Disrupt This

Video is the New Audio: Disruption of the Camcorder Market

A conversation about what makes the Flip Video so cool is brewing over at The Anti-Marketer, so we wanted to take a quick diversion from evaluating the S&P/BusinessWeek Innovation List to run a Disruption Report Card on Flip, and get an objective grade to add to the convo. Although it has won rave reviews from many sources and is undoubtedly cool and hip, we want to caution that doesn't make it necessarily disruptive or market changing. Still, if ever there was an obvious choice for disruption . . .

Key Features

The Flip Video is the ultimate in simplicity. It is a camcorder reduced to the absolute bare essentials. On, off. Start, stop. Record + store video. Play. And, most importantly, effortless upload to YouTube. It has a relatively cheap, but decent "point-and-shoot" quality lens, no optical zoom, no flip out screen, no hi-def, no myriad editing and special effects features. Basically, in every way it is a low-end camcorder.

Low-end, but popular. Because it addresses a couple of key issues that most of us have with traditional camcorders.

It is tiny and light, which means you can slip it into a pocket or purse and take it with you anywhere effortlessly. It is painfully simple to use. Anyone, from little kids to your grandparents who still haven't set the clock on their VCR can use it. Just turn it on, point at what you want to record, and push the big red button to capture. And, when you're done, it has a built-in USB port that flips out and plugs directly in to your PC, with software to make quick edits or directly upload to YouTube built right in to the camera. As brainless as video can be. And, did I say CHEAP?

The list price for the Flip starts at $119.95, but you can easily find it online for around $100. Compared with an average price of about $350 for a regular camcorder and a few hundred more for high def. And, although you could edit the video files with more sophisticated software on your PC, that $100 includes all the software you need for quick edits and uploading (video editing software can easily cost almost $100!). So cheap that even if you have an expensive, fully-loaded hi-def camera, you could easily see yourself buying one or two of these -- heck, why not three or four, and give one to everyone in your family? Then you wouldn't have to worry about missing moments because you don't have your luggable with you. Just like most of us who have expensive digital SLR cameras also have at least one or two cheap "lipstick cameras" that we keep in our pockets and purses.

Disruption Report Card

No point in hiding the grade until the end. This one is pretty obvious -- so much so that you'd almost guess it was made to be disruptive. The Flip Video ranks as an A+.

Strongest Positives Affecting Grade

• targets segments unattractive (initially) to incumbents
• targets non-consumption (users who previously lacked money or skill to use mainstream products)
• "good enough" for low-end consumers, and all those places where you'd never have a full-featured camcorder
• significant cost advantage
• targets under-served needs
• simpler and more convenient to use

Negatives

Surprisingly from a disruption perspective, there are none. Of 37 attributes that the Report Card measures, only a couple are neutral or not applicable. On every other dimension, the Fip Video scores positively. Hence the remark -- you'd think it was designed to be disruptive.

Special Notes

The manufacturer of the Fip Video, Pure Digital Technologies, is still privately held, but has a sterling list of VCs and major capital funding behind it, including Heights Capital Management, Sequoia Capital, Benchmark Capital, Focus Ventures, Crescendo Ventures, Steamboat Ventures, VantagePoint Venture Partners, and Samsung Ventures. AllianceBernstein L.P. and Morgan Stanley Principal Investments (MSPI). Inc. provided $40M in additional investment at the introduction of the Flip Video to market to assist with growth and product distribution.

Given the explosive growth and popularity of the Flip Video cameras (over 1 million sold in first year, and capture of 13% of camcorder market share), ordinarily we'd expect a forthcoming IPO, but with current economic conditions, that's hard to predict. Nonetheless, we'd expect Pure Digital to be near the front of the line to go public once market liquidity and positive buying sentiment returns.

Related Reviews and Articles

• I Love My Flip blog
• Flip Video 'the future of journalism': UK Chief Blasts Sony, Hints at HD
• The Cool List blog
• Learning in Hand blog
• Flip Passes the 1 Million-Mark, Ultra Now No. 1

How Disruptive is the S&P/BusinessWeek Innovation Index?

