13384052 Disruptive Innovation and Its Criticism the Case of Digital Music by Antonio Schuh

Disruptive innovation and its criticism: the case of digital music

Faculty discussion

Antonio Schuh

1A. Schuh

Objectives of this presentation

� Review main ideas of 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

critique

� Provide an example of

– Teaching skills

– ability to transfer ideas

– convincing

– Receptive listening

– Vocation

– Style

– Knowledge

2A. 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, …

� Graduate education

– PhD drop-out: Innovation Management at the University of Manchester

– Master in Management of Communication Firms, AnnenbergSchool - 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)

3A. 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

4A. Schuh

Innovation is more than invention

Gas-filled umbrella

Foetus Walkman

Musical flamethrower

Cheese-flavoured cigarette

Source: John Bessant, Imperial College

� Innovation means

effective introduction

of new ideas in the

marketplace

� Need to understand

� Technology and its

evolution

� Customers and likely

adoption

� Industry structure and

ability to capture

value

� Ability to execute

5A. Schuh

Incumbents often have advantages in innovation

Technology MarketAppropri-ability

•Higher ability to

•Conduct technological scanning and foresight

•Support state-of-the-art R&D facilities

•Attract qualified personnel

Execution

• In-depth understanding of the customer

• Customers are familiar with company (reduced perceived risk)

•Access to IP protection mechanisms

•Ability to finance new venture with existing cash flows

• Better access to capital markets

• Established access to distribution channels

Potential sources of incumbent advantages

Innovation requirement

forviability

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

6A. Schuh

However, there plenty of examples of incumbents who lost the train of technology change

Disk drives

Photocopiers

Telephony

Radio

Innovative new entrant

•5.25”, 5-10 Mb drives•Seagate, 1980

•Tabletop copiers•Ricoh & Cannon, 1981

•Mobile digital telephony•Vodafone, 1990

Incumbent

•8”, 80-60 Mb drives•Shugart

•Copy centers, Xerox

•PTTs/RBOCs

•Transistor radio•Sony, 1956

•RCA

Wristwatches •Quartz watches•Hattori-Seiko, 1969

•Socité Suisse pour l’Industrie Horologeré

7A. Schuh

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

Xerography, Chester Carlson

FM radio: Edwin Armstrong

Insulin: FrederickBanting

Catalytic cracking of petroleum: Eugene Houdry

Personal computers: Jobs & Wozniak

Jet Engine: Frank Whittle

Zipper: Whitcomb .ludson

E-commerce business architecture: Jeff Bezos

8A. Schuh

Analysis of a 150-year cross-section of innovations in further validates the “incumbents’ curse”

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

• 4 year-long study by 9 researchers• Consumer durables and office

products • Source: more than 250 books and

500 articles • Time: from 1851 to 1998• “Radical innovation”: different core

technology and substantially higher customer benefits in some category

• 94 innovations analyzed in depth

Sample description & methodology % of radical innovations according to firm size

< 500

49%

from 500

to 2500

More than

2500

42%

< 500 from 500 to 2500More than 2500

9A. Schuh

According to Christensen, disruptive technologies are a challenge to incumbents

Breakthrough

Derivative

Platform

Base

Improvement

Next-Generation

Radical

Nature of Te

chnological C

hange

CreateNew

Market

ReachNew

Customers

Sell more productsto existingcustomers

ReplaceCurrentProducts

Impact on Market

Level of

Uncertainty / Risk

Highest Potential for Disruptive

Growth

Disruptive technologies • Emerge occasionally• Underperform

established products in mainstream markets

• Have features that fringe/new customers value

• Different value proposition than previously available

• Evolve while incumbent continues to improve its current technology

Source: Christensen (1997)

10A. Schuh

Recap: Dynamics of disruptive technologies

Product Perform

ance

Performance demanded at the high end of the

market

Performance demanded at the low end of the

market

Progre

ss due to

sustaining technologies

Progre

ss due to disruptive

technologies

•A new disruptive technology is launched

•It underperforms the dominant one along the dimensions valued by mainstream customers

•Incumbents most profitable customers do not want products based on disruptive technologies.

1

TimeSource: Christensen (1997)

11A. Schuh


Product Perform

ance


market


market

Progre

ss due to


Progre


technologies

Disruptive technology offer new features – typically (a) cheaper, (b) simpler, (c) smaller, or (d) more convenient than those based on the dominant technology.

