Microsoft, iPads and the Innovator's Dilemma

This article was motivated by listening to Episode 44 of Hypercritical, the episode of John Siracusa‘s weekly podcast that focused on the question “What Ails Microsoft?”; listen to it for context. I agreed with most of Siracusa’s analysis, but thought he missed a few key insights and perspectives.

You should listen to Siracusa’s podcast, but here are some of the key points in his analysis of what ails Microsoft are:

• Microsoft consistently refuses bet-the-company radical changes that will be good for the user and its own long-term business prospects because it are scared of damaging its cash cows (primarily Windows and Office, but also servers, Exchange etc.);
• Microsoft serves primarily PC vendors, IT departments, backward-looking developers and perhaps Intel rather than its end-users; this leads to poor user experiences;
• Microsoft follows rather than leads and so is always behind the curve (think Bing, XBox, Zune, Windows Phone etc.)
• Microsoft underestimates its own position of strength, which would in fact allow it to upset its customers more (to everyone’s long-term benefit) for fear of losing what it has;
• The demands of its core customers for a roadmap mean Microsoft always overpromises and underdelivers, has low marketing impact and never surprises competitors etc.
• Apple is the reverse of all this, repeatedly taking bet-the-company risks, always focusing on the end user, repeatedly canibalising its own products, being secretive and never publishing roadmaps, constantly leading and redefining categories (without necessarily being first mover), all in manner of what Steve Denning calls Radical Management, which has led to its current position as the world’s most valuable company.

While I agree with most of these points, here is what I think Siracusa missed.

Clayton Christensen and The Innovator’s Dilemma¶

Clayton Christensen‘s The Innovator’s Dilemma is the best business book I’ve ever read. Unusually, it contains a thesis that can’t be reduced to a single sentence. His interest is in how great companies get overthrown by disruptive innovators. His key ideas are as follows:

• Christensen defines a disruptive technology as one that is worse than the incumbent technology on the key metrics that are usually used to measure quality in that space, but better in some other, traditionally less important metrics.
• Although he offers several examples, Christensen’s clearest example is disk drives. Here, the two traditional key metrics are speed and capacity. Disk technologies have been replaced in waves, first with 8” disks being replaced with 5.25” disks, then 3.5” disks, then 2.5” disks then 1” disks. (Solid-state drives are now gradually starting to replace rotating disks.)
• Christensen argues that incumbent leaders almost always succeed with sustaining (non-disruptive) innovations that improve the performance of the technology against the standard metrics, but almost always fail to bring to market new disruptive technologies, even though these are often first developed by the market-leading company. He says this happens primarily because leading companies tend to be “well managed”, and are strongly influenced by their best customers and partners, who are, almost by definition, mostly bought into the existing metrics. So when, for example, Winchester (the leading 8” disk manufacturer) asks its customers “would you be interested in lower power, physically smaller disk that has lower speed and less capacity they say “no, that’s a terrible thing, we need speed and capacity”.
• New entrants, often start-ups, see an opportunity to serve new markets, often consisting of people not using the incumbent technology, for whom the alternative metrics (in this case, size and power consumption) are more important than the traditional ones. For example, 8” disks didn’t work for PCs but 5.25” disks did; 5.25” disks didn’t work for laptops but 3.5” disks did (and then 2.5”); 2.5” disks didn’t work for iPods but 1” disks did. Now solid-state memory, which is fast but expensive/lower capacity, works for phones, cameras, tablets etc. in a way that even 1” disks didn’t.
• A key point Christensen makes is that the new market, of non-consumption, is often unattractive to the incumbent leader, who typically sees it as small and offering low margins, but is highly attractive for newcomers, who typically hone themselves on lower margins as they serve it.
• Over time, sustaining improvements to the new technology tend to improve it against the traditional metrics as well as the new ones: current 3.5” disks have much larger capacities and better latencies than did early ones. As they improve, they become more viable in increasing parts of the “old” market, and the old leader tends to be reduced to ever smaller, more niche parts of the market. Eventually, the new technology tends to get good enough for mainstream use and at this point the advantages of the new technology start to be more interesting to old customers. (“So I can enough speed and capacity, but with a smaller footprint, less power consumption and a lower price: well sure!”) If it survives at all, the previous leader ends up serving only the very high end where the extremes of the old metrics are required.

iPads, PCs and the Innovator’s Dilemma¶

Apple was not the first to come up with the idea of a Tablet PC. In fact, Alan Kay came up with many of the key ideas in his remarkable 1972 paper on the Dynabook. But in the more recent past, Microsoft (especially Bill Gates) championed tablet computers and brought them to market a decade before Apple built the iPad. Microsoft, however, saw a tablet, through the ever-present and distorting lens of its Windows cash cow, as an enhancement to a traditional Windows PC: you add a touch-screen (and a stylus) to traditional laptop running (of course) Windows and voilà, a tablet is born.