It may seem odd in a period when the stock markets are gyrating wildly and people are running scared, panicking about their 401(k)s, possibility of losing their job, companies failing, the banking system apparently on the brink, to want to talk about innovation and disruption of a different kind. However, I think this is exactly when disruptive innovation is most important.

Yes, a lot of people are going to be hurt by the current financial crisis. Yes, we're all going to be paying for the misdeeds of government bureaucrats, corrupt executives, negligent overseers, and tens of thousands of individuals who bought homes they couldn't afford and leveraged them beyond their value (even before the calamitous drop began), all on the belief that what goes up always goes up. The pain is going to last a long time as we rebuild confidence and fundamental value in institutions and systems that once seemed unshakeable and now seems unsalvageable.

The True Engine of Value and Growth

Credit and equity markets need to start functioning again, but make no mistake, they are not the engine of growth, and they will never pull us out of a crisis. The best they can do is stabilize, and restart the smooth flow of capital -- important and necessary, but not wealth building.

The only way out of this mess in the long term is through innovation, because innovation creates growth, creates new jobs, and builds competitive advantage and wealth where it didn't exist before. So, now more than ever, it's important to examine innovators, the nature of their innovations, the sustainability of their businesses and who is most likely to help us rebuild the foundations of our shattered economy.

To Disrupt, or Not to Disrupt, That is the Question

But the nature of the innovation is itself important. Disruptive Innovation matters because it is more about inherent value than about roller coaster rides, because disruption creates real growth, and that is the truest source of value for investing. Disruption doesn't depend on demographic trends, artificial supply shortages, arbitrage, political interventions and subsidies, technical trends, unemployment figures or even weather patterns. With the exception of demographics, which are fairly consistent and predictable, investing based on any of these other things is really just gambling by another name, and after the nonsense in the mortgage markets which has caused the crash we are now experiencing, you'd think most rational investors would have had enough of that.

So, I'm going to continue on with my plan for this blog to keep focused on disruptive innovation, the value it creates, and the business strategies that enable it. The next series of articles was always intended to examine, evaluate and score disruptors using my Disruption Report Card. Given the current financial crisis, I've decided to start with a set of well-known companies that most agree are among the most innovative. Namely, those companies that comprise the S&P/BusinessWeek Innovation Index.

Those companies, and the stock price at market close yesterday are listed below.

Company	Symbol	Exchange	10/07 Close	P/E Ratio
3M Co	MMM	NYSE	63.00	11.55
Amazon.com Inc	AMZN	NASDAQ	53.82	42.56
Apple Inc	AAPL	NASDAQ	89.16	17.43
AT&T Inc	T	NYSE	26.86	11.41
Bayerische Motoren Werke AG	BMWG.F	Frankfurt	24.34	NA
Boeing Co	BA	NYSE	51.29	8.82
General Electric Co	GE	NYSE	20.30	9.44
General Motors Corp	GM	NYSE	7.56	NA
Goldman Sachs Inc	GS	NYSE	115.00	6.91
Google Inc	GOOG	NASDAQ	346.01	22.73
Hewlett-Packard Co	HPQ	NYSE	39.68	12.29
Honda Motor Co Ltd	HMC	NYSE	24.11	14.35
International Business Machines Corp	IBM	NYSE	95.65	11.79
Microsoft Corp	MSFT	NASDAQ	24.91	12.44
Nintendo Co Ltd Spons	NTDOY	OTC	40.35	NA
Nokia Oyj	NOK	NYSE	16.70	8.39
Proctor & Gamble Co	PG	NYSE	68.58	18.2
Reliance Industries Ltd	RELI.BO	Bombay	1675.40	NA
Research in Motion Ltd	RIMM	NASDAQ	59.66	17.96
Samsung Electronics Co Ltd	SAME_PQ.F	Frankfurt	90.93	NA
Sony Corp	SNE	NYSE	26.46	7.93
Target Corp	TGT	NYSE	42.35	11.89
Toyota Motor Corp	TM	NYSE	73.38	6.91
Wal-Mart Stores Inc	WMT	NYSE	57.90	16.32
Walt Disney Co	DIS	NYSE	26.57	11.52

Beginning with the next post, I'll start going through this list in alphabetical order. Since this financial crisis has us mostly concerned with American innovation and fixing our own economy first (hard to worry about anyone else's when yours is badly broken), I will skip over those companies that are only sold on foreign exchanges -- i.e. I'll only be discussing companies on either the NYSE or NASDAQ.

