INNOBLOG

How the movie rental business disrupted traditional cinema is a well-known story. Over the years, studios have adapted to the trend by earning revenues from video rentals and later DVD sales of major productions, while never fully embracing direct-to-DVD films.

Recently, Warner Brothers created a new unit called Warner Premiere to fully embrace home video and create quality original movies for direct release on DVD. Warner Premiere is making headlines this summer with "Get Smart and its direct-to-DVD sequel to be released just ten days apart. With such a short release window, "Get Smart advertising can promote both the main attraction and its sequel simultaneously. With this strategy, Warner can innovate its business model by generating greater payoffs from one-time use resources like production assets and marketing budgets.

The core consumer Job to be Done is to be entertained. By now, the home viewing public is conditioned to wait for a films DVD release or seek illegal alternatives like street vendors and P2P networks. This summer, how many parents would love to treat their kids to the Shrek 3 DVD after watching it in cinemas? Unfortunately, studios are not capable of creating such an offering and disrupting themselves, as they are hampered by constraining contracts with industry players accustomed to the traditional business model. Mark Cuban is notable for accomplishing "simultaneous release, where a movie is released in theaters, on demand and on DVD concurrently. Warners new unit is a step in the right direction in giving viewers more options for entertainment and we look forward to others like Warner Bros. and Mark Cuban challenging Hollywoods business model.

See "Studios Have New Respect For Direct-to-DVD Films. WSJ. April 20, 2007.
"Warner Bros. Gambles on Direct-to-Video Sequels that Come Out Days After Their Theatrical Originals. Wired.com. May 7, 2007.

Innosight Director of Learning Programs Tara Donovan Young pointed out the following exhibition, which opens today down at the Smithsonian and sounds likely to be chock full of potentially disruptive solutions --

Design for the Other 90%

May 4, 2007 - September 23, 2007

This exhibition focuses on the growing need to create affordable, sustainable means for survival for the 90% of the world's population who lack the means to purchase even the most basic goods. Affordable design innovations include inexpensive treadle water pumps, a low-cost drip irrigation system, and Nicholas Negroponte's $100 computer, among other works.

If anyone gets a chance to go we'd love to hear about it.

VS.

An announcement from Research in Motion last week put two distinct mobile device strategies in stark relief: while RIM is opening up its beloved software to other device makers, Apple continues to play the proprietary game. Which of these two strategies makes the most sense, given current market conditions?

The value chain evolution theory, described in chapter 5 of The Innovators Solution, postulates that integrated solutions are best for developing markets in which new technologies are just getting started. Since there is so much uncertainty afoot, it makes sense for one company to oversee multiple parts of an offering in order to ensure consistent quality and a simple, easy to use interface. Think of how in the early days of computing a company like IBM built the entire mainframe from componentry to software. Since the industry was in its infancy and relatively little was understood about it, the world-class scientists at IBM needed to collaborate on all aspects of product design in order to deliver a top-notch, fully reliable product. IBM leveraged its expertise to achieve 70% share in the mainframe market throughout the 60s and 70s.

However, as markets mature the game changes. Once in the market, technologies become less novel and less mysterious, leading to the emergence of industry standards. As a result, expertise begins to commoditize and value chains modularize. Astute entrants, then, can begin to pick off attractive niches with focused business models that offer improved performance along certain, prized dimensions such as cost, reliability, or convenience. They carve out valuable spaces for themselves while advancing the industry as a whole. As computing matured and the mainframe gave way to the minicomputer to the PC, the industry fragmented: hardware companies like Compaq emerged to assemble the machines, chip companies like Intel provided the processors, and software companies like Microsoft programmed the operating system and various other software applications. Before too long, as Innosight founder Clayton Christensen likes to point out, there was Michael Dell assembling a computer in his dorm room. A task that had previously required a massive company employing the worlds top computer scientists could now be accomplished by an enterprising college kid. Whats more, combine Intels engineers and Dells savvy business processes and you get a more powerful and more affordable computer than any integrated provider could offer.

So whats the lesson for Apple and RIM? Apple, which essentially invented the PC and many vital software applications, fell from grace through the 80s because it tried to hold onto its proprietary, integrated architecture and refused to license its operating system. Controlling its value chain from hardware to components to software had enabled Apple to put together a consistently delightful product, but as the WinTel and Dell value network developed and matured the company got left in the dust.

Fortunately for MacHeads, long-term Apple stock holders, and portable music appreciators, Steve Jobs and his merry band had enough in the tank to regroup and reinvent another, adjacent industry with their iPod. And how did they do it? By integrating. They brought together the device the iPod and the software iTunes in a novel, simple to use, convenient, and highly effective way. An integrated provider, remember, can master the kinks of a new and emerging market to provide the reliability and performance that customers need. Similarly, RIM was famously integrated. Its handy devices did not rely on the buggy Symbian or Microsoft OS, but operated on proprietary, delightful software, and the Blackberry came to dominate the wireless handheld device market.

So that brings us up to the present. As has been widely predicted, handheld devices iPods, PDAs, cell phones are rapidly converging. Your Blackberry now checks email, makes calls, takes pictures and plays MP3s and your iPod will soon become your iPhone. Technological advances and emerging industry standards are driving the convergence. More and more people are leaving their iPods at home, since their homely standard-issue Verizon phone plays songs, and who has room in their pocket for two devices?

And yet, Apple continues to insist on proprietary, integrated architecture: iTunes only works with iPods. For how much longer will people stick to iTunes, as their iPod becomes less essential and competing services Napster, Yahoo Music, Real Music, eMusic get better and better? All the consumer insight and design savvy in the world may not be enough to ward off the multiplying hordes of competitors at different, now modular, parts of the value chain (Christensen has been warning about this for some time now, on this blog and in Business Week).

RIM, on the other hand, has boldly stepped out of the integration trap. By making their email service available to users of other devices, they are seeking to become the "Intel Inside of device software, rather than the Apple Computer of PCs. As markets modularize, this seems to be the wiser strategy.