copyright 2004-2008 by Nicholas G. Carr
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Nick Carr's essay blog
April 10, 2006
Creating disruptions is fine. Mending them can be even better.
by Nicholas Carr
For most of human history, long-distance communication was a cumbersome affair. Documents had to be carried on foot or horseback, or in the holds of ships, and they often took weeks or months to arrive at their destination. Then, in 1835, a New York University professor named Samuel F.B. Morse invented the telegraph, and the world changed. Suddenly, it was possible to send messages down wires and cables, instantaneously connecting people and businesses in different countries or on different continents.
The rise of the telegraph system was far from seamless, however. The infrastructure took many years to be installed, and users often had to struggle with gaps in the network. One of the most maddening of those gaps lay in the heart of Europe. The Belgian line terminated in Brussels, while the German line went only as far as Aachen. Messages had to be transcribed and carried over land across the 77 miles separating the two cities. But one small company saw a business opportunity in this problem. In 1849, it bought a flock of carrier pigeons and used them to fly messages between Brussels and Aachen, dramatically reducing transit times. Within a few years, the company had grown to become one of the leading telegraph agencies, specializing in the communication of time-sensitive financial information. Its name was Reuters.
There’s an important lesson in this story: When a disruptive new technology arrives, the greatest business opportunities often lie not in creating the disruption but in mending it — in figuring out, as Reuters did, a way to use an older, established technology as a bridge to carry customers to the benefits of the emerging technology. When we talk about business innovation today, we tend to use terms like breakthrough and pioneering and revolutionary. But some of the greatest and most lucrative innovations are essentially conservative. They are brought to market by companies that are as adept at looking backward as forward and that have the skill and patience to achieve the most commercially attractive balance between the old and the new. “Conservative innovation” may sound like an oxymoron, but it’s an idea that deserves to be a part of every company’s thinking.
Slogging Toward the Future
Some new technologies find commercial success rapidly. It wasn’t long after the invention of nylon in 1938, for instance, that the cheap, supple plastic had supplanted silk as the fabric of choice for women’s stockings. In most cases, though, new technologies take hold slowly, advancing through a long series of technical and market barriers. The automatic telephone switch was invented by the end of the nineteenth century, but manual exchanges continued to be widely used for another 50 years. Facsimile transmission also became possible in the late 1800s, but it took a century for it to become commonplace. Consumer PCs were introduced in 1975, but by 2000 only half of U.S. households owned one.
The future, in other words, arrives in fits and starts. There are a number of reasons why this is so. A new technology may be difficult to use, requiring specialized expertise. Or it may be plagued by bugs that reduce its utility. In the early days of railroads, for example, trains had the annoying habit of going off the rails; it was only after wheels, couplings, and tracks had advanced and become standardized that train transport became reliable enough to be broadly adopted. Or, as with the telegraph, a new technology may involve the building of a physical infrastructure, requiring a lot of money and time.
Sometimes progress goes slowly not because of flaws or shortcomings in the technology, but because consumers resist its adoption. Early versions of new technologies are often prohibitively expensive, for example, and that can restrict their use to a small slice of the market for many years. In other cases, buying a new technology requires abandoning an old and familiar one, something consumers are rarely eager to do. Years after color televisions had been introduced, many people continued to happily use their old black-and-white sets. Mobile telephony was embraced relatively slowly in the United States because the country’s landline network was so reliable and ubiquitous. Who needed a cell phone?
The Innovator’s Trap
Companies don’t always see these roadblocks clearly. In business, after all, innovation is spearheaded by enthusiasts — engineers, product developers, marketers, entrepreneurs — who tend to be much more enamored of new technologies than are your average, run-of-the-mill consumers. It’s natural for corporate innovators to overlook, or give short shrift to, the many potential barriers that can hold up progress. Their desire to be pioneers — to do cool things fast — blinds them to the more mundane realities of the marketplace. As a result, companies can easily fall into a trap: They can get far out ahead of customers in the adoption of a new technology. They can rush headlong into the future only to find that no market yet exists.
We’ve seen this phenomenon recently, and repeatedly, with the Internet. A good number of dot-coms failed not because they had the wrong technological vision but because they arrived on the scene far too early, with too much money and too little patience. Nowhere was this flaw so pronounced as in the realm of new media. In the late 1990s, a slew of well-funded startups began streaming video over the Web. With funky names like Icebox.com and a roar of buzz behind them, these companies we’re going to become the great new broadcasters of the future.
It didn’t happen, of course, and in retrospect it’s easy to see why. The success of their services required a large pool of customers with the kind of reliable, high-speed Internet connections needed to watch video. Yet even as late as 2000 — well into the so-called Internet Age — only a tiny fraction of the U.S. population had broadband connections at home. Among the minority of households that had any Internet service whatsoever, 92% were using dial-up modems, and of that group 40% were using outdated modems operating at 33.6 Kbps or slower. The Internet broadcasters had out-innovated the market.