I will also note that, for the record, and at the risk of overstating the obvious, these are extraordinary times. We don't know if the worst is yet to come, or if it has already passed. In ordinary times, we wouldn't worry about disruptive innovators like Google (OK, I spoiled at least one surprise) losing 40% of their value in a few weeks or months. That the most important company of the internet age has dropped to a P/E ratio that would qualify it as merely a little above ordinary in ordinary times is an indicator that no matter what the future performance and innovation strengths of these companies, virtually all are vulnerable to dropping further, and virtually all will eventually rebound after reaching bottom and show above average growth in valuation for a while.

All except perhaps GM, which was on the ropes before the financial crisis, and seems unlikely to survive it, innovative or not (editorial comment: I didn't create this list, I'm simply going to be analyzing it. I'm really not sure why GM is on it.) Did I let another surprise slip out? My guess is the only ones surprised are those who put GM on the list of top innovators to begin with.

Somewhere in the middle of this, I'll take a post or two to talk about what we should expect of disruptive innovators in normal times, and what the significance for investors is now.

Disruptive Confusion

A pet peeve of mine is how many people misuse the term Disruptive Innovation. Many of those who do seem not to have read Christensen's books or if they did, had no idea about the significance of the theory and its application to business (i.e. why the definition matters). Or maybe they skimmed and didn't get what the idea was about because of preconceived notions about innovation. Maybe they heard a friend who is usually in the know describe something as disruptive, or they were in a meeting where a product manager proclaimed their product disruptive. Or they read some bad review of the Innovator's Dilemma.

Whatever the issue, they don't get it, and dilute the meaning with their misapplication of the term. Some think all innovation is disruptive by definition (a truly simplistic and moronic viewpoint). Some believe it has to be breakthrough to be disruptive. Some think it only applies to technology. Some use it as a marketing adjective to imply that their product is "better" or "more advanced". Others believe that "disruptive innovation" is a buzz phrase without meaning. Others just think all innovation is over-rated.

All are wrong.

First Principles

When I encounter confusion like this, I find it useful to return to first principles. Without regard to Christensen's theories (we'll consider that in a minute), what do the words mean?

Innovation:  something novel; an invention; any improvement to an existing process, good, or service; the act of introducing something new

The thesaurus lists several alternatives including: change, departure, invention, introduction, or novelty (no, they aren't precise definitions, but the sum of synonyms usually captures the general meaning). There is nothing in any of this that implies an invention will disrupt markets or other products. In fact, there is nothing in the definition of innovation that implies any market success, or that the innovation is even useful. Innovation doesn't have to be breakthrough or significant -- it can be very minor. It could just be a different means of manufacture or distribution, and nothing to do with the product at all. Many innovations never even make it to market, so how could they disrupt anything?

Disruptive: characterized by unrest or disorder or insubordination; causing disruption or unrest

and Disruption means: the act of breaking regular flow or continuity of something; disturbance; a disorderly outburst or tumult; dislocation, especially an event resulting in dislocation or discontinuity

Clearly to be disruptive, something has to disrupt. So, let's combine the words and discern what they mean together.  Certainly a disruptive innovation should minimally cause a market disturbance. Or market disorder or discontinuity in the success and growth of market incumbents. One would expect a disruptive innovation to be something new that shakes up a market, that is threatening to the existing order of things, that changes the status quo.

Another way to think about this is that to be disruptive, a change has to have more than the potential to disrupt, it needs to succeed at disrupting the market or the incumbent products, or obsoleting a product category altogether.

A disruptive innovation then could be a breakthrough, but it doesn't need to be. It could be an invention like none that has come before, or it could be a small change that makes an existing product good enough to compete in a new product space that it wasn't previously targeted at, and forever change the basis of competition. It does not need to be better than existing products or services, and in fact, often enters a market as an inferior substitute to the dominant market players (at least on the criteria that the category was previously measured on). It could be a change in business model which alters the economic attractiveness of alternative ways of doing business.

