Why the iPhone confounds disruption theorists

IMG_4214Nokia, Motorola, Sony-Ericsson and BlackBerry were all victims of disruption. During the 1990s and 2000s, they led the cell phone during its period of take-off into ubiquity. Then in the last five years, they have lost their leadership and are on the verge of irrelevance. The common culprit was the 2007 launch of Apple’s iPhone. However, the iPhone has long confounded proponents of disruption theory. Why? Because they have had a one-sided view of disruption; enough to make them blind to their true nature.

The main proponent of disruption theory is Clay Christensen who invented the term. His theory is that disruption (that is, the failure of otherwise successful companies) comes when those companies miss important innovations precisely because they are unappealing to their primary customer base. That provides an opportunity for new entrants to leap onto those technologies, ride them through improvements until they actually end up competing head-to-head for the customers of established firms.

With regard to the iPhone, Christensen made an initial assessment that he later admitted was incorrect. He missed that the iPhone represented one of these worrisome technologies and instead saw it as a sustaining innovation: an innovation that improved upon the phones of Nokia and the like rather than appealed to a different sort of customer. As it turns out, he was wrong about that. As both Nokia and RIM realized, the iPhone actually performed worse on things their customers cared about. It is hard to remember but the initial iPhone was an awful phone so Nokia dismissed it readily. Moreover, it didn’t have a keyboard; the primary thing that had attracted RIM’s customers to the Blackberry and, actually, still do. What’s more, the iPhone, by making smart phones a sexier commodity, actually boosted Blackberry sales in the late 2000s. So they could be forgiven for thinking perhaps Apple had missed the boat.

Obviously, Apple was on the right course, as we now know. Christensen admitted that a few years later saying that his mistake was to consider the iPhone as disruptive to phone makers when, in fact, it was disruptive to laptops. Now lots of people have recognized that the iPhone is more of a handheld computer than a phone but when you take this notion seriously, it is clear that it wasn’t disruptive to laptops. That isn’t even clear for the iPad. Instead, the companies that were disrupted were all handset makers. So it is pretty clear that if the iPhone was disruptive to anything it was disruptive to them.

The Christensen-style theory of disruption cannot handle the iPhone because the iPhone did not follow the path of that theory. To be sure, it was a poor performer on traditional metrics and then improved. But the path by which that disrupts is because the poor performance leads to lower priced products which then improve and attract away the most price sensitive of established firm customers. But that never happened with the iPhone. It was high priced from the start and remains so today. To be sure, those who adopted the iPhone like approach to smart phones (Samsung, HTC and LG) were cheaper but they were still more expensive than traditional handsets.

Some have taken this high price point to formulate a theory that the iPhone was disruptive from above (the high-end) rather than the low-end as Christensen has emphasized. Andreessen Horowitz’s Benedict Evans goes further and suggests this is endemic in mobile. Now it might be that entry in mobile comes from superior, higher priced products. But that cannot cause disruption — the failure of incumbent firms. This is becaue it is only by having low priced products that incumbent firms can be wiped out rather than just stung. And that is an important element of the demand-side theory of disruption. Put simply, there is no such thing as high-end disruption, only high-end entry.

Instead, the way to think about this disruption is not to look to the demand-side (where the customers touch the firms) but the supply-side (what goes on inside the firms). Nokia, RIM and the like were extremely good at producing well engineered, cheaper phones that did a limited range of functions but did them well. The iPhone never competed on those functions and instead offered people things that weren’t otherwise available — desktop like web pages, a large screen and an intuitive but new user interface based on touch. The iPhone was made from traditional components but put together with what might be termed a different ‘architecture.’ That architecture was designed around a completely new way of interacting with a handheld device. Traditional handset makers either dismissed that as a power-hungry luxury people would not pay for or tried to replicate it but ended up with something decidedly clunker and not feeling quite up to what Apple had produced.

Academics like Rebecca Henderson and Kim Clark long recognized that this supply-side mechanism for disruption based on new architectures could trip up otherwise successful firms. And that is really what appears to have gone on with the iPhone. It was a new architecture and to replicate it required essentially a clean slate for innovative teams. Established firms rarely want to give up development teams that have worked well. This is what leaves the room open for entrants and, in the case of smart phones, we saw disruption on a large and long-term scale. And the only way to see it is to understand that there is more than one path to disruption. To do otherwise is to often try and drive a square peg in a round hole.

16 Replies to “Why the iPhone confounds disruption theorists”

  1. Unstated in the disruption analysis is Apple’s role as the high fashion company of the technology industry. Apple’s ability to disrupt from the high end has more to do with the Apple name than any technical superiority, with a large number of people who buy each new iPhone and iPad solely for the Apple name.

    1. Sorry, but this is firstly a lazy statement, and secondly just untrue, (though I’ll admit it is often repeated by people who do not understand Apple or it’s products). It’s part of that view that describes Apple’s customers as being part of an almost religious cult. It was just feasible to make this argument 15 years or so ago, when it was a pretty small PC maker with a market share of around 3%, but now it’s an absurd view.

      When Apple has created a new product category, they usually produce something that does perhaps only one thing really well, but that thing is not done at all by the competition. In the case of the original iPhone it was handheld web browsing. They do not initially worry about their opponent’s feature list, or specs, just their unique offering, but of course over the next few years, providing of course that it has some success, they iterate and iterate until they have built brick by solid brick, a reliable rock solid feature complete machine.