2

Time

12A. Schuh


Product Perform

ance


market


market

Progre

ss due to


Progre


technologies

Disruptive technologies enter emerging/ insignificant markets that value new features

3

Time

13A. Schuh


Product Perform

ance


market


market

Progre

ss due to


Progre


technologies

The new disruptive technology steadily improves in performance until it meets the standards of performance demanded by the mainstream market.

4

Time

14A. Schuh


Product Perform

ance


market


market

Progre

ss due to


Progre


technologies

The incumbent continues to improve its current technology, leading to performance oversupply (overserving customers in their needs)

5

Time

15A. Schuh


Product Perform

ance


market


market

Progre

ss due to


Progre


technologies

At that point, the new (disruptive) technology displaces the dominant one and (b) the new entrant displaces the dominant incumbent(s) in the mainstream market.

6

Time

16A. Schuh

Why incumbents do not deal well with disruptive technologies

• 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

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)

17A. Schuh

Incumbents are better prepared to assess and implement sustaining technologies, not disruptive ones

Sustaining innovation

• Positioned on a job that competitors aren’t serving well

•Margin improvement

• Isn’t over-shooting

•Existing

•Readily leveraged into derivative projects

Market focus

Reach of customer needs

Business model

How is success measured

•Success measured by market share gain

Disruptive innovation

•Focuses on a job that people are trying to get done

•Competes against non-consumption and overconsumption

•Disruptive relative to competitors’ business model

•Market development


18A. Schuh

Evolution curves

Sustaining & Non-disruptive radical technologies

Innovator: General Electric

“Breakthrough” radical innovation; superior performance in existing attributes from the start

Sustaining innovation: improvements on existing performance attributes

Disruptive innovation

Innovator: Seagate

1975 1980 1985 1990 1995

10

100

1000

YearArial R

ecording Density

(Millions of Meg

abits per Square In

ch)

Ferrite-oxide heads

Thin-film heads

Magneto-resistive heads

Disruptive innovation:• Superior performance

in some attributes• Lower performance in

others• Steep evolution (S-

Curve)

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

19A. 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


20A. 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)

21A. Schuh

And yet there are several recent criticisms directed at the theory

Lack of clarity in definition

Limited predicted value

Overstretch

Source of criticism

•Danneels (2004)•Govindarajan & Kopalle (2006)

•Danneels (2004)•Adner (2002)

•Markides (2006)• Charitou & Markides (2003)

Issues

• Is a technology inherently disruptive or it depends?

• Can it be defined as disruptive ex-ante?• Is there a formal measure of “disruptiveness”?

•Why some incumbents win?•Why disruptive innovation sometimes also fails?

•What are the basis of customer decision?• Cherry-picked examples and limited generalizability

• Is it also valid for “disruptive innovation” (business model innovation)?

Shaky foundations

• Tellis (2006) • Empiral research on technology evolution (S-curves may have random evolution)

Inadequate Recommendations

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

22A. Schuh

Questions

� Is disruptive innovation an accurate

description of technological change

process?

� Does disruptive innovation ideas

explain why incumbents lose markets

they have once controlled?

� Are the recommendations to

managerial decision-making based on

disruptive innovation sound advice?

� Does the critique raised actually

improves the explanatory and

predictive potential of disruptive

innovation as a tool for analysis?

Can companies effectively

base decisions on adoption

or certain technologies

and business models on

Christensen’s theory of

disruptive innovation?

23A. Schuh

Presentation guide








— Results




— What is missing

— Conclusion

24A. Schuh

Music industry value chain

Content creation

•Composers•Performers

Broad-casting

Retail

RecordingManufa-cturing

MarketingWholesale Distribu-

tion

Collecting societiesCollecting societiesCustomers

Recording companies

Concert management

Concert marketing

Concert infrastructure

Site owners

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

25A. Schuh

Recording companies overview

Majors

Indies

Players Practices

Market share, %

25,5%

21,5%

13,40%

11,30%

0% 10% 20% 30%

Universal

SonyBMG

EMI

Warner

28,3%

0% 5% 10% 15% 20% 25% 30%

Indiesº

• Hundreds of specialist labels

• Segment-specific • Single/2-album contracts• Outsourcing • Frequently, horizontal integration with concert management

• KSFs: •Find/develop/ sell to major•Artist development

• Focuses on mass appeal artists• 7-year contracts• Advance to artist against future royalties• Were vertically integrated, now outsourcing• KSFs:

•A&R•“Hit making” (Marketing)•Catalog exploitation

26A. 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.

