I recently finished Clayton Christenson’s Innovators Dilemma, one of the best business and strategy books I’ve read so far. I’ll do a deep dive on the book later, but man is it good. Some of the top investors in the world (Fred Wilson, Chris Dixon, Mark Suster) have mentioned they use it as their framework when deciding which companies to invest in. In a recent Chris Dixon post, this part really struck me:
“This does not mean every product that looks like a toy will turn out to be the next big thing. To distinguish toys that are disruptive from toys that will remain just toys, you need to look at http://pwgmarketing.com/category/articles/page/23/ products as processes. Obviously, products get better inasmuch as the designer adds features, but this is a relatively weak force. Much more powerful are external forces: microchips getting cheaper, bandwidth becoming ubiquitous, mobile devices getting smarter, etc. For a product to be disruptive it needs to be designed to ride these changes up the utility curve.”
This is such a good point, and one that is often overlooked. I can’t tell you how many times I’ve dismissed a new product or idea by taking it at face value. I remember first seeing Twitter and thinking it would never work because nobody wanted to sit at their computer typing little updates about their day. I was very, very wrong.
Twitter really took off with the proliferation of mobile devices. Once it was easy for people to tweet anything that was on their mind, the exact moment they came up with it, Twitter’s adoption took off. I almost never use Twitter except when I’m on my iPhone. Chris Dixon has another fantastic post here, where he mentions the power of network effects in technology adoption. While those are extremely powerful, and a strong growth driver for Twitter, I’d also argue that complements played a big part in Twitter’s growth. A basic tenet of microeconomics is that as the price of complements decrease, the demand for a product will increase. Gas and cars are a good example – if the price of cars go down, the demand (and thus the price) for gas goes up. This is the reason why Google is working on making a cheap operating system for their Chrome netbooks – the cheaper and easier it is for people to get online, the greater the chances that they interact with Google through one of their products. This is also a major driver behind their Google Fiber program – I’m sure they are tracking the jump in users from Kansas City (the city they outfitted with high-speed) that results from new high-speed broadband.
This same driver is behind the growth of Twitter, as well as hundreds of mobile apps over the past 5 years. As smartphones became more and more common, and the data plans on each phone got cheaper, suddenly the demand for mobile products goes up. In Twitter’s case, that demand doesn’t translate to profits but rather a massive increase in users.
As another smart post points out, this means that companies want to try and commoditize their product’s complements. A good example of this is playing out right now as Amazon tries to commoditize content (books and video) with their Amazon streaming service. For $36 a year, you have access to tons of streaming content through Amazon.
They’re also pushing their self-publishing platform, and incentivizing authors (by giving them a larger portion of proceeds – 70% I believe) to sell each ebook for less than $2.99 (rather than the traditional $15-25). Why are they doing this? Complements! When 5 of your favorite bloggers or authors release an ebook for $2.99 on Amazon, guess what device you want to buy to read them? A Kindle. And once you own a Kindle, spending $10.99 on a book at a later point makes far more sense than spending $79.99 + $10.99 for the Kindle and the book.
I don’t pretend to know much about this stuff, but business strategy is something that fascinates me. As technology moves faster and faster, I think it will be increasingly important to have the ability to think strategically and play for the long term.