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A Brief History of Disruptive Innovation, Part II

· August 27, 2013

This post is Part II of A Brief History of Disruptive Innovation. Part I can be found here.

Clayton Christensen, in “The Innovator’s Dilemma,” points to disruptive innovations in a wide variety of fields. As I described in A Brief History of Disruptive Innovation, Part I, power brokers across space and time resisted disruptive innovations — most of which are now ubiquitous. In the second half of the 1900s, a high-tech revolution took place, heralding a new wave of rapid disruptive innovations. This second post will focus on a key few innovations, namely in high-tech, and the ongoing controversy which continues to pervade disruptive technologies.

Mechanical Excavators

Prior to the mid 20th century, mechanical excavators had been dominated by a cable based digging system. However, when hydraulic excavators showed up in the 1950s, they disrupted the legacy firms that focused on cables. Initially, hydraulics, lacking the raw power of cables, inhabited an entirely different niche. For example, for smaller projects, like landscaping or drainage, cheaper hydraulic excavators took precedent over their cable counterparts, which dominated large building projects. As a result, the companies which had succeeded most dramatically with cable excavators were not interested in investing in their hydraulic counterparts, largely because their most lucrative customers were not interested in what the earlier hydraulic excavators were capable of. By the time the superior hydraulic excavators had moved up into the mainstream, the legacy companies had spent their resources adapting the technology to pre-existing customer demands and market conditions, as opposed to recognizing that hydraulics would change the nature of market demand. In that sense, there was not a clear pushback against hydraulics by the established industry; they simply ignored or tried to reinvent the technology (but not maliciously) to suit their customers.

Home Video and Cable

Many disruptive innovations are even more closely connected to consumers’ lives. Over the course of the last fifty years, the television industry has endured dramatic disruptive competition. Although cable TV was originally created for mountainous areas unable to receive a clear broadcast signal, its early potential was recognized by opponents and proponents alike. Although early judicial decisions favored cable, its adversaries in the broadcast sector, more adept at Washington maneuvering, successfully pushed to enact numerous regulations in the early 1970s which dramatically impeded cable’s growth. However, when the FCC began rolling back the most intensive regulations in the 1980s, cable began to expand rapidly and NAB leapt into full gear. In addition, an ad campaign, “Save Free TV,” launched to cast cable as infringing upon Americans’ rights to free television. NAB made the case to the FCC that the lack of regulations imposed upon cable TV had upset the power balance in the industry, and that cable was threatening traditional broadcasts’ ability to attract advertising. Eventually, Congress passed The Cable Television Consumer Protection Act of 1992, which imposed stricter regulations on cable network, compelling them to carry broadcast signals.

In the 1970s, Sony developed Betamax technology, which allowed users to record television onto cassettes. Companies such as Disney and Universal were amongst the first to become aware of the supposed threat posed to them by Betamax technology. Unauthorized distribution of video cassettes, Universal claimed, would have severe economic consequences for the entertainment industry. The establishment industry actors were aware that Congress was in the final stages of major copyright overhaul legislation, and would be unlikely to include sufficient new protection for the video industry. Still, they took the fight to DC. Industry lobbyist Jack Valenti famously said that “The VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.” Given the unlikelihood of a legislative breakthrough, Universal sued Sony for copyright infringement, claiming that the fact that Betamax technology even allowed for unlawful distribution rendered Sony liable for any abuse that its consumers may commit. Although a circuit court sided with the incumbent film industries, ordering Sony to pay damages, the Supreme Court reversed the decision, stating that the distribution of pre-recorded television for certain purposes constituted fair use, and that Betamax was not inherently in violation of copyright law. The “legal safe haven” created for cassette-based recording technology ultimately gave Hollywood the edge it needed to compete with home television, immensely benefiting both industries.

