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On October 14, Walmart sent shivers down some spines and a bolt of excitement up others when it announced plans to offer nationwide cellphone and mobile data service. Developed in cooperation with TracFone Wireless, the service (called Straight Talk) will offer two wireless plans, one providing unlimited voice, data, and texts at $45/month and another allowing 1,000 minutes, 1,000 texts, and 30MB of data at $30/month. Some quarters quickly labeled this development disruptive. But is it so?

For an offering to be disruptive, it has to provide superior performance along new dimensions (and, likely, worse performance along some existing dimensions) when compared with existing innovations. Disruptive innovations either create new markets by bringing novel features to nonconsumers or offer more convenience, better access, and lower prices to customers at the low end of an existing market. Let’s see if Straight Talk fits the bill.

At $30 and $45 a month, the service will send many smiling all the way to the bank. According to Nielsen Mobile Bill Panel Data, the average U.S. adult spends $78 per month for 1,000 minutes. The $30 Walmart plan would save that customer $576 per year and the $45 plan would save them $396. There is no doubt that the plans offer cell phone service at a substantially discounted price relative to existing mobile calling packages. Available exclusively at more than 3,200 Walmart stores, the service is accessible to many nationwide. Given that the service is offered without a contract, Straight Talk is certainly convenient for those tired of the conventional two-year agreement.

These elements seem to suggest that Walmart’s offering is disruptive. But the ultimate disruptive effect is contingent on a number of additional factors.

One of those is how incumbents will react to Straight Talk. Historically, many incumbents have, to their detriment, ignored offerings that cannibalize the low end of the market, instead opting to concentrate on the high-end where the margins are more attractive (think Sony PlayStation’s initial response to Nintendo’s Wii gaming console). One may assume that the incumbents in this case would be companies such as Verizon and AT&T, but the story is more complicated.

Here, it becomes prudent to mention that there’s some very interesting complexity behind Walmart’s offering. Through TracFone, Walmart is acting as a Mobile Virtual Network Operator, or an MVNO, which uses an existing carrier’s network instead of building its own – in this case, it’s Verizon’s. This isn’t a new strategy. In fact, many mobile companies failed because they struggled to nail down a winning MVNO strategy. For example, in spite of having pretty cool phones, Amp’d Mobile failed because its young, hip subscribers were massive credit risks who failed to pay their bills. XE Mobile also bit the dust after facing stiff competition from Virgin Mobile USA, which had the targeted college-going market firmly under its control.

That said, I think MVNOs that offer cheap plans with cheap phones can succeed. Specifically, a successful company would need to have a clear target customer, address key customer jobs-to-be-done through a compelling product/service offering, and develop a viable way to make money while doing so. One good example is Sprint’s own in-house brand, Boost Mobile. Launched in 2002, Boost Mobile has done relatively well by offering a wide range of quite slick handset options, dependable roaming capabilities and availability in more than 17,500 cities nationwide. Therefore, it would appear that unlike the previously unsuccessful MVNOs, Boost made some incredible headway in addressing the issues critical to success.

For these reasons, the disruptive potential of Walmart’s offering will continue to hinge on how the company works to address a number of issues: 

• JOBS to-be-done: some MVNOs struggled partly because they offered inferior handsets that failed to address the social and emotional jobs of crafting a hip identity for their customers (imagine a hefty 4.6 ounce, 1-inch thick flip phone fighting to win the hearts of consumers fiercely attached to the iPhone or the Blackberry). While Straight Talk seems to have addressed the “I don’t want to pay a lot for my wireless service” functional job through low prices, will it have a line-up of phones trendy enough to attract a huge customer base?
• Target customer: the current offering will largely attract those in the low-margin, low-end of the market – many likely plagued by high debts and high risks of default. Will it be the Amp'd story all over again? Will Walmart’s prepaid model help where Amp’d tried to go without a contract? What strategy does Walmart have to move up-market where margins are more attractive?
• Business model: unlike Boost Mobile, Straight Talk is dependent on another carrier for its network making it very vulnerable, just like many fallen MVNOs. How will Straight Talk create value for itself? Will its business model be unattractive to market leaders? How will its distribution channel fit into the model? Will market leaders such as Boost Mobile flee or will they fight?

