Tuesday, June 16, 2009

Economics: Real Meaning of "Disruptive"

TORONTO, ONTARIO - Some weeks ago, Christian Science Monitor language columnist Ruth Walker explored the meaning of the term "disruptive" and its application to technology, going so far even as to wade into the argument between John C. Dvorak and Clayton Christensen about what constitutes a disruptive technology. (Anyone who has ever heard an argument with Dvorak on any topic knows that's pretty much a hopeless exercise--just listen to an episode of "This Week in Technology".) I think they all missed the point. The use of the term "disruptive" has only one real purpose in today's economy--to try to turn off all the economic rules.

I'm not saying that what Dvorak or Christensen would consider "disruptive technologies" have not existed, or won't exist in the future. Clearly, there have been technologies that create what can legitimately be called paradigmatic or disruptive change in the world, from the wheel to sliced bread to the Internet to more incremental things like color television, the personal computer, or the facsimile machine. Few would dispute their impact on society.

My point is that truly disruptive contributors usually don't go around touting "disruptive technology." They just take their technology and try to show how it can be used. Tim Berners-Lee was trying to figure out a better way to share information amongst scientists when he proposed the World Wide Web, not change the world. Steve Jobs--who has since taken to over-using the term "disruptive" (for reasons discussed below)--was trying to figure out a better way to listen to his music when his company came up with the iPod.

I've had the privilege in my life of working for a series of companies that were working with either genuinely disruptive technology or potentially disruptive technology, in areas from microfluidics to genetics to diagnostics. If there's one thing I've learned from these experiences, it's that people turn off their normal judgments once they see the "cool stuff" and see that it could potentially be disruptive. Suddenly, risks that make no business sense are taken, follow-on investments are made in companies that would have been considered failures in more mature fields, and delays and inefficiencies that would never be allowed in the product development processes for, say, a new consumer item are ignored or viewed as excusable. The big potential return from the hoped-for disruption outweighs all other consideration until, at some point, it finally becomes clear that the market for the technology just isn't as large as people thought. The technology may even work, but if the early adopters don't consider it the best thing since sliced bread (whether because someone else also has something like sliced bread, the toaster and sandwich haven't been thought of yet to use the sliced bread, or people just seem to be satisfied with tearing bread), the normal rules come into play. By those rules, it's obvious that development should stop--or at least radically change--and it does.

I'm clearly not the only one that has seen this effect. Entrepreneurs, and even mature companies like Apple, tout the products that they are working on as "more disruptive than iTunes" in an attempt to more easily access money or publicity (which leads to money, even if in the case of Apple it's mostly money that doesn't need to spent on advertising). It's hard to blame the companies for doing this, as it's pretty clear that it has been working.

Personally, I blame the investors that have poured their money into the "disruptive" companies. The average investor--even the exceptional one--isn't equipped to evaluate technology for its future impact. Probably only a handful of people actually are; I'm certainly not one of them. But, looking back at one of my former employers more than a few years ago, a number of signs were there that investment was not likely to pay off--staff scientists skeptical of the reliability of the technology, other companies reaching commercialization in similar markets, and a lack of a clear market to dominate. (I'll grant that the latter is a bit tricky, as the nature of disruptive technologies is that they create their own markets that didn't exist before--but they tend to at least displace or extend something that already exists, and if that something is not clear, that's a problem.) Yet, a second round of financing went through anyway at a significantly increased valuation of the company. The company lived on, but the fundamentals did not change, and those investors did not get their return.

So, when I hear the word "disruptive," I run--or at least start doing a lot of research to see how plausible it might be. That company is probably trying to avoid the normal rules and scrutiny. On the other hand, if a company spends most of its time talking about how its technology can be used and backing it up with a business plan that would pass muster internally at General Electric, well, that sounds interesting and potentially like fun due diligence.

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