There are three stages in the theory of disruptive innovation. Market disruption happens when
1) a cheaper, inferior product finds a niche market,
2) improves over time, and then
3) comes to dominate the mainstream.
Perhaps this can be merged with a model of the evolution of bold new products and technologies and the relationship between the corporation and the economic and political realms. A corporation that pioneers a revolutionary technology thereby establishes itself as a
a) monopoly upon emergence, but entersb) market competition as technical sophistication accrues, and comes under
c) state ownership as the technology becomes obsolete in the mainstream market but remains an essential service for disadvantaged communities.
A unified model would look like:
1) An inferior product or technology finds a niche market, but
2) it improves over time, and then
3) it comes to dominate the mainstream,
4) creating a temporary corporate monopoly, which is replaced by
5) open market competition as technical sophistication accrues, followed by
6) state ownership as the technology becomes obsolete in the mainstream market but remains an essential service for disadvantaged communities.
The corporate monopoly might not necessarily derive from disruptive innovation. There is also "sustaining innovation", in which a product or technology innovates but does not transform mainstream markets. This might sometimes involve monopoly. There are two forms of sustaining innovation:
1) "evolutionary sustaining innovation" that improves current products. This is innovation at the service of the status quo. An example of an evolutionary sustaining innovation might be the saddle and the stirrup in horseback riding, which made riding much easier. Also, innovation in Japan seems to follow the pattern of relentlessly modifying established technologies coupled with a seeming reluctance to introduce truly disruptive products. Perhaps there are dual objectives in the system of constant incremental improvements known as "kaizen": 1) to promote relentless evolutionary sustaining innovation so as to 2) forestall disruptive innovation. In such a context, a large conglomerate like Sony could maintain multiple monopolies. (One problem with a system that promotes constant tweaks of an established product is that the product ends up "steampunked" with futuristic features on an old-fashioned platform. For instance, the Japanese did not readily adopt smartphones because their older basic cellphones already had the advanced features that American could only get through smartphones.)
2) "revolutionary sustaining innovation" that introduces a revolutionary new product that nevertheless fails to sweep aside the old product. That is, it creates a new niche market without destroying the old market. An example of a revolutionary innovation would be the invention of the automobile, which was originally a luxury product for wealthy Europeans that did not widely affect the field of transportation. The first automaker was Mercedes-Benz in the 1880s, and Mercedes did establish somewhat of a monopoly in the niche of luxury auto making -- albeit without disrupting transportation in general. (Disruptive innovation happened when Henry Ford mass produced the simple, cheap Model T, which made horse-drawn carriages obsolete. Tesla is a bit like Mercedes struggling to be like Ford.)
Where is Netflix right now in this model of development?
A cursory glance suggests that everything is "onward and upward" for Netflix.
A cursory glance suggests that everything is "onward and upward" for Netflix.
https://www.bbc.com/news/
For some investors, Netflix is still in the lucrative early stages of monopoly in video streaming (stage 4). For others, Netflix is transitioning to open market competition against an ever-increasing slew of rivals (stage 5).
https://slate.com/business/
The question is whether Netflix can maintain subscriber growth. As long as it does, it can remain in the monopoly stage. To do so, Netflix needs to sustain a virtuous circle of increasing subscriptions that will encourage new investment which will in turn fund new content (which will attract more subscribers, etc.).
The article asserts that Netflix sustains growth by churning out merely adequate content that people will watch when there is nothing else on. However, Netflix fails to create the kind of shows like "The Sopranos" that are resounding cultural events. The article concludes that this will eventually be a problem for Netflix.
Contrary to that pessimistic forecast, in terms of disruptive innovation, mediocre content might not imply a fatal prognosis for Netflix. (Not yet, at least.)
For some investors, Netflix is still in the lucrative early stages of monopoly in video streaming (stage 4). For others, Netflix is transitioning to open market competition against an ever-increasing slew of rivals (stage 5).
https://slate.com/business/
Why is Netflix stock so volatile? The answer is that it’s very close to being a binary bet: Either the company will effectively replace television in hundreds of millions of households around the world, becoming the dominant media monopoly of the 21st century, or else it will go bust. What’s more, both of those outcomes are far too far in the future to be able to predict with any certainty: Every earnings report, every data point coming out of Netflix HQ, is entirely consistent with both stories.
