ACG Research

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Thursday, August 23, 2012

Innovator’s Dilemma and Grief Counseling: The Common Denominator

Many entrenched incumbent players’ reactions to significant change in their markets bear a marked similarity to the five stages of grief pioneered by Elizabeth Kubler Ross.

I was researching and writing about the changes that OTT video and TVE everywhere are having on the video industry, particularly cable companies, and I noticed a pattern in how many entrenched incumbent players react to significant change in their markets and exhibit the five stages of grief pioneered by Elizabeth Kubler Ross. Applying this approach to companies and markets is imperfect, but the paradigm is instructive and intriguing. Also, not every company and industry react the same, but many companies that face the innovators’ dilemma of protect the cash cow business while trying to ride the innovation that threatens the old technology or business model. Definitely a conundrum!

First, incumbents deny that the new technology/business model will actually work, that it is an improvement over the existing technology or that customers will understand it or buy it. When Netflix streaming first started, the cable industry and many insiders downplayed it because the quality of experience was poor (many delays, freezes, and pixilation) and the selection was limited.  What they missed was the ease of search/discovery and a pricing model that was appealing to customers.

Try to Block/Smother the Innovation (Anger)
Once the innovation gets a few design wins or successful trials, incumbents will start to make moves to block. Again, some ISPs resorted to throttling Netflix to deal with the congestion on their network, and some would have liked to block it altogether but would have had a riot on their hands as well as run into net neutrality issues.   Recently, most ISPs have instituted caps and tier pricing as a way to try to capture some of the money they are losing on streaming services.

If you can’t stop the innovation, try to partner with a startup or offer a homegrown attempt at a new technology. These rarely work because the entrenched power and cultural inertia behind “business as usual” is typically much greater than proponents’ push for new and unproven technology. This is understandable: the risk is much less; the markets and customers are a known quantity; and the business model is proven. Some MSOs were rumored to have an interest in partnering with Netflix (Apple is also purportedly interested in deals with cable operators for STBs), but so far, these have been rumors or the efforts have gone nowhere. The failure of these talks is likely due to the inability to reach a satisfactory revenue share and account control agreement.

This stage is the realization that the new technology is going to become a dominant force, but senior management has not devised a cogent strategy for coping with or capitalizing on the change. They are still trying to understand business models, technology transitions, market needs, market segmentation and messaging.

And finally management comes to the realization that in order to survive, the innovation needs to be accepted and incorporated in the main offerings.

Based on casual observation, I would put most pay TV operators are in the depression stage regarding OTT and TVE. They are still figuring out business models and technology architectures. A few companies are in the acceptance stage and are proceeding with thoughtful approaches.

Obviously, this is a bit tongue in cheek, and not all innovations become true disruptors and not all companies or industries react this way. Understandably, companies need to determine the likelihood of a technology becoming a true disrupting force before committing major resources. It is a difficult process, and being late to the party or betting on the wrong horse are significant missteps that can become a long-term strategic liability for the company. 

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David Dines

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