STAY AHEAD OF THE GAME
Market disruption is not a new development but the rapid pace of technological advancement means that it is becoming an ever-more prevalent possibility. Large corporations such as Apple and Netflix, which are considered market innovators, are also the vanguard for creating technology that is disrupting not only competitors’ pre-existing markets, but also their own considerable profit kingdom. In a sense, market disruption has become a nearly essential way of continuing to adapt and build a society that is growing more and more technologically connected by the day.
What is market disruption?
In plain terms, market disruption (as its name implies) is the creation of an innovative experience or product that changes an existing market, or leads to its destruction. Partially, this is due to changing societal factors: as society connects itself to technological advancement, companies need to innovate in order to keep up. Companies that fail to do so will no longer be capable of matching the march of progress.
The term was first used by Professor Clay Christensen, from Harvard Business School, and changed the way that people thought about innovation-driven growth. Usually, disruptive players enter the market in small numbers, and build a sort of ‘cult following’ that only gets more popular gradually. While initially the innovation is considered lacking by the larger market players, it serves the customers whose needs are basic and lowend, and builds a greater following gradually.
Momentarily, however, when the innovation appears in the market it is not considered a threat by other market leaders: the new technology or service being promised is too immature to pose a threat and market leaders will remain confident that what they offer their clients is superior to the infant innovation. Gradually, this innovation grows to such a stage that it can offer the same level of service as up-market leaders, and then begins the process of disassembling the existing market leader.
…MARKET DISRUPTION (AS ITS NAME IMPLIES) IS THE CREATION OF AN INNOVATIVE EXPERIENCE OR PRODUCT THAT CHANGES AN EXISTING MARKET, OR LEADS TO ITS DESTRUCTION…
An easy example is the disappearance of a big chain DVD rental stores such as Blockbuster. Where there were once over 9,000 stores spread throughout the United States, there will only be one in 2019, which will close very soon. Streaming services such as Netflix, Amazon, and Hulu took what was already a practice — the method of watching videos or DVDs in your own home — and removed the hassle of going out, driving to a location with a select amount of purchase items available, renting the item, and then having to remember to return it before the rental charges start increasing. By removing the middle-man, streaming services undercut the Blockbuster stores.
Market disruption as progress
Apple launched its Apple Pay service in 2014 to act as a faster and more secure way of paying online, purportedly to replace the chip-and-pin or credit card methods. Furthermore, it didn’t need a dedicated point-of-sale terminal, but would work with any contactless point-of-sale device and any merchant that accepted contactless point-ofsale transactions.
In 2014, the contactless credit card hadn’t quite caught on, and the convenience offered by Apple Pay caught on quickly. Countries got Apple Pay at different points in time, but the fact that it was a safe and quick way of paying for goods and services online without triggering hidden charges proved popular with consumers.
Additionally, Apple Pay also offered their service with the same level of security as their two-factor identification, which meant that it was difficult to hack or defraud; considering that 2014 was the year when three major companies were hacked, the appeal of an ‘un-hackable’ method of online purchasing was undeniable. The ease of applying for an Apple Pay account was also a considerable incentive: some banks have strict guidelines on who can apply and be a holder of a credit card, which can put off consumers who don’t want to be tied to the bank’s structure.
However, Apple Pay’s progression as an innovator is limited: its profit is directly tied into the functionality, and while it was an innovative process in 2014, the ensuing five years have led multiple companies to bring out their own form of secure contactless payment.
Apple Pay has collaborated with banks to keep itself relevant, and exhibits similar capabilities as other virtual banks such as Revolut: its benefits are mostly anchored in the fact that Apple Pay is known to be very secure. This could explain its long-term popularity.
Furthermore, Apple has also introduced its Apple Card, which will be available in summer. Apple Card, the latest extension to Apple Pay, is a titanium card designed with Apple’s trademark minimalism which you control through the iPhone’s Wallet app. It allows you to keep track of your spending with more accuracy and instantly rewards you with ‘daily cash’ for every purchase you make. This will probably convince a lot of people to switch to Apple Card, thanks to its benefits over traditional credit cards, such as no fees and the ‘daily cash’ reward system.
Apple Pay is also keeping itself relevant by a slow roll-out. Only certain countries have Apple Pay available to them, and each year, the number of countries increases. As new users are introduced to Apple Pay, their revenue climbs; however, it could yet reach a point where Apple Pay can no longer enter new countries, or innovate, as the future for the innovation of virtual payment could well outweigh its cost.
That said, Apple Pay has increased its parent company’s profit margins substantially: in 2018, Apple Pay transactions accounted for a 27% increase in revenue in September. Figures are predicted to keep rising.
