It seems industries are being disrupted at an ever-faster pace. The threat and opportunity presented by the emergence of cheaper, faster, better innovations has captured the attention of established firms, hopeful startups and investors of all kinds. But while cheaper, faster, better often wins, it doesn't necessarily win right away.
The tale of digital music offers a powerful lesson in how and why we need to grasp the ecosystem surrounding an innovation if we hope to understand disruption.
In 1978, engineers at Sony successfully married a compact playback device with lightweight headphones to create the prototype for a product that would become a worldwide smash. In 1979, the Walkman was introduced in the Japanese market, selling out its entire stock of 30,000 units in three months.
For a decade after its launch, the Walkman retained a 50% market share in the U.S. (46% in Japan) in a space teeming with competition, even with a price premium of about $20 over rivals' offers.
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In the late 1990s, when the sun had set on cassettes as the preferred music-delivery format in favor of compact discs and, for the technologically savvy, digital MP3 files. But electronics firms worldwide were betting that the CD would soon follow the cassette to extinction. Which MP3 player would get there first and become the next Walkman?
In 1998, South Korea's Saehan Information Systems created the first portable digital audio player, called MPMan. It sold 50,000 units globally the first year. By the launch of the iPod in 2001, about 50 portable MP3 players were available in the U.S.—and no firm had achieved anything near the dominance that the Walkman had enjoyed 20 years earlier.
The story was very different for MP3s than it had been for the Walkman and cassettes. You couldn't buy them in traditional retail settings. Downloading an album—legally or not—could be a multihour affair. It didn't matter that MPMan was first—it wouldn't have mattered if it was sixth, 23rd, or 42nd. Without the widespread availability of MP3s and broadband, the value proposition couldn't come together.
The MP3 player market did eventually consolidate around one product: Apple's iPod. But the iPod, launched in late 2001—three years after MPMan—was anything but a first mover. How can we understand the iPod's victory, despite its delayed entry?
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Apple waited, and then waited some more. It finally made its move, putting the last two pieces in place to create a winning innovation: an attractive, simple device supported by smart software.
Steve Jobs knew that, on its own, the MP3 player was useless. He understood that, for the device to have value, other co-innovators in the MP3 player ecosystem first needed to be aligned. And, in October 2001, when Apple announced the iPod, those pieces were finally in place: Both MP3s and broadband were widely available.
The first-generation iPod for Macintosh retailed at $399, had 5GB of capacity, and could store up to 1,000 songs. It boasted an intuitive interface design and was, for its time, lightweight. But the value of the device was cemented by its seamless integration with the iTunes music management software. Despite being available only for Mac users, the iPod was the fastest-selling MP3 player ever.
In April 2003, Apple announced the iTunes Music Store, an online retail hub where customers could browse and buy music for 99 cents a song (or $9.99 an album).
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By 2005, the iTunes library had grown to 1.5 million songs. Apple would make scant profit from selling songs at 99 cents per download and 10 percent commission. By the end of 2009, it had sold nearly 8 billion songs, but that translated to revenue of just $800 million—before accounting for the store's operational costs. That's trivial when compared with $22 billion in iPod sales at that time. Nevertheless, the iTunes store gave the iPod legitimacy in a world of shady MP3 accessibility.
According to NPD Group, sales of portable CD players were still more than double those of MP3 players during the holiday season of 2004. But between the third quarters of 2004 and 2005, sales of the iPod rocketed 616%. As the same customer base kept repurchasing new and better iPods, Apple's profits also soared: By 2008, it had captured 48% of the MP3 player market. SanDisk's Sansa MP3 player was the iPod's closest competitor, with 8% market share.
Few would deny that the iPod is a great product, surpassing any other MP3 player offering. But six times better? After all, Apple was three years late. But perhaps that logic should be flipped: Perhaps everyone else was three years too early. Jobs tended to be late for everything because he wanted everything to be ready for him (we saw that again with the iPhone).
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In 2008, reflecting on catching technology waves, he said, "Things happen fairly slowly, you know. They do. These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you're going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely, it actually unfolds fairly slowly. It takes years."
Jobs's discipline paid off. In the three years between the launch of MPMan and the iPod, each element in the MP3 player ecosystem turned from red to green. Instead of waiting at the red light with everyone else—wasting precious resources and time—Apple drove right on through a green light toward the finish line, becoming, according to The Economist, "the Walkman of the early 21st century."
Ron Adner is professor of strategy and entrepreneurship at theTuck School of Business at Dartmouth College. This text is adapted from his book, The Wide Lens: A New Strategy for Innovation.