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When people in established companies hear the phrase "disruptive innovation" their immediate reaction is to feel some kind of threat. It is crucial to remember that every wave of disruption creates unanticipated opportunities in its wake.

The music industry serves as a great example of this principle. It was obvious for music executives to see the threat poised by the digitization of music. People could rip songs from physical medium, turn them into bits and bytes, and throw them out onto the Internet for anyone to download.

It is impossible to argue that music labels have lost at least some business as people around the world have downloaded MP3 files. But companies have created considerable growth categories as well. Apple's iPod is the obvious one. There are other pockets of success as well. Ringtones have turned seemingly overnight into a huge, and hugely profitable business for music labels and mobile phone carriers. In fact, in the UK the number one single at the moment is a ring tone by "The Crazy Frog," which has outsold a single by the megagroup Coldplay by a four to one margin. Describing the ringtone and associated animation is somewhat difficult. A Google search for crazy frog ringtone produces 644,000 results, so finding a sample on the Web is easy enough.

No one predicted the rise of the Crazy Frog and his ilk a decade ago. But every disruptive threat has its corresponding opportunities. Companies prescient enough to sense the opportunity when it begins to arise tend to count their success all the way to the bank.

If you happen to be attending the Front End of Innovation Conference in Boston, make sure you stop by the InnoBooth! We've got some great training and educational materials and some fun examples of disruptive products. I'm in New York speaking at another conference, but some of my Innosight colleagues will be manning the booth and will be happy to answer any questions you might have (make sure to ask for Cheryl, and complement her on that Embraer jet). Stop by and say hello!

The Wall Street Journal dedicated an entire section today to the media industry (registration required). The industry is another fascinating one. The forces of disruption are just so obvious on every side. What is still less obvious is the best way for established firms to respond. Most recommendations push for relatively minor adjustments, or suggest that old media companies simply copy what new media companies are doing. My hunch is that there is a breakthrough strategy out there, but it requires a radical rethink of the media value proposition.

Anyway, the story that really caught my attention talked about the difficult of getting physicians to adopt Diagnostic Decision Support Software (DSS) that could help them diagnose patients. Producers seemed surprised that doctors have yet to eagerly jump on the new technology.

This should not be a surprise. Consider the value proposition from the doctors perspective. You believe your particular expert skill is being a great pattern recognizer, someone who can use their expert intuition and judgment to diagnose complicated ailments.

Along comes an if-then software program. Using that program not only threatens your reason for being, it requires that you have to learn new patterns of behavior. If you do adapt your behavior and the software program gets better, you might be putting your profession out of a job. Now, thats obviously a bit stark but directionally similar to the way at least some doctors would look at the software.

As is always the case, the disruptive route would be to find people who would be delighted to have software that was better than nothing at all. Imagine you were a sales person. You told a nurse practitioner: Are you tired of just doing the routine work? With this software, you could do more than you ever could do before. Its an entirely different conversation.

Whenever a company has to convince a customer about the value of a product that requires behavior change, expect the effort to be laborious. Whenever a company makes it easier and simpler for its customers to do what they are already trying to get done, expect great things.

The big news in the airline industry was last week's announcement that America West planned to buy US Airways. It's hard to see how this merger makes a great deal of sense for America West. The hope is that US Airways' route structure will allow it to expand and better compete against other discounters. But the key to getting the discount model right is keeping things simple. Layering on the complexity of a merger with an ailing airline just seems to go against that model.

What seems to have gotten less ink in this deal is the impact this will have on Southwest Airlines. My guess is that this is extremely bad news for Southwest. You see, much of Southwest's historical success could be traced to the fact that it flew routes that didn't compete against major airlines. This allowed it to grow without incurring competitive response for a long period of time. However, for Southwest to meet the growth expectations that are baked into its stock price, it needs to start hitting some more established routes.

It wasn't an accident that one of the first big airports it targeted was Philadelphia, one of US Airways' hubs. The clear bet was that it could push US Airways over the edge, and have the benefit of being the big dog in Philadelphia. Now that it looks like US Airways is going to stick around a while longer in one form or another, it raises some real questions about how Southwest is going to meet those growth expectations.

Netflix has taken over Wal-Mart's online DVD rental business. When Wal-Mart first entered this space, some analysts thought Netflix was dead. How could a small company possibly fight against the behemoth from Bentonville? Remember, whenever you are looking at competitive battles, you have to look beyond the resources of the combatants. You have to look at whether they have the processes to succeed, and whether their values will prioritize doing what needs to be done to succeed over all the other options on their plate. Sure, Wal-Mart has the money and talent to replicate Netflix's business model, but it would require taking that talent and money away from the core business, and creating very different processes than Wal-Mart knows well. Now we'll see what happens as Blockbuster continues to teeter.

If you ply your trade helping people and companies understand the impact of disruptive innovation, it would seem to be great news if one of the nation's most widely read newspapers had an article that referenced the term. But the question is, are they using the term correctly? The technology referenced in the article is described as:

-- Significantly higher quality
-- Higher cost for the distribution channel

You look at that combination and you ask, is it really disruptive? The technology in question is digital film; the article in question is in the USA Today. Our next Innovators' Insight will analyze the technology in more detail to answer:

-- Is it disruptive?
-- Why has it taken so long for the industry to embrace the technology?
-- What are the general implications of this analysis for companies seeking to introduce disruptive innovations?

