Experimentation and Failure in Disruptive Innovation
Why is it that many technology companies today are constantly experimenting, pushing into and attempting to disrupt new industries? What drives firms to pursue, or abandon, these strategies? When examining the actions of a few technology companies such as Uber, Netflix, and Amazon, we can make key deductions that aid in answering those questions.
With respect to Uber, it seems that the company may be shifting its focus. Five months ago, Uber made the decision to end its self-driving trucking efforts. The company shut down its autonomous trucking program, began to re-evaluate its general strategy, and has since invested in other areas. Uber is reportedly shifting focus towards a range of transportation services aimed at shorter trips. This is consistent with Uber CEO Dara Khosrowshahi’s remarks earlier this year that “cars are to us what books are to Amazon.”
Delving deeper into Uber’s case, Uber’s exit from the autonomous trucking market has aided in its shift in focus towards shorter and greater amounts of trips through a wide range of transportation devices rather than longer travels. More specifically, in the last three months, Uber announced investments into electric scooters and bike-sharing services, drones, and its carefully monitored return to self-driving cars (not including delivery trucks). Uber failed to deny reports of its potential acquisition of electric scooter companies Bird or Lime. Uber also created a new rewards program last month, Uber Rewards. This is all in addition to Uber Eats, Uber Freight, and Uber’s normal ride booking and sharing efforts.
While Uber performed better this quarter than last quarter by ending their autonomous trucking efforts and shifting focus, generating $2.8 billion in revenue, it still reported a net loss of $891 million. Yet this is characteristic of the technology sector, which reinvests large amounts of revenue back into services while pursuing market-disrupting innovations.
Turning from Uber to Amazon and Netflix, we see further examples of experimentation and disruptive innovation in operation. Amazon’s net sales revenue for 2017 was $178 billion while its net income was only $3 billion. Similarly, Netflix’s annual revenue for 2017 was $11 billion while its net income was only $558 million. Both of these companies invest heavily year after year into developing their own content including TV shows and movies, and expanding their libraries and services. Both Netflix and Amazon have had failures as well, cancelling shows that were widely panned and did not give Netflix or Amazon expected returns. However, Netflix and Amazon are still showing signs of increasing the creation of their own original content.
As new streaming services from companies holding large amounts of media are coming into being now and in the near future, their content will likely be removed from Amazon and Netflix. Furthermore, some content owners that aren’t creating their own streaming services are raising the prices for licensing their content. To counteract this and continue their growth, both Netflix and Amazon are investing heavily back into their platforms, with an increasingly extensive library of original content to replace the loss of highly valued licensed content.
Additionally, Amazon is experimenting with its Amazon Go stores, a blend of its digital shopping services with a physical store to create its own supermarket. In an Amazon Go store, you scan your Amazon Go app when you enter the store. When you pull an item off the shelf, it’s added to your virtual cart, and if you place the item back on the shelf it’s removed from your virtual cart. You are only charged when you leave the store. Amazon aims to disrupt the market by creating a shopping experience without lines or waiting. Whether that will fail or succeed like Uber’s autonomous trucking or Netflix’s investments into its varied original content remains to be seen.
This process of experimentation is not native to the cases outlined above; iteration and experimentation is recurrent in technology companies and not all experiments succeed. However, while the technologies that these firms rest their efforts on may not succeed in the manner those firms were aiming for, that does not make their efforts a complete failure for the firm, the market, or consumers.
One example of this is cryptocurrency, built off the pillars of blockchain technology. While the digital currency industry sat at its highest a few months ago with Bitcoin valued at just under $20,000 and Ethereum around $1,420, their price has since dropped down quite far. This may be due to a number of factors, such as the initial luster of the technology wearing off, inability to apply the full functionality of the technology, limited use cases, or competing industries or interests being better. Nonetheless, the underlying technology, blockchain, is still extremely valuable. As DisCo has written before, while banks attacked the concept behind cryptocurrency (often slamming Bitcoin) they still invested in blockchain. Experimentation in a developing technology, cryptocurrency and blockchain, has not overthrown the financial system, yet this innovation did cause disruption and create net gain for the banking and cryptocurrency industries and consumers as a more secure means of holding and conveying data.
What lessons can we take from this? First, these cases highlight the process of experimentation, and sometimes failure, in disruptive innovation. Experimentation is key in innovation — some experiments turn out to be failures, but experiments and failures are both necessary to build to successes. Not all experiments undertaken by companies that are meant to be disruptive are successful but they are valuable nonetheless, and when looking back upon them, should not be seen as wholly mistaken endeavors. Second, companies in the technology industry are constantly pushing forward and testing innovative products or services, taking chances and risks to evolve, and learning from both failures and successes.