Chao Lam

Working on the next small things …

How has Apple avoided the Innovator’s Dilemma?

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I had the privilege of attending Asymco’s recent workshop in LA last week. It was sheer intellectual joy and mental ping-pong for over 90 minutes.

The workshop got me thinking about a fundamental question about Apple. How has it avoided the Clayton Christensen’s Innovator’s Dilemma? I’m not thinking about the iPhone or the iPad which are relatively recent, but the iPod, which is over 10 years ago and we probably have the right perspective to analyze it retrospectively.

As recently as 2006, Christensen stated in pretty blunt terms (for an academic!) in a BusinessWeek interview that the iPod would succumb to the Innovator’s Dilemma, and I quote:

Apple is doing phenomenally well these days. It seems it’s doing a textbook job of maintaining huge market share in digital music players, long after most experts thought that share would erode. And it’s doing so with the same proprietary strategy that many thought would never stand up to an onslaught from the likes of Microsoft (MSFT), Wal-Mart (WMT), and Yahoo! (YHOO). Can Apple keep it up?

I don’t think so. Look at any industry — not just computers and MP3 players. You also see it in aircrafts and software, and medical devices, and over and over. During the early stages of an industry, when the functionality and reliability of a product isn’t yet adequate to meet customer’s needs, a proprietary solution is almost always the right solution — because it allows you to knit all the pieces together in an optimized way.

But once the technology matures and becomes good enough, industry standards emerge. That leads to the standardization of interfaces, which lets companies specialize on pieces of the overall system, and the product becomes modular. At that point, the competitive advantage of the early leader dissipates, and the ability to make money migrates to whoever controls the performance-defining subsystem.

With the hindsight of history, it’s clear that Christensen was wrong, and Apple has somehow skirted around this famous dilemma. How did it do it? I think that’s a very interesting question that has even confounded the founder of modern disruption theory!

Horace Dediu’s casual answer at the workshop was that standards and horizontal integration take time to develop to be “good-enough” competitively with the vertically integrated iPod, but I believe he thought I was referring to the iPhone, which is certainly more recent. For the iPod, the confounding thing is there have already been industry standards in place even before the iPod e.g. mp3 format, the standard headphone jack, and standard electronic chips to convert mp3 to analog signals. These were available even before the iPod existed, and have certainly become much better in the last ten years. Why then has Apple been able to maintain WinTel-like marketshare for the iPod even today?

In terms of purely functional (i.e. non-branding or emotional/status) benefits, the unique thing that Apple brought with the iPod was of course the clickwheel. And it’s true, I have not seen a competitor with as good a clickwheel as Apple’s, and perhaps the clickwheel “standard” is not good enough yet to be “horizontal-ize”. BUT, actually most iPods sold today (low-end: shuffle, nano; high-end: iPod touch) don’t have the clickwheel, so that point is now moot!

The low-end mp3 player market is especially a mystery to me. How is Apple able to maintain lion share of this multi-billion dollar market by providing a completely vertical solution?

OTOH, The high-end market is actually the more interesting question. Essentially, Apple made the iPod into a software App on the iPod Touch (and iPhone/iPad). How did they do this? What are the essential steps and lessons to draw from? Is Apple applying these same techniques to the iPhone and iPad?

I have some confused/jumbled thoughts on it (iTunes store, appification, re-architecting the value chain/ecosystem) that I’ll try to write up in a future post, but I’m really wishing/hoping that Horace Dediu will address these questions with his signature insightful analysis 🙂

Written by Pseudonymous

March 21, 2012 at 6:05 pm

Posted in Uncategorized

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