17 December 2010

The Added Building blocks of Disruption - by T Ta

      Posted 12/16/10 12:35:00 pm  

Over the years, certainly in the high-tech/internet sectors, there has been a lot of talk of something called “Disruption”. Google disrupts Microsoft, Facebook disrupts Myspace, Apple disrupts with iPod and iPad combined ith its Appstores, the Wii disrupts HD-efforts, the 3DS disrupts Sony’s 3D-efforts and so forth. But what is this Disruption really? Wikipedia gives a small but superficial taste and you also have the three books by Prof. Christensen (the maker of Disruption Theory). But it relies heavily on examples and abstract theory forming to give you a insight into disruption instead of actually explaining the basis of Disruption. I will try to remedy this.

But first, why is Disruption important for videogames? Well, videogame history is heavily defined by the processes of Disruption. Writing a History of Videogames in the last years without using Disruption is now actually a sign of incompetence and lack of true insight into gaming’s history. Videogames at their start were highly Disruptive. Video-arcades disrupted slot-machines, Videogame consoles paved the way for the Computer/PC boom, no seriously think about it: what was the first computer-like object millions of families had? It was a videogame console. Ranging from the Atari 2600, NES and even SNES and Megadrive, the first computer-like device in tens of millions of homes were videogame consoles before an actual computer/PC entered those tens of millions of home. Also, videogame consoles disrupted the video-arcade (part of why video-arcades stagnated from 1983 onwards). Videogames paved the way for the e-generation(s) happening now.

The NES/SNES/Megadrive disrupted cartoons, again very serious about this. The reason for the creation behind the Simpsons, South Park and other more mature-aimed cartoons from the 90’s and onward was because videogames were replacing cartoons. In a first phase cross-breeding. Disney and Warner Bros. Characters became videogame characters while Mario and Sonic became cartoon characters.

The Gameboy would then disrupt consoles, Activision disrupted Atari as the first third party, Shareware disrupted traditional distribution channels and gave rise to studio’s like iD Software. Flash games are disrupting…well…a lot. The Wii disrupted traditional thinking behind gameconsoles. Hell, if you would make a proper timeline of all the major Disruptions that videogaming has created, you would come to an average of nearly a Disruption every 5 years (a bit more). No industry sector has this speed…and considering Moore’s law, it will only speed up even more.

Also notice that Disruptions have a knack at replacing an established product/sector/company/power by taking over functions (by doing them more cheaply and/or efficient) from the established entity over a period of time. This is what a Disruption does.

But what is Disruption at its core? A Disruption uses two basic economc laws: The law of diminishing returns and the Ricardian process of comparative advantages.

For those who are not familiar: The law of diminishing returns is about repeated use or investment of/in something and the result/return you get from them. For example, you have run a race, at the finish you are very thirsty so you consume a drink. Afterwards you feel quite less thirsty but not entirely satisfied so you consume another drink. This second drink will satisfy less of your thirst then the first one and so on. And one point, consuming another drink will hardly satisfy you because there’s nothing left to satisfy (thirst-wise). There's even a possibility that consuming more drinks after that point, those drinks could become harmful, having a negative return.

A more economically example. Consider a piece of farmland which you work alone.  On your own, you can’t work the entire surface of the farmland effectively, so hiring someone as help boosts the return heavily. Hiring a third one and so on also boosts return. But there is a point where hiring more people will get you less and less returns for that hired person. There’s even a point where the return will become negative.  Now let’s apply this to todays HD-consoles with these two facts: higher costs and a far smaller user-base (since the HD-consoles have failed the absorb a major part of the PS2-audience). The investments go up enormously but the returns are, generally speaking, mostly negative with third parties having to sell from 250 000 to a million copies to actually break-even (coming from 50 000-100 000 on the PS2). This is the effect of the law of diminishing returns kicking in. This has been the deathtrap for a lot of companies and sectors in history, hoping that vast investments, which creates so-called “superior” product will net them the same returns as the smaller investments in the past.

 

So what does a Disruption do with this law? It actually resets the curve of the diminishing returns in some aspects or all (or by introducing a new aspect) within a certain sector/product. Take the Atari 2600. What was the main attraction of the Atari 2600? It allowed people to play arcade games at the leasure of their home without keeping to pour in coins. Sure, the ports were most of the time “inferior” but people didn’t seem to care. The Atari 2600 in effect reseted the curve of diminishing returns on arcades. Video-arcades needed custom-made chip-boards which were expensive, the Atari 2600 was the same for years, becoming cheaper to make over time. The Gameboy did the same thing, resetting the graphics aspect of consoles, taking over the functions of the NES. With the GBA, handhelds completely took over 2D-gaming from consoles and so forth. The Wii stopped the curve on the graphics and reseted it on terms of controls.

 

Keep in mind, disruptions almost always start as “inferior” compared to the established traditional path because they reset the curve. But because they reset this curve, they have more room for long-term growth when applying their improvements. These improvements off course need to make sense. One the reasons why Apple keeps getting such success all these years is because Apple knows how to improve their products on a moderate pace. Incorporating new technology when it is affordable. A counter-example is the 3DS that has a high chance of hitting the diminishing curve quite high because 3D in general isn’t considered worthwhile by the core-markets (HD is half a failure in this regard, 3D is way higher on the diminishing returns curve then HD).

And what about the Ricardian proces of comparative advantages? This proces actually explains international trade and the benefits from it. Ricardo (the guy wrote this in the 18th century) found out that if country A has an advantage in making product Y and country B has an advantage in making product Z, it is most beneficial if both countries specialise in making the products they have an advantage in and then trade with each other for the other good. These comparative advantages of course are not set in stone. France is historically good at making wine, but that doesn't mean others can’t create comparative advantages to off-set this (looking at you South-Africa). Belgian chocolate is the best of the world because the Belgian government at one point in history decreed that all chocolate made in Belgium should have a (quite high) minimum percentage of cacao in it, giving it the rich flavour of Belgian chocolate and accustoming the makers of it to the process.

Disruptions, and especially the companies that carry them, are well, disruptive, because they create favorable comparative advantages for themselves compared to the established companies. Most of the time this advantage comes from being higly specialised in a certain thing (a company’s so-called internal processes).  This specialization then gives them clear cost-advantages compared to bigger (and probably more branched-out) companies, this is also called the assymmetric skill in Disruption’s literature.

Compare Apple or Nintendo with Sony and Microsoft. The first are specialised software/hardware hybrids and don’t really deviate from their chosen product-line, giving them clear advantages (especially in cost) towards the latter. A good example of this is the GameCube vs Xbox/PS2. Despite the GameCube being almost as powerfull as the Xbox but having the same price-point a the PS2, Nintendo managed to make profit from almost each sold GC (expect for a couple of months when the price went 99 dollars/euro’s). This is because Nintendo’s processes, it’s comparative advantages, are highly specialised in making a very efficient and affordable piece of hardware. Sony and Microsoft are not specialized consolemakers, which shows greatly (profit-wise and/or quality-wise).

This combined resetting of the diminishing returns curve and the comparative advantages that disruptive companies posses is one of the reasons why you heard so much about “small, agile, mostly young companies out-maneuvering big ones” the last couple of years.

Also, an extra note. This is article is not supposed to replace or go against Disruption literature. This was an attempt to dig deeper into the core-processes of an Disuption in general. A reading of the books by Prof. Christensen is higly advised and recommended, combined with these insights, to get a full understanding of Disruption.

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Chad Wagner
16 Dec 2010 at 11:20 pm PST

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