‘Customer confluence’ will Drive Cross-industry Disruption Post-covid-19
How to spot and leverage opportunities for multi-industry digital disruption after Covid-19 subsides.
by Thales S. Teixeira
Confluence: noun; the junction of two or more rivers.
The headphones was invented in 1910 by a Nathaniel Baldwin. For more than 105 years after that, headphones have not significantly differed from the original two small speakers connected by a mounting head brace with a cable.
By 2008, worldwide sales of headphones hovered around $4 billion, and headphone prices mostly sold in the range of $15 to $30. That year saw the appearance of a new brand, Beats by Dr Dre, selling headphone at $200 apiece. Suddenly, headphones sales started rising fast, oddly enough in lockstep with rising prices for the top models. In the period of 2010 to 2017, Beats launched $300, $400 and even a limited edition $1,000 model. By 2018, global sales of headphones had reached $21 billion, driven in large part by higher average unit prices.
Podcasts are as old as the internet. The first commercially recorded conversation transmitted over the internet dates back to 1995. Since then, it’s popularity has been limited. In 2006, only about 10% of the US population above 12 had ever listened to a podcast. That all changed the following years. The popularity of podcasts started a vertiginous ascent reaching 20% of the US population in 2008, 30% in 2012, 40% in 2017 and by early 2019 it had reached 51% penetration. Podcasts are yet another interesting case of a digital technology that had been around for a while before escalating.
In 2012, things were starting to change in the physical American workspace. For decades before, office parks full of buildings with beige and gray cubicles used to be the absolute dominant format of office workspace. But in 2012, a startup called WeWork started to lease commercial real estate in various cities across the US and offer flexible shared office workspace. Professionals and entrepreneurs would rent a small office or only a desk on a monthly basis to work. In a large room at WeWork, you would see dozens of young professionals from various different businesses working at the same place, sharing resources such as printers, Wi-Fi and coffee. Valued only 15 million dollars in 2012, the startup rapidly expanded its flexible workspace to all major American cities, reaching a $1.5 billion valuation by early 2014, $5 billion in late 2014, $17 billion in 2016 and by early 2019, $43 billion. (At the end of 2019, it all came crashing down in part due to a mixture of incompetence, hubris and deception by WeWork’s co-founder Adam Newmann.) Regardless, by early 2020, there were more than 20,000 coworking locations around the world and tens of millions of users. The physical workspace landscape had suddenly drastically changed.
Confluence of disparate industries
What do office co-habitation, podcasts and high-end headphone have to do with each other? On the surface, not much, none of them are recent innovations as they all have been around for decades. Yet their period of fastest growth, between 2013 and 2019, all coincide with each other. Spurious correlation, one might say? Probably. But if you look to the customer segment responsible for each of these three rises, you will notice something interesting. They are the same: young professionals between the age of 17 and 29.
Young knowledge workers such as programmers, online marketers, designers, inventors and entrepreneurs started finding low-cost places to work that had their required amenities. Coworking spaces and coffee shops became the norm. The major downside to these environments is that strangers occupy those places in very close proximity. One cannot control the noise level. In order to block away ambient noise, headphones are a solution. And if you are using them every day for 4 to 8 hours a day, it pays to invest in a high-end version. What do you listen to? At first, music, but there is only so much music listening that one can take on a regular basis while doing work. Quite quickly, these young professionals switched to activities that helped them with their jobs, with their lives or just enabled a controlled distraction. Podcasts did that job quite well. In 2018, among the two most listened podcasts in the US were This American Life, by Ira Glass, and Guy Raz’ How I Built This, about entrepreneurial journeys.
While a single technological leap in one industry can be responsible for major disruption in others, say the invention of the personal computer or the smartphone, often disruptive changes emerge from changes among customers in multiple seemingly unrelated industries, happening at approximately the same time. That is the case of co-working, podcasts and high-end headphones, each in itself not being a major innovation. Yet, when these three isolated changes come together — a confluence of events — they are responsible for seismic shifts. Co-working spaces drove the purchase of higher-end headphones, which drove more podcast listening, both of which drove more people to be willing to spend time working in co-working spaces.
Behavioral complements
Confluence points such as this one arise from “behavioral complements,” changes in the behavior of individuals or organizations such that the unexpected rise in one behavior increases the demand for other complementary products or services.
For example, the sharing economy creates the need for short-term insurance. If you start to lend your car on Turo or your sports equipment on Sharewood, you might need to get flexible on-demand insurance coverage from places like Trov and Sure, who charges premiums per item per day. Businesses adopting flexible on-demand hiring practices on Upwork create the need for human resources services such as hiring, training, paying and evaluating gig workers as opposed to full-time employees. Thus the rise of Zenefits, a cloud-based virtual HR department. The emergence of food delivery apps such as GrubHub and Uber Eats brings the need for flexible on-demand made-for-delivery only kitchens spaces provided by CloudKitchens. 2019 saw real-time professional messaging startup Slack go public. Slack has grown tremendously in the past 5 years as a professional’s alternative to email. The rise of co-working spaces has distributed a workforce that in the past would be co-located in a same office. What would normally involve live meetings and frequent one-on-one chats along the workday to align and update other members of the team, has given way to messaging over the internet. Slack has grown in tandem with remote co-working.
Collectively, these startups have benefited tremendously from a confluence of factors arising from behavioral complements. The result? Significant lock-step growth among WeWork, Slack, UpWork and Zenefits, to name a few.
