One of the criticisms of our business model discussions here is something along the lines of “but how will this replace the $x billion already made.” Or, alternatively “well, how can you expect anyone to switch until you show that it will replace what they already are doing?” The answer, of course, is that by the time you know that a new business model will work well enough, it’s too late. It means one of two things have happened: either a competitor has figured it out and taken over the market or your existing business model is too decimated to have enough left to make the switch. This is the nature of so-called “Creative Destruction.”
This point is highlighted in a recent NY Times article about how Netflix tries to avoid creative destruction by experimenting with new models well before they need to, and well before the old model has lost steam. The article compares Netflix to Blockbuster, which highlights this perfectly. Even though Blockbuster did see the success of Netflix and how the market was changing, it was very slow in embracing it, and never did so whole-heartedly. And even though it has a service quite similar to Netflix’s, it has a lot fewer users and is struggling financially.
The article highlights this with Kodak as well:
Kodak saw digital photography coming. It even invented some of the earliest such technology, in 1975. Kodak just misjudged how fast consumers would give up on film and start snapping up digital cameras. And it misjudged its ability to outrun both trends.
Indeed. In 1997, I did work with a professor who was consulting for Kodak, and we did a detailed report on why Kodak needed to embrace digital now. The response? Kodak told us “yes, yes, digital is important, and we’ll be ready to switch, but right now, chemical processing of photos is so much cheaper, there’s no reason to change yet.” And, they were right that it was a lot cheaper, but they were wrong about the time to start switching.
There are a few reasons for this: