The future of disruption

By Howard Anderson, Network World, 04/24/06

Clay Christensen dropped by my class at MIT the other day to talk about disruptive technologies in communications. Christensen, a Harvard Business School professor and author of The Innovator’s Solution, pointed out that the incumbent company rarely loses its best customers because it always immediately addresses any foray by an upstart.

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The real danger comes when an upstart goes after customers the incumbent doesn’t want, either because they are too few, too poorly financed or just too disorganized. The disruption doesn’t occur because the technology is new and strange, but because it disrupts the business models.

For a carrier, buying a Class 5 switch meant that millions of dollars would change hands, software upgrades would cost $500,000 and the carrier would charge the consumer or business tons for voice calls. Each party made lots of money.

But when the new technology costs 1/10th or 1/20th of the incumbent technology, new competitors can come in, make money and drop their costs to almost nothing. Here’s an analogy: Suppose there was a new airline that could buy jet fuel for 10 cents a gallon, could buy 747s for $1 million, could fly with only one pilot and one stewardess (both nonunion) and was exempt from paying landing fees. How do you think the traditional airlines would do?

A few months ago, I nominated Skype as a Network World power winner, because it is changing the economic underpinnings of the communications industry. Today, Skype has 75 million customers, 10% of whom live in China. If you use conventional circuit switching to call the United States from China, the cost is 42 cents per minute; if you use Skype, it’s 2 cents per minute.

Now you have a situation where the incumbents are unable and unwilling to follow. No company willingly takes its cash-cow products and crucifies them to match upstarts who are going after customers who are too few and too poor — and whom the company doesn’t want anyway. But by establishing a beachhead on the Unfortunate 500 or by serving 1.5 billion Chinese, the upstarts now can continue to move up the pyramid.