When disruptors become establishment…


A lot of the time, companies become successful by doing something different than every other player in their category, but then they tend to stop innovating. Someone new comes along and breaks the mold, thus disrupting the erstwhile disruptor, or else everyone does what the disruptor is doing at scale, thus making them irrelevant. Let me give you two quick examples and then talk a bit about how to get past this problem.

Example 1 for me is IKEA. They disrupted the furniture category by re-examining the entire supply chain, costs and consumer experience. By selling disassembled, flat packed furniture that people put together themselves they were able to achieve a cost-quality equation that most people loved. They then created a unique store experience that makes IKEA a full day family outing instead of a shopping trip. Their strategy thereafter has been physical expansion and essentially more of the same. Adding more things to the store experience, making the range of products wider and wider and so forth.

What’s likely to hit them?

Well, first of all, there is a small but clear trend towards buying furniture online (yes, I know in theory you can do that with IKEA too but bear with me for a moment). At this moment, the leaders in online furniture sales are usually the leaders in online, not the leaders in furniture. What that means is that the consumer experience isn’t built for the category, it’s like buying anything else online. It’s only a question of time before someone comes along and changes that (there are some startups doing this already). Imagine using VR to see what furniture fits in your home, how it would look along with everything else and so on. That could be an experience superior to going to the store and the technology to deliver it exists today. Delivering that experience properly would cost less than setting up one store and in the long run could provide an alternative business model for the furniture business that disrupts the existing ones.

Second, there is another small but clear trend towards renting furniture rather than buying it outright. This one has more startups behind it and a lot more disruption potential.

Continuing to build enormous stores and pack in more experiences may work for a while longer, but in the long run these two trends and the players leveraging them will change the furniture business.

Example 2 is Tesla – the posterboy for electric cars. Everyone seems to be making electric cars now but there was a time when Tesla’s visibility in this field and their solutions to some of the basic design problems were key to progress. However, Tesla is still not a successful commercial venture because they’re now trying to do what all the other car companies do – mass produce cars at a large enough volume to make the fixed costs pay out. In a world where the volume of cars from the other companies is far greater than Tesla’s, and those companies rapidly shift towards electric cars, perhaps Tesla’s disruption isn’t relevant anymore. Perhaps they need to ask themselves what business they’re really in – is it the business of manufacturing and selling electric cars? Or is it making the technological breakthroughs that make electric cars viable – in which case they’d go a completely different route than building factories and dealing with all the hassle of actually delivering cars.

The core question to ask in both cases is “What business are we in, and is what we’re doing representative of the future of that business?” If IKEA were to ask themselves that question in light of the trends in the industry, they might realize that selling more Swedish meatballs and salmon isn’t the key to their future. Tesla may realize that they don’t need to manufacture and sell electric cars – they need to keep disrupting the industry with better technology and solutions.

A quick note on the pictures – they’re of the band Rush in their youth and more recently. I used them primarily because they’re my favorite band. Any excuse to put a picture of Rush on my blog, although you could argue that they actually contradict my point rather than support it, since their skills were amazing even as they aged and became more “establishment”. Apparently Neil Peart now finds it difficult to play concerts so they’re going to retire, which is sad but understandable. Luckily I still have the video of Red Barchetta to watch, and the comforting thought that once, in a studio while practicing with my band, we pulled off an excellent cover of it which was very satisfying even though I quit the band before we played it on stage.

Blockchain’s best years are ahead

Bitcoin price graph

Cryptocurrency is, essentially, a by-product of the blockchain. It comes about when people make the effort to validate a block of transactions and is a reward for their efforts. Simply put, if cryptocurrency values are too high, far too many people are motivated to mine for cryptocurrency and the most trivial transactions will be getting verified. If they’re too low, too few people are motivated to do so and the system collapses since it depends on having enough miners to ensure a decentralized system with lots of nodes. Speculation, will constantly pose risks to blockchain development if cryptocurrency is allowed to be bought and sold speculatively.

The speculators got involved because of the hype. The hype happened because it became fashionable to produce blockchain “Handbooks” for everything and talk about how it was going to change marketing, advertising, banking, supply chain and everything… about 95% of those so called use cases make absolutely no sense at all.

The core of blockchain is a decentralized, immutable ledger to replace trust based systems. However, at this point, that ledger is really expensive to maintain – it takes a lot of processing power and electricity to confirm one block of transactions and add it to the chain. Therefore, we should be really careful what kinds of use-cases we build for blockchain. Trivial ones that are being subsidized by an inflated cryptocurrency valuation need to disappear so that the few cases which really require such a solution come to the fore.

