What is 'disruptive innovation', and when will the real estate disruption hit?

home-curve-01
November 27, 2015
10
min read

There’s one thing I think we can all agree on: these days, we just don’t hear enough about real estate disruption. Sometimes you can eat an entire banana without some ‘pundit’ on the internet predicting the exact date and time of the imminent real estate technology rapture.Ever since Uber showed the world how fragile even the most concrete of industries can be, almost every established business believes its only a matter of time until they’re scratching in the dirt for beans, and almost every start-up believes it’s only a matter of time until they’re billionaires.‘Disruption’ has well and truly entered the real estate business zeitgeist. Here’s a graph of Google searches for ‘Disruptive Innovation’ over the last ten years:

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But for the sheer volume of discussion around it, the general lack of understanding is quite surprising.Rest assured – while there are plenty of industries destined to crumble in the next decade, not everyone is susceptible to a ‘disruptive innovation’. There are limitations - for some industries, disruption is about as threatening as Switzerland.So before you worry a second more about an 'Uber for real estate’ forcing your agency to close its doors, let’s look at the facts of disruptive innovation.

Innovations

Humanity is innovating all the time – you can thank this for our ascent from the mangle, the colour on your television and your electric toothbrush. But it’s only been recently that we’ve started to grow afraid of progress. And why? Who is to blame for this treachery?Clayton M. Christensen.Christensen is a professor at the Harvard Business School. He introduced the concept of ‘disruptive innovation' in his 1997 book The Innovators Dilemma, which rapidly gained a cult following and the attention of business people worldwide.Basically, Christensen – a man who knew all the business theory the world had ever come up with – noticed that despite enormous companies with enormous budgets doing everything by the book, they could still crash and burn. How could this be? He realised that there were two types of innovation in business: ‘Sustaining’ and ’Disruptive’. One is ubiquitous and relatively harmless, and the other is extremely rare and traumatically transforms entire industries. Looking deeper, he found patterns in the way these giant companies – and entire industries – had fallen.But before we go any further, let’s run through these different types of innovation in a little further depth.

Sustaining innovations

A sustaining innovation is like an added feature. It’s a step forward in the traditional evolution of a product or service.Shareholders aren’t interested in betting on the hare - they want to invest in companies that grow slowly, steadily and reliably. You can’t do that pursuing emerging markets. So instead, they focus their efforts on the sure-fire route to the largest profits. Through market research, existing companies improve their wares to fit their consumers’ predicted future needs. Sustaining innovations: innovations that sustain business.It’s for this reason sustaining innovations vastly outnumber disruptive ones. There’s almost instant benefit, they make sense, and they’re usually inexpensive to implement.For example, video was first recorded and distributed on big, black tapes. They worked great at the time - but then the DVD was invented, and all of a sudden no-one wanted them anymore. DVDs were far cheaper to manufacture, the video quality was better, you didn’t have to rewind the damn things when you were finished and no more children would be scarred for life after their parents recorded their home movies over Barney and Friends. DVDs exploded onto the scene, and within the space of a few years, videotapes were a thing of the past. Even now, DVDs have been further improved with the advent of Blu-ray technology: the disk holds twice as much data, so the quality of your film can be twice as good.While this sounds like a disruptive innovation – it isn’t. The transition from video to DVDs, then DVDs to Blue-ray didn’t change a lot. Sure, it might have tripped up electronics companies that made VCR players, and the manufacturers of video tapes – but no industries really failed. Rather they changed paths.Companies are constantly innovating to compete and stay relevant – that’s how the business world works. You need to be constantly improving your productivity, efficiency, product and/or service. And what’s more, once someone else has done something better, you need to adopt the new technologies and/or practices quick-smart. Those who don’t usually find themselves out of a job.But occasionally someone comes up with something that isn’t just innovative – it renders the old way of doing things obsolete. No matter how hard other companies might try to keep up, they can’t. They’re going to find themselves in the gutter regardless.