The management at Straight Talk must flawlessly execute its strategy in dealing with these issues. Then, and only then, will Walmart’s powerful distribution channel prove to be a disruptive spoiler for many incumbents.

The Nov. 12 issue of Strategy & Innovation has been posted, featuring these stories:

• Are You Ready for the Next Generation of Innovation? by Stefan Lindegaard explains that the move toward open innovation requires a new mindset and a new set of skills; it is no longer enough to just be a good project manager, researcher, engineer — or leader. What skills are required for this “next-generation mindset”? In his article, Lindegaard discusses these skills: collaboration, relationship-building, stakeholder management, and communication.
• Innovators' Insights:  Sick Economy Visits Doctors by Krystin Stafford discusses the affect that the economic downturn could have on physicians' practices and what innovations they might consider to minimize a drop in their revenues while ensuring that their patients get quality care.
• Disrupt-O-Meter: RingCentral Digital Line vs. Microsoft Office Communicator by Renee Hopkins Callahan describes the competitive struggles in the business VoIP space. Is tiny start-up RingCentral better positioned for growth in the enterprise than Microsoft, which historically has owned the enterprise?

 With thisi issue we are once again making the full Strategy & Innovation issue available as a .PDF download (you will need to register before downloading). The previous four digital issue sof Strategy & Innovation can also now be downloaded in .PDF format.

The iPhone 3G hogged its share of the spotlight over the weekend. The “twice the speed, half the price” phone sold upwards 1 million units over the weekend. But while most of the spotlight was focused on the new phone itself (and the difficulties experienced during the launch), I believe time will show the iPhone App Store — a iTunes-integrated online store that allows consumers to easily install a seemingly endless variety of games, utilities and other applications — was the Apple release most deserving of the weekend spotlight.

The new features (3G antenna, standard headphone jack, etc.) are improvements, don’t get me wrong. But they are the sort of sustaining improvements that customers expect, and they don’t exactly break new ground. I doubt whether these features alone can propel the iPhone to the level of success that Apple’s other “i” product has achieved. (If they could, you’d see a lot more buzz about the LG Dare and the Samsung Instinct).

It is the App Store that adds features in a disruptive way that other phones can’t match. With it, the Apple finally gives consumers a way to conveniently add third-party programs to their phones. (I’ve used both Palm OS and Windows mobile devices and can testify that until now this has been neither a quick nor a convenient process). In the same way that the iTunes music store made the iPod much more than another digital music player by allowing the consumer to easily buy, organize, sync and play music, the App Store makes the iPhone more than another smartphone. It turns it into a computer in your pocket, ready to be customized with the applications that you want.

How significant will the effect of the App Store be? Well, if the history of the iPod before and after iTunes is any guide, the effect will be enormous.

Prior to the release of iTunes in April, 2004, no more than 1 million iPods has been sold during any quarter. After it was released for Windows in October of 2004 (it was a Mac only release for the first few months), at least 4 million iPods (and as many as 22 million!) have been sold every quarter.

Of course, there are differences. Consumers already had well-established habits relating to buying and listening to music that the iPod + iTunes could build on. Similar habits relating to the use of third-party applications on mobile devices may not be as prevalent. And this time, the competition isn’t as far behind. Google is hard at work pushing its own mobile platform, Android, with headset makers and application developers (and might even be developing a Google phone). Also, incumbents like Nokia, which acquired Symbian recently, aren’t sitting still either. Both may be able to offer consumers devices that are as flexible and application ready as the iPhone in the near term.

In the face of these challenges, it will be interesting to see whether Apple will be able to repeat the success of the iPod. It is doing plenty right. But will it be enough?

Well, one commenter wrote that my sentence-long analysis of Nokia's acquisition of Symbian in this post was too simplistic. I agree. Innosight Senior Partner Steve Wunker, who worked at Psion in the 1990s, had the following thoughts:

Ten years ago, a bevy of companies shocked the communications industry when they announced the formation of Symbian—a for-profit consortium that would transform the PDA software of Britain’s Psion PLC into a platform powering high-end smartphones.

Back then, these smartphones were gleams in engineers’ eyes (the first—Ericsson’s Project Pamela—was the size of a small book and never commercially produced). But, almost unanimously, industry analysts foresaw them taking over the premium tiers of the mobile market and requiring a common software platform for the third party developers who would create the applications that users would demand. At its peak in August 2000, equity markets valued Symbian at nearly $10 billion.