Look for the Insight in 2 weeks.

Want to learn about hog-cooking? A Boston Globe article describes how In June you can pay a mere $1.99 to download a 45 minute video about how to "find, select, prepare and serve a whole hog." The download will be available on a service called DaveTV, which intends to offer thousands of niche programs such as the hog-cooking video. In fact, that video will be one of more than 1,000 barbecue-related programs offered by the service. Of course, the downside is the video will only be available on the Web, so you have to watch it on your computer, not your television.

Telephone companies are all trying to figure out how to respond to the incursion of the cable companies into their core telephony business using Voice over Internet Protocol. The natural response is to spend huge amounts of money trying to go directly after cable operator's core business. The more disruptive play is to follow the DaveTV approach, offering a differntiated, dare I say, disruptive, offering. Ultimately, this differentiated approach has a greater chance of creating positive growth for the phone companies. Mimicking the cable operators will lead to a zero-sum game where the "winner" will be left with a rotten business.

Weve long held that one of the best ways to drive growth is to provide simple, affordable solutions to the great many nonconsumers in developing countries. This article discusses an interesting example: a computer that costs about $200 targeted at users in India who cant afford higher end solutions. To hit that low price point, the computer lacks features that existing users take for granted, such as a hard disk and Windows software. As the developer states in the article, the computer lacks the "unnecessary fluff of the conventional systems.'' It can adequately do everyday tasks such as surf the Web and word processing. The critical thing always is targeting the right product to the right user. People already consuming good computers would reject this simple computer as not good enough. People who lack the wealth to afford even low-end computers might deem this solution delightful.

A great interview over on Investor's Business Daily with Michael Miron, a digital media consultant and former CEO of ContentGuard (registration required). Miron is discussing the general fear that media companies have about the disruptive threats facing their industry. The threats are quite obvious. The democratizing power of the Internet allows anyone to create their own content; the digitization of media facilitates the seemingly profit-free sharing of previously hard-to-access content. What Miron points out is that disruptive change almost always creates net growth. He reflects on his experience at IBM:

"I was at IBM in 1981 the day the personal computer was announced. We had raging debates about mainframes vs. PCs. It turns out that PCs weren't a substitute for mainframes. It was a massive, radical expansion of the market for computing power. Today, it's 10,000 times bigger than anyone would have credibly said in 1981."

Sometimes that growth is in different spaces, but it almost always occurs. For example, in the MP3 space recording companies certainly have lost out as CD sales have plummeted. But new, attractive profit streams have emerged in the form of ring tones, MP3 players and subscription-based audio services. Existing companies can seize these profit streams, if they recognize the potential early and view the development as an opportunity, not a threat.

America Online announced this week that it planned to introduce free e-mail service on its AOL Instant Messenger platform. The e-mail service will have 2 gigabytes of storage and a number of other attractive features. It is a great idea ... if AOL had launched the product about two years ago. Now it is entering a pretty crowded space, with many users already locked into their Yahoo, Google or Hotmail accounts. AOL probably hesitated because of the fear of cannibalizing its core business. That's a fair enough fear, but now AOL has to contend with relatively entrenched competitors. It is a classic dilemma. It will be interesting to see if AOL's new free service proves attractive enough to woo users from other services.

Speaking of big bets ... there has been a great deal of coverage about the upcoming battle between Sony and Microsoft for next-generation gaming devices. Microsoft is unveiling its Xbox 360 this week, a few days before Sony is announcing its PlayStation 3. It raises an interesting question. Is the original Xbox a success or a failure? Microsoft has managed to crack into an existing market, but it has come at a heavy cost. Here's a telling line from a Wall Street Journal article: "Xbox-group losses have been about $1.2 billion a year since 2001." That's what it takes to crack into existing markets populated by large, powerful rivals. In the latest battle, most analysts still predict Sony to dominate. If Microsoft gets 25% market share in next-gen players, it will be a success.

Despite all of this, it probably was necessary for Microsoft to go into the gaming market. As the personal computer market continues to slow, operating system sales are just not going to support Microsoft's growth needs. Its efforts to get into the gaming market and the handheld market before warning signals were obvious shows that Microsoft recognizes the need to find new ways to grow. It is too bad it couldn't have followed a more disruptive path in either market, however. It might not have had to blow so much cash competing against a well-entrenched competitor.

So, Vonage has raised a hefty chunk of change from venture capital investors. That must be good news, right? Perhaps. But think about why Vonage needed that money. It raised about $100 million last year, but it continues to be expensive for it to attract subscribers. It has to keep its price at rock-bottom levels because cable companies and phone companies are introducing their own competitive services. As weve written before, the best growth strategies take advantage of asymmetries of motivation, where one company does what its rivals is motivated not to do. The VoIP strategy Vonage is following goes straight after markets that matter dearly to large, powerful companies. So it just has to spend aggressively to continue to maintain traction. Of course, perhaps Vonage can still raise enough in an IPO to justify the hopes of its investors. But the very fact that it needs so much money just to stay the course should be a warning size for its ultimate viability, unless its long-term dream is to sell out to a large telco or cable company to be its white label VoIP provider.