Disruptive innovation and its

criticism: the case of digital music

Faculty discussion

Antonio Schuh
Objectives of this presentation

Review main ideas of disruptive
Provide an example of

innovation theories and its criticisms – Teaching skills
– ability to transfer

Present the case of disruptive innovation ideas
in the music industry
– convincing

Discuss implications of actual music – Receptive
industry moves to support either original listening
disruptive innovation perspective or its – Vocation
critique – Style
– Knowledge

1
A. Schuh
A note about me

Director of Planning for Content at
Telefónica’s
— Previously, Business Development
at Telefónica Latin America,

Former strategy consultant in the
“TIME” industries (Telecom, Media,
Information & Entertainment) in a
wide variety of markets
— Arthur D. Little
— DiamondCluster (now Oliver
Wyman)

Positions in operations and finance at
RBS (diversified media conglomerate)
and Dana-Albarus (autoparts)

Speaker at ITU/EBU Hi-Level Experts
on Delivery of Content over
Competitive Platforms, Digital
Hollywood, …
2
A. Schuh

Graduate education
– PhD drop-out: Innovation
Management at the University of
Manchester
– Master in Management of
Communication Firms, Annenberg
School - University of Southern
California. Research assistant at the
Center for Telecommunications
Management
– Masters in Institutional Economics,
Management in Brazil

Undergraduate
– BA, Advertising & Mass
Communication (Federal University,
Rio Grande do Sul)
– BSc, Computer Science (Catholic
University, Rio Grande do Sul)
Presentation guide

Disruptive innovation and its criticism

— Incumbent advantage in innovation not always realized
— “Disruptive innovation” theory explains it and proposes managerial responses
— However, criticized on many grounds

Music industry and the transition to digital distribution
— P2P and legal delivery are cases of disruptive innovation
— Industry has responded badly, but…
— Results

Assessing disruptive innovation and its criticism in the music industry
— Support & rebuttal to original Disruptive Innovation
— Support & rebuttal to criticisms
— What is missing
— Conclusion

3
A. Schuh
Innovation is more than invention

Innovation means
effective introduction
of new ideas in the
marketplace
Musical flamethrower

Need to understand
Gas-filled umbrella

Technology and its
evolution

Customers and likely

adoption

Industry structure and

Cheese-flavoured cigarette ability to capture
value
Foetus Walkman
Source: John Bessant, Imperial College
Ability to execute
4
A. Schuh
Incumbents often have advantages in innovation

Innovation
requirement Appropri-
for Technology Market Execution
ability
viability

• Higher ability • In-depth • Access to IP • Ability to

to understanding protection finance new
• Conduct of the customer mechanisms venture with
technological • Customers are existing cash
scanning and familiar with flows
Potential
foresight company • Better access to
sources of (reduced capital markets
• Support
incumbent state-of-the- perceived risk) • Established
advantages art R&D access to
facilities distribution
• Attract channels
qualified
personnel

Source: Chandy & Tellis (2000), “The Incumbents Curse? Incumbency, size and radical product innovation”

5
A. Schuh
However, there plenty of examples of incumbents who lost
the train of technology change
Innovative new entrant Incumbent

•5.25”, 5-10 Mb drives •8”, 80-60 Mb drives

Disk drives •Seagate, 1980 •Shugart

•Tabletop copiers •Copy centers, Xerox

Photocopiers •Ricoh & Cannon, 1981

•Mobile digital telephony •PTTs/RBOCs

Telephony •Vodafone, 1990

•Transistor radio •RCA

Radio •Sony, 1956

•Quartz watches •Socité Suisse pour

Wristwatches •Hattori-Seiko, 1969 l’Industrie Horologeré

6
A. Schuh
Extreme example: sole inventors (absolute new entrants)
were instrumental for a large number of innovations in major
industries

Catalytic Personal
Xerography, cracking of computers:
Chester petroleum: Insulin: Jobs &
Carlson Eugene Houdry Frederick Wozniak
Banting
FM radio:
Edwin
Armstrong

