The Broken and Disruptable: Evidence of Industries Vulnerable to (or, more accurately Needing) Disruption

A narrative of personal disruption, leading to evidence of industries that desperately need to be disrupted.

The Broken . . .

Broken and disrupted: this is going to cost me....

A few weeks ago I managed to break my foot by doing nothing more extraordinary than walking on it. I wish the story was more exciting, but I can't imagine a more dull and uninteresting way to break a foot.

There I was, packing for a business trip to Toronto when I stepped towards my suitcase and heard a loud, sharp crack, like a good-sized branch breaking, and next I knew I was on the floor in a lot of pain.

. . . and Now Disrupted

So, we went to emergency, spent about 4 or 5 hours to have a nurse practitioner confirm after looking at x-rays -- "Yup. You broke it", and then bring me a pair of crutches and a goofy looking styrofoam shoe, with instructions to see a foot doctor in the next two days. And, for all their trouble, they sent me a bill for over $2,000. You'd think that after wasting that much time, I could get more than an envelope with two pieces of film, medical supplies worth less than $20, and confirmation of something that I already knew for 2 grand.

Now, don't you wish your product or service had demand that was so inelastic that you could charge virtually anything for doing almost nothing?

Alert: Healthcare Industry Ripe for Disruption

So, I got home around 2:30am, and still had to finish packing to get to the airport first thing in the morning. You see, it wasn't just that it was too late to call anyone and postpone the trip, but it was an important strategy meeting, and people were coming from Ireland, so it would have been very costly and aggravating for everyone to cancel. Anyway, it gave me an excuse to do what I thought was the right thing.

On to Toronto

I'm going to skip the gory details of traveling with a broken foot that isn't in a proper cast yet. Suffice it to say that I suffered incredibly miserable service from an assortment of airlines (not just to Toronto, but in a subsequent trip to Portugal as well). It was a real eye-opener about how poorly people with a handicap are treated.

Alert: Airline Industry Ripe for Disruption

I'm quite fortunate that in a few weeks, I'll be back to normal -- for many this is a permanent way of life. I had no idea how frequently the needs of people with handicaps are either simply ignored, overlooked and disregarded, or, that there's a seamy underside that looks to take advantage of people who need help. Not sure who needs to be disrupted to fix this, but we could all use a wake-up call.

So, in Toronto I learned to use the crutches, and narrowly avoided a face-plant on freshly cleaned marble floors thanks to the strong arms of two guys that were walking with me. Strangely, although marble is one of the most deceptive and slippery surfaces when wet, the cleaning staff apparently didn't see the need to put out signs warning that the floors were freshly mopped. Hmmmm.

Basically, Toronto was a dry run for what it would be like flying to Portugal the following week to do a keynote address at the International Marketing Congress. I survived with the sponge slipper for a couple of days, and didn't break anything else, so we'd have to say that was a successful trip.

Oh yes, the meetings were good too.

And then Portugal

As soon as I got home from Toronto, we got to a doctor and had the foot looked at. Surprisingly, he too confirmed that the foot was broken and charged me an additional $360 for that information. No wonder healthcare costs are rising so quickly -- there is no common sense and no adequate set of controls to ensure against running up the meter, duplication of services, overcharging, etc

Sorry, there's no room for this under the seat in front of me.

He wanted to put me in a full cast right away, but when he heard that I needed to travel to Portugal, he shook his head (I think in disgust and disbelief -- obviously he thought it was a mistake and that I should simply accept my fate and be immobilized for 6 weeks right then and there) and offered a temporary Air-Cast, which for all the world looks like a Robocop appendage.  See picture: it looks a lot like the walking cast that many are issued when they get a sprain or need extra support after getting out of a plaster cast, but it's got more tech.

Oh yes, and another $250 in the meter for that.

Neat contraption, in that it allowed me to deflate the airbags inside and/or loosen the straps as my foot and leg swelled on the plane. They advised me that if I didn't do this, there was a good chance my leg would need amputation by the time I got to the other side, and that was the reason not to put a proper cast on at that time.

When all was said and done, we'd spent another half an hour, and another approximately $800 for almost nothing. Who needs the mafia when we can simply visit a doctor?

Alert: Healthcare Industry Seriously Needs Disruption

The Air-Cast did make me a little more mobile, and certainly protected my foot better than the sponge slipper, but it was truly a hulking and inconvenient thing to have to wear.

Of course, the whole point of this story was to get to Portugal. It was my first trip there, and despite the foot, it was an immensely enjoyable visit. The people were great, the food was great, the wine even better, the seaside was great, my hotel was nice, the culture was very comfortable, my hosts were gracious and welcoming. 

In fact, the only downside was the whole airport experience. Have I mentioned that the air travel industry needs some disruption? Although not so much on the cost-saving low end -- that need is already over-served, and the corners being cut are apparent everywhere. Oh well, a future post.

Disruption Point

Appropriately enough, the conference title was The Disruption Point, and my keynote put forward the thought that Disruptive Innovation doesn't happen without Disruptive Marketing, using some case studies and graphed results from The Disruption Group's disruption scorecard tool.

As I was delivering my talk, I had an out-of-body sort of experience (I promise, it wasn't the Vicodin) when it occurred to me how ironic/appropriate it was that I was delivering a talk about innovation, marketing and disruption while I was disrupted in a wheelchair.

I'm sure it's been done before, but I don't think I've ever seen a keynote address delivered from a wheelchair. I'm guessing it happens somewhat frequently at conferences for the disabled. I suspect many speakers who had broken a foot 10 days earlier would have cancelled, but I had put a great deal of thought and effort into this and wanted to see how the audience reacted. I also wanted to go to Portugal, so the location definitely benefited the organizers.

What was especially interesting for me was to get a European view of disruption and innovation. The growing strength and especially the single market opportunity for the EU seems to have spawned a new spirit, willingness to take chances, ambition to grow, recognition of opportunities at home and around the world.

In short, European capitalism seems to have new life and there is some great energy over there, and desire to learn and try new things. In contrast, the US seems to be a little bit on the ropes right now by way of comparison.

I think we are weary of the Iraq war, the falling dollar and rising prices, especially for oil, fighting terrorism, dealing with airport hassles, the hangover from all the corporate fraud and Sarbanes-Oxley compliance, the failing mortgage market and the toll it is taking on banks and homeowners, encroachment on freedoms that we have always taken for granted in the name of "enhanced security'" (an oxymoron if ever there was one).

Basically, virtually everything is in the dumps at the same time.  We need a good recession and some political and economic housecleaning to clear out the fog and get back on track.

But, I digress.

One of the more interesting people that I met was Francois Laurent, president of the French National Marketing Association. He is a crusty guy with a train of thought at least equal to the controversy I cause, as you might discern from his blog and upcoming book title "Marketing is Dead". Here's what Francois had to say about the conference (automatic translation to English version here).

My presentation was well-received and despite the disruption, the trip to Portugal was very worthwhile.

Home of Disruption

So now I'm safely home, have a full cast on my foot, and am already chafing to get rid of it. It's certainly no fun trying to do anything from visiting the restroom, to going up and down stairs, to getting dressed, to bathing, to going out anywhere. 

As I wrote in a recent email, I can't believe that we can send miniature cameras inside someone's heart and do robotic surgery controlled by a doctor 1,000 miles away, yet when it comes to healing a broken bone, we still have this archaic and inconvenient 150 year old technology to fix things. I could have arthroscopic knee surgery, or laser eye surgery, and be back to 100% in a few days, but break a bone, and your life will be disrupted for at least 6-8 weeks.

Consider me broken and disrupted.

Disruptive Tidbits: iPhone Update, Office 2007, Disruptive Marketing, and more

A collection of disruptive thoughts, observations, and small items not big enough to rate their own articles:

iPhone Predictions Already Exceeded

The day before its launch, we wrote a lengthy analysis of the iPhone's disruptive potential and published our predictions of its likely popularity. Many disagreed, but our expectations were pretty close to bang on, with Apple announcing 1 million sold just 74 days after the initial release.

Some fanatics might have suggested even better sales possible, but this is about the top end of what one would expect for a disruptive product. The usual pattern is to seep into the market relatively slowly and then really take off as subsequent versions add features and correct problems, becoming good enough for more and more people until they reach the tipping point and explode into mass market consciousness.