Disruptive innovations

In contrast to a sustaining innovation, a ‘disruptive innovation’ isn’t just competitive – it’s devastating.Perhaps the easiest way to differentiate a A) disruptive innovation from B) a sustaining one, is that if someone comes up with A there’s nothing you can do. Disruptive innovations create new consumer demand – and the old, gaudy way of doing things is no longer something you want to be associated with. These are the rare events in history when a company delivers such a blow to an industry there’s no feasible way they can recover. These (usually) come in two varieties: ‘Low-end’, and ‘New-market’.

Low-end disruptive innovation

While sustaining innovations are necessary for survival, occasionally a company (or industry) can get a little carried away. If a product or service advances too much, it can become too expensive or over complicated, and surpass the needs of consumers at the bottom of the market. Consider how many features you haven't ever used in Microsoft Word, for instance.This is where low-end disruption can happen. Another company can come along and reinvent the product to be cheaper and/or more user-friendly, making it accessible to low-end consumers. With the money raised from initial sales, they too can start fine-tuning and evolving their product. Low-end disruptors creep up the market gradually poaching more and more of the incumbent’s business, until eventually they overthrow them completely.Toyota is a good example of this. In the 60’s, General Motors held around a 50% share of the American car market. As they continued to dominate, their cars became fancier and fancier, and it seemed no-one could compete. But Toyota decided not to take on the premium segment of the industry. Instead, they decided to start very much at the bottom of the market – in the gap that General Motors had left wide open.While General Motors released its premium Chevrolet, Toyota released its economy Corona. Comparatively, it was a shoebox with wheels – but it was reliable, affordable and got you from A to B. Toyota’s innovation was in its production. They could produce good cars for a reasonable price. And people bought them.With the profits they made, they inched up the market; releasing their Tercel, Corolla, Camry, Avalon, 4-Runner and Lexus models as the years went by. Their swankier cars poached more and more of General Motors market share until they finally declared bankruptcy in 2009. While they still held similar market share to Toyota – even in 2013 – General Motors could no longer afford to keep its massive factories open.

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New-market disruptive innovation

Focusing on sustaining innovations might mean you lose clients at the bottom of the market – but it also gives start-ups and other smaller competitors the advantage of time: an extremely rare and valuable thing in the fast-paced business world. Foresighted companies can get a head start to establish a good product and brand. If the market does pique the attention of the larger companies, it’s often too late for them to position themselves as a leader in that field – which is bad if you’re a film photography company standing on the brink of the digital photography age, for example.In these cases, disruption comes in the form of a completely new product - with a completely new market. If this new product does things better, and replaces the need for an existing one, the company that sells the old way of doing things is going to have a pretty rough time. We’ve seen ball-point pens over take fountain pens, word processing software on computers upheave the typewriter and Kodak getting destroyed by digital cameras.Despite Kodak actually inventing the first digital camera, they saw it as a threat. They made a huge amount of their profits selling film and photo-development solutions, so the idea of people looking at their photos on a screen wasn’t particularly appealing. Instead, they squandered the opportunity and dug their heels into film. Eventually, however, digital cameras became better and more popular. Once the price tag dropped, they were cheaper than film cameras in the long run too. Sure, they were expensive at first – but you didn’t need to pay (or wait) to have your films developed. Kodak, now too late to the game to go down the digital path, perished.

Streaming vs DVD rental – how Netflix destroyed Blockbuster

To get a really concrete idea of what a disruption looks like, here’s a great example we’ve all recently witnessed.A few years ago, if you wanted to watch a film, you went to Blockbuster and rented it out. Nowadays, you’re more likely to jump on the Internet and stream it.There’s the occasional Blockbuster still standing in a few dusty towns ten thousand kilometres away from the nearest Woolworths. Except now they’re inhabited only by tumbleweed and hot wind. The ancient kingdom of Blockbuster is well and truly on the way out. Why? Netflix.Netflix is that online service for streaming media that’s permeated the half the known world. Rather than paying for individual DVDs, Netflix allows you to simply stream as many as you want on a subscription basis. There’s no late fees, no driving to the shops, no scratched disks, no ads - it’s better, cheaper and disruptive.