E-commerce business
Zipper: Whitcomb architecture: Jeff Jet Engine:
.ludson Bezos Frank Whittle
7
A. Schuh
Analysis of a 150-year cross-section of innovations in further
validates the “incumbents’ curse”

Sample description & methodology % of radical innovations

according to firm size

• 4 year-long study by 9 researchers

< 500
• Consumer durables and office from 500 to 2500
products More than 2500

• Source: more than 250 books and More than

500 articles 2500
< 500
42%
• Time: from 1851 to 1998 49%
• “Radical innovation”: different core
technology and substantially higher
customer benefits in some category from 500
• 94 innovations analyzed in depth to 2500

Source: Chandy & Tellis (2000), “The Incumbents Curse? Incumbency, size and radical product innovation”

8
A. Schuh
 According to Christensen, disruptive technologies are a
challenge to incumbents
Nature of Technological Change

Radical Breakthrough Highest Disruptive technologies

Potential for • Emerge occasionally
Disruptive
Growth
• Underperform
established products
Next- Platform f Risk
o in mainstream
Generation
v el y /
Le aint markets
e rt • Have features that
Derivative c
Improvement Un fringe/new
customers value
• Different value
proposition than
Base
previously available
• Evolve while
Replace Sell more products Reach Create
incumbent continues
Current to existing New New to improve its
Products customers Customers Market current technology

Source: Christensen (1997)

Impact on Market
9
A. Schuh
Recap: Dynamics of disruptive technologies

1 t o gies
•A new disruptive technology is launched e
s du nolo
s
•It underperforms the dominant one gre tech
along the dimensions valued by Proning
mainstream customers sta i Performance
su demanded at the
•Incumbents most profitable customers high end of the
do not want products based on market
Product Performance

disruptive technologies.

Performance
e demanded at the
ptiv low end of the
u
d isr market
e to gies
s du nolo
g res tech
Pro

Source: Christensen (1997)

Time
10
A. Schuh
Recap: Dynamics of disruptive technologies

e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
market
Product Performance

Performance
e demanded at the
ptiv low end of the
u
d isr market
e to gies
s du nolo
g res tech
Pro
2 Disruptive technology offer new
features – typically (a) cheaper, (b)
simpler, (c) smaller, or (d) more
convenient than those based on the
dominant technology. Time
11
A. Schuh
Recap: Dynamics of disruptive technologies

e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
market
Product Performance

3
Disruptive technologies Performance
enter emerging/ e demanded at the
ptiv low end of the
insignificant markets that u
d isr market
value new features
e to gies
s du nolo
g res tech
Pro

Time
12
A. Schuh
Recap: Dynamics of disruptive technologies

e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
market
Product Performance

4
The new disruptive technology Performance
e steadily improves in demanded at the
v
u pti performance until it meets the low end of the
d isr standards of performance
market
to gie s
e
u olo demanded by the mainstream
d
ess chn
g r te
market.
Pr o

Time
13
A. Schuh
Recap: Dynamics of disruptive technologies
5
The incumbent continues to
e to gies improve its current
s du nolo technology, leading to
g res tech performance oversupply
(overserving customers in
Proning their needs) Performance
sta i
su demanded at the
high end of the
market
Product Performance

Performance
e demanded at the
ptiv low end of the
u
d isr market
e to gies
s du nolo
g res tech
Pro

Time
14
A. Schuh
Recap: Dynamics of disruptive technologies

e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
6 market
At that point, the
Product Performance

new (disruptive)
technology
displaces the
Performance
dominant one and
demanded at the
e
ptiv (b) thelow
newend of the
entrant
u
d isr market
displaces the
e to gies dominant
s du nolo incumbent(s) in the
g res tech mainstream market.
Pro

