There are many stories in business lore of companies failing because they tried to protect their legacy business against a new technology they could have implemented themselves. Probably the most emblematic example – and the one that will be used as a case study in business schools for many years to come – is Kodak. Kodak’s R&D invented and prototyped a digital camera back in 1975. The R&D guys didn’t know what to do with it, and the management only saw the risk to their film business and couldn’t conceptualize how users would relate to it (which, to be fair, wasn’t all that easy in pre-PC, pre-Internet days). My favorite part of that story is the comment in the technical description of the project:
“The camera described in this report represents a first attempt demonstrating a photographic system which may, with improvements in technology, substantially impact the way pictures will be taken in the future.”
Talk about an understatement. Fast forward 30 years and Kodak files for Chapter 11, its film business having been blown to smithereens by the digital cameras they themselves had invented.
The difficulty for large corporations to adapt to a technological shift when short term interests prevail has come to be known as The Innovator’s Dilemma, after the title of a book by Harvard professor, Clayton Christensen. There’s an interesting variant of the Innovator’s Dilemma that I’m starting to witness in the broadband business, and that’s what I want to talk about today.
If the Innovator’s Dilemma is a decision paralysis that affects legacy businesses that can’t decide when to start cannibalizing their own lucrative product and service lines with new ones that risk displacing them, then it stands to reason that the competitors of these legacy businesses should be less affected. Newcomers to the market should not be affected at all.
Yet when I, as part of my day job, examine competitive broadband providers around the world, and particularly new entrants, I find precious few examples of disruptive approaches to the market. Could this explain why incumbent operators still dominate their market 20 years after a big wave of liberalization?
The first thing I asked myself is “why this lack of disruptive thinking in competitive and new entrants to the broadband market?” Having examined this in-depth, I think it comes down to essentially two things:
- First, most of the competitive operators’ senior decision makers are people who previously worked for the incumbent. They have, by and large, carried their legacy thinking with them. They view the market as a battlefield, but the rules they understand were set down by the incumbent. So disruptive thinking is as anathema to them as it is to the incumbent’s decision makers: radically tilting the battlefield or shifting the conflict to another battlefield feels to them like destroying the market they know and love.
- Second, most of the disruption that can be achieved in the broadband market involves heavy, long-term investments in infrastructure. When you’re putting that much money in the ground, you are naturally risk-averse and this averseness makes you less likely to embrace disruptive thinking. As a consequence, you tend to compete with the legacy providers on their terms, but you’re unlikely to change the rules of the game.
And yet there are examples of very successful disruptions in the broadband market, disruptions that have reaped great success for those who embraced them. Interestingly, one way or another, all of these disruptive approaches link back to abundance. I’ll come back to that.
- The emblematic example of a disruptive market entry is France’s Free. In 2003, when consumer ADSL broadband was just emerging, a 2Mb/s connection cost 25€ per month. Free smashed the doors of the market open by offering triple-play with 8Mb/s broadband and unlimited national voice for 30€ per month. Over the years, the package grew with additional services and features, but the price stayed flat. It took a while for Free’s competitors to accept that the company wasn’t losing money with each new customer, and the “Internet Troublemaker” as the French press has dubbed, conquered a third of the broadband market and continues to exert a psychological pressure on the ecosystem to this day. Over time, the steam in their wireline engine has exhausted, but they’re now in the process of disrupting the wireless business.
- On the opposite end of the disruptive spectrum lies Norway’s Altibox. Altibox launched its fiber to the home services the same year Free was launching triple-play in France, at a time when the very idea that residential customers would one day need the kind of bandwidth fiber offers was considered silly and absurd in Europe (though not so much in parts of Asia). But they were smart, and they targeted provincial towns where internet and cable service wasn’t very good. They designed a very sleek and rich service offering and went to market with a smart and intimate commercial strategy. In other words, they did what the incumbent could not or would not do. And it worked brilliantly. Altibox is now by our assessment the company that has the best Average Revenue per User and the best take-rate on its FTTH deployment worldwide.
- A final example of successfully going against the grain in broadband is Hong-Kong’s HKBN, also launched in 2003. Every time I talk with the company’s CFO, NiQ Lai, I am amazed again at how a disruptive philosophy can be so deeply engrained in a company’s culture. At the core, what HKBN does is very simple: if – they say – the incumbent wants to avoid at all costs becoming a dumb pipe then surely the best way to compete is to be one. Commoditize the products and services that you offer as fast as possible and you can only win. HKBN now controls a third of the broadband market in Hong-Kong and is the largest FTTH provider there. Their share prices in the last six years have gone up over 800%: they must be doing something right.
The above examples should not in any way suggest that only these players were disruptive (or successful), but they do highlight that radical disruption pays when you’re a new entrant. Of course, these companies took big risks, but they did it to acquire a powerful position in their respective markets. I often despair of broadband projects – especially publicly led – that go through incredible pains, litigation and accelerated learning processes to deploy fiber networks in their territories… only to offer the same services the incumbent is offering, handing said incumbents the tools to retaliate on a platter.
One thing the three examples above have in common is abundance. Legacy operators, incumbents, cable operators or competitive operators all share a worldview: they came to be at a time when the technical resources powering services (especially voice) were rare. They acquired, and still have today a scarcity mindset that pushes them to envisage any use of connectivity by the customer as a “billable event”. This may pad the pockets of OSS/BSS vendors, but it also leaves them wide open to disruption by new entrants who understand that IP enables abundance …