With the unparalleled hype about the iPhone, it's not surprising that it was strong out of the gate, despite many noted complaints about all the ways it wasn't up to snuff (also very common for new disruptive products).

And a New iPod Too

The new iPod Touch is an iPhone, without the phone.

We also discussed the likelihood of a family of mobile handhelds using the iPhone platform, and already we have the next generation iPod, which not surprisingly is an iPhone without the phone. 

Along with that new product came a brilliant move of partnering with Starbucks to offer free Wi-fi access at any of their locations. 

It's actually pretty smart for both sides, as the days of charging for a Wi-Fi connection are almost over. This is a way for Starbucks to be a bit ahead of the curve and benefit from the glow that surrounds the iPod and iPhone.

Watch for iPhone Sr. coming soon to an Apple store near you -- I expect it will be outfitted as a true business-oriented handheld, with connectivity to corporate systems, better security, more horsepower, a suite of office applications (note that Apple's iWork product was also upgraded over the summer to offer a spreadsheet tool for the first time and integration with Office 2007. 

With the "holy trinity" of word processing, presentations and spreadsheets now covered, the Mac becomes a lot more viable as a PC replacement, and will suddenly be "good enough" for many who've been waiting for a real Microsoft alternative, and the iPhone also gets closer to being a viable substitute for the notebook, especially for road warriors tired of airport security hassles.  Don't know if we'll get it before Christmas, but I promise, the writing is on the wall. 

Office 2007 UI Mistakes: What Were They Thinking?

Microsoft is probably wondering about some of the horrible mistakes made in Office 2007, such as imposing the "Ribbon" interface on power users who not only don't need it, but find that it slows them down. Personally I don't like it because it is a big keystroke waster, makes it hard to find all the things you knew, and it wastes a ton of screen real estate.  Not offering an option to use the old menus or the keyboard interface was a really bad idea.

Microsoft's Office 2007 "ribbon": Seriously, someone thought this inelegant, productivity-sucking mess was an improvement!

Although the XML underpinning was a great idea, it also makes it easy for someone like Apple who is better at tools to eat Microsoft's lunch, and with such a huge change in the interface, there's plenty of incentive, and what has anyone got to lose by giving Apple's products a try? 

It's a classic case of overshooting the users' needs on the one hand, and not fulfilling them on the other.  And, it's the kind of arrogant decision that could only come from going so long without real competition.  Ripe for disruption indeed!

Relationships

For many, summer is a time to re-connect with family and think about relationships. Of course, we did that too, and got to attend that rarest of events -- my parents' 50th wedding anniversary.  Even more amazing, my wife's parents celebrated their 50th a couple of years ago.

How many people can say that their parents and in-laws are not only still all alive, but have both managed to stay together for 50 years?  There must be a pot of gold at the end of a rainbow somewhere.

And, check out the picture.  Gotta love the skinny people and skinny ties.  They just don't make them that way any more.

Disruptive Marketing

In the category of "growing realization of the obvious", there's another sort of relationship that comes to my mind. Namely, the relationship between marketing and disruptive innovation. With a couple of decades of technology marketing experience behind me, and my focus on disruption, you'd think I would have spent more time considering the connection. It's a relationship that's lived in my head without expression.

Strangely, Christensen comes close to alluding to it a few times in his books, but never really addresses it.  In fact, it's almost as if all those innovations that he describes were so obviously fantastic products that they grew to dominate markets without anyone making the smallest effort to target the right niches and make them appealing to customers.

I've been developing some hypotheses about that relationship, and gathering evidence and observations to test them. It's a simple but profound notion. Namely, that disruptive marketing is the secret sauce that takes the potential of a disruptive innovation and turns it into a reality.

Yes, there are accidents along the way, and occasionally disruption happens without intent, but it's become increasingly clear to me, both by looking at missed opportunities for disruption, and at products that succeeded in turning the tables, even against the odds, that disruptive marketing is a necessary component.

I will be delving into this idea in more detail in future posts with case studies, examples, definitions, and description of how disruptive marketing works.  I hope to elicit a healthy discussion around this idea and get "war stories" from marketers about how they did it, and what disrupts versus what is plain vanilla.

Upcoming Presentation

Carrying on with this idea, I will be making a keynote address to the International Marketing Congress in Lisbon in a few weeks.  The conference theme is The Disruption Point, and I will be addressing the connection between Disruptive Innovation and Disruptive Marketing. 

This will be the first public forum where I will be presenting my theories and observations, and I'm looking forward to a great discussion and debate.

Disruptive Business Strategy: What is Steve Jobs Really Up To?

Two days before the official launch of the iPhone, the pitch of media, pundit and public anxiety over perhaps the most anticipated new product since Windows 95 has reached a level only Steve Jobs could properly describe -- Insanely Great!  And here I am, contributing to the noise, raising it even a decibel louder if that's possible.

How loud is it?  As I finish writing this post, Technorati says that there are nearly 189,000 blog postings (in English -- there are nearly 305,000 in all languages) that talk about the iPhone. 

iPhone Debut Rivals Harry Potter Mania, But Will It Last and Why?

Compare that with 39,170 that mention Motorola's RAZR, a phone that was the previous biggest smash hit and which literally put Motorola back in the cell phone business after years of decline.  Nearly 6 times the level of mention of a phone which has been exceedingly popular, a design hit, has been in the market since 2004 and which exceeded all other flip phone sales within one year of its release. 

And, the number of postings that include mention of the iPhone has been rising by over 1,000 every 4 hours today, and you can count on it growing even faster until the pent up hysteria is released at 6pm on Friday.  And, the chatter certainly won't stop then.

Every major media outlet has weighed in.  The Wall Street Journal, New York Times, USA Today, every computer or telecom related industry trade journal has reviewed it.  Virtually everyone who's been privileged to receive one of the media samples for review has said it's cool -- so cool it almost lives up to its hype. 

Like the mania for video game consoles or Harry Potter books, prospective customers started waiting in line outside flagship stores in New York Tuesday morning.  Unprecedented for a phone.

Think about it -- the entire country seems locked in a heat wave, with most major cities experiencing temperatures in the mid 90s or higher.  Yet, people are so lustful of being one of the first to own an iPhone, that they will camp outside a store for 4 days in the sweltering heat to lock in to a 2-year service commitment from AT&T, the worst service provider in the business (more on that later).

So, does all this mean runaway success -- the game is already won?  Or, will there be an equal and opposite reaction when possibility and excitement about the future gives way to reality, and inevitable issues with service, availability, bugs in functionality and unfulfilled expectations?

Apple fanatics say it will be successful because it is ultra-cool, easy-to-use, a breakthrough in design elegance and software sophistication. Naysayers say nothing could live up to this level of hype, and that when things die down, sales will appear lackluster no matter how good they are.

Virtually everyone notes the stupidity of getting into an exclusive deal with AT&T and warns that this could be the albatross around the iPhone's neck. Almost all of the speculation and predictions are based on visceral and emotional reactions, and influenced heavily by the reality dispersion bubble that surrounds Steve Jobs, and by the majority belief that "better" wins. 

But if we run with that notion reductio ad absurdum, what exactly does 'winning' mean?  Assuming that the consensus is that the iPhone is a better phone, does it have to achieve market dominance as a late entrant the way the iPod has in the MP3 player space?

Surely it doesn't have to match iPod's 80% market share within 5 years! There are over a billion mobile phones already in use around the world.  Is a 10 or 20% market share strong enough to be considered successful? (The RAZR's share is only around 5%.)

Is this even the right yardstick to use?

The iPhone Will Be a Disruptive Winner

iPhone will be successful regardless of the metrics used.  It will be successful beyond the expectations of the most enthusiastic pundits. 

It will be successful beyond what Steve Jobs thinks.  It will be successful in spite of the apparent deficiencies that have already been noted in the reviews. It will be successful despite partnering exclusively with a single carrier, and the one most despised in the industry -- although this will be the biggest road bump the iPhone faces. 

It will be successful because it will change the game -- actually, it will change many games, and therein lies the secret of its success.  It will do all this because it will be disruptive. 

