Disruption Is the New Normal

The Wall Street Journal

After Google Maps added navigation, the value of stand-alone GPS makers fell by as much as 85%.

 

By L. GORDON CROVITZ

Jan. 5, 2014 6:30 p.m. ET

On a trip over the holidays, my wife rolled her eyes when I realized we'd left the Garmin at home and said we'd have to get a GPS for the rental car. She pointed to the Google Maps app on her mobile phone and said: "I bet this works even better." It did. We benefited from the kind of technological disruption that is great for consumers, but brutal for businesses trying to survive rapid change and perhaps impossible for government regulators trying to keep up.

A generation ago, the Rand McNally atlas was the state of the art in navigation. Then Garmin, TomTom and other innovators developed satellite-based GPS devices. But barely a decade later, Google added constantly updated navigation to its maps and made them easily accessible as an app on mobile phones for the unbeatable price point of zero. The market value of stand-alone GPS makers fell as much as 85%.

A giant Google Maps marker sign stands on the Friedrichsplatz square in Kassel, Germany, 28 August 2013. European Pressphoto Agency

This is the radical new normal for business, according to authors Larry Downes and Paul Nunes. "Before the information age, conventional wisdom held that new markets were created from the top down," they write in their new book, "Big Bang Disruption." Analog-era business strategies have been disrupted. Business guru Michael Porter once told companies they could get competitive advantage if they picked one strategy among premium pricing, cost savings or focusing on market niches. In the 1990s, Clayton Christensen urged executives to overcome what he called the innovator's dilemma by moving fast once newcomers entered markets with lower-quality, lower-priced products.

But powerful new technologies like cloud computing and big data allow entrepreneurs to develop products and services that are "simultaneously better, cheaper, and more customized," Messrs. Downes and Nunes write. "This isn't disruptive innovation. It's devastating innovation."

Who would have thought that a mobile phone would challenge industries as varied as home phones, video cameras and flashlights? Digital alternatives undermined the business models for travel agents, restaurant guides and newspapers. Even disrupters rapidly get disrupted: Digital videogames decimated the pinball industry, but the market value of Zynga collapsed after consumers abandoned Farmville for the next new game.

In the 1930s, economist Ronald Coase identified high transaction costs as the reason companies had grown so large. They had to do much of their work internally because it was too expensive to contract out services and supplies. Today, Messrs. Downes and Nunes observe, "near-perfect market information has dramatically reduced transaction costs." Digital data and computer networks make it easier to find "just the right goods from just the right sellers at just the right time, place and price." Startups operate nimbly and cheaply.

Disruptive companies often don't even have strategies to enter the markets they end up dominating. Google's GPS-killer grew out of its maps product whose purpose is to gather up more information about its users so it can sell more search ads. Twitter's founders never set out to displace traditional media as a source of breaking news.

The biggest impact of this big bang of innovation over the next few years could be on regulated industries and government itself. Government involvement leads to what the authors call "Eroom's Law," which is Moore's Law backward: Instead of computing power doubling every 18 months, regulation makes innovation harder and slower.

"In heavily regulated industries," Messrs. Downes and Nunes write, "the cost and other limits imposed by regulation loom large in the design, testing and deployment of new innovations." The number of new drugs relative to research-and-development spending has declined steadily for 50 years.

The authors predict consumer demand will force changes in heavily regulated industries such as pharmaceuticals, energy and autos as well as for services like education, medicine and law. Many cities have given up on decades-old laws regulating taxis as Uber and other new mobile services enter the market—and their enthusiastic users show up at city council and public utility meetings to demand deregulation. Consumers are likewise pushing back against efforts to restrict the use of genetic-analysis kits.

This book demonstrates why antitrust laws also need to be rethought. Consumers often benefit when technology-led innovation leads to winner-takes-all markets. Companies that capture a large share of a market use online data about customers to make their products even better. That's why Google dominates search, Amazon dominates online retail, and Facebook dominates social media. But consumers move on when market leaders are in turn disrupted by new, unexpected innovation.

Washington keeps getting bigger and more complex—not smaller and simpler, as ObamaCare reminds us. So technology still has a long way to go to disrupt government the way it has disrupted business. Messrs. Downes and Nunes predict that "regulators will be left unable to justify limits that no longer have economic, social or political rationales. The devastation when it comes will be that much more dramatic."