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Friday, November 6, 2015

Rapidly Growing Niche

What is disruption? How does it occur? When we answer these questions, we will see that in many cases the leaders in the market are blindsided by the rapidly growing niche.

The word "niche" describes a market that fits nicely into a crevice of the overall market, but, according to popular opinion, doesn't really matter. And that's actually the funniest thing of all, in a way: the market that doesn't matter can actually take over the larger market, given certain characteristics. Love this stuff.


Consider the rise of the automobile. The specific market that internal-combustion vehicles displaced was the horse-drawn carriage, trap, dogcart, brougham, or whatever Sherlock wanted to call them. But consider the advantages of the new niche technology.

The space taken up by the conveyance is the first issue: having a horse and a cart means having both a stable and a garage, while a car only requires a garage. Umm, not to mention that the stable had to be swept out(!).

Which brings us to the next issue, consumables: a horse must be fed, and so must a car. But what the horse eats can go bad, and must be carefully regulated to avoid having the horse eat itself to death. Fuels can be easily stored. In plain fact, people were used to using fuels because they lit their houses with kerosene.

Repair was another issue: a horse can go lame and a car can also break down. But when a horse goes lame, it's usually not recoverable (and sad). However, a car can be fixed.

In the personal transportation market, the ever-growing advantages of the rapidly growing niche product, the car, increased its uptake dramatically, even exponentially, displacing the horse-drawn carriage. It took decades to fully play out.

Instead of sweeping out stables, we are now dealing with the hydrocarbon emission problem, and its carbon footprint. One thing is clear: we need to be smarter about the environmental impact of our disruptive technologies!

But now consider electric vehicles. In the US by the high cost of gasoline, which was almost $4.10/gal in June 2008, drove the hybrid Toyota Prius to great success as they were selling about 20,000 of them per month at the time. The cost of gasoline went down, driven by an economic downturn (caused by hurricanes and a crisis in mortgage lending which led to bad debts and a foreclosure increase). This occurred simultaneously with the introduction of the disruptive technologies of shale oil extraction, fracking, and improvements in deep-sea drilling. This caused the biggest oil producers, Saudi Arabia and Russia, to be dominated by the production in the US, for a while. The Saudis countered, with their huge cash hoard as a life boat, by increasing oil production, thus decreasing the price of oil even more, but diminishing their spare capacity. This had the dual effect of helping them to retain clients that they were losing left and right, and also of putting pressure on the Americans whose revolutionary oil extraction techniques might (still) be made too costly by reducing their profit margins.

All of this will eventually lead to a spike in oil prices and thus even greater reliance and demand for electric vehicles, like the Tesla Model S, which I am seeing everywhere. Perhaps because I live near Silicon Valley. Hmm.

Progress is accelerating

As mechanical wonders turn into embedded computers and sensors make them ever more cognizant of our environment, the size of a gadget is going down dramatically and the capabilities of a gadget are increasing tremendously. Once you can carry it in your pocket, it becomes irreplaceable, essential. The smaller gadgets get, the faster they will improve: now the improvements are often a matter of simply writing new software.

So what used to take decades now takes a few years. In the future it likely won't even take that long. Now let's look at some more examples of disruption (and disruption prevented) in this era of faster progress.

Computers in general

Well, now we come to the biggest disruption of all, which is actually in progress: computers. The rise of the smartphone shows that an all-in-one gadget can succeed over the feature phone. And by modifying its form factor and use cases, the rise of the tablet shows that there is a great alternative to the netbook, laptop, and even the home computer. Even businesses find that iPads can replace a host of other, clumsier gadgets.

What were the advantages that triggered the displacement of the feature phone by the smartphone? A single high-resolution glass touchscreen was an astounding improvement over the button-cluttered big-fat-pixel interfaces of the feature phones. A simpler interface with common visual elements won out over the modal menu environment that had to be searched through laboriously to find even the simplest commands. It can even be argued that the integrated battery made the process of owning a phone simpler. What cemented the advantages of the smartphone was the ecosystem that it lived in. On the iPhone, this is exemplified by the iTunes Music Store, the App Store, and the iBookstore. A telling, crucial moment was when the smartphone didn't have to be plugged into a desktop computer to be updated and backed up.

The next step was the tablet. In retrospect, it was more than just increasing the size of the screen. It required more power and it probably had a very different use case. The use case was closer to the laptop. On the smaller end, tablet sales are probably being cannibalized by the larger phones such as the iPhone 6S Plus. On the larger end, the power of tablets will increase until they become viable alternatives to laptops.

Still, I love my laptop.

But all it would take is a significant increase in battery technology to let the tablets reach the power of the best laptops. Then it will be purely a matter of ergonomics. Tablet are lighter, still quite useful, and clearly good enough for many types of businesses. The disruption of the PC market is but a few years away, I expect.

The post-PC era is nigh.

Those who call tablets PCs really don't quite have a handle on the form factor. Perhaps it's like Microsoft says: all it takes is a keyboard and your tablet becomes a PC. Detachables have the advantage of a keyboard and a bigger battery, with the prohibitive cost of the weight of the device.

While I like my laptop - it IS heavier than a tablet by a huge margin. Perhaps the rapidly growing niche of tablets will displace the laptop - but the growth isn't there yet.

Social media

Now: why did Facebook buy Instagram? Because it was a rapidly growing niche that was taking on more and more of its customers' time. By purchasing it they accomplish two things. First, it's a hedge against the niche technology taking over and displacing them. Second, it prevents their competitor, Twitter, from purchasing it. Mark Zuckerberg, Facebook's leader is smart. He knows that the rapidly growing niche can take over. After all, Facebook successfully did the same to other portals such as MySpace and Yahoo.

And what comes around goes around.