Jul 25, 2017

Defining the Word “Disruptive” in Digital Tech Ecosystem

Disclaimer: The essay is based on writer’s opinion

I would like to start this post by disclosing my purpose of this essay.

I ruminate that the word “disruptive” has been highly overused—at least in Indonesia’s tech ecosystem—reaching a level that I personally despise it as more and more people treat it like a raunchy catchphrase. I used to mistakenly take that being disruptive is about bringing new age technology—which I think is how most startup founders and business stakeholders in Indonesia still perceive it. Most of the people in the scene trying to claim that they’re doing something disruptive by “redefining x”, “adopting the most advanced technology of y”, or combining it with other jargons (“machine intelligence”, “predictive learnings”, etc).

I met a startup about 2 years ago that is trying to create beacon/BLE-based solutions for retailers and advertisers. I thought that they have some potentials, until they’re calling themselves a disruptive IoT company (duh~). Good vernaculars for corporate pitches, until when it comes down to result, they’re dull as dishwater.

I would like to convey my thoughts on at least 3 things that make a technology products or services should be categorized as “disruptive”.

 

1. When it democratizes the economics’ supply chain

This type of disruptive technology is imminent in sharing economy startups, such as Uber and Airbnb.

What makes Uber and Airbnb great is that it brings liquidity into markets with an inelastic supply. In simple economics term, they democratize the supply side of the market by making it more skewed into perfect competition market structure. Today, everyone can be a cab driver and hotel host. Supply of cabs on hotel rooms that used to be inelastic (the number of cabs and hotel rooms are limited to the capacity of cab companies and hotel chains) becoming more elastic, and hence, with all things equal (ceteris paribus), reducing the price down, as it brings more quantity to the market.

A platform expert Sangeet Paul Choudary in his book “Platform Scale” manifested the concept of “changing business channels from pipes to platforms”. Platform companies are in the business of enabling interactions between supply and demand side of the market. The power that enable this kind of interactions and at the same time bringing more value for both sides of the market (higher availability in supply side, more affordable prices in demand side) is very powerful, and bringing a disruptive force to the incumbent players?—?all of whom are still struggling with their inelastic supply chain.

 

2. When it changes businesses’ cost structures

Cloud computing has definitely disrupted the whole enterprise software market. Products like Amazon Web Services (AWS) and Dropbox are changing the landscape of how enterprises pay for their hosting and storage services, respectively. Instead of compiling a bulk of upfront costs for the initial outlays, using these cloud technologies, companies can pay for those same services in a monthly/yearly subscription basis.

This shift ultimately impacts businesses’ cost structures and cash flows, that all the capital expenditures are shifted into operating expenses. This is a big deal for companies, as they can preserve healthy level of cash flows and they can start allocating the cash for other costs, such as sales and R&D. This model also enables those service providers to gain scalability faster, as barriers to adoption is significantly lower compared to the on premise model. Dropbox has demonstrated this capacity as it grows from launch to 500 Million users in 8 years (Forbes, 2016), and currently the fastest company to reach US$ 1 Bn ARR run rate (IDC, 2017).

 

3. When it transforms businesses’ natures from “atom” to “bits”

Coined by venture capitalist Chamath Palihapitiya, bits to atom businesses are defined as busineses that are building something in software that then gets translated and manifested in the real world, in physical atoms. 2 of the best examples of bits to atom businesses are Amazon and Tesla.

Amazon started off as a 100% virtual e-commerce, but now they are building more things in the physical world: boats and planes for logistics services, robots and drones for delivery mechanism, and fulfillment centers. Tesla is another good example. It is a company with supreme software capability, but it manifests in batteries, engines, and cars.

Companies like Amazon and Tesla are completely reshaping commerce and automotive. Amazon is so massive in its scale and dominates e-commerce market and trading industry in general, that it aggravates a country’s monetary effort?—?in this case, Japan’s?—?to beat deflation, as reported by Wall Street Journal (2017), where retailers in Japan constantly need to cut prices for them to be able to compete with Amazon. Today, Amazon is valued twice as Walmart, the biggest retailer in the world.

Tesla constantly challenges the incumbents in the automotive industry as it is the front-runner amongst all car manufacturers to embrace the new age of transportation: energy storage and autonomous cars (Morgan Stanley, 2014).

From these observations, I think we can come to a conclusion that disruption is a dependent variable of an equation, which implies that a company cannot simply claiming themselves “disruptive”, unless it has figured out the impact that the company is bringing to the industry. As we have seen from the examples above, technology — no matter how cutting-edge and abstruse (esp. with all the jargons) — is merely a disruption, if the product cannot create a dent in the economy’s value chain. As what Wealthfront’s Andy Rachleff wrote 4 years ago, that business models, not products, are disruptive.

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(Joshua Agusta - Head of Portfolio @ MDI Ventures)