Identifying points of confluence before others creates incredible new business opportunities.
There are three ways to do this: (1) predicting new points of confluence, (2) not predicting but responding fast to the emergence of confluence points, and (3) identifying current gaps in behavioral complements to exploit. In my experience, they are listed here in decreasing order of difficulty.
Hardest — Predicting confluence points
Predicting the emergence of a new point of confluence is extremely challenging. Differently from changes in a single industry, in confluence, the ingredients of change come from very disparate directions. Going back to the convergence of co-working, podcasts and high-end headphones, how could an executive at a headphones maker see this confluence coming when, according to IBM Consulting, executives spend north of 90 percent of their time focused on their own industries? To make matters worse, some of the strongest instances of confluence occur because at least one of the changes driving it is a completely unforeseeable event.
The global financial crisis of 2007 was one such unexpected event that created multiple points of confluence. While it started with the mortgage securities and housing industry, what followed was a total economic recession. Many people saw their houses devalue by 30% or more, their stock portfolio reduced by as much as 40% and many were laid off or went into underemployment. In various sectors of the economy, supply of workers and services was significantly higher than demand. Suddenly, black car chauffeurs and home cleaners were idly looking for passengers and home owners.
Then, in 2008 in Boston and 2009 in San Francisco, TaskRabbit and Uber were founded. The former attracted people willing to do tasks such as shopping, cleaning and running errands for others. Uber was easily able to convince black car owners initially, then regular car owners, to sign up and drive in their platform. Airbnb, also launched in 2008, was able to attract home owners to give up their spare rooms or homes for others to stay for a few days. In all, TaskRabbit, Uber and Airbnb started and grew dramatically fast in part because of their timely appearance, just months after the worst financial crisis in modern US history. These platforms offered to many a second or even primary source of income, at the time when they needed it the most.
These platforms, also known as two-sided marketplaces, can only start if they bring in first a significant volume of suppliers: cleaners, drivers and homeowners. In the past few years, many other entrepreneurs have tried, unsuccessfully, to build different marketplaces. Where they stall is in getting enough suppliers (see how to acquire the first 1,000 customers here). No wonder. With the US economy doing so well up until mid-February 2020, when unemployment was at an all-time low of 3.6%, there has been hardly a sector where one could find underutilized excess labor or assets — that is, until covid-19 struck.
It is very unlikely that Travis Kalanick, Brian Chesky, and Leah Busque foresaw the global financial crisis as an event that would so strongly provide the initial tailwinds for Uber, Airbnb and TaskRabbit, respectively, to emerge and fly so high.
Predicting where the next wave of cross-industry disruption will occur is like trying to predict the next flash flood. Because water flows from various directions and joins unexpectedly at a confluence point, by the time you identify it, everybody else is already running away for higher land. In many markets, it takes expertise in very specialized sectors to see changes sooner than others. At the same time, by definition, confluence comes from two or more very different directions or sectors. Sometimes, rather than predict what will happen, it is best to wait and see, then respond quickly.
Fast-follower strategy
Instead of predicting precisely where and when new confluence points will emerge, an extremely uncertain exercise at best, entrepreneurs looking for new venture opportunities may prefer to be attentive to behavioral complements that emerge and then respond fast. Let the new opportunities begin to reveal themselves first.
Apple, one of the most technologically advanced consumer electronics company, with all its visionary designers, marketers and engineers did not see the rise of high-end headphones as a critical work instrument early on. So, they had to play catch-up. And they did so in a very big way, by buying Beats in 2014 for $3 billion, its largest acquisition to date. At the time, Beats was already the top most desirable headphones brands among young consumers. The purchase instantly catapulted Apple into the top position in the high-end headphones industry.
But what if your company does not have a financial war chest as Apple? Skullcandy was in this camp. A smaller maker of headphones, it mostly sold lower end colorful earbuds for the young and sports enthusiasts. It was founded in 2003 by Rick Alden who was frustrated whenever he went snowboarding and felt the need to take off his gloves and disconnect his earphones to talk every time he received a call on his mobile phone. Early on Skullcandy understood the ever-growing dual purpose nature of earphones: to listen and to talk. So when it realized that this problem did not just arise when people practiced sports but also when they were on the go or working on their computers, the natural next step was to quickly design and launch high-end headphones, the most expensive of which was around $180 in the US. Skullcandy identified the confluence and followed up fast.
Easiest — Identifying behavioral complement gaps
Whether you choose to lead with predicting new points of confluence or follow fast, the key is to identify gaps in behavioral complements. In response to the rise of ride-sharing and autonomous vehicles providing rides in certain trial cities in the US, a startup named Trov has come out with on-demand passenger and driver insurance. In response to the rise in need for safe cosmetics and skin care, followed by a tidal wave of new self-proclaimed safe skincare brands, a startup named The Good Face Project has come out with an A.I. powered ingredient keyword search engine that allow women shopping online and in stores to know what’s exactly is in each product and whether it is really safe or not. When unexpected changes in multiple disparate industries collide — such as transportation an insurance or health, beauty and online retailing — the confluence of forces can be a bigger determinant of startup success (or failure) than idea, funding or past experience.
Ask yourself this: what emergent consumer activities and novel behaviors due to covid-19 are currently not being well-complemented enough that should be?
Thales Teixeira was a professor at the Harvard Business School for 10 years. He is the author of Unlocking the Customer Value Chain, published by Currency, and co-founder of Decoupling.co, a digital disruption advisory firm.
