Disruptive Products, or Disruptive Technology doesn't apply to Software

Disruptive Technology

For a long time I've heard people use the phrase "Disruptive Technology" in conjunction with one idea or another, as if the invocation of the phrase was supposed lend some weight to the discussion I never quite fathomed. The people who tended to use the phrase also tended to be the sort of people who often used those kind of phrases in such a manner as to render them meaningless, so I never really paid much attention to exactly what it was that they meant -- because strangely enough, it turned out that whether declared "disruptive" or not, it made no difference as far as I could tell!

I've heard half-coherent explanations of the phrase, but I always took it to mean "technology that makes managers and business-types no longer understand how to make money", which I thought was nothing special considering I assume that most business types don't understand technology anyways, and their understanding of how to make money with it was always suspect in the first place.

However after Clayton Christensen's "The Innovators Dilemma" made its way to the bookshelf at work, I thought I would see just what it was I was missing the whole time. Turns out there is far more to the idea than the throngs of excessive catch-phrase users would imply.

Firstly, I object to the use of the phrase "Disruptive Technology", since that implies to me there is something inherent in the engineering or science that causes a technology to become "disruptive", which is just not the case. The things labeled disruptive technologies often have traits in common, but those traits are really all about how a market perceives them, and have nothing to do with technology itself. I prefer "Disruptive Products", because that captures the fact that this is a book about Business Management, not Engineering. The idea of "disruptive technology" as presented by Christensen cannot be separated from the fact that is is a product destined to be sold on a market.

I recommend you read the entire book yourself, because there are lots of noteworthy ideas for anyone interested the business of technology, but I will give a brief summary of the major themes as I saw them herein.

The author uses his extensive research into a collection of industries where certain technological innovations happened, which he characterizes as either "sustaining" or "disruptive", and how the affected the health of the businesses in that industry.

A Sustaining Technology is one where the market for the products made with the technology is well known, and the firm in question can use the technology to increase its profit margin by adding new features which increase the products performance in the market.

Higher profit margins mean the company can further grow, and invest that growth in tuning the entire operation of the firm to servicing the high-margin market. In many ways the firm becomes captive to its high-margin customers, because failing to invest in sustaining the growth in performance of the products, as its existing customers demand, will cause it to hamper its own growth in profit, and lose market position. The author notes that a firm's quest for continued growth, forces it to "trend upward" from the low-end low-margin area of the market, to the high-end high-margin, and that trend is essentially inevitable if a firm wants to satisfy its investors.

Disruptive Technology is one where there the technology has no proven market at the time of development, but eventually will develop a market outside the expectation of its developers.

That in and of itself is hardly surprising. The interesting thing about the book is that Christensen does his research, and finds there is a historical trend in disruptive technologies, that if known, can help businesses manage and succeed in turning disruptive technologies into profitable, and often industry changing, products.

He discovered that DTs have common traits, and the following traits serve as a definition of a DT

• DT often appear as an innovation stemming from an existing industry.
• DT provide value in areas that the current market places no value in. Historically this means they are low-performing and low-cost, but provide benefits such as reduced size, or improved flexibility.
• DT, due their perceived lack of value in the existing market, begin their life as a product by taking the low end of the market, left under served as established firms climb to the high-end in pursuit of growth.
• Existing firms are completely unable to capitalize on DTs because their high-end cost structure means they cannot grow with low margins, and thus development of DT into products for the emerging market is left entirely to small firms.
• DT improve in performance in traditional metrics over time, as well as retaining the benefits that gave it access to its first emerging market, and thus begins to move into the high-end and cannibalize the previous market (for which it initially appeared ill-suited), and the existing firms, caught flat footed, find them selves in serious trouble.

To make that more concrete, the classic example used throughout the book is the hard drive industry. The story there is

1. market demands higher capacity and speed for their existing computers, which existing well-managed firms deliver, and thus grow and move upscale
2. someone develops a smaller form factor drive, with dramatically reduced capacity, and the existing market soundly rejects is as unsuitable for their needs
3. new markets emerge for smaller computers (mainframe -> minicomputer -> pc -> notebook -> appliance (ipod, car-navi)), which find the smaller form factor indispensable
4. density on the small form factor drives increase to the point where it cannibalizes the market for large high-margin drives, and the once small companies who were able to market the small drives grow larger and displace the incumbents
   
5. repeat (14 -> 8 -> 5.25 -> 3.5 -> 2.5 -> 1.8 etc inch drives)

Disruptive Products

However while reading the book, I kept trying to see how the concepts there applied to what I was doing, which is programming in the software industry. I couldn't help but come to believe that this analysis was a little bit dated, being published in 1997, and only seemed to apply hardware products.

Hardware products have a easily quantifiable manufacturing and distribution costs, and thus have a clear relationship between price and profit. That is expensive hardware is expensive because the physical bits involved in making it are expensive, and the overhead of moving those bits to market is expensive.

Software however, has no fixed costs except programmer salary (among which programmer talent and pay can vary widely), and some minor managerial overhead. For a shrink wrapped software product, you could charge $1000 one day and $1 the next, and it would cost you nothing but your profit margin to do.

And here is the controversial point coming up:

I don't believe that, ultimately, software is really a product at all. It's a service. The days of being able to hand over an application in exchange for $X will soon be gone for good.

Ultimately, there will be two models for commerce in the software industry:
1. Custom whole application development
2. Customization of existing open source solutions to emerging, specific, business needs

Although the first case you might assume that since there is an integrated deliverable, you might consider it a "product", I would assert that what the developer is being paid for is to solve a problem, and so the compensation is proportional to the problem, not to the cost of manufacturing the good.

I foresee that so long as there exist new and different niche businesses, there will always be a demand for new and niche software; things not complete serviced by any pre-existing software package, and have to be built from scratch.

The second case makes a lot of assumptions in excluding proprietary software from the picture. Let me try to follow the history of open source in the software industry, and use that to justify my extrapolation.

• Most open source projects are born out of existing industries, either because the a firm needed some software for its core business, and found that once completed it was valueless to keep it secret, or because engineers trained in an industry felt like putting their skills to use outside of a corporate setting.
• Open source solutions at first held no value for anyone outside hobbyist and hackers. It was hard to use, poorly supported, and lacking important features. However the one value proposition it did provide, access to the source code, gave it flexibility that made it absolutely indispensable for certain applications such as research or highly customized niche applications, where the code would have to be heavily modified, but there was no justification for starting entirely from scratch.
• Due to the perceived inappropriateness of open source for business or personal use, open source use often started out as skunkworks style projects running under the radar of management, in small low-end roles where other existing solutions were inappropriate.
• Existing firms software firms, Apple, MS, Adobe, etc, at first treated open source with derision, then fear, and tried to ignore it for the longest time, because their dependence on high-margin software sales could never allow it to move downscale and compete with something that was free. It would be corporate suicide. This allowed smaller shops to capitalize on the commercialization of open source.
  
• While at first constrained to only the low end, open source has been on a trend of steadily increasing quality over time, and is now at the point where MacOS has significant open source portions, Adobe is open sourcing the basis for its strategic Flash platform, and Linux is seen as a credible alternative for Windows on low end machines.
• I predict this trend will continue to the point where open source has so complete dominated the software world, from the bottom up, that firms like Apple are constrained to sell their OS as value-added perks on top of a mostly open OS for their hardware, Adobe becomes a seller of boutique software, and MS becomes a systems integrator and software as a service provider.

Open Source is a Disruptive Product

Surely, I'm not the first person to think of this...