Disruption: It’s All About the Business Model
This post is an excerpt adapted from my book, Disruptive Analytics, available soon from Apress and Amazon. (Note: under my contract with Apress I am legally obligated to link to their site, but it’s not yet possible to order the book there. Use the Amazon link if you want the book.)
The analytics business is booming. Technology consultant IDC estimates total spending for analytic services, software and hardware exceeded $120 billion in 2015; through 2019, IDC forecasts that spending will increase to $187 billion, an 11% compound annual growth rate.
Powerful forces are at work in the economy today:
- Digital transformation of the economy and rapidly declining storage costs combine to create a flood of data.
- The number of data sources is exploding. Data sources are everywhere: on-premises, in the cloud, in consumers’ pockets, in vehicles, in RFID chips, and so forth.
- The “long march” of Moore’s Law: cheap computing power makes machine learning and deep learning techniques practical.
So, if analytics is such a hot field, why are the industry leaders struggling?
- Oracle’s cloud revenue growth fails to offset declining software and hardware sales.
- SAP’s cloud revenue grows, but total software revenue is flat.
- IBM reports seventeen straight quarters of declining revenue. Mass layoffs
- Microsoft underperforms analysts’ expectations despite 120% growth in Azure cloud revenue.
- Predictive analytics leader SAS reports five years of low single-digit revenue growth; Executive Vice President and Chief Marketing Officer departs.
- Data warehousing leader Teradata shuffles its leadership team after four years of declining product revenue.
Product quality is not the problem. Each company offers products that industry analysts rate highly:
- Forrester and Gartner recognize IBM, SAS, SAP and Oracle as leaders in data quality tools.
- Gartner rates Oracle, SAP, IBM, Microsoft and Teradata as leaders in data warehousing.
- Forrester rates Microsoft, SAP, SAS, and Oracle as leaders in agile business intelligence.
- Gartner recognizes SAS and IBM as leaders in Advanced Analytics.
- Industries consist of value networks, collections of suppliers, channels, and buyers linked by relationships.
- Innovations disrupt industries when they create a new value network.
- Not all innovations are disruptive. Many are introduced by market leaders to sustain a competitive position.
- Disruptive innovations tend to be introduced by outsiders.
- Purely technological innovation is not disruptive; what matters is the business model enabled by the new technology.
For a more detailed exposition of the theory, read Christensen’s book.
Christensen identified two forms of disruption. Low-end disruption occurs when industry leaders enhance products faster than customers can assimilate the enhancements; the disruptor enters the market with a “good enough” product and a better value proposition. The disruptor’s innovation makes it possible to serve customers at a lower cost than the industry leaders can deliver.
New market disruption takes place when the disruptor innovates in ways enabling it to serve customers that are not served by the industry leaders.
Technology alone does not disrupt industries; incumbents can and do innovate. New business models enabled by new technology are the cutting edge of disruption. Frequently, incumbents cannot respond effectively to new business models; this is partly due to “blinders” caused by changing value networks, and partly out of fear of cannibalizing existing business arrangements. Two business models, in particular, are disrupting the business analytics world today:
- Open source software business models offer an increasingly attractive alternative to commercial software licensing. The Hadoop ecosystem displaces conventional data warehousing; R and Python displace commercial software for advanced analytics.
- The elastic business model made possible by cloud computing undercuts conventional software licensing. When customers pay only for what they use, they pay a lot less.
Disruption does not mean that leading companies like Oracle, IBM and SAS will go out of business. Blockbuster may be the poster child for disrupted businesses, but most cases are less dire; for the business analytics leaders, disruption means they will struggle to grow. Slow growth is less benign than it sounds. As McKinsey notes, the rule today is “Grow or Go”: companies that cannot define a credible growth strategy will be acquired by other companies or by private equity.
The alternative to revenue growth is increasing profitability. But when revenue is flat or declining, that usually means job cuts.
Consider what happened to Teradata. Late in 2012, the company started missing sales targets; in early 2013, it stunned investors by reporting an absolute decline in sales. Management offered excuses; Wall Street punished the stock, driving it down by half in the face of a bull market for tech stocks.