This week, Nokia bought out the remaining shareholders of Symbian for about $410 million, and immediately declared it would give away the software code to a non-profit Symbian Foundation.

Was this tumble because Symbian produced a bad product? Not at all. By most measures—system reliability, power consumption, etc.—Symbian’s mobile operating system is the best on the market.

Rather, the world changed in ways very few industry analysts expected. A decade ago, intelligent people reasoned that the processing power of the mobile would start catching up to PCs, and so people would start to demand PC-like functionality on their phones. Moreover, the mobility of the phone would lead to many unique applications being developed for this platform.

Read the rest on Scott's Harvard Business blog, Innovation Insights.

A Wall Street Journal article yesterday described how Android—a mobile phone operating system pushed by Google and more than 30 partners—is encountering some unforeseen difficulties.

These struggles aren’t actually that surprising. Chapters 5 and 6 of The Innovator’s Solution describe how pushing performance boundaries almost always requires that a single company control critical interfaces.

Google its partners are betting they can create a modular mobile phone operating system that anyone can pick up and use. They hope that Android makes it simple and cheap for third-party developers to encourage the use of the Internet on mobile devices, which will result in more advertising revenue for Google.

However, the Android team is still fine-tuning the operating system. Developers report being frustrated because they no sooner optimize an application for Android than the operating system changes. Getting a single Android-powered phone out the door for T-Mobile USA is sucking up almost all of Google’s Android-related resources.

Imagine how different it would be if Google was aggressively pushing its own phone forward (which it very well might be doing behind the scenes).

Read the rest on Scott's Harvard Business blog, Innovation Insights.

Attendees of the Mobile World Congress in Barcelona earlier this year might have easily overlooked what could become a huge success. Modu, an ultracompact cell phone launched by the Israeli technology start-up modu mobile, might be the first truly modular phone – a technology with significant disruptive potential in the mobile communication devices category. However, highly relevant questions on consumers’ jobs-to-be-done and the business model need to be thoroughly considered for modu mobile to be successful in the marketplace.

The technology

In essence, the 1.41 oz., 2.8 x 1.4 x 0.3 inch device is a no-frills cell phone with a small screen and just a few buttons that can be wrapped in one of multiple “jackets” to become a more advanced cellphone (e.g. with a full QWERTY keyboard, a bigger screen, or individualized design). When merged with a “mate,” the modu becomes the core of an entirely different compound device with different performance dimensions such as a portable music player, a car radio, a GPS-system, a bike computer, a camera, or an alarm clock with a docking station that displays incoming text messages. The modularity of modu’s hardware and software allows its processor, memory, and wireless technology to run the compounded devices. 

The job

The modu is set for success only if it precisely targets consumers’ jobs-to-be-done and does not get distracted by the technological possibilities. Instead it should focus on specific circumstances consumers face during their day where the modu could be a winning solution: “Help me enjoy my commute” when getting to work and back, “help me access my emails while on the go” during the work day, and “help me become available for communication” when going out at night might be examples. Now, each of these jobs is already addressed separately by illustrious products such as Apple iPod, RIM Blackberry, and small form-factor cell phones by Nokia, Motorola, Samsung and others. 

At the moment, modu mobile’s answer to these competitors seems to be a lower price. The anticipated price of $200 for a modu bundled with two jackets that range in price from $20 to $60 each might differentiate modu from its respective nonmodular competitors. Yet, competitors could simply decide to sell for less, cutting their margins to outcompete modu.

The true power of modu’s technology lies in its modular architecture. Modu mobile can create a competitive edge by translating the device’s customizability into two distinct performance dimensions. First, modu's modularity can facilitate the individualization of consumer electronics -- a trend that predates its most common and unfortunately popular example, the personal ringtone. The second performance dimension follows the broad job “help me make my daily life easier.” This might sound more straightforward than it actually is, but figuring out how precisely to align communication technology with cross-architectural usefulness will be key for modu to challenge the iPods, Blackberrys and Nokias of this world. In this context, swapping the modu between multiple jackets and mates per day needs to be as quick and easy as its teaser suggests.

