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One of the paradoxical things about disruptive innovation is that incumbent companies get into trouble by doing exactly what they are supposed to do. They listen to their best customers, innovate to meet their needs, produce the best products on the market and seem to get blindsided by a disruptive innovator armed with a simple, cheap, convenient offering.

Incumbents almost always see the disruption coming. But making the down-market move often required to master disruption is challenging.

Take, for example, Microsoft's recent move to offer versions of its productivity software over the Internet. Pundits have noted the disruptive potential of Web-delivered application software like Google Apps, whose users can access free spreadsheet, word processing, instant messaging, and calendaring software over the Internet. Google Apps doesnt have all of the features packed into Excel, Word, and PowerPoint, but it is "good enough and it is free.

Down-market moves are incredibly difficult. First, the moves seem economically unattractive. Would Microsoft rather sell one additional copy of traditional packaged software with 80 percent gross margin or get one additional customer to use online services for free? At the margin, the choice is obvious.

With no core software business to worry about, Google doesn't face this dilemma...

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