But, predictions are dangerous. And, mine disagree with those of many people whose opinions I respect and whose theories I borrow from. Even though I'm siding with the majority who believe the iPhone will be a big winner, how do I arrive at that conclusion and what exactly makes it disruptive?

Who Disagrees With Me

Before explaining what the highly respected experts are missing, let me first say who some of them are and try to summarize their positions.

Innosight

Innosight is the consulting company formed by Clayton Christensen to sell management services around disruptive innovation. Clay developed the original ideas and theoretical framework that underlies disruptive innovation in his series of books - The Innovator's Dilemma, The Innovator's Solution and Seeing What's Next. Saying he (or his minions) have it wrong is like saying that the pope isn't Catholic.

In January, after the original announcement of the iPhone, Innosight consultant Jonathan Barrett said:

• at $500 or $600, the price is too high
• Cingular (now merged into AT&T) is incapable of providing the same high quality, seamless user experience that Apple customers expect
• iPhone won't work on 3G high speed data networks -- only EDGE or Wi-Fi is supported -- so there won't be anything unique or distinctive about the wireless service
• the deficiencies plus high price point will prevent iPhone from finding a market sweet spot
• the approach of Apple is a "sustaining strategy" (i.e. incremental innovation of the cell phone), not a disruptive one, positioned against deep pocketed, long time industry incumbents who have a lot to lose if Apple wins and will fight fiercely for share

He reaches his "not disruptive" conclusion while still finding many things to like, such as lack of keyboard, design beauty, novel interface, thinness and coolness factor.

Mike Urlocker

My colleague, and the CEO of The Disruption Group, has a stronger technology, industry and investment background when it comes to the iPhone, having been the original analyst at UBS to identify the RIM Blackberry as a disruptive product and the first to recommend RIM as a strong buy. Mike has worked for and advised software companies on marketing strategy, and at UBS he was executive director and member of the global technology and telecom teams.

In his Disruption Scorecard evaluation of the iPhone, again shortly after the original announcement in January, Mike rates it a B-, and labels it likely a hit, but not very disruptive.  He reasons that the product appeals to people who want status and high design (the coolness factor) and are willing to pay for it, but that it doesn't have much potential to change the game like Blackberry did, or upset incumbent rivals such as Nokia, Motorola or Samsung.

Laura and Al Ries

Branding and positioning experts Laura and Al Ries (Al Ries and Jack Trout wrote the original book that defined the concept of positioning) take a different tack, identifying the iPhone as a "convergence" product, and the iPod as a "divergence" product. The concepts of divergence and convergence come from Evolution Theory -- basically, the idea is that there is a common origin to all species, but that over time the "tree of life" diverges as natural selection creates specializations to adapt to the environment.

Another failed convergence product.

Similarly, Al and Laura (and other pundits too) argue that the natural trend for all products is towards divergence and specialization to better suit consumer needs.

They claim the iPod was successful because it was a divergence product. Moreover, they argue that most "convergence" products fail -- convergence being when multiple feature categories are combined in a single product (in iPhone's case, an iPod, cell phone and PDA).

Their position is that consumers prefer products that are optimized to do one task well, rather than a lot of tasks poorly, and they further claim that the iPhone has been over hyped and most over hyped products fail to live up to expectations, therefore the iPhone will be a failure.

Hmmmmm.

Most of the others who claim the iPhone will be a failure base it on their own personal biases rather than what the market as a whole is likely to do and why -- "I'm not going to get one because . . .".  Name your complaint here. Price, lack of keyboard, slow data network, AT&T as carrier, touch screen keys too small to hit accurately, it will have bugs in version 1.0, etc.

So, what are they all missing, and more to the point, what is Steve Jobs really up to?

The Label Problem

One of the problems with evaluating anything analytically is that we get hung up on labels rather than thinking about what the labels mean and why the rules of thumb associated with them usually work. In the case of the iPhone, there are many labels and definitions being applied that are throwing people off the scent of what's really happening and my belief is that this is deliberate.

Yes, Steve is trying to fool the experts and fly below the analytical radar, ironically while mounting one of the most pervasive and successful hype build ups of all time.

To start with, the name iPhone is a mislabeling. While iPhone does indeed have phone capability in it, it is not a phone. Suspend disbelief for a second, walk with me a little, and it will all make sense soon.

Is your laptop PC a phone because you can make GoogleTalk or Skype calls using it? If not, why not?

Does it matter that it isn't the only thing you do with it? What if that was the most important thing you did with your PC, because you make a lot of calls to India, and free long distance service is worth a lot to you? Still not a phone?

Well, if your PC isn't a phone, is it a typewriter? I know that the primary purpose for my PC is typing documents, blog posts and html. I print a lot of those on paper. Mine is definitely an evolved typewriter.

Or maybe your PC is really a gaming console, or a mobile email device because you use it at home, at work, at Starbucks and at hotels and other wi-fi hotspots around the world to send and receive emails. Or, maybe it's just another example of a highly unsuccessful convergence device?

Or, do you still think your PC is something else?

The iPhone is Definitely Not a Phone

So, if you were willing to suspend disbelief and suppose that the iPhone might not be a phone, what is it then? Let's start with why it's called an iPhone.

iPhone is both sales positioning and a ruse. iPhone is positioned as a phone because Apple knows that in that niche, the market is sorely lacking for a stylish, easy to use, fun, visual, well-designed and well integrated device. It is a first if only because of its elegance. Don't believe me?

Then why isn't it really an evolved iPod?  One with a really big screen, beautiful graphics and music navigation, and by the way, it includes the ability to make phone calls?

The reason is because Apple believes this is the purpose that you will understand out of the starting gate, and for which it can convince people to shell out $500 or $600 to get the most stylish and coolest gadget on the block. Therefore it is positioned as a phone, and that's the basis on which everyone is analyzing it, and writing glowing reviews. But it isn't a phone.

It's also a ruse, because Mr. Jobs has a much higher goal in mind than selling the world's coolest phone. But this is an effective way to divert attention from the real disruption that is happening until it's too late.

Why This Makes Perfect Sense

Let's get a historical perspective to make a little more sense of this. When Alexander Graham Bell invented the telephone and tried to sell his patents to Western Union in the late 1870s, how do you think he described what it was?

No one had a framework to describe how revolutionary the phone would be as a communications tool. If you wanted to talk to someone, you went across the street, knocked on their door, and if they were at home or in their office, you could talk.

Initially, outside of the securities industry, people couldn't even understand why they would want a phone. Especially since the first version could only work over short distances due to signal loss on the wires. There was no network, there wasn't any need for communications to be sped up that much and nobody else had one, so how much use was it?

Bell considered the telephone to be a way to transmit voice over the telegraph, and that's why he thought Western Union would buy his patents. Bell viewed the telephone, perhaps one of the most disruptive technologies of all time, as an incremental ("sustaining") innovation over telegraphy.

Western Union, on the other hand, viewed it as being worth less than $100,000 since they rejected the offer to buy the patents for that much, although they later tried to buy them for $25 million.

Do you consider your telephone today to be a highly evolved telegraph? If you can imagine that, what about your cell phone, or is it different because it's mobile? What then of the iPhone? Just a space age telegraphy device with no keys or dials?

The important thing to note here is that in the early days, it is difficult to imagine the application and importance of disruptive innovations if they really are, because no one has a framework to understand its value.

That's why the car was positioned as a horseless carriage. That's why TV was radio with pictures. That's why the first computer was called ENIAC -- or the Electronic Numerical Integrator and Calculator. 

That's right, the first computer was just a calculator that cost 200,000 man hours to build, $486,804 in 1946, and used $650/hr worth of electricity to sit idle. Some times the original naming belies the importance of an innovation.

So, positioning of an innovation in the short term is not the same as long-term recognition of value and the salient characteristics that define its use. If not for the need to calculate missile trajectories more quickly and accurately during the war, the first computer might never have been built.

And what of convergence versus divergence? Most consultants and branding experts will tell you that convergence as a strategy almost always fails, because the more things you combine into one, the more compromises you have to make in design, and each individual function is sub optimized at the expense of the whole.

In disruption theory, a parallel idea says that as companies continually add sustaining innovations to better meet the needs of mainstream consumers and/or differentiate their products, they eventually overshoot the needs of most of their customers. Convergent products usually exceed the needs of all but a small minority of any prospective customer base. After all, who needs every tool on a Swiss Army knife?

