This article was adapted from Read, Write, Own: Building The Next Era of the Internet by Chris Dixon with permission from Cornerstone Press, an imprint of Penguin Random House.
One of the amazing things about the technology industry is how often tech giants miss major new trends and allow startups to rise up as challengers.
Take short-form video. TikTok mastered the format before anyone else, catching tech giants like Meta and Twitter off guard. It wasn’t as if these incumbents were being complacent; most of them aggressively crushed, copied, acquired, and built products to avoid being displaced. Instagram and Twitter had video capabilities well before TikTok became popular, but they prioritized their legacy products instead. Twitter shuttered its short-form video app Vine in 2017. A year later, TikTok went viral in the United States.
The reason incumbents whiff is that the next big thing often starts out looking like a toy. This is one of the main insights of the late business academic Clayton Christensen, whose theory of disruptive technology starts with the observation that technologies tend to get better at a faster rate than users’ needs increase. From this simple insight follow non-obvious conclusions about how markets and products change over time, including how startups are so often able to take incumbents by surprise.
Let’s review Christensen’s theory. As companies mature, they tend to cater to the high end of a market and improve products by increments. Eventually, they add capabilities that exceed what most customers want or need. By this time, the incumbents have developed myopia, focusing on profitable niches to the exclusion of the low end of a market. And so they overlook the potential of new technologies, trends, and ideas. This creates an opening for scrappy outsiders to offer cheaper, simpler, and more accessible products to a wider array of customers who are less demanding. As the new technology improves, the newcomer’s market share grows until it eventually overtakes the incumbent.
When disruptive technologies debut, they’re often dismissed as toys because they undershoot user needs.
The first telephone, invented in the 1870s, could carry voices only short distances. The leading telco of the time, Western Union, famously passed on acquiring the phone because it didn’t see how the device could possibly be useful to the company’s primary customers, which were businesses and railroads. What Western Union failed to anticipate was how rapidly telephones and their underlying infrastructure would improve. The same thing happened a century later when minicomputer manufacturers, like Digital Equipment Corporation and Data General, ignored PCs in the 1970s and, in ensuing decades, when desktop computing leaders, like Dell and Microsoft, missed out on smartphones. Time and again, a sling and rock beat a lumbering swordsman.
Yet not every product that looks like a toy will become the next big thing. Some toys remain just that, toys. To distinguish the duds from the disrupters, products need to be evaluated as processes. Disruptive products ride exponential forces that cause them to improve at surprising rates. Products that get better incrementally are not disruptive. Bit-by-bit improvements yield weak forces. Exponential growth comes from stronger forces that have compounding effects, including network effects and platform-app feedback loops. Software composability — a property describing code that is reusable so developers can more easily extend, adapt, and build on what exists — is another source of exponential growth.
The other critical feature of disruptive technologies is that they are misaligned with incumbent business models. You can be sure that Apple is working on phones with better batteries and cameras. It would be foolish for a startup to try to compete with the company on that basis. Apple knows that improving its phones will make the phones more valuable and help it grow its core business: selling phones. A more interesting startup idea would be something that makes phones less valuable. This is something Apple is far less likely to pursue.
A product doesn’t have to be disruptive to be valuable, of course. There are plenty of products that are useful from day one and continue being useful long-term. These are what Christensen calls sustaining technologies. When startups build sustaining technologies, they are often acquired or copied by incumbents. If a company’s timing and execution are right, it can create a successful business on the back of a sustaining technology.
Expectation matters. Few people doubt the significance of many modern technology trends, including artificial intelligence and virtual reality. Their potential is obvious, even to the least techie among us. It’s easier, on the other hand, to underestimate dubious, toy-like technologies — like the early telephone, PC, and now, I believe, blockchains — which arrive from outside the establishment and appear at first blush to be crude, clumsy, and of questionable utility. But ignoring their potential would be a mistake.
Big trends start small; the biggest upheavals come from disruptive innovations, which, by definition, incumbents overlook.
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