27A. Schuh

Description of main likely sources of disruptive technologies in the music industry

LEGAL DISTRI-BUTION

P2P

� Possibly paid download of music files to a given customer

� Not necessarily based on a given technology

� Usually involving DRM

� Possibly illegal download of music files to a given customer

� Technology based on large-scale, distributed file sharing

� Users offer (upload) files

� Software/servers coordinate directory of content available and queries

� Other users get access to (dowload) files

28A. Schuh

IUMA (Internet Underground Music Archive)

Main events of potential sources of disruptive innovation in the music industry

LEGAL DISTRI-BUTION

P2P

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071992 1993 1994 1995

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

MP3.com

•Rio Player•eMusic OD2

wholesale platform

•iTunes

Fraunhofer

Gesellschaft MPEG-1 layer 3

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071992 1993 1994 1995

Napster 1.0

Gnutella

SonyConnect

PressPlay MusicNet

KaAaA

Napster closes

BitTorrent legal version

•Music subscription

service

29A. Schuh

Both new technologies fit Christensen’s criteria of disruption

� Emerge occasionally

� Underperform established products in mainstream markets

� Have features that fringe/new customers value

� Different value proposition than previously available

� Evolve while incumbent continues to improve its current technology

Legal distribution P2P

•Initially, MP3 was below CD quality•No artwork…

•Convenience

•Rental, subscription...

•Majors’ own distribution services

•Search•Download time

•Cost

•Advertising model

30A. Schuh

Disruptive innovation with legal music distribution

Market focus

Features & value

proposition

Size

iPod/iTunes

business model

is based in part

on cross-

subsidization

between device

and content

� Initially: high-end

� Over time:, broader base

� iTunes Music Store was first successful player

� Valued by niche: integrating ripped CD and purchased files; convenience, pay per song; exclusives(selection of previously un-digitized singles and remixes)

� Unfit for mainstream market: expensive

� Lock-in via proprietary DRM

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

� iPod market share: ~40%

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

31A. Schuh

Disruptive innovation with P2P

Market focus

Features & value

proposition

Size

P2P indicated a

significant

market

interested in

music

download

under an

advertising-

based business

model made

viable for low

operating cost

(by not paying

IP)

� Initially, low end: technophile, heavy user of music, low willingness to pay

� Over time:, broader base

� Valued by niche: Breadth of content, all-you-can-eat

� Unfit for mainstream market: mislabeled files, lack of guaranteed quality

� User shares cost of service provisioning (disk space, bandwidth)

� Adware/Spyware

� Between 17%-33% of online users are downloading with P2P(1)

� Total users worldwide ~280 MM

Sources: (1) NPD Group 2006; OECD 2004; CacheLogic 2006.

32A. Schuh

Response of the recording companies to disruptive innovation

LEGAL DISTRI-BUTION

P2P

� Majors: 3 stages

1. Ignore/fight it (circa 2000): concerns of cannibalization

2. Own sites (2001-02):

– 2 “blocks”

– No cross-licensing

– Pricing

3. Validation and support: post-iTunes

– Business model experimentation

– Promotion of competitive intensity in distribution

� Legal measures

� Discussion of alternative pricing schemes: “broadband tax”

Direct response Other

� Support traditional product (CD)

• Technical improvements: SACD; DVD-Audio

• Added value

– Artwork

– Booklets

– DVD

• Pricing flexibility

� Focus on “safe” artist: Mariah Carrey example

� Move towards “all rights”

Main response

But: divergent position between majors & indies

33A. Schuh

Current situation: incumbents hurt

P2P downloads

not decreasing

� Stable position— Files available for downloading in 2002: 900 MM

— January 2006: 875 MM

� More concentrated on hits

Indies gaining share

� 6 point (25%) growth in market share in last recorded 5 years: From 22,6% (1998) to 28.4% (2004)

Decreased market power in legal

downloads

� “a la carte” (song-by-song) downloads

� Standard pricing: US$ 0,99

� Personalization services

Artists bypassing recording companies

� Artic Monkeys

� Increased importance of MySpace

� Distermediation— Aimee Mann

— The Firm

� Weight of concerts

— Price of tickets +30% (2000-03)Spending in CD: -29% same period (1)