That's the theory, but the reality is that when you try to apply simplistic labels to categories or products and then assign attributes or success factors based on those labels, you can miss the forest for the trees. In the case of convergence versus divergence, this is especially true, since which bucket you assign a product to varies based on whether the combined elements are truly synthesized in such a way that they cannot be separated and provide the same benefit, or whether they are just bolted together and not really integrated to optimize overall performance.

Ask yourself whether the combination of radio technology, speakers and a cathode ray tube to make a TV represents convergence or divergence? Is it the evolution of radio, or are the elements synthesized in such a way that they create something truly new?

If I turn on the TV, but listen to it from another room, is it still a TV, or is it a radio? Did the TV fail because several technologies converged? What about personal computers?

So what is the iPhone, and what is Steve really up to?

It's a handheld one of these. Fits in your pocket too.

The iPhone is disruptive because it isn't really a phone, or for that matter, an iPod. If it was either of these, then as cool and elegant and nicely designed as it is, it would still just be an incremental or "sustaining" innovation.

Remember that the iPhone has a complete version of the Mac's OSX operating system embedded, plus it lacks a keyboard and has a truly novel interface with seamless integration between different functions. With all that, it can be considered as the first truly personal handheld entertainment and communications computer.

It can also be considered the first handheld business computer powerful enough to replace a notebook for road warriors tied of lugging all their paraphernalia through airport security. In other words, it competes in a different class of products -- not as a phone, not as a smart phone, and not as a computer.

It serves the un- or underserved need for lightness, simplicity, ease of use, true integration and is simple enough that my mother could use all the features without thinking about each being a different application or device. Competing against laptops, it doesn't yet have all the applications my PC has, but it is "good enough" that many will be ready to give it a try.

And, there are already numerous applications you can download to enhance the functionality for your needs, and many more business applications (especially things like bluetooth connectivity to a real keyboard, document editing, spreadsheets and presentation capability) which will run in Safari are likely to come. 

And, when compared to a laptop, it is disruptively inexpensive. Analogous statements are true if you evaluate it as a personal communications and entertainment computer.

This is, I think, what the huge excitement is about. People innately sense that this is much bigger than a phone, they just aren't yet able to articulate what is significant about it, and how we'll look back on Friday June 29, 2007 as one of those days when everything changed. 

And, it looks really cool and I desperately want one.

Steve's End Game

The iPhone is a trojan horse.

Steve lost the first battle between the PC and the Mac because he was less sophisticated as a business person in those days, and didn't fully appreciate how difficult it would be to convince the masses that they needed an expensive personal computer before they had even used one at work. In 1984, the Mac exceeded the needs of most potential customers, and looked like a toy to business (unless your business was about graphics or publishing).

The DOS-based PC was the "good enough" disruptive innovation of its time because it catered to mainframe users used to buying computing equipment from IBM and used to looking at green-screen character-oriented terminals.

This time it's different. Almost all of us use PCs daily. And, most of us are tired of the now clunky-seeming interface which isn't much different or easier to use than the initial Mac interface of more than 20 years ago.

And, we desperately need a single, small pocket-sized device that can handle all our business needs while on the road and enable us to leave our 10 pound paperweights at home. Something that's easy to get through airport security, and makes my life less complicated.

Moreover, at the price point of $500 or $600, this is something that every road warrior can afford today, if only as a style accessory. So, the decision won't be made or inhibited by corporate IT departments.

Sure, they'll try to block connectivity to their servers on security grounds -- they always do, because they think computers are about them, not about the users' needs. Of course, the iPhone includes VPN connectivity, and most have already got their heads around that. But so many executives will have these that just like the Blackberry before it, corporate acceptance will be very fast. And, once you've adopted the iPhone as your traveling computer, how much of a jump will it be to make your next notebook/desktop for office use be a Mac?

My Prediction

As a phone, the iPhone will be exceedingly popular. If production can keep up with the demand, I believe that Apple will sell more than 2 million before year end 2007 -- if they can scale fast enough and have a new version out in time for Christmas, maybe as many as 5 million.

Steve Job's stated target is 10 million sold by end of 2008. Given that there will probably be at least 2 more versions of this product before that, I believe 10 million is a very low estimate, set so that expectations can be smashed -- again, it will depend how fast production can gear up to handle demand and support several different models, but 20 million should be easily reachable.

As additional business applications start coming online, probably early to mid-2008, expect sales to really take off. We will no longer be judging the iPhone as a phone when that happens, but as a true micro-mini sized PC which revolutionizes the entire tech industry and rejuvenates innovation throughout Silicon Valley. At that point, the iPhone will disrupt Blackberry, Nokia, Motorola, Microsoft, Samsung, and maybe even Nintendo (to name a few).

see Seth's Prediction Page

Postscript

And, what about AT&T? Well, that truly is the fly in the ointment and Steve's Achilles Heel. AT&T is brutish about customer service, slow to innovate and slow to reform. They will try to extort every possible advantage in pricing and contractual obligation that they can. AT&T knows nothing if not how to exercise a monopolistic advantage.

Moreover, AT&T lacks the broadest service coverage, and no single carrier (in the US, at least) is right for everyone. We all know that signal strength and dropped calls vary based on where you spend most of your time.

So, if you live in an AT&T dead zone, tough luck. Their EDGE network is slow, and they don't have anywhere near complete enough coverage with their 3G services (which aren't built into this version of the iPhone anyway).

It's hard to understand why Job's wouldn't let the market decide if he wasn't going to lease his own service. With a single carrier that many will be unhappy with, Apple will take the brunt of service complaints -- if I could go anywhere, I'd blame the carrier, not Apple. 

Verizon has the best coverage and fewest dropped calls. T-Mobile has the best customer service, best rates, and happiest customers.  Maybe AT&T (Cingular at the time) was the only one willing to play ball on the technology changes that Steve wanted.

Regardless, if service complaints and customer mistreatment stories start hitting the press, expect a negative backlash that could take a serious bite out of sales growth and long term success. On the other hand, wide scale Wi-Max is a technology whose time may well have come -- it would make perfect sense for independent Wi-Max providers to bathe cities in their signal, and then AT&T could become almost irrelevant in the equation (if Wi-Fi VOIP capability exists).

Other Links

• iPhone Q + A
• iPhone facts from Engadget
• Vote for the iPhone: Hit or Miss
• Microsoft Surface vs iPhone???
• Consumerization of IT: iPhone Skirmishing Begins
• Apple Innovation Blog
• Apple Introduces Safari for Windows
• Safari Beta for Windows Tops 1 Million Downloads in First 48 Hours
• RIM versus Apple, Integration versus Modularity
• iPhone Application List

The Disruption of American Idol

Disclaimer: This article is not about disruptive innovation per se, but is more of an entertaining diversion into a different kind of disruption. It does, however, have analogs with the kind of disruption we normally like to explore here, so for fun, I use a similar analytical framework.

Ok, I'll admit it. I too have guilty pleasures. American Idol is one of them.

Back when AI first began, I studiously ignored it. My wife got hooked by the third or fourth show, but I thought the whole idea was dumb and never bothered.

The first show I sat through was the finale of the first season, which I thought was pretty pathetic. I hated both singers. They were too amateurish, and although Kelly Clarkson was clearly better, that was only because her competitor was soooooo bad.

Then came the second season. My suspicions confirmed by the first season finale, I ignored the first 5 or 6 weeks

Then for some inexplicable reason, probably boredom, I sat through a show because my wife was watching it. Then I got hooked.

It was still like watching a train wreck happen for many of the below average contestants who couldn't sing in tune or remember their words, but the Ruben - Clay thing was kind of interesting, and I enjoyed seeing the bad singers get voted off one by one. I think that was about when AI started to become the ratings juggernaut and pop star-making phenomenon that it is now.

So, I haven't watched every show since then (not a total addict), but I have come to anticipate my regular fix.

Becoming "The Establishment"

Over the past several years, American Idol has grown in strength, kicking the butt of every show that dares to go against it. America got more and more hooked. Viewership for some regular season shows now approaches Superbowl ratings, and the finale has become so big that it completely encapsulates pop culture

Prince's appearance on last year's finale confirmed the acceptance of AI as part of the establishment and TV royalty. Other than the Superbowl and Y2K New Year's Eve party, what other shows has Prince participated in in recent memory?