Time
15
A. Schuh
Why incumbents do not deal well with disruptive
technologies

the very management practices that have
allowed them to become industry
leaders also make it extremely
difficult for them to develop the
disruptive technologies that
ultimately steal away their markets:
• Listening to customers
• Investing aggressively in
technologies that give those
customers what they say they
want
• Seeking higher margins
• Targeting larger markets rather
than smaller ones.
Source: Christensen (1997)
16
A. Schuh
• Resources, processes & values
— Companies depend on customers
and investors
— An organization’s capabilities
define its disabilities
— Technology supply may not
equal market demand
• Incentives and resource allocation
— Smaller markets don’t solve the
growth needs of larger
companies
— Markets that don’t exist can’t be
analyzed
Incumbents are better prepared to assess and implement
sustaining technologies, not disruptive ones
Sustaining innovation Disruptive innovation
• Positioned on a job that •Focuses on a job that people
Market competitors aren’t serving well are trying to get done
focus
•Margin improvement
Reach of • Isn’t over-shooting •Competes against non-
customer consumption and
needs overconsumption
•Existing •Disruptive relative to
Business competitors’ business model
•Readily leveraged into
model
derivative projects

How is •Success measured by market •Market development

success share gain
measured

Source: Christensen (1997)

17
A. Schuh
Evolution curves
Sustaining & Non-disruptive radical Disruptive innovation
technologies

Magneto-resistive heads
1000
Disruptive innovation:

(Millions of Megabits per Square Inch)

• Superior performance
“Breakthrough” in some attributes
radical innovation; • Lower performance in

Arial Recording Density

superior performance others
in existing attributes • Steep evolution (S-
from the start 100 Curve)

Ferrite-oxide heads
Thin-film heads

10
Sustaining innovation:
improvements on existing
performance attributes
1975 1980 1985 1990 1995 Year

Innovator: General Electric Innovator: Seagate

Source: Henry C. Co, “The S-Curves and Technological Strategy”, Cal Poly Management of Technology (TOM 320) course materials

18
A. Schuh
Main managerial implications of Christensen’s disruptive
innovation theory

Spin-off unit to focus on innovative technology

Create learning ventures (even if fails early and
inexpensively)

Selective use resources of the main organization to
address the disruption. Careful not to leverage its
processes and values.

Develop new markets that value the attributes of the
disruptive products

Do not wait for disruptive product to evolve and become
a sustaining technology in mainstream markets

Source: Christensen (1997)

19
A. Schuh
Christensen’s theory has been extremely successful

The Innovator's Dilemma (1997) was a huge bestseller:

in excess of 200,000 copies sold

New books

— 2003: The Innovator's Solution.

— 2004: Seeing What's Next

Guru status: ranks 22nd in “The Thinkers 50” survey

Speaker in dozens of management conferences

Fledging consulting practice: Innosight

Google search results for "disruptive technology":

573.000. (0,10 secs)

20
A. Schuh
And yet there are several recent criticisms directed at the
theory
Source of criticism Issues

• Danneels (2004) • Is a technology inherently disruptive or it

Lack of • Govindarajan & depends?
clarity in Kopalle (2006) • Can it be defined as disruptive ex-ante?
definition • Is there a formal measure of “disruptiveness”?

• Danneels (2004) • Why some incumbents win?

Limited • Adner (2002) • Why disruptive innovation sometimes also
fails?
predicted
• What are the basis of customer decision?
value • Cherry-picked examples and limited
generalizability
• Markides (2006) • Is it also valid for “disruptive innovation”
Overstretch • Charitou & Markides (business model innovation)?
(2003)
Shaky • Tellis (2006) • Empiral research on technology evolution (S-
foundations curves may have random evolution)

Inadequate • Danneels (2004) • Spin-offs are partial solution at best

Recommend
ations
21
A. Schuh
Questions

Is disruptive innovation an accurate

description of technological change
process?

Does disruptive innovation ideas Can companies effectively

explain why incumbents lose markets
they have once controlled?