The business model

Modu mobile plans to launch its device with support from major cellphone carriers in Italy, Israel and Russia this October, followed by the U.S. and other European countries in 2009. Modu's business model focuses on selling the phone while licensing the technology to third-party manufacturers, who will build jackets and mates on their own. Manufacturers could profit from licensing modu’s technology by launching their products without a slow and relatively expensive licensing process with the Federal Communications Commission, because the modu is already a phone.

Modu mobile, in turn, keeps full control over the core component of what they hope will become as standard as flash data storage devices, the last undertaking of modu founder and CEO Dov Moran, who was formerly CEO of msystems inventor of flash data storage devices that was acquired by SanDisk Corp for $1.6 billion in late 2006). The two main advantages of licensing technology to other manufacturers for modu mobile are that with an increasing number of jacket and mate manufacturers the modu would be more and more cemented as a standard, and as other companies also strive for success, modu mobile hedges its risk of failure by potentially not getting the job quite done for consumers.

The future

Modu mobile has the potential to disrupt the mobile communication devices category. It can target overshot and/or nonconsumers (an interesting occurrence of a potential low-end and new market disruptive innovation), if it is able keep the low-price promise along with increased ease of use, or by introducing a new performance dimension around the device’s modularity and striving for increased customizability. The business model appears promising, if the self-reinforcing mechanism of initial success results in a large base of third-party manufacturers.

These are all big ifs, and I am really curious to see what the future will bring for modu. 

Lillian Zhao

When I first was told that Mocospace was getting VC backing in early 2007, I skeptically thought: “Who’s going to use another social networking site?!”

Eighteen months later Mocospace has grown to become the leading mobile social networking site in North America. With more than one billion mobile page views per month, it’s holding its own against incumbents like Facebook (which has more than 300,000 mobile page views per month).How did Mocospace become so popular?

What I didn’t realize when I first heard about Mocospace was that it has a powerful, disruptive business model that has successfully targeted a new distribution channel (the mobile phone) and a new customer base (non-consumers of existing social networking sites). This disruptive business model has propelled it to a leadership position in mobile social networking.

New Channel

Mocospace was one of the first to create a social networking site specifically designed the mobile phone. There is a subtle though distinct difference in how people use social networks on the PC vs. the mobile phone that stems from the basic differences between the PC and the mobile phone –- the PC is a static, multi-function device, whereas the mobile phone is an always-on, always-connected, communication device.

Mocospace realized this early on, and optimized its features for the jobs-to-be-done of a mobile phone user: instant communication, quick entertainment, killing time, and staying socially connected. Mocospace offers every type of communication (chat, IM, mail, messaging, micro-blogging and even voice-messaging) in one place. Other entertainment options include games, rating other people’s photos, watching videos, contributing to forums (my personal favorite are the ‘yo mama jokes’ in the jokes forum). Mocospace’s “friend finder” application also serves members’ job-to-be-done of meeting new friends and staying connected with existing friends.

Mocospace’s strategy is different from the incumbents, Facebook and MySpace, which emphasize content rich user pages and graphic-intensive applications –- all awesome features that work great on a PC’s screen, but are too cumbersome to navigate on the phone. As such, they’ve naturally chosen to use the mobile to extend a subset of their online features. However, MySpace’s initial strategy was to charge users an annual monthly subscription, shared with the carriers, to use their mobile site. That strategy was not overly successful and has now been de-emphasized.

In contrast, Mocospace’s site is extremely mobile-phone user-friendly, as all functions have been optimized for the small screen and numeric keypad input. For example, it leverages icon-based navigation and limits the amount of words and excess visual distractions per page. The results are clean, easy-to-navigate pages.

Meeting the needs of nonconsumers

Mocospace’s functionality serves the jobs-to-be-done of a previously untapped market: nonconsumers of existing social networking sites designed to be accessed on the PC. A large portion of the US population doesn’t have constant, private access to a PC with a broadband connection, for a variety of reasons that could include on-the-go lifestyles, economic limitations, and/or remote locations. However, most of these users have a mobile phone. Some use unlimited data plans from carriers like Leap Wireless and MetroPCS, in lieu of a PC. This eclectic group of urban youth and mobile workers were the early adopters of Mocospace. They didn’t have PC access 24/7; but they had mobile access 24/7.

