Network Disruption

I’m a big fan of Clayton Christensen and the Innovator’s Dilemma. It is not easy to describe it in one sentence but I will give it a shot. An industry leader or incumbent can lose out to a new player with what might seem like an inferior product from an emerging market, and as that product offering improves it becomes good enough to meet the needs of a large part of the established market. That definitely doesn’t do it justice so if you haven’t read the book then go get it or download it. One of the main tenets of a Disruptive Innovation is that it comes in from the low-end of the established market. Since reading the Innovator’s Dilemma I’ve seen and lived several market disruptions that didn’t come in from the low-end of the market and this has led me to think there is another distinct mechanism at play that can disrupt established markets.

I will describe the mechanism at play as a Network Disruption and look at several examples and one example of a disruption that is about to happen. In this context a network can have quite a broad definition. It is a system that plays a significant role and helps define the market itself. It in turn imposes constraints and limitations on the products that work with it. Examples of networks are the internet, the power grid, mobile phone networks, financial payment infrastructure, roadways etc… A Network Disruption occurs when a new experience or product is created that makes use of a particular network and then elements of this product or experience are then brought over to an established network as the capabilities of the established network evolve to allow for products and experiences that weren’t possible before. One of the unique elements of a Network Disruption is, unlike a Disruptive Innovation, the disruption does not need to come in from the low-end of the established market. The knock on effect here is the established players may retreat to the low-end of the market where in a Disruptive Innovation the established players retreat to the high-end of the market.

For the first example we will look at BlackBerry. The BlackBerry service was established in 1999 and it ran on an old underused data network called Mobitex with an accompanying network and server that connected it to your email. Mobitex is a wireless packet switched data network that from today’s viewpoint had very little bandwidth but low latency and good reliability. It was a high end service that provided business users with real-time access to their email on the go with devices designed solely for this purpose. The experience was refined and well understood by BlackBerry and its customers. Once similar network capabilities were added to the existing mobile phone networks then BlackBerry migrated to these networks with these new capabilities. At this point there is a knowledge unbalance in the market — the knowledge of how to turn the BlackBerry devices into good phones while maintaining the mobile messaging experience is easier to figure out then how the mobile phones can become really good at mobile messaging and email. BlackBerry customers were both BlackBerry users and mobile phone users while most mobile phone user never had experienced a BlackBerry at the time. By 2006 BlackBerry had consumer focused devices and services and the disruption in the mobile phone market began. Unlike a Disruptive Innovation BlackBerry came in at the high end of the market.

For the next example we will look at the iPhone. The iPhone went on to disrupt all the mobile phone players at the time including BlackBerry. Again in this example the iPhone comes in at the high end of the market. There has been much analysis of the iPhone in the marketplace with the brand power of Apple, the new user experience, and unique relationship with AT&T being talked about, but the big question that stumps most people is why it was disruptive. The application ecosystem wasn’t a factor on the original iPhone, the ability to run 3rd party apps arrived with the launch of the 3G iPhone. Looking at it through the viewpoint of Network Disruption provides the answer. Most mobile phones are evaluated in context of their use on the mobile phone networks. In this context the original iPhone had a limited feature set, it was an average phone for phone calls, a very good iPod, an acceptable messaging device if you could get comfortable with the virtual keyboard, and a poor internet and maps experience because of the inconsistency and slow speed of the At&t Edge network that it ran on when rendering full web pages instead of mobile optimized pages that other phones used. The Network Disruption is that the iPhone experience wasn’t designed for the mobile phone network it was designed for a WiFi network. On a WiFi network browsing on the Safari browser and using Google Maps was a transformative experience where people could now see the future of smartphones. Of course other companies didn’t see it at the time because it didn’t actually work on the mobile phone networks that were available. The compelling aspect was browsing the full internet on a phone that is in your pocket but not actually using the mobile phones network to do it. The mobile phone networks evolved to 3G and then later 4G bringing the actual experience that the iPhone provided to mobile networks that could now fulfill it including an ecosystem of applications that used the power of these networks as well.