Are the recommendations to
managerial decision-making based on
disruptive innovation sound advice?
base decisions on adoption
or certain technologies
and business models on
Christensen’s theory of
disruptive innovation?

Does the critique raised actually

improves the explanatory and
predictive potential of disruptive
innovation as a tool for analysis?
22
A. Schuh
Presentation guide

Disruptive innovation and its criticism

— Incumbent advantage in innovation not always realized
— “Disruptive innovation” theory explains it and proposes managerial responses
— However, criticized on many grounds

Music industry and the transition to digital distribution
— P2P and legal delivery are cases of disruptive innovation
— Industry has responded badly, but…
— Results

Assessing disruptive innovation and its criticism in the music industry
— Support & rebuttal to original Disruptive Innovation
— Support & rebuttal to criticisms
— What is missing
— Conclusion

23
A. Schuh
Music industry value chain

Concert Concert Concert

Site owners
management marketing infrastructure
Content
creation Collecting
Collecting societies
societies
Customers
•Composers Broad-
•Performers Wholesale
Manufa- casting
Recording Marketing Distribu-
cturing
tion
Retail

Recording companies

Source: Bruno Cassiman and Pablo F. Salvador, “Digital Technologies and the Internet: Their Impact on the Music Industry” IESE-PwC eBusiness
Center research note, 2005

24
A. Schuh
Recording companies overview
Players Practices
Market share, %
0% 10% 20% 30% • Focuses on mass appeal artists
• 7-year contracts
Universal 25,5% • Advance to artist against future royalties
• Were vertically integrated, now outsourcing
• KSFs:
SonyBMG
Majors 21,5%
•A&R
•“Hit making” (Marketing)
EMI 13,40% •Catalog exploitation

Warner 11,30%

• Hundreds of • Segment-specific
specialist labels • Single/2-album contracts
0% 5% 10% 15% 20% 25% 30% • Outsourcing
Indies • Frequently, horizontal integration with concert
Indies
º 28,3%
management
• KSFs:
•Find/develop/ sell to major
•Artist development
25
A. Schuh
Is there disruptive innovation in the music industry?

Looking for an example of disruption in

action? Just use your ears. The digital
delivery of music is a disruptive force that is
currently tearing through the music
industry

Source: Christensen & Innosight Team (2004). Strategy & Innovation Innovator’s Insights, January 2004.

26
A. Schuh
Description of main likely sources of disruptive technologies
in the music industry

Possibly paid download of music files to a given customer

LEGAL
Not necessarily based on a given technology

DISTRI-
BUTION
Usually involving DRM

Possibly illegal download of music files to a given customer

Technology based on large-scale, distributed file sharing

P2P
Users offer (upload) files

Software/servers coordinate directory of content
available and queries

Other users get access to (dowload) files

27
A. Schuh
Main events of potential sources of disruptive innovation in
the music industry

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

•iTunes
LEGAL MP3.com SonyConn •Music
ect subscription
DISTRI-
service
BUTION •Rio Player
Fraunhof •eMusic OD2
er IUMA (Internet wholesale
platform PressPlay MusicNet
Gesellsch Underground
aft MPEG- Music Archive)
1 layer 3
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Napster KaAaA
P2P 1.0
Napster BitTorrent
Gnutella closes legal
version

Source: Caslon Analytics (http://www.caslon.com.au/filesharingnote5.htm)

28
A. Schuh
Both new technologies fit Christensen’s criteria of disruption

Legal distribution P2P

Emerge occasionally

Underperform established •Initially, MP3 was •Search

products in mainstream below CD quality •Download time
markets •No artwork…

Have features that •Convenience •Cost

fringe/new customers value

Different value proposition •Rental, •Advertising model

than previously available subscription...