While Mocospace has clearly done extremely well to date as a mobile social networking site, I still wonder if it can sustain its leadership position. Despite impressive monthly growth, will it be able to continuously grow its user base to solidify its dominance in the mobile social networking sector? Or will incumbents Facebook and MySpace, or even a new start-up, take the mobile lead away from Mocospace? If so, how will Mocospace’s strategy’s change?

Time will tell. And, I am scheduling an interview with the founders of Mocospace soon, and I'll be sure to ask about these issues.

Watch for the “Voices of Disruption” interview with Mocospace co-founder, Justin Siegel, in the July/August edition of Strategy & Innovation. 

Recently a reader commented on our earlier piece on Clearwire that WiMax will probably meet with greater success in developing countries than in developed ones. We thought it was an intriguing comment so for this piece, we decided to look into Malaysias WiMax efforts.

Malaysias telecom regulator, the Malaysian Communication and Multimedia Commission (MCMC), recently awarded Wimax wireless high speed internet licenses to four companies. While the awarding of the licenses is not ground breaking in itself, the regulators motivation in choosing these 4 companies out of a field of 17 deserves a closer look.

The four firms chosen were all smaller firms while among the losers were some of the largest companies in Malaysia, including the largest mobile operator in the country, Maxis Communications. At first blush, this decision may seem to be an odd one. Wouldnt the larger, more established firms have an easier time rolling out a nationwide network? Wouldnt granting licenses to the market leaders be a less risky choice.

But MCMCs choice does makes sense if we look at the situation through the lens of disruptive innovation. The theory of disruptive innovation says that established firms have a tougher time taking advantage of disruptive innovations than smaller start-ups do. This happens because, over time, established firms optimize their processes, resources, and values, to succeed in their current environments. When faced with a truly disruptive innovation, these firms have difficulty changing their entire business models to take advantage of the new innovation. So, for example, instead of offering a quad-play package (traditional wireline voice, wireless, video, and internet) over the new WiMax network, these incumbents would be more inclined to try to use their existing infrastructure to leverage their existing investments as much as possible and only sparingly use WiMax to augment their offerings. Of course, this makes sense for the incumbent firms given their large investments in their current infrastructure but it also has the affect of slowing down innovation by keeping the market from realizing the full potential of the new network.

Smaller start-ups, on the other hand, have none of the historical baggage of the incumbents and are free to enter the market in a truly disruptive way. Since the MCMCs goal was to disrupt the market and increase competition and choice for the consumer, it made the right decision when it chose to award the licenses to smaller, more nimble firms instead of the market leaders with established processes.

Each issue of S&I, we feature a person who is in the trenches of disruption. Recently, we heard from Horace Dediu and Chris Briglin, who work in Nokias Enterprise Solutions developing new market entry strategies and business models. Nokia Enterprise Solutions develops devices and server products that improve mobile worker productivity. An excerpt of their writing follows, but the full article can be read by subscribing here.

Disruptive innovation theory can be a powerful management tool to help define a companys path to future growth. To extract real value from the theory, however, weve needed to work diligently to fully understand the power and limitations of disruption.
Harvard Business School Professor Clayton Christensen refers to this in-depth training as getting a disruptive black belt. At Nokia, we have found that the learning process is perhaps just as onerous and time-consuming as getting a real black belt in martial arts.
The correct use of the theories is a matter not only of practice, but of continuous trial and, unfortunately, error. This persistent practice pays real dividends that can improve company performance"and lead to real career distinction.

Our journey at Nokia Enterprise Solutions business group has revealed four primary insights:
1. Begin by rigorously studying your past patterns of innovation
2. The only constant in disruptive innovation is change
3. New resources, processes, and values need buy-in from the top
4. Answering questions is easy, asking the right ones is hard

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!

A reader passed on a recent NYT story discussing how the cable companies are beginning to compete for business customers ("Not Just TV, Cable Competes for the Office Domain"). For a long time, it was difficult for cable companies to effectively serve business customers. For one thing, their coaxial cables didn't pass by many office locations. Even worse, their best offering (video) wasn't exactly what business customers needed.

Technological innovations have altered the landscape. Businesses now of course are looking for the high-speed data connections that cable companies provide. Even better from a cable company's perspective (and worse from a phone company's perspective), VoIP solutions allow cable companies to offer solid voice services at reasonable prices.