Even today, considerably fewer than half of all U.S. households have broadband Internet access. Nearly all the common barriers to rapid technological advance are in evidence here. For many households, it’s a matter of technology — their phone and cable lines have yet to be upgraded to accommodate high-speed data transmission. For others, it’s a matter of economics — they can’t afford the higher cost of broadband subscriptions. And for still others, it’s a simple matter of desire. They connect to the Internet only occasionally — to check their e-mail, for instance — and they don’t feel any pressing need to upgrade.
But even in the face of the slow spread of broadband connections, one company has found success in running an Internet-based video business. Its name is Netflix, and its secret is conservative innovation. Like Reuters with its pigeons, Netflix uses an old technology (the U.S. mail) to deliver DVDs of movies ordered through a new technology (the Internet). Through a fairly simple Web interface, it provides a sophisticated database and ordering system easily available to virtually all Internet users, whether they have broadband or narrowband connections. But instead of trying to get customers to download enormous files, it simply delivers physical media to their mailboxes, often the day after they place their orders.
With a business model that’s half Amazon.com and half Blockbuster, Netflix has struck a balance between an old and a new technology that is in tune with the current needs of the market. Its challenge now is to build on its customer relationships and brand strength to remain successful as the continued spread of broadband makes streaming video and video downloads more attractive to a broader set of the population.
Toyota’s Hybrid Solution
There’s another common barrier to technological advance: a lack of what economists call complements. It took more than Henry Ford and his assembly line, for example, to make the automobile a mass-market product. Critical complements, such as highways and gas stations, had to be built as well. Even after a new technology is well established, its spread is often hampered by the slow development of necessary complements.
The next great shift in automotive technology — from gasoline to hydrogen power — promises to again be held up by the absence of complements, in particular the lack of a broad distribution system for hydrogen. For hydrogen-fueled cars to appeal to a large set of buyers, hydrogen stations will need to become as commonplace as gas stations are today. The complexities inherent in the shift to a new motive technology present a major challenge to carmakers, and it’s instructive to look at the very different approaches taken by two of the largest of them, General Motors and Toyota.
All the major automobile manufacturers know that they will need to move away from gasoline-fueled vehicles. Growing environmental and political pressures to reduce the use of petroleum will be impossible to resist. GM took the technological lead in the race to a new generation of clean automobiles, investing heavily in perfecting the hydrogen fuel cell as a replacement for the internal combustion engine. A few years ago, GM announced that it plans to introduce hydrogen-fired passenger cars by 2010. Many experts, however, believe that GM was overoptimistic. They predict that, even if the basic technology is refined by then, it will take much longer to roll out the complements required for hydrogen cars to be attractive to drivers.
Toyota took a very different course. Rather than focus on pioneering the next great technological advance, it positioned itself as a conservative innovator, creating a hybrid car that combines an old automotive technology (the internal combustion engine) with a new one (the electric engine) in a way that provides near-term market opportunities. The products of its strategy, the popular Prius and other, more recent hybrid models, use some of the power produced by their gasoline engines to continually recharge their batteries. They’re able to reduce emissions and increase fuel efficiency by shifting from gas to electric power whenever possible.
Because they use gas rather than hydrogen, the hybrids do not require either the fine-tuning of a radically new technology or the emergence of a new set of complements to support it. Average people can drive hybrids immediately without having to change any of their habits. The Prius and other hybrids may not be as “green” as hydrogen cars promise to be, but they are considerably cleaner than traditional cars — and environmentally-minded consumers don’t have to wait another decade to buy them. Today, the Prius moves off dealers’ lots faster than any other car model in the world, a distinction it has maintained almost since its U.S. debut in 2000.
It’s been said that, because of high manufacturing costs, Toyota's hybrids are not yet profitable. But that argument misses the larger point. As Toyota has gained experience in building hybrids, manufacturing expenses have fallen steadily, and at the same time the company has created a strong brand and a large and loyal clientele. When the shift to hydrogen cars finally arrives, it will have already established a dominant presence in the market for electric vehicles as well as a store of practical knowledge about the products and their buyers.
GM, meanwhile, was also spending heavily to create its technological breakthrough, but it wasn't pulling in any revenues to defray those costs. It’s probably no surprise that GM has now backed away from its previously singleminded commitment to hydrogen power, announcing that it would offer hybrid models even as it continues its work in pioneering the new technology. Belatedly, GM has joined the ranks of the conservative innovators.
A Third Way
Research by business scholars has shown that, when it comes to major innovations, the first movers rarely find the greatest success. They’re usually outmaneuvered by the copycats — the companies that follow in the innovators’ footsteps but end up dominating the market because of their stronger managerial and marketing skills.
Conservative innovation follows a different path, a third way. Conservative innovators neither pioneer a new technology nor copy it. Rather, they combine it with an older technology to create a different sort of product altogether. And, often, it’s exactly the product that today’s customers actually need, want, and are willing to pay for.
This article originally appeared, in slightly different form, in Strategy & Business.