Majors lo

sing ground in

the in

dustry

Sources: (1) y (2), IFPI; (3) Connolly & Krueger, Rockonomics (2005)

34A. Schuh

Current situation: more complex value chain

Content creation•Com-posers•Performers

Customers

Recording companies Hosting

DRM

Metadata

Encoding

Jukebox software

Concert management

Concert marketing

Concert infrastructure

Site owners

Collecting societiesCollecting societies

BillingRecor-ding

Manufactur-ing

Mar-keting

Wholesale

Distribution

Digital asset provisioning

ISP Device

Commercial frontend

•New players •More difficult control over value chain

•More performers

•Increase importance of concerts

•More consumption of music

35A. Schuh

But…

Digital Digital margins highmargins high

Digital market underdeveloped

Majors control over mobile market

Signs that current players are holding

on

36A. Schuh

Digital margins are higher than CDs’

Breakdown of revenues, %

Source: Billboard, NARIP (National Association of Record Industry Professionals)

Source:AMM Music Group based on sales of 250 th units.

16% 16%

60%

32%

9%

27%

16%15%

9%

iTunes Traditional CD

Marketing & Overhead

Distribution+Retail

Manufacturing

Recording company

Artist+publisher

Credit card

Apple

Recording company

Artist+publisher

100% 100%

37A. Schuh

Online music market is still relatively small and majors’ actions in mobile music show tight control of its development

130

46

0 20 40 60 80 100 120 140

Nokia+SonyEricsson

iPods

Online revenues are

small and mobile

grows faster

High potential: sales of music-

enabled phones

dwarf iPod’s

Majors’ actions

� Inventory control

� Standard, non-negotiable terms

� Minimum pricing levels

� Revenue split

� Clauses on commercial exploitation

� Marketing efforts paid by mobile operators

Physical90%

Online5%

Mobile5% Mobile full-

track: grew230%

(06/05)

38A. Schuh

Presentation guide








— Results




— What is missing

— Conclusion

39A. Schuh

Answering questions with music industry case



process?

� Does disruptive innovation ideas

explain why incumbents lose markets

they have once controlled?








� Yes: new entrants beginning with low-end and/or “overshot” customers

� Up to a point

� Up to a point

� Up to a point

40A. Schuh

Digital music industry case shows that disruption and majors’ actions were aligned with Christensen’s recommendations, but results were not

Starting point

Situation

Disruptive innovation.

No.

Different framework necessary

Incumbent reaction

Focus on sustaining

Replacement by new entrant

Spin-off, ventures...

Works

No

Yes

Replacement by new entrant

Market position secured

Music industry

•New entrant focusing on low-end (P2P) or overshot consumers (iPod)•Different value proposition

•High awareness•Own sites:Pressplay/MusicNet

•Clear failures•Apple & Indies position strong•But

• Industry underdeveloped

• High profits• Mobile is different

Anomaly

41A. Schuh

Applicability of criticism to music industry case

Lack of clarity in definition

Limited predicted value

Overstretch

Shaky foundations

Inadequate Recommendations

Explains anomaly? Comments

• Clearly disruptive early on

•Valid criticism: basis of customer decision would be tough to anticipate, esp. for file sharing

•…But: how to increase predictive value?

• Both technology and business model innovation

•Different impacts

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

•Valid criticism: majors did as recommended•…But: what should they have done? Isn’t current status good enough?

Occurs in music case?

42A. 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

43A. Schuh

Not the first time that the music industry deals with significant changes in delivery format

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

Per capita spending in the USA; US$

44A. Schuh

Answering questions part 2



process?Can companies effectively

base decisions on adoption

or certain technologies

and business models on

Christensen’s theory of

disruptive innovation?



process?








� Not in all cases

� Need of improving

analytical tool

45A. 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

46A. Schuh

Capstone: objectives and takeaways

� Recap of Christensen’s theory

� Various sources of criticism

Objectives Take-aways

� Review main ideas of recent disruptive innovation theories and its criticisms

� 2 simultaneous sources of disruption: P2P and legal downloads

� Industry moves consistent with recommendations, results partly so

� 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

� Criticism somewhat valid

� Need of assessing additional elements

� Next: online video

47A. Schuh

Extras and back-up slides

48A. 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.

