The Fall of Facebook (and other giants): Disruption in Digital Media

(also featured at the Online Economy Class Blog here)

Clayton Christensen, the Robert and Jane Cizik Professor of Business Administration at Harvard Business School, describes in his oft discussed theory on disruptive innovation a cycle within businesses that causes incumbents within an industry to continually pursue the creation of higher performance products.  The idea is that incumbents generally focus their efforts on the high-end of the market where margins are the greatest.  They continue to pursue innovations that incrementally improve their product, “sustaining innovations” in the rhetoric of the theory, in order to satisfy their highest-end customers.  In this process, they create a situation where the low end of their market is highly over served.  This situation allows new entrants to compete for low-end customers, who do not require the highest performance, on the basis of convenience and price.   The incumbents see this competition in their lowest margin business as little threat to their core, which is the high performance, high margin segment.  As the disruptive entrant improves its product offering, the incumbent will pull out of the low end to focus even more on the high end.  This provides the new entrant greater market share, greater scale, and more opportunities to improve which eventually leads them to the next level of customers/market.  The rate of improvement for these disruptive companies is far greater than the incumbents allowing them to overtake the incumbent in the long run.

I believe we can apply this theory to identify how Facebook and other digital giants may falter if not careful.  With consumer internet businesses especially, I believe alongside the traditional pursuit of larger margins there is a different type of capital that these companies obsess over.  Credibility capital seems to be a huge driver for sustaining innovations at these digital media companies.  Because most credibility in the tech world comes from early adopters, Facebook feels obligated to continually add cutting edge features to capture this credibility.  In addition, early adopters are the most frequent users of tech services which, in pageview/advertising driven businesses equates, to being the greatest margin producing users in the traditional sense.  The pursuit of the cutting edge satisfies their most discerning and high-touch users but produces a performance surplus at the low end of their customer base.  This over serving is most obvious during the extreme customer backlash that Facebook experiences after any redesign or new feature release.  The over served portion of their customer base does not need more features and would rather maintain a cleaner, simpler experience.

This is exactly where I think Facebook and other major digital media products will have the most likelihood of being challenged.  Potential competitors cannot immediately produce a more feature filled product.  They can, however, produce a simpler, more streamlined, more narrowly focused product that serves the bottom of the market by competing on convenience and ease of use.  Once they are able to get this foothold, they will be able to quickly pick up speed and innovate more nimbly than the incumbents. Eventually, this ends with the challenger overtaking the incumbents unless they are taken out in a defensive acquisition.

In future posts, I will identify startups with the potential to disrupt the current kings of the internet.  Until then, let me know what you think!

Tags: Administration of business, Clayton M. Christensen, competition, Customer, digital media, disruption, Disruptive technology, facebook, harvard business school, Incumbent, Innovation, strategy