If blockchain is a replacement for trust based systems, where do we really need it? For a large number of real-world transactions, trusted institutions or middlemen exist.  When we make online travel bookings with trusted travel companies like Agoda or CTrip we show up at the airport or hotel knowing that the transaction did take place and that if there’s a problem we can call someone to fix it – in the vast majority of cases, they do. Replacing this system with blockchain doesn’t help a great deal, certainly not in proportion to the cost of validating the transactions with current “proof of work” methodologies. That applies to ecommerce and other platforms as well – Alibaba, eBay, Amazon all work well because they provide  a trust based system.

Banks have been mentioned as a target for replacement by blockchain but the two things that mitigate against this are mining cost and time. Blockchain works on a roughly 10 minute block verification timeline, which means transactions are not recorded in real time – so if you bought currency at a particular moment, it may not get verified for a while, creating some uncertainty around the exact moment at which the transaction happened and the rate at which it was made.

Where do you really need immutable, updated records? This is a good starting point for thinking about blockchain applications.

Think about situations in which someone can show up with an old / fake paper record – say for owning a piece of property or a copyright. Being able to look up copyright / property ownership records online in a blockchain supported database will ensure you see the latest information and verify that it has not been interfered with in any way.

Large food retailers are starting to use blockchain to keep records of how produce traveled from source to shelf – all the various stages it went through and all the companies / logistics steps along the way. If you found a batch of strawberries that made people sick, an online database supported by blockchain would make it a lot easier to figure out where they came from and prevent the problem from getting bigger. The value of that kind of record keeping is perhaps much more than just a proportion of the specific transactions being monitored – in the event of a food crisis having this kind of traceable information is immensely valuable and can save lives.

A stable blockchain system where the reward for confirming a block of transactions doesn’t fluctuate because of speculation is key to being able to maintain this kind of database.

Is it possible to make cryptocurrency immune to speculation? In the original construct of a public blockchain where anyone can be a miner, this may be hard to control, but this is where private blockchains make a lot more sense – although in some ways that goes against the principle of a decentralised ledger.

Striking a balance where blockchain mining is somewhat restricted, but still to a large closed pool of miners, and establishing a different reward system where players pay for block verification as a service rather than speculating on cryptocurrency could make the development of blockchain solutions for real problems much faster.

It’s early days, and the first cryptocurrency boom and bust have cycled through faster than the dotcom boom and bust in its time. However, the real development of the internet, online businesses, ecommerce and so on all happened long after the dust from the first bust had settled and I don’t doubt that blockchain’s best years are ahead of us

Disruption means changing the basic economics of an industry

Famous Last Words

Prompted by an interesting article on the financial state of Uber I was led to research the fortunes of various similar companies around the world. The picture I formed after doing so was uniformly dismal – ALL the big ride hailing app companies around the world seem to be losing money hand over fist. This is happening when they’ve each been in business several years and accumulated a large user base – while that base may grow some more, it’s not going to grow quite so fast. If we don’t see profitable revenue now, we probably never will.

Which got me thinking about why this so called disruption hasn’t led to a single financial success, at least at this stage.

The reason seems to be that none of these companies has changed anything fundamental about the taxi business. For a while, they brought in lots of new drivers – private car owners looking to make some extra money – by offering a high proportion of the fare to them. For a while they also brought in new users or changed the frequency of usage by offering very low fares. All of this was funded by investor money.

These companies failed to fundamentally improve the taxi business and create some new, previously undiscovered efficiencies because they raised too much money too soon and spent it on “buying” drivers and customers with subsidies. Each time a company attempts to leverage its dominance by changing price or dropping driver earnings a new competitor comes in and starts undercutting them.

All that these companies will have done in the long run is helped the taxi industry add a simpler and better tool for engaging with its consumers – the mobile app. Apart from that, the app has not created a different market or cost structure that is sustainable over time.

What about the others in the list? Alibaba, Amazon and Face book are hugely successful because they came up with new definitions of retail and media that made the old ones obsolete. AirBnB did something analogous to the ride-hail app companies but has succeeded, reaching profitability and contemplating the real possibility of an IPO. However, unlike ride hail, this category had less of the savage local competition in market after market that made customer / network acquisition so expensive. Also, unlike transport where variable costs are significant and therefore driver revenue / rider fares are not really flexible, renting out an apartment or room involves relatively small variable costs and the possibility of earning something against fixed costs – a logic which leads to more permanent network, flexibility on pricing and overall, a real opportunity to change the economics of the hotel industry.

Just because Uber and its ilk look set to fail doesn’t mean the transportation industry isn’t vulnerable to disruption. All industries are – including yours. The question is, are you going to let someone else do it or are you going to disrupt it from within?