The beginnings

For a long time, Blockbuster were operating ten thousand stores across the world – they seemed invincible. Then in 1997, Netflix started. They weren’t a streaming company back then – 1997’s Internet wouldn’t have allowed for that. Instead, they changed the usual rental model by posting DVDs to their customers for a fraction of the price. This could best be described as a sustaining innovation at that point. While it was cheaper – it wasn’t any more convenient. Rather than stopping into Blockbuster on your way home from work to grab your Friday night movie, you’d have to plan ahead in advance. Postal services – as we’re all aware – are far from instant.Netflix tootled along for a few years, and never really seemed to pose a much of a threat. In fact, in 2002, five years after Netflix began, Blockbuster was still worth $5 billion.

Streaming

But Netflix continued to move up the ranks – pilfering more and more of Blockbuster’s customers, generating revenue and bettering their service quietly in the background. It was in 2007 that they produced their game changer - their ‘new-market’ disruption: streaming.In 2007, only 50% of homes in the US had an Internet connection – so streaming didn’t exactly explode onto the scene. But it was still the beginning of something big. For a monthly fee, customers could watch all the movies and television they wanted instantly from their home. It was a cheaper and more convenient option for the entire movie-loving mass market.

Even more innovations

As the Internet permeated more of the world, Blockbuster only continued to lose customers to Netflix. By this time, they decided it would probably be wise to launch their own streaming service. But Netflix already had the product and the brand. Blockbuster couldn’t compete.Netflix powered ahead with more and more sustaining innovations. They expanded the list of devices that supported Netflix to allow clients to watch whatever they wanted just about anywhere: Internet TVs, Blu Ray players, Playstations, Xboxes, iPads and smartphones.With the money they earned, they even started producing their own exclusive television programs. House of Cards even won an Emmy. Now Netflix owned award-winning content that could only be accessed through their service – probably the final nail in Blockbuster’s coffin.

Blockbuster goes bankrupt

While Netflix were lighting cigars with burning hundred dollar notes and bathing in Moet, Blockbuster’s revenue and profits rapidly fell. In 2010, they declared bankruptcy, and what was left of their business was bought by a satellite company for $300 million - roughly 16 and a half times less than their net worth only eight years previously.The DVD rental service - and thus Blockbuster – has been disrupted. Netflix on the other hand, (as I write this) has a market cap value of almost 46 billion dollars.

Are we at threat? The real 'real estate disruption'

In a world where a thirteen year old with a laptop can overthrow an entire industry overnight, it’s understandable to be concerned for the future of your chosen profession. While the rapid demise of Blockbuster probably makes you feel a little uneasy about all this technology – let’s be frank – real estate agents will probably be around for a long time. There’s no doubt that technology is changing the face of real estate – but these are all sustaining innovations.You can’t simply ‘disrupt’ real estate like you can movie rentals, film photography or expensive cars. Real estate is the service of guiding clients through the exhausting process of buying and selling property.Property isn’t a 'commodity' like cars, DVDs or cameras. You can't just follow the same one path. Agents need to operate differently with every house sold - there's no way to automate the process, and the only way of getting ahead of your competitors it is to offer a better service. Sure, a challenger might pop up every now and again with a different way of doing things – take Opendoor, for example - but they’ll only ever take a tiny piece of a very large pie.Now you know the difference between a sustaining innovation and a disruptive one, you can keep your eyes open in your area, just in case that piece is yours. Remember: every business is now a tech business. You need to utilise the latest technology to ensure our service is as good as it can be. Every principal is now a CTO, and every agent needs to be an IT guru.Prepare for the sustaining innovations of the future. Stop worrying about disruption.In part two of this disruption mini-series we'll take a look at a few examples of modern agencies trying their hardest to disrupt real estate and how, and why, they probably won't succeed: The future of real estate.

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