The iPad received a very luke-warm reception when it was launched, and was widely derided as (merely) a giant iPod Touch. It was criticized for being underpowered, closed, not running even standard Mac applications, let alone Windows software, not supporting “true” multi-tasking or windowing and more besides. Yet it quickly sold in the tens of millions and is clearly now replacing PCs for some people.

With some caveats, this fits Claytonsen’s model very well. The iPad is a worse general-purpose computer against the traditional metrics. It has slower hardware (though rarely feels slow), few ports, no user accounts, comparatively little storage, no hardware keyboard, limited, vetted software and (cough) no true multitasking, no Flash, no replacable battery and limited upgrade options.

But look at the alternative new metrics, that show all the ways in which it is better for some people and purposes. It is extremely small and light. It is fantastically easy to use. Thanks to Apple’s control-freakery, installing software is simple and worry-free. It has a touch screen. It has no significant issues with viruses etc. Its battery genuinely lasts over 10 hours even when you use the machine intensively. It has stores for software, books, music and videos built in (and it probably already knows your credit card number). It has numerous sensors (cameras, microphones, accelerometers, gyroscopes and more). Software for it tends to be really cheap and some of it is of fantastic quality. It is supremely relaxing to use.

For people who mostly surf the web, do light email, play games, watch films, read books etc., the iPad is not just a “good enough” alternative to a laptop or even a desktop PC: it may actually be signficantly better. The iPad 2 (and iOS 5) followed the pattern of sustaining improvements, both on the new metrics (usability, weight, size, sensors etc.) and the old (speed, capacity, ability to link to an external monitor, multitasking etc.).

Crucially, while Microsoft saw a tablet as a way to extend the PC, and added Touch features to Windows and made its tablet PCs full Windows PCs “with added Touch”, Apple redesigned all the upper layers of the operating system to give the best possible experience for the iPad as a new class of device. It didn’t worry about disrupting sales of its own Mac laptops, still less (naturally) those of Windows PCs: it just made the iPad as good as it could, in its own right.

Risk and Perfect 20-20 Hindsight¶

The other major point I feel Siracusa failed to make, and many people are missing, is that Steve Jobs’s and Apple’s Radical Management is a genuinely high risk strategy: it can fail as well as succeed, and frequently does so. I think we need to separate out two ideas that I feel are being conflated. The first is “betting the company” on an uncertain new thing, which isn’t necessarily a good idea for a leading company, but makes more sense for a struggling company. The second is the the aggressive development and marketing of new technologies that might canibalize your existing business; this probably is a good idea, even if the new business is lower margin or lower value, because almost certainly someone will do it, and it’s better for the leader to do it to itself than for a competitor to do so.

[Image: Flippin’ Coins , by Pauli Antero on Flickr, Creative Commons, some rights reserved.]

In terms of the risk side, a comparison I like to make is with finding lucky people. Contrast two situations. If I say to you “Give me a coin and I’ll toss it ten times and get heads each time”, and then I do it, you’ll probably think that is quite impressive and either very lucky or (more likely) manipulated. But if I take a thousand people and get each of them to flip a coin repeatedly, and after each round of flipping I get all the people who got tails to stop, after 10 rounds I might well have a single person who got a sequence of 10 heads. But there would be nothing odd about that, and it certainly doesn’t require the person to have special powers or be “lucky” (in any non-scientific sense).

Apple now has the largest market capitalization of any company in the world, with massive success and profits, after a series of audacious, high-risk moves that worked out. I’m not saying for a moment that this is pure luck, or that Apple is like the one-in-a-thousand kid who got ten heads in a row, but I do think that the world has annointed Apple after the fact when many other companies have made “audacious” moves that didn’t work out and, in some cases, sent them under. (Time-Warner’s merger with AOL was certainly audacious.) I think the modern Apple has made a series of good moves, and combined those with backtracking where necessary (allowing native apps, giving Final Cut Pro a stay of execution, allowing various apps and books into the stores after poorly judged bans etc.), and has won for reasons that combine skill and luck; but even if Steve Jobs had lived, that doesn’t mean he didn’t have more lemons in him, and that these might not have come out and eventually hobbled or even killed the company.

Even today, when Microsoft is routinely left off the list of the key tech companies (now typically Apple, Google, Facebook, Amazon), or is at least seen as the laggard among these, it remains massively profitable and powerful. I think it is in terminal decline, and deserves to be, but it is far from irrelevant yet.