How disruptive technologies get adopted and what it means for Crypto
First, one has to understand the difference between disruptive and sustaining technologies. The latter tend to maintain a rate of improvement along known parameters. Users get something more or better in relation to the attributes they already value. An example is today’s smartphone market. Screens improve, cameras can switch between different lenses and are AI-supported, mobile internet gets faster. These are all elements users appraise for quite some time now and expect to get better. It is what the mass market demands.
In contrast, disruptive technologies introduce a different package of attributes from the one mainstream customers historically value. Not just this, but they tend to perform worse on currently important factors at the start. Resultingly, mass market demand is non-existent at first. Instead, niches with disparate wishes adopt it, often out of pure necessity as the current market does not fulfill their needs. As a result, they put up with the inferior performance in other areas. These niches can either be from the low-end (e.g. cryptocurrencies) or high-end (e.g. Uber, bringing a premium taxi experience to the masses).
The first wave of adoption is often based on applications not possible before, creating new markets.
After gaining traction in these niches, disruptive technologies take on the mainstream market. Since the underlying technology is rather undeveloped, the technological progress is faster than for the mature technologies of incumbents (Fig. 1) to a point where they can pass them.
Disruptive technologies get adopted by the mass market due to
1. a steeper performance improvement curve along known parameters
2. introducing customers to new attributes they excel in
What is usually perceived as a positive, a loyal customer base, slows down established enterprises in the case of radical paradigm shifts. By staying close to current users and listening to feedback to improve offerings incrementally, corporations focus on value factors that will only play a minor role in the future. When the mainstream expresses new demands, it is already too late to adapt as the innovative companies had enough of a headstart. This often coincides with the takeoff stage in the technology life cycle. When the masses (early and late majority) adopt a technology, its S-curve tends to be around the inflection point (Fig. 2). Correspondingly, startups can translate their lead in R&D efforts (x-Axis) into a large performance advantage (y-Axis). The disruptive technology now provides enough value to convince the mainstream to switch. This allows the leaders to set dominant designs and create network effects. Incumbents have issues overcoming these barriers.
So why don’t established enterprises invest in new technologies earlier? Their wait-and-see approach has 2 main reasons:
- For incumbents, it would not be a rational investment decision to divert resources away from known customer. The current, established markets come with higher margins and less uncertainty, while the size of niches seem insignificant and are difficult to estimate. This issue gets worse when the niche market takes place outside of current geographical target markets.
- It is complicated to build up the capabilities needed for new technologies. Going back to the beginning and “software eats the world”, many older companies still struggle with software engineering. New employees have to be hired as well as processes be defined and integrated with existing workflows. The disruption of carmakers illustrates these potential issues quite well. With cars becoming more autonomous and moving towards a digital ecosystem, the value of its software for users increases. This represents a challenge for traditional manufacturers because not only does the hardware, something they excel in, decrease in importance. Additionally, the software development cycle is multiple times faster than the one for hardware. New processes for software development have to be learned and integrated with the hardware cycle. Other firms identified this and are trying to seize the opportunity, like Tesla and Google.
Problems are enhanced when a change in the business models is required. Then, the issues of investment decisions and capability needs arise not just on the technology but also on the business model side. For example, the internet changed the business models of many industries, for instance to Freemium models, ad-based revenue and marketplaces. If we take a look at the S&P 500, internet companies using these business models play an important role nowadays. On the other hand, the shift from desktop to mobile can be described as less disruptive overall, as most business models remained the same. Consequently, internet companies like Google and Amazon were able to retain their dominant position.
Disruptive technologies are especially dangerous to incumbents if they enable new business models
Bitcoin introduced a new value factor to modern money, namely censorship resistance. While this may not seem important to most of the developed world, it is essential for people in countries with legal uncertainty to be able to protect their wealth. Also, it allows citizens of sanctioned countries to receive payments from abroad. In these markets, adoption is not hindered by current limitations in throughput and convenience.
(Permissionless) blockchains are the underlying technology that drive cryptocurrencies. By providing a solution to the Byzantine General’s Problem, the required trust in a single entity can be reduced by distributing it over a network of nodes. Bitcoin used the trust minimization to bootstrap a decentralized money network, which represents a new application that was not possible before. This created a new market which is now filled with a plethora of cryptocurrencies. While most of it may be due to speculation, the fundamental disruption tapped into a market of users that value censorship-resistance. Cryptocurrencies also perform better on other elements than current technologies, like privacy. The main value however lays in trust minimization, which enabled the first, radical application of censorship-resistant money.
As the technology matures, incumbent corporations will try to adopt it. Their focus will be on applying blockchain in a fashion that sustains their current business. The uses will be less radical, like permissioned blockchains. This represents a way of trying to benefit from the technological improvement and its S-curve, but most will ultimately fail. These corporations are used to locking-in customers and engage in rent-seeking as a business model. However, most of the technological progress of blockchains is based on open-source development, interoperability and community support. Further, tokens shake up the clear distinction between shareholders and stakeholders these enterprises are used to.
While established companies will try to adapt the technology to their business instead of the other way around, startups will continue to work on the current shortcomings regarding throughput and convenience, experiment with new business models and value creation for users as well as change mainstream’s perception of decentralization and privacy.
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Source of the theory around disruptive technologies
Disruptive Technologies: Catching the Wave
https://scholar.googleusercontent.com/scholar?q=cache:jYYPdwhpzuIJ:scholar.google.com/&hl=de&as_sdt=0,5
Published at Sun, 06 Oct 2019 15:17:55 +0000
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