Thursday Threads: Disruptive Innovation and the Amazon Kindle Fire

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Today's DLTJ Thursday Threads looks at the potential for the Amazon Kindle Fire to disrupt the tablet market as we know it now. First is a link to an eight minute video by Clayton Christensen in which he describes his theory of disruptive innovation. Then there is pointer to an article from the Harvard Business Review blog describing the Kindle Fire's place in the disruptive innovation graph. Finally, some guesses as to why Amazon is selling the Fire for $200 when it costs about $210 to build one.

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Clay Christensen Explains Disruptive Innovation

"This is the model I tried to summarize in The Innovator's Dilemma, and I'd just like to quickly review it for those who have not yet had a chance to read that book."

In this 8-minute video from 2008, Clayton Christensen describes his theory of sustaining and disruptive innovations. As long time DLTJ readers might suspect, I'm a big fan of Christensen's work, particularly how it can be applied to libraries and higher education. One would be hard pressed to find an clearer and more concise explanation that what is offered in this set of slides with an audio narration. If you are interested in more, check out a list of references I've put in a shared Zotero library.

Amazon's Kindle Fire Is a Disruptive Innovation

Disruption occurs given two criteria. The first: that incumbents move upmarket to the most profitable segments, ignoring low-end competitors at the bottom of the market. The second: that the low-end competitor introduces a product with a scalable technology or business model advantage at its core that has the potential to displace the incumbent.

This is exactly what Amazon has with the Kindle Fire. It's not just a low-end competitor to the iPad. There is scalable technology at its core that the present-generation iPad lacks — the extensive use of the Cloud. That is why Amazon can get away with shipping a device that has only 8GB of memory. What's more, the Fire has a business model advantage too — Amazon is using content to subsidize the hardware.

This means that the Fire has the potential to disrupt the iPad.

- Amazon's Kindle Fire Is a Disruptive Innovation, by Rob Wheeler, Harvard Business Review blogs

Now if you listened to the 8-minute video described in the first entry of this week's DLTJ Thursday Threads, you'll have some context for reading this article. Predicting what new innovations will disrupt the marketplace is hard, and Christensen's model points only to signals of what to watch out for. Apple may do something radical to reduce prices or stay ahead of user expectations (but not so far ahead that they overshoot customer's capacity); that is their dominant market position advantage. Or Amazon may stumble and not deliver on moving their product "up-market" in the face of feature oversupply by Apple; that is the new entrant's challenge. But the model is useful in predicting and/or categorizing the sequence of steps that each is taking in their efforts to dominate the marketplace.

Amazon Fire More Than Just a Digital Content Reader

“The real benefit of the Kindle Fire to Amazon will not be in selling hardware or digital content,” read a Sept. 30 research note accompanying the analysis [of the cost of the Kindle Fire components]. “Rather, the Kindle Fire, and the content demand it stimulates, will serve to promote sales of the kinds of physical goods that comprise the majority of Amazon’s business.”

That strategy could pay off for Amazon in the long run. “So far, no retailer has managed to create an umbilical link between digital content and a more conventional retail environment,” the note added. “With Kindle, Amazon has created the most convincing attempt at this yet.”

First off, there are companies that specialize in figuring out the cost of components that make up a device? Who knew?

Second, and more important, is the observation that the Kindle Fire represents a way to make proprietary the optimization of part of the supply chain to create a better user experience. In The Innovator's Prescription: A Disruptive Solution for Health Care Christiansen, along with co-authors Grossman and Hwang, describe a similar optimization with the Apple iPod: "Other Companies' attempts to assemble systems from modular components resulted in difficult-to-use, unreliable products. But by optimizing end-to-end the integration of its iTunes music store and the designe of its iPod player, Apple created an elegantly simple system which companies with nonoptimized, industry standard architectures cannot now compete." ((Christensen, C. M., Grossman, J. H., & Hwang, J. (2009). The innovator’s prescription: a disruptive solution for health care. McGraw-Hill Professional. p 268.)) When you couple the money-losing price of the Kindle Fire with the bundling of a free month of Amazon Prime (which gives customers free two-day shipping in addition to access to commercial-free movies and TV shows), I think we can guess that the user interface of the Fire will be intended to make more frictionless the process of buying physical and digital goods from Amazon. (Or, as one blogger put it, "The real benefit to Amazon is that it acts as cash register to buy more Amazon goods.")