ReplayTV generated excitement when it was first unveiled at the Consumer Electronics Show in Las Vegas in 1999. The prospect of being able to fast forward through commercials, while enticing for couch potatoes, frightened a broadcasting industry heavily dependent on ad revenue. When ReplayTV announced that its newest models would ship with the capability to detect and fast forward through ads, as well as share recorded shows with friends over broadband, the major TV corporations banded together and took ReplayTV to court. The establishment entertainment industry, led by Paramount, accused ReplayTV of infringing on their copyrights and undermining the “lifeblood of the industry.” Ultimately, ReplayTV (which had since been purchased by SONICblue) had to file for bankruptcy amidst the legal fees it incurred. Later models of ReplayTV, now owned by a Japanese company, shipped without the file sharing and automatic ad skipping capabilities. TiVo, ReplayTV’s main competitor, has resisted adding similar features to its service amidst fears of invoking ire from certain major corporations.

Commercial-skipping remains one of the great controversies in today’s television industry. Just last February, CNET positively reviewed DISH network’s new DVR, the Hopper, which (gasp!) automatically fast-forwards through ads. CBS, CNET’s parent company, forbade CNET from awarding its “best of CES” award to the Hopper, due to ongoing litigation between CBS and DISH. FOX and NBC were quick to file their own complaints. DISH came out on top, with the judge citing the high-profile Cablevision case, and reaffirming that while certain customers make unauthorized copies; the platforms shouldn’t be punished.

Computer Hardware

Computers are the latest, and perhaps greatest, purveyors of disruption. IBM, with its monopoly on the mainframe computer, dominated the market during the mid to late twentieth century. Mainframes were large, difficult to operate, and far too expensive for individuals or small companies. While, at the time, most computers in the world were mainframes, smaller, affordable, personal computers became available to consumers in the 1970s. These “minicomputers” were cheaper and less powerful than mainframes. Initially, mainframe manufacturers saw no need to directly compete with personal computers. However, as technology evolved, minicomputers began catching up in speed and utility, and more and more businesses began utilizing them to handle their data. While minicomputers and their descendents, microprocessors, now constitute huge commercial and personal markets, the availability of mainframes are still stymied by IBM’s anticompetitive practices. Personal computers benefit from open systems; they are compatible with a wide range of components, software and operating systems. The same is still not true for the mainframe market — still largely the domain of IBM.

The Internet

While the sophistication and rate of technological progress has expanded exponentially, so too has the Internet fueled the greatest era yet of disruptive innovation. The tech boom coupled with the visible, exponential growth in technology has ensured that the stakes over the future of the industries involved remain as high as ever, as legacy firms move ever more aggressively to counter the perceived threats posed by the Internet economy. Blogs and Internet writing have disrupted traditional media, Wikipedia has heralded the end of Encyclopedia Britannica’s printed run, and more and more people are cutting their cable cords in favor of Internet streaming.

The music industry proves a compelling example of the Internet’s capacity for disruption. The Internet and more advanced computer technology has largely digitized the way music is consumed, much to the disdain of the traditional recording industry. When Diamond introduced the Rio, one of the first commercial, portable MP3 players, the music industry fired back with the full force of its legal team. The RIAA, representing the 5 biggest record labels, sued Diamond for copyright infringement citing a violation of the 1992 Audio Home Recording Act. The RIAA claimed that the device both easily allowed and actively encouraged users to procure music illegally via the Internet. Independent and digital distribution of music would make record labels less relevant players in the industry, which the RIAA obviously feared. Digital music players, now embedded in all types of consumer products, are descendants of the Rio player, which underscores the importance of rulings which encourage innovation, by not holding manufacturer’s responsible for how their products are used.

In Sum…

Historically, the trend is clear. From Roman emperors to Turkish czars, radio moguls to multinationals — incumbents take advantage of regulatory structures to keep out potentially disruptive rivals. New inventions, when they do emerge, are cheaper, more-consumer friendly and often springboard other innovations. In that light, regulators, from lawmakers to the FCC and the Justice Department, ought to recognize the advantages disruptive technologies confer on the economy, and adapt accordingly. While the rate of technological expansion sometimes raises challenges, the opportunities for economic expansion and furthering the public interest are immense.

Benjy Cannon is an intern at the Computer & Communications Industry Association. 

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.