The Problem with Experts - Why Uber, Tesla and the iPhone are Disruptive Innovations

Clayton Christensen has published a new article in the Harvard Business Review with co-authors Michael Raynor and Rory McDonald. You can find that article here. It does a very good job describing Christensen’s theory of Disruptive Innovation that was popularized in his 1997 book, The Innovator’s Dilemma. The theory has been an important personal tool for me in forming my views on innovation and business strategy. The problem is Christensen gets the application of his own theory wrong when applying it to Uber and Tesla in this new article and from previous analysis of the iPhone.

Obviously the authors of this article are smart, intelligent and have done their analysis with care. So why do they get it wrong? I see this as a ‘problem with experts’ issue where they can’t see the forest for the trees. They are focused on the detailed analysis but miss the company or product categorization at the outset of the analysis. Uber, Tesla and the iPhone are too complex to just categorize them simplistically as a taxi company, a luxury car maker and a smartphone. One of the common markers of a disruptive innovation is the fact that it isn’t easily identifiable early on so it is also strange that Christensen only considers the obvious and simplistic categorizations in his analysis. As well it is also common that a disruptive innovation takes a different business strategy in approaching the market relative to the incumbent business.

Now most people would consider Uber a disruption to the taxi industry and Christensen does as well but he just happens to not like the term disruption because it causes confusion with his theory of disruptive innovation. He likes to categorize Uber’s effect on the taxi industry as a sustaining innovation. However describing Uber as a sustaining innovation is unsatisfying and trying to confine Uber to the taxi industry is mystifying. A disruptive innovation requires a new-market entry or a low-end entry that isn’t initally appealing to the primary customers. As well a disruptive innovation needs many of the users in the existing market to be overserved. Meaning they would be okay trading off some conveniences or features for a new set of features or a lower price. The disruption happens when the entrant improves along a path where the new product starts to serve the needs of a large group of the incumbent’s customers. The HBR article does a great job explaining the theory. Other theories exist to help tackle disruption from different perspectives and cover some of the area that Christensen groups in sustaining innovations. Examples here include Chris Dixon’s Full Stack Startups, Joshua Gans’s Supply-Side Disruption, as well as my own concept of a Network Disruption. Understanding these different perspectives can help you understand the business strategies behind the most disruptive companies. In fact with Tesla you can see all four of these strategies are in play right now.

Let’s look at the specific examples of Uber, Tesla, and the iPhone and examine why they all fit Christensen’s theory of Disruptive Innovation.

When we talk about Uber we should also include Lyft (there are other companies as well) that are growing and using a similar business model. In San Francisco, the most mature market for Uber, we can see that Uber and Lyft have grown significantly larger than the taxi industry was a few years ago. The taxis have taken a severe hit but they are still operating. If we limit our vision and group all these services into what we call the taxi industry then the industry has grown significantly more than 3 times the size it was a few years ago. Could the existence of a better and cheaper product really grow the market that much that fast? This should be a clue that maybe our view of Uber shouldn’t be confined to the taxi industry. Another clue should be what the company actually says its goals are and in Uber’s case it is quite clear that its goal is to eliminate personal car ownership.

Let’s look at the hypothesis that Uber is a disruptive innovation to car companies by reducing personal car ownership. Uber would have to be moving along a path where the costs of using its service drops below the costs of owning a car. For many people this is true today and as they introduce new services it will be true for a larger group of people. Uber is very clearly a different business approach to the market and car companies don’t appear to be reacting to this new model.

UberPOOL is a service designed for commuters (not a large market for the taxi industry) but a direct replacement for the most common need for car ownership. UberPool allows you to share a ride and the cost of an Uber ride with a stranger on your commute into work. Lyft has a similar service called Lyft Line. It pairs up riders so that the amount of time you are losing in picking up or dropping off the other person is minimized. In fact Uber and Lyft are trying to get actual commuters to be part time drivers for their service on their way to their Job. So you now may have 3 people travelling the same commute in one car all easily coordinated through the app. There are many couples with two cars that could save significant money by dropping to one car and using UberPOOL. At first it may seem like an inconvenience to travel on your commute with strangers but many people will recognize that it is a great advantage because you can actually do some work like catching up on email while you are on your commute.

Surge Pricing is a model that Uber uses to match supply and demand, when there aren’t enough Uber cars available in an area to meet demand the price goes up. This reduces demand and attracts more drivers to work at those times. This is a critical feature for people who decide not to own a car because unlike a taxi it means Uber is a reliable service at any time. Other Uber services like UberEATS and UberRUSH provide delivery service from restaurants and stores again making it convenient to live without a car. For many individuals these services make life simpler and cheaper without owning a car and you can always use a car sharing service like Zipcar when you do need one. Obviously the car ownership cycle is much longer than the time it takes you to try out Uber’s services so Uber as a disruptive innovation will unfold clearly over the next decade. A much higher percentage of young people today in urban areas don’t aspire to ever owning a car because of services such as Uber.

Tesla is not simply a luxury car manufacturer. They are also a battery manufacturer, a home energy storage company, a transportation refuelling network, and a data gathering network of vehicles. The luxury car is a step along the way to make more affordable electric cars and Elon Musk really wants other manufacturers to follow his lead because he knows Tesla can’t supply all the cars the world needs. Elon Musk’s vision (from the movie ‘Pump’) is: “All electric cars, and no gas stations”.

