In September 2000, three men from Netflix sat down in a conference room on the 23rd floor of the Renaissance Tower in Dallas, Blockbuster’s headquarters. Netflix rented DVDs by mail. The dot-com crash had hit, its cash was running down, and selling, its cofounder Marc Randolph wrote later, “had seemed to be our only way out.”
Reed Hastings, the chief executive, made the pitch to Blockbuster’s chief executive, John Antioco, and its general counsel, Ed Stead. Join forces, he said: Netflix runs the online business, Blockbuster runs the stores. Then he offered a division of labor. “With us focusing on back-catalog items, you’ll be able to concentrate your inventory on the new releases which are at the heart of your business.”
“The dot-com hysteria is completely overblown,” Antioco said. Stead asked what number they had in mind. Netflix’s finance chief started explaining comparables until Hastings cut in: “Fifty million.”
“John Antioco was struggling not to laugh,” Randolph wrote.
The part nobody wanted
From Blockbuster’s chair, the laugh had a case behind it. Netflix’s early service, Clayton Christensen and his coauthors wrote in Harvard Business Review in 2015, didn’t appeal to most of Blockbuster’s customers, who rented movies, typically new releases, on impulse. Selections arrived by mail several days later. The service appealed to a few groups: movie buffs who didn’t care about new releases, early adopters of DVD players, and online shoppers.
Hastings’s pitch had said as much: Netflix would take the back catalog, and Blockbuster could keep the new releases its customers came in for.
A product worse for your customers may start with people you ignore, then win yours away.
That is disruptive innovation, in the sense Christensen meant. He and Joseph Bower introduced the idea in Harvard Business Review in 1995 as “disruptive technologies.” In the 2015 restatement, an entrant gets a foothold either at the low end, with customers the leaders overserve, or in a new market, by turning nonconsumers into consumers. The leaders, chasing their most profitable customers, tend not to respond vigorously. The entrant then moves upmarket. Disruption has happened, they wrote, only “when mainstream customers start adopting the entrants’ offerings in volume.” Netflix, they argued, followed “a classically disruptive path,” and streaming finally made it appealing to Blockbuster’s core customers.
Two lines on a chart
The engine is a difference in speed. Bower and Christensen tracked hard-disk drives, where storage capacity for a given size of drive grew about 50 percent a year on average. The same pattern, they wrote, caught the minicomputer makers: desktop computers’ power improved much faster than minicomputer users’ demands for power, until PCs caught up with the needs of many of those customers. Draw the two lines on a chart, what the newcomer delivers and what the mainstream customer needs. In these industries, the lines eventually crossed. By 1995, they wrote, not one of the independent disk-drive makers that existed in 1976 survived.
Attacking the leaders head-on rarely worked in his data. In Christensen’s disk-drive study, the 2015 article says, only 6 percent of entrants pursuing a sustaining strategy, a better product for the leaders’ own customers, succeeded.
What the word doesn’t cover
That is also why Christensen and his coauthors said Uber was not disrupting taxis. It started in San Francisco, a well-served taxi market, with people already in the habit of hiring rides, and its service, they wrote, was rarely described as worse than a cab. As they put it, “success is not built into the definition of disruption.”
The theory’s record is argued over. In June 2007, Christensen told BusinessWeek that the iPhone was “a sustaining technology relative to Nokia,” and that “the prediction of the theory would be that Apple won’t succeed with the iPhone.” By 2015 he and his coauthors described the iPhone’s later growth as a disruption, of the laptop as the main way onto the internet.
The historian Jill Lepore wrote in 2014 that advocates of disruption “have an affinity for circular arguments,” and called the handpicked case study, Christensen’s method, “a notoriously weak foundation on which to build a theory.” In 2015 Andrew King and Baljir Baatartogtokh asked 79 industry experts about 77 cases Christensen and Michael Raynor had cited; by MIT Sloan Management Review’s summary, many did not fit four of the theory’s key elements well. Defenders replied that the theory has more than four elements.
The courthouse weddings
Imagine you own a wedding photography studio. Your clients want two photographers, ten hours of coverage and a printed album. A newcomer offers one-hour shoots at the courthouse for a fifth of your price, with files ready for phones. None of your clients would hire it.
The theory gives you questions to check, not a verdict. Who are the newcomer’s customers, and would they ever have come to you? Each season, count how many of its bookings are from couples who sound like yours. If that number climbs, the foothold is turning into your market. Christensen’s advice for that point was to keep the profitable business and start a separate unit for the new one, which, he and his coauthors admitted, sometimes works and sometimes doesn’t.
Blockbuster did fight back. It ended late fees and started online and kiosk services, the Associated Press reported. On September 23, 2010, it announced that it had filed for Chapter 11. For the time being, the company said, all 3,000 of its U.S. stores would remain open.