Disruption Risk

Disrupting risk is a key element to disrupting markets, the national pastime here in Silicon Valley.

Attend any VC pitch event, and the word “disruption” is tossed about as lightly as conjunctions, though few people truly understand what disruption is. Classically defined, disruption means “to destroy the normal continuance or unity.” Not cause a bump, waver or undulation, but to completely alter what has been. One good entrepreneurial practice is to look for stagnant industries, ones that have not materially changed for ages, and then figure out what customers what to change. Circuit City started that way, by examining what people hated about the consumer electronics industry and then engineering it out of their stores (an advantage management wizzed away out of competitive fear).

disruption-riskRisk is an often overlooked element in creating disruption. Humans are risk managers. Perceived risk motivates action (and inaction). This is why politicians use the Lie of Fear as their primary tool; to create the perception of risk and thus votes via fear. Changing the nature of risk changes a core element of a market.

This came to light with a recent exposé concerning Netflix, described as Hollywood’s “big, red menace.” Netflix’s history has been the reduction of risk. In early days they reduced the risk of their customers by providing choice, simplicity and an absence of late fees for renting DVDs. They also reduced their own risk by eliminating stores and store-front employees. They later expanded both concepts by streaming video to homes instead of merely delivering DVDs, and adding social elements (such as viewer ratings) to reduce consumer time-waste risk.

Ponder for a moment the risks in creating or trafficking a television series in the soon-to-be-dead mode of the last fifty years. The cost risk of distribution was staggering (Netflix erased most of the video distribution cost from their side), as was the risk of control (networks, affiliates and cable companies all had influence and created resistance risk). Netflix skips past a lot of regulatory risk from the FCC, and by turning over ratings control to viewers, reduced the risk of being a taste maker. They even eliminated the time-of-day risk, letting you watch what you want when you want, not sitting by a TV set waiting for a certain hour of the night to arrive.

Netflix, Hulu and the like will “destroy the normal continuance or unity” of the broadcast industry. Mine is one of a rapidly growing number of homes where there is no cable or satellite subscription, though a monstrous TV runs most nights.

One recurring IT risk was vendor lock-in, where by picking one or another platform doomed you to forever live with it due to high switching cost risks. The entire Open Source movement – Linux, Apache, PHP, MySQL – was based on changing risk factors by moving control of IT infrastructure elements to public committee and all but eliminating the investment risk.

When dreaming up your next product, ask what risks are inherent in the industry you are entering, and if you “destroy the normal continuance or unity” of the market by shifting risk. If not, think twice before committing. If risk equations are not changed, you likely are not being disruptive at all.


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