Early in my career, I made a simple promise to two professors at Skidmore College who focus on Advertising and Marketing. I told them that each time they invite me up to talk to their students I will prepare a fresh presentation – and each new presentation will be better than my last.
Five years and nine presentations later, I found myself up at Skidmore College once again this past weekend talking to Advertising and Marketing students. In keeping with my promise, I prepared a new presentation about disruptive innovation, inspired by The Innovators Solution by Clayton M. Christensen and Michael E. Raynor.
The purpose of the presentation was to get the students to understand the concept of a low-end market disruption and identify such disruptions in their everyday life. I wanted to show them that sometimes the biggest disruptions actually start with very poor quality products. Products that could be created by a very lean start-up, made up of – say – recent college graduates. As always, I found the students to be quite inspired and passionate. They asked tons of questions and I’m looking forward to seeing what they do pre and post graduation.
The slides to the presentation are embedded below via Slideshare. The content focused around three examples of low-end market disruption: VOIP vs. landlines, online video vs. cable television and stents vs. open-heart surgery. I’ll explain one of them (VOIP vs. landlines) in detail in this post. For the others, you’ll have to fill in the talking points with your imagination when paging through the slides.
VOIP vs. Landlines
First popularized around 2004, VOIP (Voice over Internet Protocol) allowed users to talk to each other and even videoconference over the Internet. Following the 2011 acquisition of Skype for $8.5B and the development of Google Talk, VOIP today is a common household technology. However, when it was first released it was really a very poor quality product compared to landlines. The first users of VOIP predominantly used it for very cheap international calling. The technology that powered VOIP provided a new “value network” that allowed Skype and others to offer international calling for a fraction of the cost of companies who relied on landline telephones.
The first users of VOIP were willing to accept a very poor quality product because their alternative was non-consumption. Early users suffered static-y connections, dropped calls, and voice echoing with little complaint. Their alternative was not calling at all. Landline international calling was prohibitively expensive and, before VOIP, consumers favored writing letters and emails over paying for expensive international calling.
Competing against non-consumption allowed VOIP to gain a valuable foothold in the telecommunications market with the least demanding customers. After securing a foothold, VOIP providers were then able to improve the quality of their product to the point where it could meet the needs of the most demanding customers. Today most businesses and homes are switching from landlines to dramatically less expensive VOIP telephones.
My favorite thing about low-end market disruption is the competitive aspect. You would think that landline providers such as AT&T and Verizon would be able to easily squash VOIP newcomers; however, they probably didn’t even see the disruption coming. The fundamental problem is that the business for AT&T and Verizon landlines probably got more profitable when the new VOIP technology entered. As with all low-end disruptions, VOIP providers started by serving the least profitable customers in the existing market. No doubt, existing landline providers actually didn’t mind the disruption at all. With the new technology taking the low end of the market, they could focus more on the most profitable business customers who had the biggest contracts and brought in the highest margins. It was probably a relief for landline providers to not have to serve the low end of the market: without their least profitable customers landline business probably became more profitable as they were being disrupted.
By the time the traditional landline companies realized they were being disrupted, it was too late. VOIP had completed the market disruption and the landline value network could not continue to exist profitably.
Enjoy the presentation – happy to answer any questions!