The first iPhone was shipped 10 years ago today, and Blackberry was done
How did Blackberry go from controlling half of the world’s smartphone market and get taken over by Apple’s iPhone? Or, more generally, how do well-managed companies listen to their customers actively, invest aggressively, but still lose market dominance?
Startup companies can perhaps learn from mistakes big companies like Blackberry have made. In fact, the failures of big companies in disruptive technology directly implies new opportunities for startup founders.
So, what are the lessons here for founders? What should you learn from this?
iPhone was a toy
Let’s look at the iPhone and Blackberry example. Ten years ago, Steve Jobs proposed that QWERTY keyboards are bad because the controls are fixed and irreplaceable. But, if you have a dynamic multi-touch screen, you can customize controls for every application.
Blackberry who had the market dominance until 2010 saw the opportunity too. But, the original iPhone was seen as a toy by Blackberry. At the time, Blackberry was serving enterprises who were not going to pay for toys. The market positioning of iPhone (customer based) was very different from that of Blackberry (enterprise based). Blackberry didn’t want to lose focus on its lucrative corporate users. So, they kept making smartphones with their old design.
In other words, Blackberry (consciously) gave up on a better design and user experience.
In 2007, iPhone wasn’t seen as a professional productivity tool by enterprise users. But, multi-touch screens enabled an entire economy of mobile apps, most of which are far superior and more productive than apps you would find on a Blackberry or other QWERTY-based “smartphones”. And, as a result, the large influx of great iOS apps not only captured a significant amount of consumers but also crushed Blackberry in the enterprise sector.
The lesson here is that most products with a new vision are initially seen as a toy or an “inferior” product by incumbents. But, as the disruptive product improves over time, the toy that few people love becomes something everybody wants.
Why didn’t Blackberry ditch the QWERTY keyboard
If Blackberry knew they were going to be screwed, why didn’t they do something? What were they doing? Specifically, what was the management team doing?
Was it that Blackberry had a bad CEO? Maybe. But, what we know is that with a team of more than 50 people, the CEO effectively doesn’t run the company. The team does.
What? I can’t control the destiny of my company? But, “I AM THE CEO!”.
Let me explain. Emerging markets (i.e. iPhone in 2007) are always unclear if the market is “big enough” at the time. Your employees don’t want to develop products for markets that don’t exist yet. They want to work on products that will guarantee sales, which is a great metric to throw out when they are seeking for a pay raise and promotions.
So, instead of risking their career by working on an uncertain market, they chase after higher margins on the company’s existing and most profitable markets. At this point, your employees are acting in both their own and company’s interest.
Projects that fail because the market wasn’t there have far more serious implication for someone’s career. So, even when the CEO wants to take risks, employees will do whatever makes more sense for their career within the company. And, usually, they are reluctant to take risks.
For Blackberry, its employees decided that they and the company will earn the most money if its phones stay the same, which worked for a few more years until they became totally obsolete.
Low-margin emerging markets are full of opportunities
The larger the company, the less appealing low-margin markets are to managers. Good managers are driven by profit growth for many reasons. For some, growth helps increase stock prices which is an inexpensive way to reward employees.
Since most big companies are chasing after bigger margins quarter after quarter by serving more premium customers, markets with low profit margin are usually underserved. This helps create a supply and demand gap where startup founders can bet on. Underserved customers are usually desperate for any solution to solve their problems.
Let’s use an example other than the iPhone. People used to listen to music with a CD player like the Walkman. In 1997, the first MP3 player was developed by SaeHan Information Systems with only 32MB storage. The MP3 players used disruptive technologies and did not require CDs to play music. It was more expensive than a CD player and stored less songs than a CD. Nonetheless, some customers loved it because it’s more portable, and you can even use it while you are running.
The MP3 player market was small but emerging. The small group of customers looking for portability was simply ignored by CD player manufacturers because these customers don’t bring in enough profit. This allows MP3 players to capture this small group of customers and continue to improve its technologies.
In other words, if you offer a solution for an emerging (typically small) market using disruptive technology, customers will come to you even when your products are inferior, comparing to traditional standards. By 2001, the first iPod could store up to 1000 songs with 5GB of storage, 160 times more than 4 years ago. MP3 players went from a cool portable toy to a superior product in just 4 years.
As a founder, you should serve a small number of users and make sure they love your product. Capture a niche market before you improve and expand. Underserved customers are happy with a half-baked product that satisfy their needs. They can live with bugs because no one else is solving their problems.
Every product category eventually becomes a commodity with little differentiations
There’s a market lifecycle to any category of products. Markets start with products competing and differentiating based on performance and functionality. This is the first stage of market lifecycle. For example, an iPhone can take a 12 megapixel photo, but a Samsung phone can take a 20 megapixel photo.
As the market matures, products will improve to a point where its functionalities exceed user needs. For example, when you compare a phone that can take photos of 100 megapixel resolution to that of 90 megapixel resolution, the two phones make no difference to an average consumer because both cameras already exceed the consumer’s satisfaction threshold.
At this point, products shouldn’t compete on functionalities but rather on reliability. This is the second stage of market lifecycle. Say, you have an iPhone that can take photos at 12 megapixel 100% of the time. And, you have a Samsung phone can take photos at 100 megapixel only 97% of the time. iPhone wins here because it’s more reliable. The fact that a Samsung phone can take photos with higher resolution is less relevant to customers when they want a reliable camera.
Eventually, all products will converge to be ultra reliable. That’s when convenience becomes a factor of competition. This is the third stage of market lifecycle. When both the iPhone and Samsung phones have practically the same functionalities and reliabilities, I am going to buy the one that’s lighter and more convenient to carry around.
At last, it comes to the fourth (last) stage of market lifecycle, where everyone solely competes on price, making the product a commodity. For example, when I want to buy some A4 sized paper, I am going to get the cheapest one.
Startups can compete at the stage where the previous stage has been satiated. If the functionality stage has been satiated, go for the next stage (reliability) where user expectations have not been met. If you compete at the commodity stage, you have no way to differentiate yourself besides being cheaper.
What it takes to build something people love
Emerging markets are small by default. So, your team must be small enough to get excited and become profitable at a small scale. In an emerging market with so many unknowns, it’s impossible to plan for execution.
Rather, you should optimize for learning and discovery. Working in a new product category or an emerging market entails a process of mutual discovery by customers and manufacturers. It simply takes time.
Because markets for disruptive tech are unpredictable, your company’s’ initial strategies for entering these markets will generally be wrong. The key is not to find THE winning strategy. You should conserve enough resources and relationships so you get a second or third chance at getting it right. Justin.tv didn’t find the right approach in the beginning, but it eventually stumbled upon live streaming for games and became a billion dollar business — Twitch.
Failure is intrinsic to the process of finding the right approach for emerging markets. Most managers in big organizations believe that they have no room for failure, so they don’t take the risk of trying. Blackberry certainly didn’t want to take the risk, and, in this case, they became obsolete.
The willingness to fail is what it takes to make something people love.
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