Pop stars line up to release new songs or new albums or rejunvenate dead careers on the show. Other TV shows covet the spots before and after AI's time slot, and all FOX has to do to create a new hit is let it follow AI for a few days.

New movies are released by offering boondoggles for Idol participants. Actors with new movies out show up in the audience just to be seen. And, they'll pay anything just to secure a seat in the studio audience if they haven't got something to promote.

The Today Show, the leading morning Infotainment program routinely reports the previous night's Idol results as one of the top three lead news items of the day -- results from a competing network's "reality" show! Virtually every major media outlet now announces the American Idol results on a weekly basis.

Yes, American Idol rules the roost, but trouble is on the horizon.

The Sweet Sound of Disruption

Melinda Doolittle: Is She the Best American Idol Singer Ever?

So, with all the money and star power and publicity and seemingly ever-increasing ratings, how can I say that American Idol is being disrupted? Simple -- the best pure singer the show has ever had, with a voice equal to any pops-topper of the past 40 years, was voted off last week. Amazing!

How could this happen?

Why I Might Be Wrong

Before I delve into the analysis demonstrating that disruption is indeed happening, let me first explore why others might say that I'm wrong.

Many will say that the voters are always right. If the two left are the ones who collected the most votes, then they must be the best, or the most exciting, or have attracted the best following. Especially with over 60M votes being cast -- more than the totals for any presidential election ever.

But realistically, is that possible? Or more to the point, why did Sanjaya last so long?

What explains it? Why did Sanjaya last so long? Sanjaya forgot words, sang out of tune, and was often just ridiculous. Yes, lots of little girls liked him. Yes, he had a built-in core demographic of Indian voters who had never had one of their own to vote for before. But would that have been big enough to keep him aloft into the top 7?

Why Did Sanjaya Last So Long

An unholy alliance, perhaps? The crying little girls were part of it, and so was the Indian demographic. So was a group who truly found him entertaining and refreshing and thought he as a good singer.

But the influence that tipped the balance could only have come from a blog which encouraged its readers to all get behind the very worst performer left and try to keep them alive week after week.

Vote For the Worst

This graph of website reach statistics from Alexa shows the impact that votefortheworst.com has had during the 2007 season of American Idol.

Readership starts to rise just as the public voting season gets underway in mid-February. Spikes correspond to the Monday to Wednesday period each week. The site's heaviest draw was during the period of mid-March to mid-April when Sanjaya seemed to defy gravity and the odds week and week, until his final performance of Bonnie Raitt's "Something to Talk About" which was so dismal, even the tinniest of adoring teenage girls' ears could detect the poor quality of performance.

The biggest peak almost hits .04 percent of all internet traffic for a single day near the end of March, which is far above the average reach estimated by Alexa of .0475 percent of global internet traffic in a week. Using Nielsen data to estimate visitors, this reach equates to approximately 2 to 3 million US-based readers in an average week.

If we can safely assume that at least this many votes were influenced to "vote for the worst" (who this site identified as Sanjaya), it's more than enough in a close contest to keep an individual competitor in.

Vote for the Worst was a little subversive blog site that started in 2004. Having all the right qualities to grow with viral explosiveness, it now has a readership that at its peak this season averaged 500,000 hits per day (coincidentally, that peak occurred in the period when Sanjaya seemed to be invincible, and the media started questioning why such a bad singer was able to survive week after week, while better singers were being voted off.

The Alexa "Daily Reach" graph (shown right) clearly indicates that votefortheworst.com had the intended affect, and was responsible for ensuring that Sanjaya survived for several weeks past when he should have.

VFTW succeeded in having their good fun, and with the vote distributed between lots of candidates and those near the bottom being particularly vulnerable, a small boost in vote is plenty to alter the result and keep the weakest contender alive.

But, What About Melinda

That's a very plausible, reasonable and highly probable explanation for the survival of Sanjaya, but how does it explain the ouster of Melinda, clearly the best and a strong judges' favorite

As the vote totals rise, and the number of finalists goes down, shouldn't that increasingly favor the best? Moreover, what proof do I have that the vote was close?

DialIdol's busy signal statistics show that last week's semifinal was extremely close with all three contestants having almost identical busy signal percentages on their voting lines. When the voting is this close, the margin of error is bigger than the difference between the contestant's votes, making a reliable prediction nearly impossible.

With over 60 million votes cast, and statistically insignificant differences separating first place voting from third, a very small number of votes can make a huge difference, as we saw in the 2000 presidential election where subjective decisions about every hanging chad dictated the outcome. The Alexa graph above shows that fewer people are visiting votefortheworst.com now than when Sanjaya was still alive, but they are still influencing over 1 million votes per week.

VFTW is now supporting Blake as the worst remaining singer. However, like Sanjaya, Blake also has a strong fan base to count on. As the only (somewhat attractive) male left, he draws the majority of the teenage and younger female votes. He is also perceived to be more up-to-date in his musical styling, and more of an "interesting performer" with better stage presence than either of the women.

The extra information we need comes from DialIdol.com.

DialIdol provides software which enables avid voters to speed dial their Idol votes from their computers. In addition to helping fanatical young voters get the maximum number of votes recorded for their choice in the allotted time, DialIdol also records how often a busy signal is obtained when trying to vote.

As we might expect, there is a high correlation between frequency of busy signal and the respective singer's rank in the results show (i.e. the more often the voting number is busy, the more people are trying to cast votes for that singer.)

DialIdol uses this data to publish predictions of the most likely winner and loser each week. (It's hard to believe we're so obsessed with this that we can't wait a few more hours for the actual results show, but there you have it.)

Close Voting Favors the Disruptor

In the week that Sanjaya was voted off, DialIdol accurately predicted the bottom three, including that Sanjaya would be loser. In all preceeding weeks, he was safely in the middle. Last week, as the "DialIdol Rank Graph" below indicates, the voting was too close to predict vote ranking for anyone. So, either the audience didnt agree with the unanimous assessment of the judges and most observers that Melinda knocked it out of the park, or something was helping the poorest singer to stay alive.

Impact of AI Disruption

FOX network at first denied that VFTW was having any impact. Then, when it was clear that they were having an impact, FOX called them "hateful" and "mean-spirited".  Ironic accusations from the show that deliberately calls out the most delusional and sometimes mentally-challenged entrants to callously make fun of them in the beginning-of-season reject shows.

But mean-spiritedness is surely what the FOX execs feel who rightly understand that the long-term health of the franchise is at stake, and that the sham that American Idol built upon is being exposed and therefore the business model threatened.

What sham?

American Idol is positioned as a contest to find the best undiscovered young (amateur) singer in America, thereby "discovering" them and making them into a star. But that basic idea is a lie. The audition process is not designed to find the best singers, but the best contestants for a reality show.

Of course, the producers want a decent singer to win at the end, so they put "judges" in place to try to guide and influence the public voting. In any given year, there are about 3 or 4 who are actually good enough singers to deserve a recording contract, so as long as the show eventually whittles down to 2 or 3 of that group still standing, and generates a built-in fan base and familiarity to sell records the producers have won.

Say it ain't so! The sham: it isn't a real singing competition until we get down to the last 2 or 3.

In the mean time, the show needs to provide entertainment, and a pure singing competition would get awful boring awful fast. Admit it -- we all watch because we like the train-wrecks, because there are crazies who make things funny, because we like to see bad singers insulted by Simon, and we like to see them insult Simon back and then take their medicine by getting voted off.

But, and this is a very important 'but', it isn't a real singing competition until all but the last 2 or 3 have been eliminated.

Here's another way of looking at it. Does anyone really believe that out of more than 100,000 auditions, there are only 4 or 5 people who can carry a tune moderately well?

In the general population, there are at least 2 or 3 per hundred selected at random who can sing well. If those 100,000 were selected randomly, there should be a couple of thousand potential contestants. But they self-select, which means they either believe they have some talent or just want to be on TV, but that still means that the ratio should be more like 4 or 5 out of 100.

