty analysis that resulted in a business model that was impossible to execute. The type of innovation represented by the Connexion service, and how the business model came to be is typical of large-company thinking, and why disruptive innovation so rarely comes from incumbent industry players.

Part 1: A business model that couldn't take flight

On July 17, 2006, Boeing announced the discontinuation of its in-flight "hi-speed" internet service. A quick analysis of the business model shows that this dodo was doomed to extinction before it took its first flight.

Why it had no chance - by the numbers

Connexion offered a satellite-based internet connection which enabled internet connectivity even on transcontinental flights. Started with plenty of fanfare 6 years ago, Boeing's Connexion service won the "World's Leading High Speed Inflight Internet Service Provider" award from the World Travel Awards organization in London for 3 years running.

Said Connexion by Boeing president, Laurette Koellner, "Winning this award for the third consecutive year is a welcome validation of our success." That was in November 2005, just a scant few months ago.

Exactly what success was being validated though?

Service Usage

According to data released by Boeing, "more than 20,000 passengers have used the Connexion by Boeing service during its first year of availability." 20,000 certainly sounds like a big number, but as an absolute number, it is free of context and that context is important.

Anyone who knows how to make statistics lie would agree that the best way to distort the meaning of figures is to offer them without context, or juxtaposed in the wrong context.

In truth, 20.000 was the only number that Boeing could have published that made things look positive. In a separate announcement, Boeing offered other data which tells a more complete story.

A corporate backgrounder published a few months later in early 2006 shows that Connexion was available on 180 flights daily. That is 65,700 flights per year, give or take a few.

Assume that a few more planes were outfitted between the time of these two announcements, and perhaps the run rate was 60,000 flights per year at the time Boeing said 20,000 passengers had used the service. That is one person on every 3 flights using the service. Not such a stunning success anymore.

So, lets be generous since we don't know the rate at which service was added during the period when Boeing had 20,000 users. Maybe it was actually 1 person every two flights. Hmmmm. Still not much of a business model.

Revenue Streams

Now let's look at revenue, and assume that everyone who used the service paid the top daily rate during that first year of $30. 20,000 paying customers at $30 each is a grand total of $600,000 revenue.

We know, however, that prices were reduced during this period, and many of these passengers likely opted for the lesser priced packages, so lets give a nice round number and say they had $500,000 in air-time revenue from end consumers. This for a technology that cost over $500,000 per plane to install. I'm starting to smell some really rotten fish. (140 aircraft had been outfitted at the time this backgrounder was written.)

Of course, there were other revenue streams from government, ship traffic, corporate jets, branding fees from airlines but it's clear that this business model and the cost structure was based on hefty uptake from business travelers. The WSJ says Connexion had $25M in revenue, but also notes that over $1B was invested over 6 years.

Profit Potential

What about potential for profitability? We know that there were very high fixed costs associated with this service including expensive satellite bandwidth purchased from several providers, roaming agreements with land-based providers to ensure smooth logon and hand-off of communications, and payroll for 560 employees, the majority of whom required expensive technical knowledge to do their jobs.

Boeing didn't break out Connexion separately in its operating statements, but lumped it into a category called Other which was mostly Connexion. In the most recent quarter, Other showed a loss of $90M for the quarter (improving from a loss of $110M in the quarter a year earlier). Let's be really generous (and for the sake of nice round numbers) and say that only $50M of that loss is directly attributable to Connexion.

Again, for the sake of round numbers, let's say that the losses due to Connexion were approximately the same every quarter, or $200M annually. To generate $200M in revenue and break even, Connexion needed 400x the usage they were getting at last year's higher prices. (Since these are quick calculations, we aren't considering that higher usage would also mean higher expenses).

At that rate, instead of 1 person every 3 flights, what was actually needed was an average of about 130 paying customers on each and every flight.

Where Was the Gut Check?

That stunning calculation leads us to the first great "Aha". What marketing/business genius put together a plan that could only succeed if a very large percentage of the target customers on every flight had so great a need that they would be willing to pay almost as much for a single flight as the cost of a month's broadband access on the ground?

Even if there are some Fortune 500 companies that would be willing to allow that as an expense, I certainly wouldn't want to be justifying more than 1 per month of those to my boss or the corporate controller. I might be able to get away with it, but it's a nuisance factor I don't need.

Another indicator that these round numbers aren't so far off: Boeing anticipates $0.15 per share benefit to next year's results coming from this decision, which at the current number of shares outstanding is over $113M in increased earnings. Since most of Connexion's staff will be moved into other jobs at Boeing, and therefore the majority of payroll expense will continue, that seems about right.