Evolve while incumbent

•Majors’ own
continues to improve its distribution
current technology services

29
A. Schuh
Disruptive innovation with legal music distribution

Initially: high-end
Market focus

Over time:, broader base
iPod/iTunes

iTunes Music Store was first successful
player business model

Valued by niche: integrating is based in part
ripped CD and purchased files;
Features convenience, pay per song; on cross-
& value exclusives(selection of
previously un-digitized singles subsidization
proposition and remixes) between device

Unfit for mainstream market: and content
expensive

Lock-in via proprietary DRM

MP3 devices penetration: 3% -12% of
population in Western Europe(1)
Size

iPod market share: ~40%

Itunes market share: ~60%
Source: (1) Screendigest. “Online Music in Europe: Market assessment and forecast” (August 2006)

30
A. Schuh
Disruptive innovation with P2P

Initially, low end: technophile, heavy P2P indicated a

user of music, low willingness to pay significant
Market focus

Over time:, broader base market
interested in

Valued by niche: Breadth of content, all- music
you-can-eat
download
Features
Unfit for mainstream market: mislabeled
files, lack of guaranteed quality under an
& value
proposition
User shares cost of service provisioning advertising-
(disk space, bandwidth) based business

Adware/Spyware model made
viable for low

Between 17%-33% of online users are
downloading with P2P(1) operating cost
Size

Total users worldwide ~280 MM (by not paying
IP)
Sources: (1) NPD Group 2006; OECD 2004; CacheLogic 2006.

31
A. Schuh
Response of the recording companies to disruptive innovation
Main response
Direct response Other

Support traditional

Majors: 3 stages product (CD)
1. Ignore/fight it (circa 2000): • Technical
concerns of cannibalization improvements:
2. Own sites (2001-02): SACD; DVD-Audio
LEGAL – 2 “blocks” • Added value
DISTRI- – No cross-licensing – Artwork
BUTION
– Pricing
– Booklets
3. Validation and support: post-iTunes
– DVD
But: divergent – Business model experimentation
position between
– Promotion of competitive intensity
• Pricing flexibility
majors & indies
in distribution

Focus on “safe” artist:

Legal measures Mariah Carrey
example
P2P

Discussion of alternative pricing
Move towards “all
schemes: “broadband tax” rights”

32
A. Schuh
Current situation: incumbents hurt
P2P
Stable position
downloads Files available for downloading in 2002: 900 MM

Majors losing ground in the industry

—

not — January 2006: 875 MM

decreasing
More concentrated on hits
Indies
6 point (25%) growth in market share in last
gaining recorded 5 years: From 22,6% (1998) to 28.4%
share (2004)

Decreased
“a la carte” (song-by-
Personalization

market song) downloads services
power in
legal
Standard pricing: US$
downloads 0,99

Artic Monkeys
Weight of concerts

Artists
Increased importance — Price of tickets +30%
bypassing of MySpace (2000-03)
recording
Distermediation Spending in CD: -29%
same period (1)
companies — Aimee Mann
— The Firm
Sources: (1) y (2), IFPI; (3) Connolly & Krueger, Rockonomics (2005)

33
A. Schuh
 Current situation: more complex value chain

•More •Increase importance of •More consumption

performers concerts of music

Concert Concert Concert

Site owners
Content management marketing infrastructure
creation
•Com- Collectingsocieties
Collecting societies Customers
posers
•Perfor Whole Digital Comm
Manuf
mers Recor-
actur-
Mar- sale asset
Billing
ercial
ISP Device
ding keting Distrib provisi fronte
ing
ution oning nd

Jukebox
Recording software

companies Hosting

DRM
•New players
Metadata
•More difficult control
Encoding over value chain
34
A. Schuh
But…

Digital
margins high

Signs that current

players are holding
on
Majors control
Digital market
over mobile
underdeveloped
market

35
A. Schuh
Digital margins are higher than CDs’

Breakdown of revenues, %

100% 100%

Credit card 9% 16% Marketing & Overhead

15%
Apple
27% Distribution+Retail

9% Manufacturing

Recording company
60% Recording company
32%

Artist+publisher
Artist+publisher 16% 16%

iTunes Traditional CD

Source: Billboard, NARIP (National Association of Record Industry Source:AMM Music Group based on sales of 250 th units.
Professionals)