But, the audition process skims most of the crowd, looking either for good personalities for the finals, or oddball personalities for the "audition" rounds, which are highly staged for TV. Either way, it is TV presence that matters, not singing ability

After all, out of 15 to 20 thousand people in any given city, only about 10-15 get on TV, and most of those get the TV spot so we can laugh at how bad they are. But the show would have us believe that outside of the few who are picked for Hollywood, everyone else is mediocre or less. 

VFTW exposes this sham.

They recognize that American Idol wants train wrecks in the final 12 to keep the show entertaining while we get to know the "real" finalists. Which is why there are so many in the top 12 who can't sing.

VFTW agree that it's funny, so they want to keep the train wrecks on as long as possible, and in the process they are slowly but surely eroding the premise that the show is based on by exposing the lie that it really isn't about finding the best singer. And, they need almost no resources, no money, little time -- just a small blog to undermine the show's foundation.

That's why poor Melinda lost last week. That's a personal slap at her, but it may end up being the straw that broke the camel's back as far as the show is concerned. AI didn't care who she sang against, but everyone wanted the best singer to be in the final.

So, the real cost of disruption is that America starts to realize there is a wizard behind the curtains trying to manipulate them into picking who they always wanted us to pick, and once we realize we've been fooled, we lose interest, they lose their star-making machine and the billions of advertising dollars and promotional opportunities that the show has spawned.

And the outcome may be that VFTW forces a change in process which makes the show more honest but less interesting. That's a real world example of the power of disruption -- either way it costs and it may kill the target if the response to the threat isn't met successfully.

Nobody said that all disruption was good.

Food for Thought

• Could FOX or American Idol's producers have anticipated this?
• How should they have reacted to the disruptive threat?
• Is there anything they could still do to neutralize it before next season?
• How would you know if the crown jewel of your business was about to be disrupted?
• Can you deliberately create disruption like this to upset your competitors (in an ethical and legal way)?

More Conventional Opinions

• http://www.buddytv.com/articles/american-idol/american-idol-was-melindas-eli-6559.aspx
• http://www.tvgasm.com/recaps/american_idol/melinda_what_happened/
• http://www.foxesonidol.com/cgi-bin/ae.pl?mode=1&article=article2119.art&page=1
• http://nymag.com/daily/entertainment/2007/05/american_idol_lets_get_political.html
• http://nymag.com/daily/entertainment/2007/05/has_american_idol_jumped_the_s.html
• http://www.cinemablend.com/television/American-Idol-Melinda-Is-Eliminated-4266.html
• http://www.point-spreads.com/content/view/1807/2/

Sites Mentioned in This Article

• http://www.votefortheworst.com
• http://www.dialidol.com
• http://www.alexa.com/data/details/traffic_details?url=http

Starbucks: Ripe for Disruption, or Already Disrupted?

I suspect most people have heard by now of the kerfuffle about an internal memo, leaked through a popular Starbucks fan blogsite and ultimately covered by BusinessWeek, The Wall Street Journal, Forbes, CNN, etc., which was penned by the founder and chairman of Starbucks, Howard Schultz. Certainly the blogosphere is a-buzz with the come-to-Jesus nature of Schultz's personal revelation that Starbucks may have lost its mystique. I counted hundreds of blog postings - right up there with Britney Spears haircut and Anna Nicole Smith in popularity.

The memo itself was an interesting document that raises eyebrows and questions: although addressed to the president and other senior execs, was it always intended to be leaked via social media, into the mainstream press and back to the blogosphere?  It has certainly created a lot of passionate commentary and free advertising for Starbucks.

Was it really intended to tell the public that Starbucks knows that people are complaining and that the competitive sands are shifting? Was it a message to investors that the company needs to slow growth and fix the experience to save the brand and that it's going to cost a bundle?

Or was it just the confessions of a founder and Chairman, purging feelings of guilt about a loss of soul, and a plea to executives for salvation? (Which, incidentally made Starbucks look good while rallying those who are still passionate about the brand experience to Starbucks' defense?)

No matter which of these it was, it was a brilliant document, but it may be too little too late.

Too Little, Too Latte? Starbucks is the World's Pre-eminent Coffee Brand: How Can it Be So?

It really depends on whether the executives realize that disruption is afoot, and that there's much more going on here than the diminution of brand experience. To properly address this question, and explain why disruption is the real problem, it helps to go back to the beginning, and define the innovation that led to Starbucks becoming a household name approaching 15,000 stores around the world.

What problem did Starbucks solve for its customers?

Anyone who travelled in Europe BS (Before Starbucks) would have marvelled at the quality and variety of coffee, and the cafe culture there. Especially in places like Italy and France.

The coffees were strong, but fresh, well-prepared and a perfect complement to a day of sitting on a sidewalk under an umbrella people-watching, or to end a perfect meal, or a delightful jolt to start the day with a pain chocolat or even just toast and eggs. You would have wondered how everywhere you went, coffee could taste so strong, yet be so delicious and universally good.

On this side of the pond (outside of your favorite Little Italy restaurant), it was almost impossible to get a decent cup of coffee, and especially to get a strong cup that was drinkable. I remember wondering after every trip why it was that good coffee on our side of the pond was an oxymoron whilst on their side, it was impossible to get a bad one.

It wasn't just that most (North) American coffees were made from Robusta versus the superior Arabica beans. It also had to do with poor roasting, poor quality control, and the fact that we got used to crappy coffee during the second world war when everything was rationed and/or watered down.

By the 50s, everything was about speed and automation, and so we made matters worse by going from percolated to instant to freeze dried to Coffee-Mate powdered creamer (another oxymoron). We drank it by the gallon, rotting our stomachs, taste buds and brains in the process.

It was purely about the caffeine and the speed. (Wonder why we never distilled out the caffeine and dispensed it straight via injection?). Yes, in a few big cities, you could find that rare place that would serve a great European-style coffee, and sometimes even with a bit of the ambiance, but that was so small a percentage of consumption that it barely qualified as an exception to the rule.

The story is apocryphal, and published on Starbucks website, and in Schultz's book, about how Schultz felt exactly this way on visits to Milano, and decided that it was time Americans got to upgrade their coffee experience. And, not just create a better cup of coffee, but the same smell and feel and cultured experience and ambiance that you felt in a great Italian coffee bar. That was the beginning of Starbucks as we know it.

We'd been upgrading the experience for ourselves, as much as we could with drip coffee becoming more the norm in the 70s and 80s versus instant, but the vast majority of Americans had never had a quality cup of coffee nor enjoyed the sensuality of the European coffee culture. So, when Starbucks hit Seattle, we were ready for something different.

So What About Disruption?

Disruption theory says that products or services evolve incrementally to better meet the needs of the most demanding customers, but eventually overshoot the needs of most consumers. In this process, the incumbents that dominate the existing market build processes and operational efficiencies that enable them to maximize profitability and continually introduce new "sustaining innovations".

In the short term, these series of decisions that improve processes and efficiency are seen as good management, delivering better profits. In the long term, however, they create the opportunity for a disruptive innovator to enter the scene.

At the time when Starbucks began, the big coffee suppliers had enormously overshot the needs of their customers for a cheap, fast cup of coffee. Yet, each "innovation" they introduced kept on making the product either cheaper or faster to prepare, stripping the product of the original reasons we became addicted to it - its flavor first and foremost, but also its ability to facilitate social interaction, savor a great meal, sit and relax, etc.

So Starbucks was a disruptive innovator. It brought flavor, a friendly social setting (the "third place"), quality, plus the consistency that only a chain can do. They brought back the smells, the sensuality, and introduced to Americans a "European experience" -- and, what Schultz has described as the sense of theater.

But isn't disruptive innovation "low-end"? How does a $5 cuppa disrupt?

But, you might be saying, Starbucks introduced a high-end innovation -- disruptive innovations typically are aimed at the low-end markets and low-end needs.  Well, you'd be right, usually, but the question is: what needs were low-end, or more accurately underserved?

The characteristic that initially made Starbucks a small niche disruption was the speed. The big producers were optimized for speed above all else, not flavor and certainly not the organic pleasure of a gathering place with great smells where you hang out with your friends.

The characteristic of Starbucks' innovation that was just good enough for the original niche of coffee culture appreciators was the speed.  They were happy to sacrifice the speed of picking up a pot of coffee off the Bunn burner (ironic that they called these things burners, because that's what they did/do to most pots left longer than 5 minutes) and pouring it straight to the cup and from there to the lips, in order to drink something they truly enjoyed, and to experience the coffee bar ambiance.

