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 / Summer 2005 / Issue 39(originally published by Booz & Company)


Top-Down Disruption

Beyond Trendsetters
For contemporary examples of top-down disruptions, look no further than the current tumult in the media world. The traditional radio industry, for instance, is facing a major threat from the top-down disruption of satellite radio. Pioneered by two companies, XM and Sirius, satellite radio offers clear performance benefits over the familiar through-the-ether version. First, there are no commercials. Second, there’s a much broader menu of programming choices, from punk to bluegrass to swing. Third, you can listen to the same station anywhere you want — the signal doesn’t fade as you get further from a land-based transmitter. Fourth, the quality of the digital audio is higher than what you get over the airwaves.

As is typical with top-down innovations, satellite radio costs customers more — unlike traditional radio, it’s not free — and that has limited the size of its early audience. But technological advances are leading to a slew of new receivers, from car radios to portable tuners to home systems, while also rapidly driving down prices, from about $300 a couple of years ago to about $70 today. The number of subscribers for both XM and Sirius shot up during 2004, and growth promises to accelerate further as radio personalities like Howard Stern move their programs to the new medium. Although its success is not assured, satellite radio is beginning to look a lot like cable television, an earlier top-down disruption that started slowly but then upended an established broadcast medium.

Another recent top-down disruptive innovation — Apple Computer’s iPod — has shaken up the market for portable music players, until recently dominated by Sony. Digitally compressed, Internet-deliverable music existed well before the iPod, of course, as did devices to store it. But before the iPod’s introduction in 2001, most popular portable devices held a limited number of songs and sold for fairly low prices. That was true of Sony’s original cassette-tape Walkman, of the multitude of portable CD players that flooded the market through the 1990s, and of the first wave of flash-memory-based MP3 players.

The iPod upped the performance stakes immensely. By using a tiny hard drive to store music, it allowed people to carry hundreds, even thousands, of songs with them at all times. Its price, starting at $399, was equally eye-opening — the price of a mid-range component stereo system.

The iPod was not an immediate mass-market hit. Only trendsetters and gadget freaks were initially willing to pay the high price to own one. But Apple steadily introduced attractive new features while also driving the iPod’s price down with new models, such as the $249 iPod mini and the $99 flash-memory iPod shuffle. Such moves have enabled the company to expand its reach steadily into less demanding and more frugal market segments. Now both fashionable and more affordable, the iPod has captured the lion’s share of the market for portable music players — and fundamentally changed the way customers think about the products.

The Incumbent’s Advantage
As Professor Christensen has shown, bottom-up disruptions are usually deadly for established players. Successful companies find it difficult, if not impossible, to sacrifice their current, high-margin business in order to pioneer a cheap, low-end alternative. They’re essentially paralyzed, unable to respond to the threat, even though they can see it mounting steadily. But that is not necessarily the case with top-down disruptions. Although such innovation breakthroughs don’t sustain a market’s comfortable status quo, they do offer the possibility for strong profits even during their formative years. Economically, therefore, they can offer attractive opportunities for big firms as well as entrepreneurial startups.

Nevertheless, established companies, from UPS in overnight package delivery to Sony in digital music players, routinely miss chances to spearhead top-down disruptions. Which forces the obvious question: Why?

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