36
A. Schuh
Online music market is still relatively small and majors’
actions in mobile music show tight control of its development
Mobile
5% Mobile full- Majors’ actions
Online track: grew
Online 5% 230%
Inventory control
(06/05)
revenues are
small and
Standard, non-
negotiable terms
mobile
grows faster Physical
90%

Minimum pricing
levels

Revenue split
High iPods
46
Clauses on
potential: commercial
sales of exploitation
music-
enabled
Marketing efforts
phones Nokia+ 130 paid by mobile
Sony operators
dwarf iPod’s
Ericsson
0 20 40 60 80 100 120 140

37
A. Schuh
Presentation guide

Disruptive innovation and its criticism

— Incumbent advantage in innovation not always realized
— “Disruptive innovation” theory explains it and proposes managerial responses
— However, criticized on many grounds

Music industry and the transition to digital distribution
— P2P and legal delivery are cases of disruptive innovation
— Industry has responded badly, but…
— Results

Assessing disruptive innovation and its criticism in the music industry
— Support & rebuttal to original Disruptive Innovation
— Support & rebuttal to criticisms
— What is missing
— Conclusion

38
A. Schuh
Answering questions with music industry case

Is disruptive innovation an accurate
Yes: new entrants beginning

description of technological change with low-end and/or
“overshot” customers
process?

Does disruptive innovation ideas
Up to a point

explain why incumbents lose markets
they have once controlled?

Are the recommendations to
Up to a point
managerial decision-making based on
disruptive innovation sound advice?

Does the critique raised actually
Up to a point

improves the explanatory and
predictive potential of disruptive
innovation as a tool for analysis?
39
A. Schuh
Digital music industry case shows that disruption and majors’
actions were aligned with Christensen’s recommendations,
but results were not
Replacement by
new entrant
Focus on
Disruptive sustaining
innovation.
Incumbent Replacement by
reaction No new entrant
Spin-off,
ventures...
Situation Works

Starting Different Yes Market position

point framework secured
No. necessary

Anomaly

•New entrant focusing •High awareness •Clear failures

Music on low-end (P2P) or •Own sites: •Apple & Indies position
overshot consumers Pressplay/MusicNet strong
industry (iPod) •But
•Different value • Industry
proposition underdeveloped
• High profits
• Mobile is different
40
A. Schuh
Applicability of criticism to music industry case
Occurs in Explains
music case? anomaly? Comments

Lack of • Clearly disruptive early on

clarity in
definition

• Valid criticism: basis of customer decision

Limited would be tough to anticipate, esp. for file
predicted sharing
value • …But: how to increase predictive value?

• Both technology and business model

Overstretch innovation
• Different impacts

Shaky • Fits well technology evolution (S-curves) idea.

foundations
• Valid criticism: majors did as recommended
Inadequate • …But: what should they have done? Isn’t
Recommend current status good enough?
ations
41
A. Schuh
Yet there might be missing elements, such as

In the music industry, industry structure could explain some issues

— Oligopoly

— High exit barriers and high entry barriers in the majors strategic group

— Control over catalogs allows for a relevant degree of influence over distributors,
online or else

— Ability to at least slow down industry developments

Likewise, learning is a dimension not developed from Christensen’s

— Given reaction time, learning becomes critical

— In the case of music

– Music industry position in the emerging full-track mobile music space shows impact of
lessons of iTunes market power grab

– Learning can also arise from illegal sources: P2P as inspiration to SpiralFrog ad-based
rental

42
A. Schuh
Not the first time that the music industry deals with
significant changes in delivery format

Per capita spending in the USA; US$

Source: Blomqvist, Eriksson, Findahl, Selg, Wallis, 2005. “Trends in downloading and filesharing of music”

43
A. Schuh
Answering questions part 2

Is disruptive innovation an accurate

description of technological change Can companies effectively
process? base decisions on adoption
or certain technologies

Is disruptive innovation an accurate
and business models on
description of technological change
Christensen’s theory of
process?
disruptive innovation?

