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 / Winter 2004 / Issue 37(originally published by Booz & Company)


Bridging the Breakthrough Gap

Companies don’t always see these roadblocks clearly. As Costas Markides and Paul Geroski of the London Business School have noted, business innovation often is spearheaded by enthusiasts — engineers, product developers, marketers, entrepreneurs — who tend to be much more enamored of new technologies than are run-of-the-mill consumers. (See “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” by Costas Markides and Paul Geroski, s+b, Fall 2003.) It’s natural for corporate innovators to overlook, or give short shrift to, the many potential barriers that can hold up progress. Their desire to be pioneers — to do cool things fast — blinds them to the more mundane realities of the marketplace. As a result, companies can easily fall into a trap: They can get far out ahead of customers in the adoption of a new technology. They can rush headlong into the future only to find that no market yet exists.

We’ve seen this phenomenon recently, and repeatedly, with the Internet. A good number of dot-coms failed not because they had the wrong technological vision but because they arrived on the scene far too early, with too much money and too little patience. Nowhere was this flaw so pronounced as in the realm of new media. In the late 1990s, a slew of well-funded startups began streaming video over the Web. With funky names like and a roar of buzz behind them, these companies were going to become the great new broadcasters of the future.

It didn’t happen, of course, and in retrospect it’s easy to see why. The success of their services required a large pool of customers with the kind of reliable, high-speed Internet connections needed to watch video. Yet even as late as 2000 — well into the so-called Internet Age — only a tiny fraction of the U.S. population had broadband connections at home. Among the minority of households that had any Internet service whatsoever, 92 percent were using dial-up modems, and of that group 40 percent were using outdated modems operating at 33.6 Kbps or slower. The Internet broadcasters had outinnovated the market.

Even today, considerably less than half of all U.S. households have broadband Internet access. Nearly all the common barriers to rapid technological advance are in evidence here. For many households, it’s a matter of technology — their phone and cable lines have yet to be upgraded to accommodate high-speed data transmission. For others, it’s a matter of economics — they can’t afford the higher cost of broadband subscriptions. And for still others, it’s a simple matter of desire. These people connect to the Internet only occasionally — to check their e-mail, for instance — and they don’t feel any pressing need to upgrade.

Conservative Innovation
But even in the face of the slow spread of broadband connections, one company has found success in running an Internet-based video business. Its name is Netflix, and its secret is conservative innovation. Like Reuters with its pigeons, Netflix uses an old technology (the U.S. mail) to deliver DVDs of movies ordered through a new technology (the Internet). Through a fairly simple Web interface, it provides a sophisticated database and ordering system easily available to virtually all Internet users, whether they have broadband or narrowband connections. But instead of trying to get customers to download enormous files, it simply delivers physical media to their mailboxes, often the day after they place their orders. With a business model that’s half and half Blockbuster, Netflix has struck a balance between an old and a new technology that is in tune with the current needs of the market. Its challenge now is to build on its customer relationships and brand strength to remain successful as Internet and video technologies continue to advance — and as other companies, including behemoths like Wal-Mart, try to mimic its simple business model.

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