The Search for Spectrum Unearths a Disruptive Innovation Paradigm

Below, you’ll find an excerpt from the April monthly issue of The George Gilder Report. If you’re not already a subscriber, click here for more information on our research.

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Readers know I often reference the work of my longtime friend and colleague Clayton Christensen who passed away just this past January.

I had never met Clay when I first read his book The Innovator’s Dilemma, but I was so excited by it I began to push it to everyone. That must have been how I learned that Clay had been brought in as a consultant to Intel by CEO Andy Grove.

Andy Grove was a brilliant business leader but also a famous, no–nonsense Silicon Valley tough guy. The idea of him bringing in a Harvard academic to tell Intel its business was way out of character. I called the then editor of Forbes Jim Michaels and told him this was a big story. Next thing I knew, Clay and Andy Grove were on the cover of Forbes together. That helped propel Clay’s book to the top of business book best seller lists.

Clay eventually joined the Gilder Technology Group as a partner and became a mainstay of our conferences for years. He was not only brilliant, he was wise and steady and helped us through several crises. Clay was brilliant at our conferences, though he was frequently in terrible pain with migraines arising from his health problems. He never missed a conference because of it; he played through the pain.

These memories come to mind because our chosen portfolio company of the month is a classic example of Clay’s “disruptive innovation” paradigm. You see, disruptive innovation explains the repeated phenomenon of an inferior technology suddenly replacing — disrupting — a superior, dominant technology.

Clay’s favorite example was the disk drive industry. In the late 1970s, the biggest and most profitable customers for disk drives were manufacturers of mainframe computers. The mainframes required the top performing disks available, which were 14–inch hard drives incorporating the latest innovations in a fast–developing technology.

The mini–computer industry was just coming on at the time, including companies such as Wang, DEC, and Data General. Competing with mainframes on cost and convenience, the mini–computer makers could not afford the expensive 14–inch drives, nor fit them into the smaller architecture of mini–computers.

Up the Down Staircase

Instead the mini–makers went down market. They bought new eight–inch drives that used dated technology and were vastly inferior to the 14–inch disks measured by price–per–byte.

By the mid–1980s however, the learning curve had done its work. Finding a big market in mini–computers and now being produced in volume, the capacity of the eight–inch drives had increased by a remarkable 40% per year.

They became cheaper per byte stored than the 14–inch models. Suddenly, the once inferior eight–inch drives were “good enough” for the mainframe industry and much cheaper. The makers of the still superior — but expensive — 14–inch drives lost their best customers and disappeared almost overnight.

The same story was repeated a few years later with the 5.25–inch drive. At first, it could not deliver the performance demanded by the mini–computer makers. But priced around $2,000 (which seemed cheap at the time!) they were well suited for the price point and the architecture of the emerging desktop computer.

Hopping on the learning curve, the 5.25–inch drive improved its performance by some 50% a year. By the late 1980s, the 5.25 drive was “good enough” for the mini–computer standard. Nearly all the eight–inch manufacturers vanished as their best customers abandoned them. The eight–inch drive was still the superior technology, performing far better than the 5.25–inch drives.

The eight–inch drive became irrelevant because it provided more performance than the customer needed or was willing to pay for. Ok, but now we come to the really important point, which is “how”? How did the inferior drive makers improve their products so quickly? The learning curve predicts a 20–30% decrease in the cost of a manufactured product for every doubling in accumulated volume.

Yet in each case studied by Clay, the inferior drives’ capacity improved at a significantly faster pace. How could these smaller, newer, less–well funded enterprises, with smaller R&D budgets, get so much better so quickly? Clay’s explanation: They imitated the big boys. The small–drive makers gradually incorporated the very improvements the big–drive makers developed to improve their own more expensive products.

Clay’s term for the gradual, steady improvement of a dominant technology was “sustaining innovation” because it sustained the older technology’s market position. The disrupters glommed onto the sustaining innovations produced in part by the big R&D budgets of the dominant firms… and used them to power their own disruptive innovation.

And that is just what is happening in the network today.

Regards,

George Gilder
Editor, Gilder’s Daily Prophecy

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George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

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