49A. Schuh

Long list: small new entrants were instrumental for a large number of innovations

Electronics

� Xerography, Chester Carlson

� Vacuum Tube: Lee De Forest

� Frequency Modulation Radio: Edwin Armstrong

Basic research

� Rockets: Robert Goddard

� Titanium: W. J. Kroll

� Cyclotron: Ernest O. Lawrence

Mechanical devices

� Cotton Picker: John & Mack Rust

� Zipper: Whitcomb .ludson/Gideon Sundbeck

� Automatic Transmissions: H. F. Hobbs

� Gyrocompass: A. Kaempfe/E. A. Sperry ,IS. G. Brown

� Jet Engine: Frank Whittle/Hans Von Ohain

� Self-Winding Wristwatch: John Harwood

� Helicopter: Juan De LaCierva/Heinrich Focke/Igor Sikorsky

� Ball-Point Pen: Ladislao &Georg Biro

Pharma

� DDT: J. R. Geigy & Co.

� Insulin: Frederick Banting

� Streptomycin: Selman Waksman

� Penicillin: Alexander Fleming

Chemicals &

� Dacron Polyester Fiber: J. R. WhinfieldlJ. T. Dickson

� Catalytic Cracking of Petroleum: Eugene Houdry

� Cellophane: JacquesBrandenberger

50A. Schuh

Innovation requires going beyond technical issue into market, strategic and execution issues

Launch innovation

Technically feasible?

Likely to be adopted by consumers?

Appropri-able?

Executio-nable?

• Does the core technology works?

• Are there production processes in place?

• Is it reliable?• Is there an evolution path

for the technology?

• Are there adoption barriers?• Does the innovation

provides…• Relative advantage

(economic or social)• Compatibility • Complexity• Observability • Trialibility

• Is there a relevant core group of early adopters?

• Can it reach a tipping point?

• Are complementary assets required?

• Is control over complementary assets possible?

• Are there innovations with increasing returns to be displaced?

• Learning curve• Externalities

• Is there possible access to distribution channels?

• Is there a marketing value proposition around the innovation?

• Does the firm has the resources to withstand early losses?

51A. 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

52A. Schuh

Value creation in the music recording sector

Huge incentive for majors to exploit economies of scale and promote hits

-2.000

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

10 50 100

200

300

450

600

1.00

01.

500

3.00

0

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

� Fixed costs

— Recoupable

– Studio cost: US$ 60k

– Video clips: US$ 120 k

— Non-recoupable

– Marketing: US$ 510

– G&A: US$ 30 k

� Variable costs:

— Manufacturing: US$ 1,20/unit

— Distribution: 27% of revenues

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

53A. Schuh

P2P growth indicates willingness of a large chunk of the market to get music under an advertising-based model

2

10

37

0

5

10

15

20

25

30

35

40

2002 2004 2006

P2P simultaneous users worldwide

•Between 17%-33% of online users are downloading with P2P(1)

•Total users worlwide ~280 MM

Sources: NPD Group 2006; OECD 2004; CacheLogic 2006.

Million� P2P offers users…

— Convenience

— All-you-can-eat

— Variety of content

� But requires

— Incurring some of the infrastructure costs

— Patience. 10% of files are wrongly labeled

— Accepting heavy exposure to advertising (on occasion, very intrusive)

� P2P advertising revenues are hard to estimate since it is agrey zone for advertisers and companies lack transparency. E.g.,KaZaa

— Incorporated in Vanuatu

— HQ in Sidney, Australia

— Servers inDanmark

— Software development in Estonia

54A. Schuh

Christensen’s Principles of Disruptive Technology

• Smaller markets don’t solve the growth needs of larger companies

Spin-off unit to focus on innovative technology

• Companies depend on customers and investors for resources (resource dependence)

ApproachesPrinciples of Disruptive Technology

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

• An organization’s capabilities define its disabilities

Create learning ventures (even if fails early and inexpensively)

• Markets that don’t exist can’t be analyzed

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

• Technology supply may not equal market demand

55A. 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-.

56A. Schuh

Music industry sales

Date post:	28-Jul-2015
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13384052 Disruptive Innovation and Its Criticism the Case of Digital Music by Antonio Schuh

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