Are the recommendations to
managerial decision-making based on
disruptive innovation sound advice?
Not in all cases

Does the critique raised actually
Need of improving

improves the explanatory and analytical tool
predictive potential of disruptive
innovation as a tool for analysis?
44
A. Schuh
Conclusion

Disruptive innovation theory can be extended and improved to

improve its usefulness to managerial practice

Several sources of criticism have already identified areas of

improvement

Music industry case suggests that

Revise usage of spin-offs

Need of including industry structure elements and accounting for

potential of blocking development of disruptive innovation

Go beyond extreme cases of industry dismissal

45
A. Schuh
Capstone: objectives and takeaways
Objectives

Review main ideas of recent
disruptive innovation theories
and its criticisms

Present the case of disruptive
innovation in the music
industry

Discuss implications of actual
music industry moves to
support either original
disruptive innovation
perspective or its criticism
46
A. Schuh
Take-aways

Recap of Christensen’s theory

Various sources of criticism

2 simultaneous sources of
disruption: P2P and legal
downloads

Industry moves consistent with
recommendations, results partly
so

Criticism somewhat valid

Need of assessing additional
elements

Next: online video
Extras and back-up slides

47
A. Schuh
Selected bibliography
(when not referenced directly in the main presentation)

Adner , Ron (2002). “When are technologies disruptive? a demand-based view of the emergence of
competition”. Strategic Management Journal, Volume 23, Issue 8 , Pages 667 – 688.

Chandy, Rajesh & Tellis, Gerard J. (2000). “The Incumbents Curse? Incumbency, size and radical
product innovation”. Journal of Marketing, Vol. 64 (July 2000), 1-17

Charitou, Constantinos D. & Markides, Constantinos C. “Responses to Disruptive Strategic

Innovation”. MIT Sloan Management Review. Winter 2003, Vol. 44, No. 2, pp. 55–63

Danneels, Erwin (2004), "Disruptive Technology Reconsidered: A Critique and Research Agenda,"
Journal of Product Innovation Management 21 (4): 246-58.

Markides, Constantinos C. (2006). “Disruptive Innovation: In Need of Better Theory”. Journal of

Product Innovation Management 23 (1), 19–25.

Tellis, Gerard J. (2006). “Disruptive Technology or Visionary Leadership?” Journal of Product

Innovation Management 23 (1), 34–38.

Vijay Govindarajan, Praveen K. Kopalle (2006). “The Usefulness of Measuring Disruptiveness of

Innovations Ex Post in Making Ex Ante Predictions”. Journal of Product Innovation Management 23
(1), 12–18.

48
A. Schuh
Long list: small new entrants were instrumental for a large
number of innovations
Electronics Pharma Mechanical devices

Xerography, Chester
DDT: J. R. Geigy & Co.
Cotton Picker: John &
Carlson Mack Rust

Insulin: Frederick

Vacuum Tube: Lee De Banting
Zipper: Whitcomb
Forest .ludson/Gideon Sundbeck

Streptomycin: Selman

Frequency Modulation Waksman
Automatic Transmissions:
Radio: Edwin H. F. Hobbs
Armstrong
Penicillin: Alexander
Fleming
Gyrocompass: A.
Kaempfe/E. A. Sperry ,IS. G.
Chemicals & Brown
Basic research

Dacron Polyester Fiber:
Jet Engine: Frank

Rockets: Robert J. R. WhinfieldlJ. T. Whittle/Hans Von Ohain
Goddard Dickson

Self-Winding Wristwatch:

Titanium: W. J. Kroll
Catalytic Cracking of John Harwood
Petroleum: Eugene

Cyclotron: Ernest O. Houdry
Helicopter: Juan De La
Lawrence Cierva/Heinrich Focke/Igor