      This makes it hard for anyone, whether a tech journalist, competitor, or potential customer, to understand these new product categories by just reading the description or specs. That’s why I believe the proliferation of their Apple Stores is one of the keys to their success, because my experience is that I usually cannot understand the product or whether it has any appeal for me until I hold it in my hand, and see for myself what it can do.

      1. I have to disagree. I personally know people who show up with the latest iPhone after each new release. Given the relatively modest enhancements of new versions of the iPhone and the large first day /week sales, the alternative is that Apple has somehow found exactly the new feature everybody has to have for each new version (and they recognize the need the first day).

        Finding a market need is part of Apple’s success, but Apple also has a large following which needs the latest toy.

      2. Those “people you know” are not necessarily members of an imbecile cult but have simply figured out that Apple products retain a high resale value even after the next model is released, making the upgrade *relatively* inexpensive.

  2. Apple’s real disruption was with the mobile carrier’s business model. Palm, for example, actually sold a touch screen based personal organizer and telephone combination that, in terms of user interface, looked a great deal like the iPhone’s. It’s problem was that no carrier would offer a reasonably priced data plan. In fact, they resisted carrying the Palm phone because it supported WiFi, so it could do an end run around their mobile networks when there was an access point available. There were other such phones around produced by other parties. I remember searching for one that supported WiFi and had a sanely priced data plan for use on the road. I wasn’t ditching my laptop. I just wanted to be able to look at a weather report or the headlines without paying Verizon a fortune. To start with, Verizon didn’t support ANY phones with WiFi. AT&T supported one or two.

    Somehow, Apple managed to convince AT&T to allow not only a phone with WiFi (and Bluetooth) support, but also to sell a $30 a month all you can use data plan. I don’t know how they did this, but their market power surely had some effect. I’m sure that every carrier realized that the first carrier to support the iPhone would have a huge competitive advantage. In theory, some carrier could have done a similar deal with the Palm phone or one of its competitors, but those companies lacked Apple’s marketing power. AT&T offered the best deal and the rest is history.

    I know a number of former Blackberry users, and I know that all of them have iPhones now. The Blackberry was never the poor man’s cell phone. It was a premium product in its day. RIM itself was too successful to bother developing what we would now consider a proper smartphone, but other companies had already entered the market, much as Rio, among others, was selling portable music players for years before the iPod came out. If you had a Rio, you had to rip your own CDs or illegally download what the music companies would not sell. Apple provided a player and then managed to convince the music companies to let them sell their music. (Apple also bought SoundJam, the support program that used to come bundled with your Rio.)

    The trick, it seems, is not to disrupt other hardware or even software vendors. The trick is to disrupt the content providers and network operators, basically the guys collecting the big rents. Netscape, Craigslist and Google disrupted the newspapers and magazines. Apple disrupted the music and mobile data providers. An iPhone may just be a small computer, but its value isn’t in its ability to compute, but flows from the value of the data flowing through it.

  3. My recollection, which may be incorrect I admit, is that the iPhone won customers because of the SYSTEMS it incorporated that enabled owners to easily carry out functions like importing music or taking and uploading photos. Apple integrated its Apple Store with its phone with easy to use software. It integrated the phone with computer programs so that people could take photos and (at the time this was important) upload them to their computers. The ease of use appealed to people who weren’t geeks and wanted easy to use systems. Now, I didn’t like Apple because I didn’t like being stuck in their tech ecosystem. Because, yes, there were better programs out there if you took the time to learn to use them and make them work. But most people cared more about ease of use.

  4. I didn’t understand your analysis of why high-end disruption is impossible or why you resist calling the iPhone a case of high-end disruption (of course I agree that it is silliness to say that iPhone was disrupting laptops from below). You say that entry via the high-end (presumably defined in terms of willingness-to-pay) can just sting entrants. But why not? The evidence suggests that contra Christensen, disruption is at least as likely from the high-end as the low-end. See this piece and see especially the references that they include: http://sloanreview.mit.edu/article/how-to-position-your-innovation-in-the-marketplace/.

    (Note also that one of the ambiguities in Christensen that you repeat is whether disruption applies to the technology, to the firm, or something else. Adner is good on this as are the papers that are referenced by the above link. But even if you define disruption in terms of unseating an incumbent firm, I don’t follow what allows you to rule it out as a possibility.

  5. You also need to look very carefully at the difference between who buys items and who uses them. (Nod to Ben Thompson who goes on about this.) The Innovators Dilemma book studies are almost all about items where the buyer and the user are different people. Purchasing departments lead to purchases based on feature checklists, the organisational immune system, and getting better pricing.

    The iPhone is generally purchased by the same person who uses it. That means also caring about other less tangible things like how it makes it you feel, or what others will think when seeing you with one. The cohesiveness of the user experience matters a lot more too, all the way from the opening the box experience through integration with the rest of the ecosystem. Apple does a really good job on all this.

  6. “Different architecture” is the standard method of disruption.
    Digital vs. Film. Digital was worse at first — worse at everything except one thing (instant upload of photos to computer). But it was the architecture of the future.
    Electric car vs. Gasoline car.
    Heck, telegraph vs. postal mail…

    Et cetera. The companies which clung to the old architecture are the ones who died.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s