Clay Christensen dropped by my class at MIT the other day to talk about disruptive technologies in communications. Christensen, a Harvard Business School professor and author of The Innovator’s Solution, pointed out that the incumbent company rarely loses its best customers because it always immediately addresses any foray by an upstart.
The real danger comes when an upstart goes after customers the incumbent doesn’t want, either because they are too few, too poorly financed or just too disorganized. The disruption doesn’t occur because the technology is new and strange, but because it disrupts the business models.
For a carrier, buying a Class 5 switch meant that millions of dollars would change hands, software upgrades would cost $500,000 and the carrier would charge the consumer or business tons for voice calls. Each party made lots of money.
But when the new technology costs 1/10th or 1/20th of the incumbent technology, new competitors can come in, make money and drop their costs to almost nothing. Here’s an analogy: Suppose there was a new airline that could buy jet fuel for 10 cents a gallon, could buy 747s for $1 million, could fly with only one pilot and one stewardess (both nonunion) and was exempt from paying landing fees. How do you think the traditional airlines would do?
A few months ago, I nominated Skype as a Network World power winner, because it is changing the economic underpinnings of the communications industry. Today, Skype has 75 million customers, 10% of whom live in China. If you use conventional circuit switching to call the United States from China, the cost is 42 cents per minute; if you use Skype, it’s 2 cents per minute.
Now you have a situation where the incumbents are unable and unwilling to follow. No company willingly takes its cash-cow products and crucifies them to match upstarts who are going after customers who are too few and too poor — and whom the company doesn’t want anyway. But by establishing a beachhead on the Unfortunate 500 or by serving 1.5 billion Chinese, the upstarts now can continue to move up the pyramid.
Boston, like 137 cities across the United States, is flirting with free or quasi-free Wi-Fi and WiMAX. Broadband access now is regarded as almost a right, not a privilege. Today 99% of the ZIP codes in the United States have access to broadband, according to the FCC (though they regard wideband as anything over 200Kbps, which shows you how behind the times they are). If you had just 200Kbps, you would swear you were in the Third World. The cities haven’t faced up to the fact that wideband access won’t be used just to gain access to data; sooner or later it will provide free telephony and even wireless video.
Listening to your best customers — the Fortune 500 or the RBOCs, for example — works only for a while. It will help improve your existing products and keep frontal competitors out. But when technology comes along that ruins the economics, the incumbents will be almost paralyzed.
Skype in China operates in a gray area of regulation. Officially, you aren’t supposed to be able to make voice calls from a PC to a handset, but regulation is always behind technology. Sooner or later, the traditional Chinese fixed-line phone companies, China Telecom and Netcom, will try to bottle up Skype.
They will offer a cheaper service based on Internet technology, but why pay 30 cents or 20 cents or even 10 cents when you can pay 2 cents with Skype? Want to bet that within two years China will be 25% of Skype’s business — and 50% within five years?
Let’s go full circle. Paul Baran, one of the names on the original IPX patents, had two great ideas: distributed networks and packet switching. By combining these, he fathered a revolution in communications and possibly in worldwide political systems — the ultimate disruption.