Let’s look at the hypothesis that the Tesla Supercharger network is a disruptive innovation that will disrupt gas stations. First take a look at the existing network of gas stations to see if it is over serving the market of car owners. For most people with a car, they don’t need to plan ahead to find a gas station. When the gas light comes on they pull into the nearest gas station. In fact there are many intersections that have 2 or 3 gas stations on the corners. Most people are able to fill their car with gas in 5 minutes and rarely encounter a wait or lineup. When you go on a trip people don’t need to plan ahead or choose their route based on whether they will be able to find a gas station along the way. If you want to pay more and have someone else pump your gas, then that is an option that is easy to find as well.

Now let’s see if the Supercharger network represents a low-end entry to the market. With an electric car most of your charging happens at home, but the supercharger network exists to allow Tesla cars (possibly other brands in the future) to charge up your car on a trip that goes beyond your range or when your destination doesn’t provide an opportunity to charge. The Supecharging network appears to be free, but the reality is there is a cost to support it that is embedded in the cost of the car. I don’t know what number to put on it but it is significantly cheaper than regularly buying gas. Its clear that the supercharging network takes a very different business approach, you aren’t paying for the amount of fuel but a flat fee for access to the network. A Supercharger installation is fundamentally cheaper than a gas station, there is no attendant, there is no deliveries, and the fundamental cost of the fuel is cheaper. It is also quite likely that the real estate and installation cost are partially subsidized by the shopping and restaurant areas in which they are installed. On a trip with a Tesla you need to plan ahead, possibly take a different route and stop where there is a Supercharger station. Charging at a Supercharger station takes significantly longer than refilling at a gas station.

The path of disruptive innovation for the Supercharger network will follow the number of vehicles that are on the road with access to the network. This number is constantly growing and will accelerate greatly when Tesla launches the Model 3 in a few years. This will expand their reach outside of their current high end luxury segment. Other accelerators would be Tesla allowing access to the network for other electric cars and other similar recharging networks being built by other companies.

The disruptive innovations for Uber and Tesla are just beginning but for the iPhone the disruption to the mobile phone industry happened years ago and for iOS the disruption to the laptop market is just beginning. People struggle with the original iPhone as a disruptive innovation because it was a relatively expensive phone but we need to take a closer look at what the iPhone was.

First we need to rewind our thinking to 2007. The successful smartphones at the time where BlackBerrys, Palm Treos, Motorola Q’s and Symbian smartphones like the Sony Ericsson P1 or a Nokia N95. The attributes that were important at the time for smartphones were email and messaging, the ability to run applications, the quality of the phone and speakerphone, durability, access to information on the internet, and battery life. All of the smartphone operating systems at the time had grown up from PDA’s, pagers and regular mobile phones.

The iPhone launched on June 29, 2007. The iPhone had a large screen, powerful OS (based on OS X), a powerful processor and lots of internal memory. It also had an innovative user experience that made use of the power of the hardware with fluid scrolling, zooming and the ability to repaint the screen rapidly. At its launch the iPhone wasn’t a good smartphone by the standards of the day. Typing was difficult on the touchscreen and the email function only worked when the email app was open. The original iPhone at launch couldn’t download and run applications. The quality of the phone and speakerphone was relatively poor. It was fragile. The web browser provided amazing access to the full internet but it was basically unuseable over the 2G wireless network. Because of the powerful nature of the system the battery life was poor and the battery was not replaceable. At the time if you relied on a smartphone because you needed reliable communication then the iPhone would have been an unlikely choice.

To understand the disruptive innovation of the iPhone we should look back at how Steve Jobs described it at the time. He described the iPhone as the internet in your pocket and as a good value because it was a phone, iPod and the internet combined. Even though smartphones at the time could access the internet they didn’t do it with the type of experience you had on your computer. They used mobile sites, WAP or proxy servers to allow the heavy bandwidth sites to be accessible through the small straw of the 2G data networks. Apple relied on WiFi to provide the internet in your pocket experience through the iPhone that made Safari and Google maps an experience that you couldn’t get on any other pocketable device. This represented a new-market disruptive innovation. The iPod touch shipped a few months later and sold at similar rates to the iPhone in the early years. The iPod touch was basically an iPhone minus the phone. This proves it represented a new market and it also puts a value on the phone aspect of the iPhone. With the same memory the iPhone was only $100 more with a contract than the iPod touch, so the phone aspect was an inexpensive phone paired with a new-market product. People who bought an iPhone at the time were overserved by the smartphone market but wanted the new market features of an iPod touch.

The path that the disruptive innovation followed was improving the iPhone as a computing platform and the improvement of the bandwidth on the wireless network. Apple added the appstore, more memory, faster processors, better screens and 3G and then 4G. The faster wireless network speeds allowed the WiFi experience of the iPhone to translate to the wireless networks and this is when the disruption really took place and the whole group of smartphone manufacturers of 2007 were disrupted. Building an experience on WiFi and translating that to the mobile network once its capabilities improved is what I call a network disruption. Having powerful applications and the full internet on the wireless network has redefined what a smartphone is.

As you can see Uber, Tesla and Apple integrate disruptive innovation theory into their business strategy. In the future we will see their disruptive power again as they work on autonomous cars with new business strategies while the car companies treat autonomous driving features as just another feature to fit into their existing business models.

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