One of the big questions for the cable companies will continue to be how they pick their fight with the phone companies. All of the signs in the marketplace continue to suggest a full-on assault on the core business of the phone companies. Cable companies have a compelling offering with the ability to combine voice, video and data on a single bill. Now that they've moved away from offering circuit-switched solutions to IP-based solutions, they can actually create a compelling and reasonably priced combined offering that doesn't hide under the smoke screen of marketing bundles. From a disruptive perspective, the problem of course is that they are going after markets that established incumbents will hate to lose. In response, phone companies are continuing to work to improve their video offerings and partner with satellite providers so they too can go after the cable companies core business.

All of this suggests that the intensifying competition is going to end up bruising both the video business and the phone business (we discussed this in Chapter 10 of Seeing What's Next). I'm still waiting for someone to break free of the obvious no-holds-barred, head-to-head competition and find a disruptive path. If not, I'd bet we're going to see more consolidation over the next couple of years. One of the cable companies might pick up Vonage. Then a cable company and a phone company will merge. None of this will help the goliaths fight back against disruptors such as Skype and emerging IPTV providers. It will be interesting to continue to watch how this unfolds.

There was a classic article in the WSJ on Thursday. As you may know, the local telephone companies (Verizon, et al) have announced plans to get into the cable television market. Part of this is of course the perpetual quest for new growth. Part of this is to have a weapon to use to beat back the cable companies who are using VoIP to come after the telephone companies.

In Seeing What's Next (shameless plug alert), we talk a lot about how the best way to go into these battles is to try to take some kind of asymmetric approach that your opponent doesn't want to respond to. The cable companies seem to be largely moving in this direction with their low-cost, good enough VoIP solution (just a matter of time before one of them buys Vonage ...). The phone companies seem to have missed this chapter. Everything I've seen suggests an all-out approach going right after the core of the market with a largely me-too product. The hope has been to have everything the cable companies have and layer on top some additional services that take advantage of the telephone network's flexible architecture.

Well, surprise, surprise. Sensing a potential threat to their core business, the cable companies are trying to figure out how to do switched services that allow them to match some of the new benefits the telephone companies hope to provide.

Confused yet? Read Thursday's WSJ article ("Cable Operators Rush Services To Keep Edge", registration required). It's clear a battle is a-brewin'. Hard to bet against the cable operators here unless the telephone folks can figure out a disruptive path.

Occasionally we come across an innovation that looks like a disruptive innovation on first glance, but upon further consideration turns out to be a sustaining innovation. In situations like these, asking the right questions is critical. Take for example the new Firefly mobile phone. A pretty neat concept, the phone is designed for young children (the target is ages 8 to 12). Without a keypad, children don't have to remember phone numbers and parents don't have to worry about children making outside calls. And none of that time wasting, distracting text messaging which is so bothersome in the class room.

On the surface, this might appear to be a disruptive innovation. A simple (almost toy-like) product that enables usage by a new market. And yet, if we ask the right questions, we discover that the Firefly is more of a sustaining innovation and if it gains any traction in the market, incumbents are likely to take over the market.

The first question to ask should be "is the innovation low-end or sustaining?" In the case of the Firefly, it is a new market disruption. It wouldn't be considered a low-end disruption, because at $99.99, it's much more expensive than your average mobile phone and it's functionality is not even good-enough for the regular mobile phone market.

Now, when evaluating a new market disruption, two sets of questions must be answered. First, "is there a large population of people who historically have not had the money, equipment or skill to do this thing for themselves and as a result have gone without?" Certainly a lot of young children have gone without, either because a regular cell phone was too complicated or because parents felt it inappropriate to give a young child a cell phone. Is the market large? That is up for debate in this case. For Firefly the answer is clearly yes, but it is less clear for a phone manufacturer like Nokia.

Second, "is the innovation disruptive to all the major incumbents? In this case the answer is no. There is nothing unique about the Firefly from the perspective of Nokia. It is simply a stripped down cell phone with limited capabilities. Such a product would be fairly easy for them to develop (setting aside the issue of product design for the moment). Additionally, with a new market disruption, as the product improves it pulls customers from the original value network into a new value network. In the case of the Firefly, the concept was to take a cell phone and strip it down. As the product improves, it ends up competing at the low-end of the existing value network, not creating a new one.

When it comes to innovations, asking the right questions is critical.

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.