Amazon, Tesla & Bitcoin: Disruption Case Studies

In our Markets section we outlined Harvard professor Clayton Christensen’s paradigm for understanding Disruptive Innovation. In a nutshell, real disruption comes when:

• A new entrant, often with a different business model than existing players, enters a market at the low end of the price/quality spectrum.

• Because this is usually where current competitors make their smallest profits, they cede the market to the upstart.

• Over time, the new entrant moves up the product spectrum until they either displace the existing competitors outright or those companies adopt the “special sauce” of the new company.

With that in mind, we thought it would be helpful to look at two public companies we often hear mentioned as “Disruptors” and see how closely they fit Christensen’s paradigm.

Amazon fits the model exactly. They started in a backwater of retail (books) with a differentiated business model (online sales). Broadline retailers thought they had nothing to fear since books were a small part of their profits. Over time Amazon started using data analytics to suggest other purchases, another point of differentiation for their business model. When the data side got large enough, they started offering cloud-computing services. Then came groceries, home automation, and a raft of other capital projects.

If you stare in wonder at Amazon’s 130x forward price earnings multiple, this is a big part of why it exists. It may be the most perfect example of innovative disruption since Ford’s Model T or the original Sears Roebuck catalog, both of which were created with America’s underserved rural community top of mind.

Tesla… Not So Much. We’re not piling on here – the company has enough problems at the moment and they actually have nothing to do with “Disruptive Innovation”.

Tesla’s products are what Christensen calls a “Sustaining innovation” – a better mousetrap, in other words. Its original mass-market vehicle, the Model S, is expensive. Its minivan, the Model X, only more so. The Model 3 is mid, not low priced. So on that count alone, Tesla’s vehicles are not Innovative Disruption. They are too expensive to appeal to low-end consumers.

There’s one “But”… The iPhone was originally a sustaining innovation, but morphed into a disruptive one as it added better hardware and slowly became a computer in a different form factor. Tesla may hope to replicate that path with self-driving cars, but first it needs to deliver on its production goals.

If it cannot, other automakers will eventually have their own electric vehicles. That’s what happens when you come in at the high end of a market: the competition always takes notice and fights back.

And a bonus idea – bitcoin – where the jury is still out. Make no mistake: bitcoin was created to disrupt sovereign currencies. The very first bitcoin mined has a message attached to it, a news headline: “The Times 03/Jan/2009 Chancellor on the brink of a second bailout for banks”. The criticism is clear: money has become a tool of governments and the status quo, and technology can disrupt this societally unproductive linkage.

Does bitcoin target a low-end consumer, as the Christensen paradigm requires? That’s hard to say, since ownership is quasi-anonymous. Bitcoin’s early adopters were certainly at the fringes of society: computer nerds and libertarians, not to mention truly unseemly sorts. With the currency’s rapid appreciation one thing is for sure: they aren’t low-end consumers any more.

But bitcoin shares two key problems with Tesla: adoption rates and competitive response. The former has slowed with the price declines this year and the notable lack of useful real world applications. Government responses have been all over the map, from outright bans to open embrace. In short, we’ll mark bitcoin as a questionable disruption. If it fails, it will be for the same reason that Tesla folds: established competitors return fire.

Summing all three examples: Disruptive Innovation isn’t a one-size-fits-all guaranty of success for any business idea tied to semiconductor. There is a very specific list of criteria that gives the paradigm its power. Follow them, and the disruption in question has a chance of success. Skip a step, and the odds drop steeply.

Read more about the Christensen disruption paradigm here: https://hbr.org/2015/12/what-is-disruptive-innovation