Netflix is the current leader in streaming movies and tv shows. Streaming has disrupted movie rental services and is currently disrupting cable and satellite services. This disruption in a general sense isn’t a network disruption, one network disrupting another network is technology evolution. The interesting question is why did Netflix become the dominant player instead of a group of competing companies offering streaming services. This can be answered by looking at Network Disruption. Netflix was a subscription service where the customer selects movies and shows they would like to watch and they get DVD’s sent to them through the mail. The DVD’s get sent along between customers of the service that select a particular movie or show. The initial network in this system is the postal system with the internet for managing the service. As home internet service improved and streaming movies became viable then Netflix switched to a streaming model and successfully transitioned and created a Network Disruption by dominating the industry even though there were many other strong players in the market including Apple and Amazon. Netflix understood the power of the subscription model, they have a powerful recommendation engine and many millions of customers and these elements allowed them to successfully switch networks and dominate in the new space.

The Tesla Model 3 doesn’t exist yet and won’t be on the market until 2017 or 2018. The Model 3 will be a Network Disruption. There will be many other electrical cars on the market at that time and likely many with a similar range but Model 3 will likely see great success where the other offerings can only hope for success as a niche offering. What’s incredible in this example is that Elon Musk has publically disclosed his plans for years and it appears like the automotive industry will not have a response. The Network Disruption is a little more complex in this example. The current Tesla Model S is not a disruption outside of a small niche of very expensive luxury sedans because of its expensive price point. There are many innovative elements to Tesla and Tesla’s cars from low maintenance, no dealer network, in life feature updates through software and leveraging the unique attributes of an electric car for layout, performance, and experience enhancements. These elements have allowed Tesla to create a market and have shifted customers attention to new attributes and away from some of the attributes that have defined the luxury market for years. These elements give Tesla a foothold in the market and allow it to it to establish itself. However this lead isn’t necessarily defendable across the many segments that you find in the industry. The Model 3 will still be a luxury vehicle but at a price point that encompasses a significantly larger part of the market but it is one vehicle in an automobile market with many segments, styles, price points, and brand loyalty. So where is the disruption? The network that the Tesla Model S launched into was a new network of home refuelling where you plug your car into the wall while the rest of the industry uses a network of refuelling stations of different brands and fuel types (Premium, Diesel etc…) that are accessible while driving. The buildout of Tesla’s supercharger network is where Tesla is able to jump onto the established network of refuelling on the go while away from home. Even though Tesla uses a different fuel for it’s refuelling stations it is the established network once the buildout is large and the refuelling is convenient. It can be difficult to think of a gas station and a Tesla Supercharger station as the same network but it is the same way mobile phone networks such as Verizon and AT&T may use different antenna towers and incompatible wireless technologies. Not only is Tesla part of the established network you can still charge it at home unlike a conventional car. Plug-in hybrids can access the established network and be charged at home as well but usually their batteries are significantly smaller and by having two propulsion technologies you have a much more complex solution. The key elements that will make the Model 3 a Network Disruption is hitting a price point that will encompass a large part of the market. This will be achieved through a drop in battery costs, structural savings that get passed onto the consumer such as lower maintenance costs and no dealer network. The magic is what Tesla is able to bring over from its original network to the established network. This is some of the design benefits of an electrical car but more importantly it is that refuelling at home is cheap and refuelling at a Supercharger station is free. The critical element is that the Tesla Model 3 will be part of the established network but access to this network is completely free. This will allow the car to disrupt an industry of many segments, styles and price points. Many people who might have had a preference for a particular brand or a style will now be buying a Tesla instead. It’s a mistake to over analyze the costing details at any particular point in time because the volume and sales will drive down the battery costs and will allow the Supercharger network to expand.

next post → On Innovation (and why many companies lose the ability to innovate)

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