How do you set about disrupting an industry? Well, typically you look for one that hasn’t changed in a long time, one that’s set in its ways, and then look to innovate it. You try to create a new business model that gives you advantage. Let’s look at a couple of examples:
The Taxi Business
First the ride hailing or taxi business. That was a business that had changed very little in probably 200 years. It had moved from horse and carriage to motor vehicle and then became radio controlled, but those were probably the only innovations in that time. That’s where Uber and others saw the chance to innovate, to use modern technology to radically change the business model. They were able to reduce cost and provide a better service through an App that enabled people to find and book a ride through registered drivers, using their own vehicle. These drivers though were not employed, they were contractors, so Uber avoided a lot of the overheads of an employee and so could operate at lower cost.
The Music Business
Secondly the music business. Another business that had changed very little since its inception. Record labels controlled the business, they signed the artists and managed distribution of physical media. The major innovations came in the type of physical media: from records to cassette tapes and then CDs. In the early days of the internet people saw the possibility to download music to PCs and the emerging MP3 players, but this was largely done illegally. It took Apple to develop a business model, through its iTunes platform and iPod MP3 player, that changed the music industry forever.
Both examples have proven successful, but if we contrast the two approaches, we can see how the disruptive business model can run into problems. In the end these problems might prove so severe as to undermine or even invalidate the new business model.
In Uber’s case they planned to put incumbents out of business, this is a potentially dangerous strategy. These incumbents have been in business a long time, they are not just going to roll over. They usually have powerful lobby groups who will campaign and pressure regulators to create legal barriers that weaken the competitive advantage of the new business model. That’s what happened in Uber’s case. The employment status of the drivers was used to weaken their business model. Suddenly Uber drivers had to have employment rights, such as paid holiday and sick pay that would increase Uber’s costs. This could have been catastrophic for them, but fortunately they had built enough scale by then to manage it. It is a fact though that regulation will eventually catch up with technology, something that social media platforms are experiencing right now, and this can be a major problem for a disruptive business if they haven’t built scale by the time it happens.
In Apple’s case they adopted a different approach. They didn’t try to take on the record companies but to work with them, to collaborate. At the time the record companies were losing money to piracy and spending vast sums on legal actions to shut them down. What Apple provided, through iTunes, was a way to legally download and pay for music. The “revenue split” proposition for the record companies was more attractive than trying to prevent piracy and gave Apple such competitive advantage that the iPod achieved a 70% share of the MP3 market.
The Disruptor’s Business
These examples show the risks involved when the disruptor’s business model takes on incumbents, effectively trying to put them out of business, and how it can be turned against them. It’s a possibility that needs to be carefully weighed at the outset. Assessing the impact on the business model and how to combat it if does happens is crucial. If, however, we can work with incumbents, as in Apple’s case, conflict can be avoided, and the win-win situation removes the risk to our business model. It’s great to be disruptive of course, that’s how we make progress, but we must consider how the market will react to our presence.