The question is whether Netflix can maintain subscriber growth. As long as it does, it can remain in the monopoly stage. To do so, Netflix needs to sustain a virtuous circle of increasing subscriptions that will encourage new investment which will in turn fund new content (which will attract more subscribers, etc.).
The paramount importance of subscriber growth is explained in a fantastic piece by former Amazon Studios strategy head Matthew Ball, who is probably the most insightful Netflix analyst out there. Ball explains that, as far as Netflix CEO Reed Hastings is concerned, the company is still in the early stages of a very long game, as its 40 percent year-on-year revenue growth suggests. (Mature companies, by definition, never grow that fast.) Netflix’s subscriber base of 56 million U.S. households, on top of another 68 million outside the U.S., is enormous—but it’s still well short of the 250 million households without which, Ball argues, Hastings’ business “will buckle and break.”
The article asserts that Netflix sustains growth by churning out merely adequate content that people will watch when there is nothing else on. However, Netflix fails to create the kind of shows like "The Sopranos" that are resounding cultural events. The article concludes that this will eventually be a problem for Netflix.
Contrary to that pessimistic forecast, in terms of disruptive innovation, mediocre content might not imply a fatal prognosis for Netflix. (Not yet, at least.)
In classic disruptive innovation, an inferior product finds a niche, improves over time and then dominates the mainstream. Netflix originally occupied such an odd niche market when it competed against Blockbuster Video by mailing DVDs to customers. Netflix embraced video streaming in 2007 before everyone else did, and thereby came to dominate a new market; this was an inferior experience because smart TVs and Roku were not marketed until 2008, and the iPad until 2010, so Netflix was initially a computer experience (it was inspired by observing that viewers enjoyed YouTube despite a lack of high definition). It has maintained that dominance by producing its own content because other content providers are fickle or can sell directly to consumers. It has thus pioneered and dominated three markets: mail-order DVD rentals, video streaming and producing content for streaming.
The question is, In which stage of disruptive innovation is Netflix in terms of content production? In the earliest stage of disruptive innovation, a niche market tolerates and accepts inferiority because it is cheap and convenient. In the next stage, the product improves over time.
Does Netflix's "pretty good" content appeal to a marginal niche market? Not according to the article, which asserted that it is aimed at everyone, everywhere. It is as if by pioneering bold new technology, Netflix went straight to the third stage of disruptive evolution -- dominating the market -- and skipped over the first two stages of finding an odd niche on the margins of video streaming and improving over time.
The question is, In which stage of disruptive innovation is Netflix in terms of content production? In the earliest stage of disruptive innovation, a niche market tolerates and accepts inferiority because it is cheap and convenient. In the next stage, the product improves over time.
Does Netflix's "pretty good" content appeal to a marginal niche market? Not according to the article, which asserted that it is aimed at everyone, everywhere. It is as if by pioneering bold new technology, Netflix went straight to the third stage of disruptive evolution -- dominating the market -- and skipped over the first two stages of finding an odd niche on the margins of video streaming and improving over time.
YouTube might be a prime example of a company that is still in the first stage of disruptive innovation in terms of streaming video and content creation. On YouTube, ordinary people make and post videos, filling a niche for viewers who want to watch things like cat videos. That is free user-generated content, like Wikipedia.
In contrast, Netflix offers content typical of standard cable television that appeals to the mainstream television viewer, and not the cheap, inferior content characteristic of early disruptive innovation, in which a product finds a niche on the fringes and improves over time. From this point of view, "mediocre" is too good. Like YouTube, Netflix should be substandard and amateurish in its earliest stage of disruption.
However, with its slew of mediocre shows, Netflix might be the cheaper, inferior product that has found a niche in terms of competing against high-end cable television. Moreover, there are signs that Netflix has improved over time. In developing "House of Cards", Netflix began to compete directly with HBO.
Do Netflix and HBO compete with each other? If they did, HBO and Netflix would be imitating one another. Netflix would occasionally aspire to produce the kind of critically acclaimed shows that HBO specializes in; indeed, Netflix is doing just that (e.g., "Orange is the New Black", "The Crown"). HBO would in turn imitate Netflix in terms of simply churning out all sorts of shows to attract as many viewers as possible.
