Why the integrated approach to mobile devices is winning

Until last week’s announcement of the new Surface tablet, Microsoft had taken the same approach to mobile devices that they had with PCs: build the software themselves and let partners build the hardware. Google took a similar strategy with Android but then reversed course when they acquired Motorola. Apple’s integrated strategy was once widely ridiculed as a repeat of their losing 1990′s desktop computer strategy, but is now being copied throughout the industry.

There is a trade off between integrated and non-integrated approaches to building devices. The non-integrated approach lowers costs, but adds friction between components that compromises performance. Consider this anecdote from Microsoft’s previous attempts to build tablets with hardware partners:

The H.P. tablet was thick, the Intel processor it used made the device hot, and the software and screen hardware did not work well together, causing delays whenever a user tried to perform a touch action on its screen. “It would be like driving a car, and the car not turning when you turn the wheel,” the former H.P. executive said.

– ”With Tablet, Microsoft Takes Aim at Hardware Missteps,” New York Times

What is the difference between mobile devices today where the integrated approach is winning and desktops PCs in, say, 1995, when the non-integrated approach dominated? The best way to understand the difference is through the lens of Clay Christensen’s disruptive technology theory*. When a new category of device first launches, it is usually not “good enough” for most customers. Chistensen illustrates this with a famous graph:

According to Christensen, technology gets better at a faster rate than customers’ demands on technology do (in the graph, the black line goes up faster than the other lines). Eventually, new device categories become “good enough” (the black line crosses the purple/blue lines), and customers become unwilling to pay significantly higher prices for improved versions of the device. At this point it doesn’t make sense for manufacturers to invest in greater performance if customers won’t reward that investment. Instead, manufacturers should spend the “performance surplus” on making devices less expensive. The best way to do this is to let different companies produce the core software and hardware components, i.e. to switch from an integrated to non-integrated approach.

If you believe Christensen’s theory (and most senior people at large technology companies do), the interesting question now is: when will smartphones and tablets be “good enough” (respectively) for non-integrated to beat integrated approaches? My guess is it will be at least 5-10 years before customers are no longer willing to pay significantly more for faster bandwidth, more features, longer battery life, increased storage, faster processors, etc. But no one really knows.

It isn’t hard to see how Google, Microsoft and pretty much everyone but Apple missed the key difference between PCs and the new generation of mobile devices. Christensen himself missed it:

Christensen’s most embarassing prediction was that the iPhone would not succeed. Being a low-end guy, Christensen saw it as a fancy cellphone; it was only later that he saw it also being disruptive to laptops.

– When Giants Fail: What Business has learned from Clayton Christensen, The New Yorker. [paywall]

Seen as high-end smartphones, iPhones were “sustaining” innovations (above the blue line) that would only appeal to the highest end of the market. Seen as low-end laptops, iPhones were disruptive innovations that would eventually subsume the PC business. With support from the iPad, they seem to be doing exactly that.

* If you aren’t familiar with Clay Christensen, this talk is a great way to learn about his theories.

The experience economy

Before World War 2, the middle-class in the developed world struggled to afford basic needs. In the post-war boom, standards of living rose dramatically, and people consumed far beyond what they needed. It was the age of conspicuous consumption: a race to own bigger cars and houses, and accumulate more stuff. The mean income in the developed world became sufficient to provide for a comfortable life.

Today, people increasingly realize they own more than enough stuff, and don’t want to pay for feature-rich versions of that stuff. Four blades in your razors are enough. In the language of Clay Christensen’s disruptive innovation framework, the product economy overshot the mass market’s needs.

An economy of experiences is emerging in its place. Experiences make people happier than products (a fact that scientific studies support). The popularity of experiences like music concerts has skyrocketed compared to corresponding products like music recordings. Apple, the most valuable company in the world, maniacally focuses on product experiences, down to minute details like the experience of unboxing an iPhone. Customers want to know where their food and clothes come from, so they can understand the experiences surrounding them. The emphasis on experiences also helps explain other large trends like the migration to cities. Cities have always offered the trade-off of fewer goods and less space in exchange for better experiences.

The trend toward experiences is important for technology startups. The era of competing over technical specifications is over. Users want better experiences from devices, applications, websites, and the offline services they enable. It is no coincidence that interaction design is replacing technical prowess as the primary competency at startups. People who create great experiences will be the most valuable to startups, and startups that create great experiences will be the most valuable to users.


Seth Godin on “organizational momentum” acquisitions

Seth Godin left an insightful comment on my post yesterday (“Three types of acquisitions“) describing a type of technology acquisition you might call an “organization momentum” acquisition:

I think the most common form of tech acquisition is a variant of the [business acquisition], in which the acquirer wants to inject forward motion into the organization. It’s far more difficult for a public company to rally around a launch into what might seem like a small sector… it just doesn’t seem worthy of the biggest brains and bravest folks, so it gets shunted aside.

On the other hand, once a smart tech company acquires a smaller company with momentum, it gives the company permission to drive, perfect, polish and grow that business. I’d argue that this what actually happened with YouTube.

The logic underlying organizational momentum acquisitions can be found in Clay Christensen’s disruptive technology theory. Smart CEOs of large companies realize how hard it is to shift internal momentum away from developing sustaining technologies. As a way to avoid this trap, Christensen recommends that large companies set up internal startups that are as organizationally separate as possible. But, as Seth points out, acquiring startups with momentum is another way to get the same result.



The next big thing will start out looking like a toy

One of the amazing things about the internet economy is how different the list of top internet properties today looks from the list ten years ago.  It wasn’t as if those former top companies were complacent – most of them acquired and built products like crazy to avoid being displaced.

The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a “toy.”  This is one of the main insights of Clay Christensen’s “disruptive technology” theory. This theory starts with the observation that technologies tend to get better at a faster rate than users’ needs increase. From this simple insight follows all kinds of interesting conclusions about how markets and products change over time.

Disruptive technologies are dismissed as toys because when they are first launched they “undershoot” user needs. The first telephone could only carry voices a mile or two. The leading telco of the time, Western Union, passed on acquiring the phone because they didn’t see how it could possibly be useful to businesses and railroads – their primary customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve (technology adoption is usually non-linear due to so-called complementary network effects). The same was true of how mainframe companies viewed the PC (microcomputer), and how modern telecom companies viewed Skype. (Christensen has many more examples in his books).

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 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.

Social software is an interesting special case where the strongest forces of improvement are users’ actions. As Clay Shirky explains in his latest book, Wikipedia is literally a process – every day it is edited by spammers, vandals, wackos etc., yet every day the good guys make it better at a faster rate. If you had gone back to 2001 and analyzed Wikipedia as a static product it would have looked very much like a toy. The reason Wikipedia works so brilliantly are subtle design features that sculpt the torrent of user edits such that they yield a net improvement over time. Since users’ needs for encyclopedic information remains relatively steady, as long as Wikipedia got steadily better, it would eventually meet and surpass user needs.

A product doesn’t have to be disruptive to be valuable. There are plenty of products that are useful from day one and continue being useful long term. These are what Christensen calls sustaining technologies. When startups build useful sustaining technologies, they are often quickly acquired or copied by incumbents. If your timing and execution is right, you can create a very successful business on the back of a sustaining technology.

But startups with sustaining technologies are very unlikely to be the new ones we see on top lists in 2020. Those will be disruptive technologies – the ones that sneak by because people dismiss them as toys.