Questions

why was there no business model experimentation to determine whether the market as envisioned would or could ever materialize?
how were the usage, revenue and profitability projections determined?
how did Boeing manage to scale this service to require massive fixed costs and 560 employees to support the service before determining product/market fit and the real size of the likely market?
were any of their assumptions realistic, and if not, how did they miss such a gaping hole in their business plan?
can a big company realistically behave like a startup to test business models in "fast-fail mode" before scaling?

In Part 2

In Part 1, our quick analysis of the accounting clearly shows the magnitude of the miscalculation implicit in the Connexion by Boeing service. It looks as though it had no chance to reach profitability ever. So, how did this come to be? In Part 2, we examine the marketing mistakes that contributed to this colossal failure.

The Long Tale of Market Disruption

Paul Paetz — Tue, 15 Aug 2006 23:02:00 GMT

. . . in which we examine how marketing professionals and creators of all types of products and services can use this upside-down view of the world to market more effectively.

The Long Tail According to Chris Anderson

Quickly summarized, the 'Long Tail' refers to the shape of a curve which has a concentration of high values for a small number of occurrences, and tails off to much lower values (approaches zero) for the vast majority of occurrences. The long tail is the part of the graph that is continuously approaching zero.

In Chris's writing, he examines the long tail of sales for all the products in a given category that were not 'bestsellers', or 'hits', or 'blockbusters', but rather catered to a much smaller niche audience.

Traditional views of the world see business as a "winner-take-all" venture, where the top two or three products represent 80 to 90 percent of all sales.

Or where Tiger Woods' income is more than twice Phil Mickelson's, and Phil's is more than twice the next highest. And together, they earn more than the rest of the PGA tour combined.

We have become acclimatized to thinking there is nothing beyond number 1 and number 2.

Chris Anderson coined the term Long Tail a couple of years ago in an article he wrote as editor of Wired Magazine. He has expanded his discussion of the Long Tail into a whole book which is now published, and rapidly ascending the NY Times bestseller list (ironically, it is not a 'Long Tail' book, but a very solid 'Head').

Although it has been called the Long Tail theory, much of what Chris has observed is not really theoretical at all, but plainly evident. There is no disputing the shape of sales data curves, nor can we dispute that the internet has introduced a new dynamic to sales of anything that can be digitized (and therefore has a low-cost footprint for storage and distribution).

What Anderson points out is that through most of the past century, and especially since the advent of broadcast media, we have tended towards a one-size-fits-all kind of mass marketing that emphasizes only the winners, or the head of the curve, and ignores the tail. Yet there are vast numbers of tiny niche products which in total represent much larger markets or unit sales than the hits.

The new order

The book is primarily about how the internet changes the economic equation for the the tail of the curve and enables niche products to find their audience efficiently (or vice versa). It focuses on digital and digitizable media and entertainment products - books, CDs, DVDs, film, music where the examples are most obvious because they are all information products.

Amazon, eBay, Netflix and iTunes have demonstrated amply that with "unlimited shelf space" and near zero-cost accessibility to niche products, huge revenues can be generated from what we used to think of as marginal (loser) products. But we knew that -- all of us have idiosyncratic preferences and things that we buy on foreign vacations because you can't get them here.

These internet stores just prove what was already obvious -- if you had access to things you like at a reasonable price, you will buy them, no matter how few other people do the same.

The bigger questions for me concern the niches rather than their aggregation. Internet retailers can generate hit-sized sales volumes from the aggregation of very large number of products selling in relatively small quantities -- their economics aren't so different from the old model, except that more products are in the channel. But that same model doesn't necessarily apply to the producers of small volume niche products.

What incentives do they have to fill the niche channels and how do they market effectively to make money at this game? Does thinking about things this way imply anything different for the marketer of a bona fide hit, mass market product or those products that are in 3rd through 10th place - the great middle mass market?

Are there existing markets we can learn from that have always been about selling the long tail?

These are questions that Anderson largely leaves unanswered, and an area of huge opportunity for businesses that understand we are going through a disruptive realignment of how companies create products and relate to customers.

What corporate America is only beginning to wake up to is that this realignment changes everything. The iconic companies of the industrial revolution must adapt or die.

This is also true of the vast army of traditionally-oriented marketing agencies supporting them that still have blinders on as well.

In my view, we are only beginning to see the upending of long held beliefs about "the right way" to market products. The next few installments of my blog will focus on these long tail marketing issues.

If you haven't already visited, Chris has an excellent Long Tail blog with links to many other sites discussing Long Tail implications. And, just so that we recognize that the hype the Long Tail is getting doesn't mean that's the only point of view, here's another way of looking at it The Shape of the Tail.