Market disruption as reduction of profit
Netflix has been around since 1997, and has taken on multiple forms. The most ubiquitous and well-known one is today’s Netflix streaming service, which offers instant television and film-viewing options for people subscribed to its content service. It is widely considered as one of the industry’s most disruptive innovations. However, Netflix’s market disruption has not only cut into the profits of other market competitors, but also its own.
The first reiteration of Netflix wanted to be an e-commerce site like Amazon, but for videos. VHS tapes were too bulky and expensive to ship, and the development of DVD technology seemed to be the answer. They tested out shipping DVDs to addresses to see the viability of the exercise, and the success of that experiment lead to Netflix opening up as an online DVD rental store. It used Blockbuster’s pay-per-rent concept and similar rates to start off with, however they quickly changed over to the format that Netflix is best known for: its monthly subscription service, with unlimited rentals and no risk of due dates or shipping and handling fees.
At the time, Blockbuster was still Netflix’s major competitors, and the company was struggling to turn a profit when it mostly relied on the US Postal Service to deliver its products. Blockbuster made an offer to purchase Netflix, and the company resisted, remaining until 2007 as a relatively unknown enterprise.
By 2007, data speeds and bandwidth costs had improved sufficiently that Netflix made the move to start offering movies online. Consumers could purchase a Netflix box that could download movies overnight and leave them available for consumers to watch the day after; however, once noticing that YouTube and other streaming services such as Weibo were immensely popular without the high-definition capabilities, the idea of marketing a software device was set aside; instead, people could purchase an unlimited streaming package that would give them immediate access to movies and television series; they just needed the bandwidth to support it.
At the time, Netflix was still selling DVDs. Their online rental rates witnessed a drop between 2006 and 2011, but Netflix had started to move away from the DVD market and was devoting more of its time and profits to streaming services.
Today, Netflix no longer sells DVDs, and it is widely considered one of the major death knells for the video rental industry, and a main disruptor of the video rental market, which used to net some $16 billion, a revenue that Netflix now makes on its own. Furthermore, Netflix has now extended its reach to content creation, changing the preconceptions over the limitations of content providers. Several of the Netflix originals available on the platform have had critical acclaim, and since its first original content debut in 2013, Netflix has increased its original work database exponentially.
It is likely that the future of Netflix will involve Netflix streaming only self-made content — however, this is most likely going to be the future of streaming regardless. Following Disney’s decision to take away distribution rights for its movies and series in preparation for launching its own streaming service, Netflix is definitely preparing to future-proof its existence by heavily leaning on its revered original content. Netflix’s chief content officer, Ted Sarandos, has stated that the long-term future of Netflix will be exclusively original content, to protect itself in the likelihood that content providers keep their productions for themselves or start their own streaming services, like Disney.
Is market innovation worth the while?
The case of Netflix and its overnight boom is particularly telling of how the market is going to change and adapt in the coming years. As Christensen outlined, market disruptors are not an enemy to revenue, but a necessary way for the market to continue growing and adapting, developing new technologies to keep up with the plethora of advancements that are hitting society from every angle.
During Netflix’s initial rise, nobody considered that streaming services such as YouTube would become the worldwide phenomenon that it is today. It is certainly due in part to Netflix, having pioneered the movement of streaming directly into the comfort of our homes, and offering unlimited products for a flat rate, something that Blockbuster and other video rental companies could not support or match. And it’s something that Netflix’s DVD branch could not support either and thereby needed to be removed for the company to remain floating. It is likely that Netflix’s innovation was going to happen as a matter of course, the way people moved from paying for material goods with credit cards instead of cash, and now with online payments instead of credit cards, and that if Netflix hadn't made the move, some one else would have.
Market innovation is necessary. Companies are steadily seeking more ways to engage and undermine their activity, and to show their product as superior to their consumers. To fulfil the demands that are placed on them in a society that is increasingly interconnected, increasingly more a way of technological advancement, increasingly more aware of what goes on behind the scenes, market disruption needs to happen. Industries that refuse to modernise and move forward will go down the same path as Blockbuster: a steady decline of stores, until it vanishes from existence and becomes a footnote.
This has happened before: with cars, instead of carriages, flights instead of ships for travelling long distances, and with mobile phones instead of pay phones. It will continue to happen, and as it does, companies need to decide whether they will sacrifice some of their profits to disrupt the market, and hope for the best — such as Netflix did — or to innovate only slightly, to draw consumers away from the tried-and-tested methods of doing things, and take the profit for themselves, like Apple Pay.
The only thing that’s for sure about market disruption as it stands is that it will keep happening. M