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Chapter 10 of The Innovators Dilemma uses the principles of disruptive innovation to discuss the disruptiveness of the electric car to traditional automobile manufacturers. While the current hybrids such as the Toyota Prius are not that disruptive they have gained in popularity and their future is looking bright. This week I received a newsletter from my VW dealership with what could be an even more disruptive product. The article discussed the Bio-Beetle, a car fueled by 100% recycled vegetable oil, also known as bio-diesel. The technology is simple; the fuel consists of recycled animal fats and restaurant greases. Bio-diesel may not be cheaper than gasoline (the industry currently only produces 50 million gallons annually) but it is renewable. The performance certainly is not better than gas-powered cars but probably good enough for non-demanding customers (such as tourists putzing around Maui).

This car is currently only available for rental in Hawaii. Is this something that could pose a threat to car manufacturers? The signs are pointing in that direction. It is unclear whether VW will pursue bio-diesel for mainstream use in their vehicles. Other car manufacturers are bound to ignore this alternate fuel while they concentrate on building better gas-powered and hybrid cars. And, if nothing else, it makes me feel better about ordering fries.

It is clear that some of the reporters at The Economist really get the disruptive innovation concepts. Last month, The Economist had an intriguing article that posited that Intuit could shake up the health care industry (registration required). It is absolutely true that the U.S. health care industry is confusing and frustrating to many consumers. If Intuit uses its skills in creating simple software that makes people's lives easier to help solve this task, it could indeed have an attractive growth business on its hand.

This week, The Economist's cover story ("How the Internet killed the phone business") discusses VoIP and traditional telecommunications providers. Here's the article's first sentence: "THE term disruptive technology is popular, but is widely misused. It refers not simply to a clever new technology, but to one that undermines an existing technology"and which therefore makes life very difficult for the many businesses which depend on the existing way of doing things." The article hits the nail on the head. The new business models that companies can now follow that use voice as an application instead of as a pure moneymaker challenges the fundamental business model that telephony players have used for decades. As prices continue to quickly move towards zero, incumbent companies that don't recognize that they need to start changing yesterday are going to face a whole heap of trouble.

This morning Ebay announced its intention to acquire Skype for about $2.6 billion. Not bad for a service that was only launched in August 2003! According to the companies, since its launch, the Skype software has been downloaded over 163 million times. We have an interesting article comparing Skype and Vonage from the perspective of disruptive innovation in the most recent edition of Strategy and Innovation. Strategy & Innovation's website There is no question that Skype is disruptive. The question is - "What happens to a disruptive company after it is acquired?"

There are certainly examples of disruptive companies being acquired and succeeding. The Washington Post bought Kaplan Testing and has seen that continue to grow rapidly. But there are also examples of disruptive companies being acquired and never heard from again. What will happen with Ebay and Skype?

As they do with most big acquisitions, Wall Street is pressuring Ebay to identify the synergies between the two companies. Ebay has responded by claiming that voice communication will eliminate some of the "friction" in online transactions and will accelerate the growth of transactions consummated through Ebay. This makes some sense and could turn out to be true. And Ebay's presentation on the acquisition stresses that Skype makes sense as a stand-alone business. This is encouraging. However, should Wall Street start demanding cost savings out of the merger, look out.

One of the most important things about disruptive innovations, particularly low-end disruptions, is that the business model that evolves around the innovation tends to be a lower cost business model. This is why it is so difficult for incumbents to replicate what a disruptor is doing - they simply can't afford to do it within their existing business model. Digital equipment built an entire cost structure around selling complicated minicomputers; selling PCs with the same cost structure wasn't possible.

Given Skype's products and the early stage of the company, it is likely that Skype's cost structure is substantially lower than that of Ebay. In addition, it is safe to assume that Ebay has very different internal processes and priorities than Skype. All of which means that Ebay has to be very careful about the way they integrate Skype. Searching for cost savings in the integration doesn't make sense. Skype is not a sustaining innovation for Ebay and and trying to integrate the two companies as if it were could end up knocking Skype off their fast growth trajectory. Combining Ebay's resources with Skype's business model is a receipe for success. Combining Skype's resources with Ebay's processes and priorities is likely to be a receipe for disaster.

Strategy & Innovation subscribers: You'll receive a detailed analysis of the eBay / Skype deal in Tuesday's Innovators' Insight!