Cellophane: Jacques Sikorsky
Brandenberger

Ball-Point Pen: Ladislao &
Georg Biro
49
A. Schuh
 Innovation requires going beyond technical issue into market,
strategic and execution issues
Launc
h inno
vation

Execu
nabletio-
Appro ?
able?pri-
Like • Is there possible access
adoplyt to be to distribution
consu ed by channels?
Techn mers?
• Are complementary • Is there a marketing
feasibically assets required? value proposition
le?
• Is control over around the
• Are there adoption barriers? complementary assets innovation?
• Does the innovation possible? • Does the firm has the
provides… • Are there innovations resources to withstand
• Does the core technology • Relative advantage with increasing returns early losses?
works? (economic or social)
• Compatibility to be displaced?
• Are there production
• Complexity • Learning curve
processes in place?
• Observability • Externalities
• Is it reliable?
• Is there an evolution path • Trialibility
• Is there a relevant core
for the technology?
group of early adopters?
• Can it reach a tipping point?

50
A. Schuh
Majors’ reaction centered in legal action against users…

Major promoter: RIAA

Threat of lawsuits of up to US$

150 thousand per song

Indiscriminate approach
— College students
— Families
— A 12-year old girl
— Durwood Pickle, 71

Heavy-handed in acquiring
information: threat to ISPs

51
A. Schuh
Value creation in the music recording sector

Cost structure of a “typical” album Profits as a function of sales

Fixed costs 18.000

— Recoupable 16.000

– Studio cost: US$ 60k 14.000

– Video clips: US$ 120 k 12.000

10.000
— Non-recoupable
8.000
– Marketing: US$ 510
6.000
– G&A: US$ 30 k
4.000

Variable costs:
2.000
— Manufacturing: US$ 1,20/unit 0

— Distribution: 27% of revenues -2.000

0
0

0
10

50

00

50

00
10

20

30

45

60
1.

1.

3.
— Royalties: 10% to composer; 10% minus
recoupable to performer

Huge incentive for majors to exploit economies of scale

and promote hits

52
A. Schuh
P2P growth indicates willingness of a large chunk of the
market to get music under an advertising-based model
P2P simultaneous users
worldwide

P2P offers users…
P2P advertising
Million revenues are hard to
40 — Convenience estimate since it is a
37 grey zone for
35
— All-you-can-eat advertisers and
30 companies lack
25
— Variety of content transparency. E.g.,
KaZaa
20

But requires — Incorporated in
15
10 Vanuatu
10 — Incurring some of the
5 2
infrastructure costs — HQ in Sidney,
0 — Patience. 10% of files Australia
2002 2004 2006 are wrongly labeled — Servers in
•Between 17%-33% of online — Accepting heavy Danmark
users are downloading with exposure to — Software
P2P(1) advertising (on development in
•Total users worlwide ~280 MM occasion, very Estonia
intrusive)
Sources: NPD Group 2006;
OECD 2004; CacheLogic 2006.
53
A. Schuh
Christensen’s Principles of Disruptive Technology

Principles of Disruptive Technology Approaches

• Companies depend on
customers and investors for
resources (resource dependence)
Spin-off unit to focus on innovative technology
• Smaller markets don’t solve the
growth needs of larger
companies
• Markets that don’t exist can’t Create learning ventures (even if fails early and
be analyzed inexpensively)
• An organization’s capabilities Selective use resources of the main organization to
define its disabilities address the disruption. Careful not to leverage its
processes and values.

• Technology supply may not Develop new markets that value the attributes of the
equal market demand disruptive products
Do not wait for disruptive product to evolve and become
a sustaining technology in mainstream markets

54
A. Schuh
Current situation from the vantage point of a musician

[the music industry crisis] in what does it affect

the artists? Well, in that we have to distribute
our music in some other ways. In what it affects
the record companies? In that they will
disappear. I’m not a record company, it is not
my problem. The one with a problem ought
search for a solution-.

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A. Schuh
Music industry sales

56
A. Schuh