Initially, potential competitors to Starbucks ignored them because the market wasn't big enough for Dunkin Donuts or McDonalds to care about. To them, Starbucks coffee drinkers were aficionados -- a tiny specialized segment that had nothing to do with the mainstream, who they perceived still mostly wanted speed.

This ignorance is typical (and logical) to mainstream vendors who aim to maximize profit by serving the largest market as efficiently as possible. It also allowed Starbucks to "fly under the radar" for a long time -- over 20 years of strong growth -- allowing them to build their market unimpeded by real competition.

Yes, there are smaller chain coffee brands, like Caribou and Peets, etc., but their presence serves to expand the market for all specialty coffee vendors, and benefits the leader, i.e. Starbucks, disproportionately. But, Starbuck has become mainstream, and they can no longer hide -- they are officially perceived as a real threat to the foodservice business of other big companies.

But Starbucks is the leader and still growing. Are you seriously saying they might be "disrupted"? By who, and how?

As noted, disruption can take a long time to play out, and the seeds are sown long before the heavy damage is done.

As Starbucks has grown, they have focused on operational efficiencies to grow faster and more profitably. Efficiencies such as automatic espresso machines, flavor-sealed packaging (which eliminates the great smell of a real coffee shop), and expanding merchandise options ("would you like some fries with that doppio mocha latte half-caf with low fat milk?") to extract every last penny of same-store sales growth.

In the process, they have incrementally sacrificed seemingly small parts of the experience -- the smell, the theater, the ambiance (who wants a line snaking around the tables while you're trying to relax or have a conversation over a cuppa?), the service quality (rapid growth almost always comes with higher turnover and poorer training -- by now, we've all experienced the surly baristas who won't go the extra mile, but still make too many mistakes), etc.

The endgame: they've reduced themselves to serving a pretty-good-but-not-outstanding cup of coffee, too slowly and at too high a price. And, more importantly, they've overshot the needs of their customers, and are ripe for disruption.

To speed up coffee service in order to sell everything else too, they installed automatic machines. Automatic machines can be more consistent, especially for inexperienced operators, but they also reduce the flavor and the authenticity of the experience, and show competitors how they too can produce a cup just as good as Starbucks (i.e. open themselves to commoditization). This was an unnecessary and ill-advised "innovation". 

Customers didn't ask for it, would probably agree that they didn't need it, and in general would feel that they are getting less for their money. Do I really need a bacon and egg (McMuffin) breakfast with my espresso?

Again, the more I overlap with my competition, the more I illustrate to them how to compete with me.  And now I smell eggs cooking, not coffee beans and fresh espresso.  Not wise.

Most fanatical customers who still are, were more fanatical 10 years ago, so what have these innovations added?

In becoming ubiquitous, the mystique is demystified, the coffee which was the central feature has become a means to sell myriad other food items and irrelevant merchandise (t-shirts anyone?), and the taste and smell and comfort have all been diminished. Yet, the high price remains. And, therein lie the seeds for potential disruption.

Because now, wanting a good cup of coffee has become mainstream, and Starbucks has become focused on speed (but not really), and efficiency, and foodservice, and add-on sales and rapid growth, they now face a new reality.

It's easy to add a pretty good cup of coffee to the menu. Especially for companies like McDonalds and Dunkin Donuts who already served coffee.  All they have to do is add middle-of-the-road or better automatic machines to their operation, and they're almost as good.

But, they excel at real speed and efficiency, and are optimized to process customers in seconds or at most a minute or two, whereas Starbucks will never get that fast without redesigning every store and adding a lot more baristas. Moreover, they are value-oriented -- i.e. cheap. For McDonalds, $1.25 for coffee is an improvement in margin, but for Starbucks, it's impossible to go that low.

So, if I can get something almost as good for 1/3 the price, is that 'good enough'? Heck, even the the local QuikTrip service stations can create a relatively decent cup of coffee or espresso now.

And, more than commoditization, Starbucks' real problem now is that the competition is 'good enough' to be disruptive and undermine their business. But here's the real conundrum Starbucks faces. It will be almost impossible to go back.

Replacing the automatic machines with better quality semi-automatic or manual, and fresh ground and hand-tamped shots means throwing out a lot of expensive machines. It means they will go a bit slower for each coffee, which also means they'll need more people and more space for brewing. And, they'll need to increase their training expense enormously.

It will be hard to explain to investors why all the superfluous merchandise needs to come out of the stores, and why same-store sales will likely decrease. It will be even harder to recognize that for the mainstream coffee consumer, a $1.25 cup of coffee is good enough, even if I can't quite bring myself to visit McDonalds, and so there will be increasing downward pressure on price.

And, if they don't want to compete on price, then they probably already have too many stores, because the average consumer won't continue to spend a premium price for a commodity that is only marginally better than the competition.

Coffee Customization at Its Finest

Coffee art from danyrolux on Vimeo.

To Schultz's credit, he recognizes that all is not well. And, he's recognizing it at a time of apparent strength. Starbucks just announced another record year where revenue grew 23%, 1177 new stores were added, and same-store sales increased 6% over the previous year (although the rate of increase is slowing, these are still impressive numbers for a $6.7B company.

If he can convince his executives and board and investors that a strategic overhaul is required to address the looming disruption, then he may well be able to avert it, but it isn't as simple now as returning to the good old days of better quality machines, better service, less merchandise, whole beans scooped out of bins rather than prepackaged in flavor-sealed bags, more uniqueness in each store, etc. They will need a plan designed specifically to address the disruption Starbucks faces from new competitors, or else the disruptor will become the disruptee.

Acknowledging that the market has changed irrevocably, and is now attracting disruptive 'good enough' solutions for quality coffee, but at a lower price and faster pace, what would you do to re-energize Starbucks and fend off a loss of leadership position in the coming years?

Links for coffee fans

Koffee Korner - coffee history and culture
CoffeeResearch.org - the science of coffee
Wikipedia - coffee history
Wikipedia (2) - all about coffee
Starbucks Gossip - blog that broke the story

There is a follow up article to this post here: Has Starbucks gone far enough?

Boeing's Big Boo-Boo: Top 6 Innovation Takeaways (Part 3 of 3)

In this 3-part series, we dissect the failure of Boeing's inflight satellite-based internet service, Connexion by Boeing. In parts one and two, we discussed the flawed business model and massive marketing mistakes that inevitably led to nearly $1 billion in losses before shutting down the project. In this 3rd and final article, we ask what could have been done differently, and what lessons should be learned.

Recap: A 6-Year Long String of Failures

After looking at the cost structure, revenue models, poor assumptions about market size and demand, pricing, scale of operations and marketing strategy, the inescapable conclusion is that almost everything that could have been done wrong to bring Connexion by Boeing inflight internet service to market, was. Like so much other big company innovation, it was clear that Boeing had no idea how to go about launching and driving market adoption of this service, or how to design a business model that had a chance of working.

Part 3: What could they have done differently?  (Hint: Next time pretend you're a startup.)

Although not in any way a disruptive innovation, or even one with potential to disrupt, the Connexion by Boeing service could have learned a lot from how disruptive innovations are successfully brought to market and how startups launch products.

Here are some of the things they could have done differently and lessons that can be learned from Connexion's failure.

1) Business Model Design

The cost structure that this service was saddled with, from satellite bandwidth licensing to having a business unit with 560 people to incredibly expensive technology needed on each plane, boxed Boeing in. To get the service available in a large enough number of planes and at the right price point to make it economically viable, Boeing ought to have used a strategy more akin to the early dotcom successes like Amazon and Yahoo and Google.

If your product depends on a mass market to be affordable, then you have to seed the market to bootstrap it. That means pricing low -- even giving it away for the first year (like Skype is doing) to get people on the grid and addicted.

Ultimately, the pricing strategy needs to recognize what the average or downmarket consumer considers good value, not be a skimming strategy dependent on only those willing to pay the maximum.

Lesson 1: There are many possible variables in designing a business model, and what works in one scenario doesn't always work in another. Don't assume you got it right the first time, and don't scale your business before you know that it's viable.