How Christensen Intended the Term "Disruptive Innovation" to be Applied

Not surprisingly, just by parsing the definitions of "disruptive" and "innovation" accurately, we come up with something very close to what Clayton Christensen meant when he identified a type of product, service, business model, or other process which over time, completely displaces the incumbent market leaders. It does so because it enjoys an order-of-magnitude cost advantage, or because it changes the ease-of-use or convenience attributes so significantly that it enables a lower level of expertise to successfully use a product, or enables the product to be used away from a centralized inconvenient location and be distributed out to the consumer's location.

Significantly, disruption results from business strategy, even if the innovation's disruptiveness wasn't planned but happened by accident. In other words, it isn't enough to have a product with disruptive potential -- the majority of those fail in the market.

It must also be properly positioned, targeted at appropriate segments, launched properly, priced accordingly, distributed effectively, and even marketing communications programs have to hit the right note and use appropriate tactics for a product to disrupt a market. If a company has a direct sales force, it helps that sales policies and tactics are targeted for disruption.

This fact is missed by many would-be entrepreneurs who believe that if they build a better mousetrap, the world will beat a path to their door. But, disruption doesn't happen that way, except in very rare incidences. And, we aren't interested in accidents when we talk about disruptive innovation, because the idea is to plan for it, and have a reliable, repeatable set of processes based on solid theory that we can use to create disruption.

Why Do We Care?

Disruption is about economic growth. About creation of shareholder value. In fact, almost all real growth comes from disruption -- a fact that I will illustrate in an upcoming post. For now, I will simply refer to a graph that resulted from scoring companies as disruptive or not based on sorting through and analyzing the key attributes that predict market disruption. We used a simple technique of assessing a disruption score based on the current product and market attributes (current at the time of scoring), and then comparing market cap one year later with the valuation on the date of the original scoring.

Significantly, all the disruptors had a minimum gain in shareholder value of over 100% in the course of that year, and all the non-disruptors had a minimum loss in value of over 40%. No exceptions.  Black and white results. (I'll be scoring and reporting on many innovators and their "potentially" disruptive innovations in this blog).

It Matters

So clearly, disruption matters. Without it, everything eventually slides into "commodity" status, with minimal to no differentiation. It's what drives the stock market and the reason investors place bets on startups. It creates jobs. It builds wealth. It is the holy grail of business.

So please, get the definition right, and understand what it means if you're going to use the term. It matters.

More Disruption

This is the beginning of a new business and investment-focused blog on disruptive innovation. My aim is to deliver insights about market disruption, the study of disruptive innovation, disruptive business strategy, and to show how disruption delivers shareholder value. It is designed to complement my long established Anti-Marketer blog and to be an additional source of information for understanding the mechanics of disruption for visitors to my company's website.

Why I Needed Another Blog

I've been struggling to stay focused at The Anti-Marketer blog. My goal for it was to talk about market disruption and the importance of marketing strategy in creating the necessary environment for a potentially disruption innovation to succeed. My objectives included looking at successful disruptors and marketers who completely missed the boat, dissecting their marketing strategy to hi-lite what works and what doesn't, and showing how disruptive marketing is the secret sauce that makes disruptive innovation work.

But there is another story that I needed to tell. While marketing strategy is a key component in delivering on the promise of disruption, it became increasingly apparent that I needed to discuss the connection to the business strategy and how disruption creates value. Without this, marketing disruptively is a concept without a raison d'etre. As a result, I felt it necessary to either write extraordinarily lengthy posts covering all aspects of the story, or not add content at all because of the time investment.

As I thought about it, it became obvious that I needed a place where I could look just at the businesses and technologies, score their strategy and whether or not they have disruptive potential, and analyze the business value that disruptors create, and in so doing, it would be easier to keep The Anti-Marketer focused on marketing, and create equally valuable material that didn't really have a place on a marketing-focused blog.

So, that's what I aim to do here. As well, I will occasionally write different parts of the same story on each blog as appropriate with pointers back and forth. I hope my readers find this new material useful and appreciate the increased focus this should bring to each of my blogs.