This is precisely what AT&T, HBO's new overlord, wants HBO to do. This could either dilute quality or lead to new hit shows.
https://www.bloomberg.com/
HBO is being disrupted by Netflix and so it must imitate Netflix. That is interesting because HBO (Home Box Office) was once itself a disruptor when it emerged in 1972 and offered a convenient, inferior alternative to going to a movie theater. This means that Netflix is likewise competing against cinema.
https://www.bloomberg.com/
“If you throw another billion at HBO and it gets stretched thin, then suddenly they don’t make hit shows,” Martin said. “That’s a real risk.”
Right now, HBO is far more profitable than Netflix. The network had $2.15 billion in operating income last year, compared with $838.7 million for its online rival.
For AT&T executives, the question is also whether additional new programming will attract enough new subscribers to pay the added cost or whether profitability suffers. Raising HBO’s price would make the network look less compelling than services like Netflix and Hulu, where entry-level subscriptions cost $8 a month. A bigger budget could also mean that HBO no longer passes on hits that end up elsewhere -- the case with Netflix’s “House of Cards.”
HBO doesn’t need to spend as much as Netflix to make its new bosses happy, according to John Janedis, an analyst at Jefferies LLC. The network could ante up an additional $300 million to $500 million a year to create five or six more original series. At least one of those could yield a new hit like “Veep” or “Silicon Valley,” Janedis said.
“You just need one show to hold an audience,” Janedis said.
HBO is being disrupted by Netflix and so it must imitate Netflix. That is interesting because HBO (Home Box Office) was once itself a disruptor when it emerged in 1972 and offered a convenient, inferior alternative to going to a movie theater. This means that Netflix is likewise competing against cinema.
This might help to explain two recent trends in Hollywood: the rise of the superhero franchise and the abandonment of the star system (actors in superhero roles like Batman are interchangeable). In the superhero genre, Hollywood blockbusters have become akin to television series, with ensemble casts and endlessly evolving storylines. Movies seem to be imitating television; perhaps they are being disrupted by it. If so, HBO and Netflix are well situated to replace movies.
In terms of Netlix losing its monopoly, there are powerful new challengers. Walmart has announced that it will launch a Netflix competitor that will produce its own content.
Walmart's real target is Amazon Prime Video. But it seems an odd and overconfident response by Walmart to create a competing service in a harsh and unfamiliar market (a bit like Microsoft's attempt to create its own smartphone operating system). An alliance with a rival's main adversary is a more conventional and sensible policy (at least in international relations). Walmart might be better off simply cooperating with any one of Amazon's Prime Video competitors, like Netflix or Disney.
This raises the specter of media consolidation. Is consolidation really something to worry about?
Again, the theory of stages of revolutionary technology asserts that
a) a revolutionary technology initially creates a corporate monopoly, but this is eventually
b) undercut by open market competition that derives from innovation, and is ultimately
c) consigned to obsolescence, although the government maintains a semblance of it for the sake of disadvantaged communities.
Corporate consolidation does not fit into this scheme. Perhaps the attempt to create monopolies by merging various corporations is a symptom that these corporations have exited their monopoly phase and entered into open market competition -- and are trying to turn back the clock and re-establish a monopoly. For example, when Verizon's customer base ceased to grow, shareholders pressured the company to purchase two obsolete companies, AOL and Yahoo; likewise with AT&T's attempted purchase of Time Warner. As people "cut the cord" and lose interest in traditional (cable) television, Comcast and Disney are compelled to buy Fox in order to acquire more content that can be streamed. Corporate consolidation in these cases is a sign of panic, not greed.
By that measure, the fact that Netflix has not attempted to merge with or purchase another corporation is a sign of its vitality: it is still in its monopoly phase. Likewise, although Amazon did buy Whole Foods, the fact that they are in considerably different markets is a sign of Amazon's health: Amazon is still in the monopoly phase within its own field.
Media consolidation might be scary, but not just because it might entail the rise of a new monopoly that will dominate the political realm (as in Italy with Silvio Berlusconi). Rather, it might be a symptom that so much of the media landscape is transitioning away from its lucrative and stable monopoly phase.