Teradata’s leadership continued to miss sales and earnings targets; Wall Street drove the stock price down to a fraction of its 2012 peak. While it is tempting to blame the problem on poor leadership, Teradata’s persistent failure to accurately forecast its sales and earnings is a clear sign that its leadership no longer understood the value networks in which they operated. The world had changed; the value networks created in Teradata’s rise to leadership no longer existed; the mental models managers used to understand the market no longer worked.
There are two distinct types of disruption. The first is disruptive innovation within the analytics value chain. Here are two recent examples:
Hadoop. The Hadoop ecosystem disrupts the data warehousing industry from below. Hadoop does not do everything a relational database can do, but it does just enough to offer an attractive value proposition for the right use cases. When first introduced, Hadoop’s capabilities were very limited compared to data warehouse appliances. But Hadoop’s flexibility and low cost were highly attractive for applications that did not need the performance and features of a data warehouse appliance. While established vendors struggle to maintain flat and declining revenue, companies that offer solutions built on Hadoop grow at double-digit rates.
Tableau. Tableau virtually created the market for agile, self-service discovery. The charting and visualization features in Tableau are available in mainstream business intelligence tools. But while business intelligence vendors target the IT organization and continually add complexity to their product, Tableau targets the end user with a simple, easy to use and versatile tool. As a result, Tableau has increased its revenue tenfold in five years, leapfrogging over many other BI vendors.
Disruption within the analytics value chain is pertinent for readers who plan to invest in analytics technology for their organization. Technologies at risk of disruption are risky investments; they may have abbreviated useful lives, and their suppliers may suffer from business disruption. Taking a “wait-and-see” attitude towards disrupted technologies makes good sense, if only because prices will likely decline in the future.
The second type is disruption by innovations in analytics. Examples of disruption by analytics are harder to find, but they do exist:
Credit Scoring. General-purpose credit scoring introduced by Fair, Isaac and Co. in 1987 virtually created a national market in credit cards. Previously, banks issued credit cards to their local customers, with whom they had an established relationship. Uniform credit scoring enabled a few large issuers to identify creditworthy clients in the general population, without a prior relationship.
Algorithmic Trading. When the U.S. Securities and Exchange Commission authorized electronic trading in regulated securities in 1998, market participants quickly moved to develop algorithms that could arbitrage between markets, arbitrage between indexes and the underlying stocks and exploit other short-term opportunities. Traders that most effectively deployed machine learning for electronic trading grew at the expense of other traders.
For startups and analytics practitioners, disruption by analytics is essential. Startups must disrupt their industries if they want to succeed. Using analytics to differentiate a product is a way to create a disruptive business model or to create new markets.
There is a common theme across the four examples: the business model enabled by the technology and not the technology itself drives the disruption. Hadoop and Tableau do less than the legacy products they compete against; what they do, however, is sufficient for a class of use cases, for which they provide a better value proposition. Credit scoring and algorithmic trading created fundamentally new ways to lend and invest; while these applications attracted technological innovations as they expanded, it was the new business models they created that disrupted the lending and investing industries.
To illustrate the importance of the business model, consider the case of columnar serialization, a significant innovation in data warehousing that did not disrupt the industry. In 2005, Vertica introduced a commercial columnar database, a technology that is well-suited to high-performance analytics (as we explain in Chapter Two of Disruptive Analytics). Vertica successfully built a customer base, but did not create a unique business model; by 2010 the leading data warehouse vendors had introduced columnar serialization into their products. HP acquired Vertica in 2011 for about $250 million, a price well below the $1.7 billion IBM paid for Netezza, a competing data warehouse appliance vendor.
Here are some takeaways for the reader to consider.
First, if you want to invest in new business analytics technology, ask yourself:
- Are we paying for what we use, or for what we might use?
- What particular value do commercial software options offer over open source alternatives?
Second, if you want to use analytics to create a disruptive innovation, ask yourself:
- What new business model does this support?
- Can we disrupt incumbents from below with a better value proposition?
- Can we reach new markets and new customers who are underserved by existing value networks?
There is one additional takeaway: nobody ever disrupted anything by managing data. Keep that in mind the next time a data warehousing vendor tries to tell you that their Big Box is a “strategic” investment. We’ll explore that in another excerpt from the book.