2) Fast Failures

Boeing assumed that the service they wanted to deliver at the price they wanted to sell it for was the service that the potential customers wanted and were willing to pay for. There was no small scale testing of this before scaling the business into a 560 person business unit, locked into very expensive satellite bandwidth contracts, targeting availability anywhere in the world.

Fast failure is a necessary part of startup methodology. The objective is to test the constraints, minimum viable product features and alternative business models, and assumptions about the target market. You expect to fail multiple times but learn from each failure until you arrive at the right configuration or determine that there is no product/market fit or viable business model.

Big companies tend to see failures as something to penalize rather than something to learn from, which means when they fail, they fail big, just as Boeing did.

Startups without the luxury of Fortune 500 cash backing them are forced to do things in a more lean fashion, and to test all their assumptions before committing them to the business model. This little bit of common sense might have been enough to work out the kinks without blowing a billion dollars, maybe even hitting profitability within months of operation.

Lesson 2: Failing is a good thing in a startup if you do it fast, learn from it and pivot. In fact, it's a necessary component of identifying the right business model design and optimizing for success. It also costs a lot less than assuming you're right and failing slow.

3) Cost Structure

Lean startups need to keep their cost structure pared to the bone until they demonstrate that they have a business model that can scale because VCs wouldn't have it any other way. As noted above, Boeing built an outrageously costly platform making it virtually impossible for the service to be profitable unless every unrealistically optimistic projection came true, and boxing themselves into a price model that customers wouldn't buy into.

Disruptive innovations tend to have the lowest cost structure, often by an order of magnitude. Boeing choose to implement almost the highest possible cost structure. This left the service vulnerable to lower cost technology advances (e.g. onboard conventional wifi from ground transmission stations and/or plane-to-plane daisy-chaining) that could be expected to compete in the future, undercutting and undermining Boeing's business model.

Lesson 3: Always try to achieve the lowest possible cost that delivers a product/service that is "good enough" to satisfy your target market, and be conscious of technology advances that could obsolete your innovation using cheaper components or lower manufacturing and assembly costs.

4) Network Effect Potential?

One of the factors that strongly favors disruptive innovation is the existence of a potential network effect. In this case, there was a weak potential network effect that could have been exploited, which favored convenience and usability and faster time-to-critical-mass.

Had Boeing promoted Connexion directly to consumers with a message that they could now get affordable (assuming the price was affordable, which in their model, it wasn't) internet access in the sky, using a single account with a single sign on and promoting the carriers that offered it, and gained a large subscriber base quickly, the other airlines would have to get on board or be left out of the game.

Achieving this potential network effect / sole supplier status depended on having the right business model to begin with, and getting out of the starting blocks fast once product/market fit was established.

Lesson 4: Always ask whether there is a possible network effect, and if there is, what you need to do to enable it. Don't get greedy in the early days, because networks can easily stall before reaching critical mass if you overprice or enable alternatives to establish viability.

5) Customer Development

The key idea here is that ideas about customer needs formed in a laboratory and without talking to customers are hypotheses, not an accurate description of real needs. The only way to uncover real needs and gain an understanding of who the market is and what its members are willing to pay for with a service of this nature is to go out in the field with a prototype/working model and observe and talk to them. Customer Development is the methodology most commonly used by successful startups to establish what the real needs are and get to Product/Market Fit.

It appears that Boeing failed to understand that the airlines weren't really their customers, just gatekeepers. Unfortunately, for aircraft sales, the airlines are their customers, which complicates this enormously. Boeing probably shouldn't have been in this business, or should have found a way to work around this fundamental conflict.

For this service to be successful, Boeing needed direct access to the end customer -- the passengers using the service. They needed to have a few market-test planes where the service was fully available, but could be run experimentally with different ways of constructing pricing. They needed to sit beside customers who were deciding whether or not to use the service and to see directly everything about its operation and the user experience, from how the customer pays to price barrier resistance to difficulties signing on to how it was communicated by flight crew to passengers.

These and many more attributes needed to be known so that an affordable, easy-to-use, properly communicated and desired service could be introduced. Because this wasn't done, none of the obvious objections about usability, availability of power outlets, space to work, price point, etc. were encountered or thought of, creating numerous barriers to adoption.

Lesson 5: Understand who your real customer is before you launch a service saddled with $1 billion in cost structure and have no way to reach them.

6) Establish Product/Market Fit

Establishing product/market fit is the process of identifying the compelling need that your target customer must have satisfied by the Minimum Viable Product, as well as all the assumptions that this is based on and the risk factors.

If you haven't spoken to real customers, it's impossible to know whether your product/service innovation meets any compelling needs that they are willing to pay for. It's also difficult to uncover the risk factors that will inhibit adoption, or to know which assumptions are valid, and which are invalid.

Boeing theorized that passengers were willing to pay for inflight internet access, but never validated that assumption with more than a flawed market survey, nor properly established if sufficient demand could be created at the pre-determined price point to have any chance at economic viability.

They also didn't observe firsthand customers choosing not to use the service because they wanted to sleep, or to watch a movie, or because they lacked sufficient space to get value, or didn't have access to power or sufficient battery life -- they never learned any of the risk factors so that they could act to address/negate them, or pivot their strategy and work around the risks.

Lesson 6: With any innovation, you must know how customers view the product, what the risk factors to viability and adoption are, what alternatives exist (to using your product -- they don't have to be direct competitors), what segment(s) you appeal to and what will motivate them to a purchase. You have to get out in the field with customers (not imagined customers) and see it yourself.

Other Issues

• Traditional market research instruments and focus groups are useless for designing non-sustaining innovations. They cannot uncover real needs and market drivers. The most you can expect from research with end-users is that they tell you their pain, not a solution or its value. After they've tried it in a real scenario, they can give lots of feedback about what's wrong with it. The conclusions of Boeing's research indicate that the survey used was an invalid research instrument that asked irrelevant self-serving questions - the sort used to fill press release content, not to determine customer needs.
• Accessibility and Convenience. Every plane needed to be outfitted ASAP for this service to take off. Amazingly, it was not until this year that the first new plane was built and delivered with Connexion installed. Boeing should have made the decision to include it as a standard piece of equipment, and charge more if the airline said no. This way, there is no retrofit cost barrier to laggard carriers deciding to offer the service -- they could even conduct trials without having to plan years ahead and make big commitments.  Furthermore, the cost to retrofit existing planes should have been made much more attractive, even going so far as to bundle it with major maintenance service intervals at cost of materials, or cost of labor, whichever was lower.
• Take responsibility for your own marketing. If you need to work through the carrier to reach the customer, do their marketing and business planning for them. A Connexion-in-a-box kit, because if they have to think, you've lost the game.
• Pricing. What the market has clearly said regarding any communication/network service such as this (think landlines, cell phones, earth-based broadband, Tivo, even text messaging) is that it wants a reasonable (read: relatively low) subscription price which is capped, and which an average user perceives as good value. For example, if it costs me $30 for 2 hours of access, I'll wait until I'm on the ground and connect for free at the airport lounge (not free really, but I already have a subscription that works there). Very little email is that urgent, and I certainly won't pay that for gaming or to watch TV over the net.
• What about the lack of carrier vision? Indeed there is plenty to pin on the carriers too. They don't get marketing either, at least not in a user-oriented authentic context. For any of the US majors, this would have been a cinch to create brand loyalty, much like frequent flyer miles did when American was the only one doing it. Think of this: a premium flyer package, as an add-on to my Crown Room or Admiral's Club membership.  How about a $15-20/month upgrade to my membership that not only gets me Club access, but gives me unlimited internet access on the plane, higher priority waitlisting for upgrades, a free drink on domestic flights and two freebies on international (if I'm stuck in cattle class), plus phone calls, movies, the whole shebang. It's hard to imagine anyone not buying this, with an associated increase in demand for Club memberships and an extremely sticky preference for a ticket on that carrier. Ironically, I would probably pay $30-40 more for a ticket on a carrier where I had those privileges, and that level of increased ticket price is well within most business traveler's discretion at time of purchase.

In the end, it's about being sensitive to customer needs and perceptions, and offering a product and packaging that removes barriers to adoption, rather than erecting them.

And carriers, please, power access in every seat should have been done 15 years ago.