Sept. 29 (Bloomberg) -- High technology, once again, is packed with battles for market supremacy. Amazon.com Inc. is introducing a tablet computer that takes aim at market leader Apple Inc. Another prominent showdown involves Netflix Inc.’s efforts to capture the lead in online movie streaming.
Eye-catching as each joust may be, companies should heed two enduring lessons about innovation in any market. First, big breakthroughs tend to involve cut-rate simplicity, rather than elaborate features. Second, even the best strategy will fail if it isn’t customer-friendly.
The case for simple and cheap inspires Amazon’s tablet rollout. The Kindle Fire offers a smaller screen than the iPad, while omitting the built-in camera and some other features that Apple provides.
Amazon does offer a rock-bottom $199 price, compared with Apple models that often top $500. That contrasts with pricier Apple imitations offered earlier this year by Hewlett-Packard Co. and Research in Motion Ltd. (Those models fared poorly.) By providing less than Apple -- but perhaps offering just enough -- Amazon is showing a crafty way for upstarts to target entrenched leaders.
Harvard Business School professor Clay Christensen has warned for years that competitive threats go beyond longtime rivals’ efforts to make better products. Pay close heed, he says, to newcomers whose cheap, seemingly inferior offerings use new technologies that you don’t yet fully understand.
Those disruptive upstarts can be killers. As Christensen argued in his bestselling book “The Innovator’s Dilemma,” newcomers first target low-end customers who don’t seem important. Then the insurgents gain traction. Their products keep getting better and quicker. Eventually the upstarts demolish the old guard.
Even the upstarts, though, can face tricky strategic choices. Netflix reached such a crossroads after early success in renting movie DVDs by mail. This booming business helped push the traditional video-store giant, Blockbuster Inc., into bankruptcy proceedings.
Now Netflix must cope with new disruptive technology: Internet streaming of movies to viewers’ televisions or computers. Hoping to stay on top, Netflix is bifurcating its services and attaching the Netflix name to its nascent streaming business. The older DVD rental operation will be renamed Qwikster, with separate billing and customer data.
Although Netflix’s decision can be seen as an extreme effort to apply Christensen’s principles, customers and investors have seethed at the prospect of losing single-account access to both DVDs and video streaming. Netflix stock is down nearly 20 percent since the split was announced. Three lessons from that misstep stand out:
-- Convenience matters. Straddling DVDs and streaming might be more work for Netflix, but it’s a boon for customers wanting movies in both forms. Customers cherish companies that make life easier; loyalty vanishes as roadblocks arise.
-- Customers’ habits can’t be upended overnight. Netflix is probably right about streaming’s future. But it will take time for people to change movie-viewing habits. Step-by-step transitions work best.
-- Great companies boost quality, not prices. Trying to nudge customers toward streaming, Netflix jacked up its prices this summer by as much as 60 percent. The company didn’t offer parallel quality upgrades, and customers wailed.
One pioneer that ignored these maxims was Wingspan, an Internet-only bank created by Bank One in 1999. That venture perished within two years, as it became clear that customers preferred to blend online and branch banking at one institution.
By contrast, high tech’s biggest success stories -- including Apple and Amazon -- constantly put all three principles to work. They obsess about convenience; they guide customers forward with many small changes over time, and they steadily lower prices while offering more features or services. That’s the secret to winning in disruptive times.
--Editors: George Anders, Stacey Shick
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