Why Big Companies Almost Never Notice Disruptive Innovation

from the follow-the-money dept

Fri, Aug 20th 2010 6:33pm — Mike Masnick

Paul Graham has written one of his typically worth-reading essays about why Yahoo! went from the darling of the internet world in the mid- to late-90's to whatever it is today (an also-ran's also-ran). I don't have much to say on the main point of the essay, so if you're interested in that, go read it. However, what did catch my eye, was one little aside about trying to get Yahoo to buy Google soon after Google came on the scene:

I remember telling David Filo in late 1998 or early 1999 that Yahoo should buy Google, because I and most of the other programmers in the company were using it instead of Yahoo for search. He told me that it wasn't worth worrying about. Search was only 6% of our traffic, and we were growing at 10% a month. It wasn't worth doing better.

I didn't say "But search traffic is worth more than other traffic!" I said "Oh, ok." Because I didn't realize either how much search traffic was worth. I'm not sure even Larry and Sergey did then. If they had, Google presumably wouldn't have expended any effort on enterprise search.

Whenever we talk about innovation and things like patents, one common refrain is that no innovation would occur without patents because big companies would immediately copy the technology and destroy any up-and-comer. We've pointed out plenty of times that this simply isn't true. For a truly disruptive innovation, big companies often won't even notice you until you're way ahead of them -- at which point copying is fruitless. Hell, for nearly the past decade now, Yahoo's tried every which way to "copy" Google, and it got them nowhere in terms of actual market share (actually, it got them so little that they recently gave up and outsourced it all to Microsoft).

The problem is encapsulated in the little exchange between Graham and Filo above (and, I've actually heard nearly an identical anecdote from some folks at AOL who looked at buying Google in '98/'99 as well). If a company is big enough to be the "feared" competitor that people always worry about, it's because they're making a lot of money from something. When a disruptive innovation comes along, they usually don't care because they're blinded by the cash cow that they already have. In fact, the really disruptive innovations are scary to these big companies, because it they usually look like they'll undermine the cash cow. Elsewhere in the post, Graham notes that before Yahoo! bought his company in '98, he showed Jerry Yang a new offering he was working on that would optimize revenue on shopping search -- but he notes that Yang didn't care:

Jerry didn't seem to care. I was confused. I was showing him technology that extracted the maximum value from search traffic, and he didn't care? I couldn't tell whether I was explaining it badly, or he was just very poker faced.

I didn't realize the answer till later, after I went to work at Yahoo. It was neither of my guesses. The reason Yahoo didn't care about a technique that extracted the full value of traffic was that advertisers were already overpaying for it. If they merely extracted the actual value, they'd have made less.

Real innovations threatens cash cows, and one of the most difficult things for any company to do is undermine their own cash cows. So stop worrying about some big, successful company copying your idea. If it's really innovative, they probably won't even notice it... until it's too late.

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Filed Under: copying, disruption, innovation, patents
Companies: google, yahoo

28 Comments

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Paul Merrill, 20 Aug 2010 @ 7:59pm

Prime innovation example HP vs HP
I've heard that a great example of a company that embraces innovation is the guys running the HP Printing Business. HP has basically two types of printers, laser and ink, two cash cows. From my understanding they are based in different locations and management's ethos is basically, we're (ink) are going to try and send the other business (laser) broke, and visa versa. Net result is the overall HP market share of printers is > 75% because they are innovating so madly that everyone else is getting steam rolled. It's a brillant idea! I've also heard that the two business units hate one another, which is indicative of innovation working well. Competition to the extreme!
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Anonymous Coward, 20 Aug 2010 @ 8:27pm

Whenever we talk about innovation and things like patents, one common refrain is that no innovation would occur without patents because big companies would immediately copy the technology and destroy any up-and-comer.

An old Techdirt comment (see #53) claims that this was exactly the plan: Yahoo! did realize the value of Google's innovation and, rather than paying them for it, would have indeed just copied it...were it not for the PageRank patent.

What happened then? Oh, that's right, Yahoo! paid Google for a license such that Google was providing Yahoo!'s search results for many years.

So it seems that Yahoo! might have indeed recognized the innovation in search around that time.

Google had a nice new search algorithm, but it's unclear they had any way to make money from it. I'm not sure how or whether they made any money at all up through 2000. They may have just been burning investment capital along with some other smaller sorts of revenue like Yahoo!'s license. According to this article there was no advertising on the site at all until 2000.

They then copied the auction-based ad-selling strategy of another company, Overture, and made an improvement on it. Overture apparently did have a patent on this, and sued Google. Overture was later acquired by Yahoo! Google paid out about $260-$290M in stock in a settlement.

So Google got Yahoo! to license, rather than copy the technology, and they came out ahead: Yahoo! paid them, and they used that capital to pull further ahead.

By the time of the settlement with Overture, Google was big enough to shoulder a $300M payout to Overture for infringing their patent. We don't know the extent to which Google was aware of, or copied, Overture's model, but it's probably a safe assumption that since Overture was a major player in the market they at least had some idea of Overture's innovation when they started to use and extend it.
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Anonymous Coward, 21 Aug 2010 @ 12:46am

Re:
Yet over the next few years yahoo treaded water and google began an inexorable march to conquer all. PageRank is neat, but it wasn't the deciding factor, or else yahoo would would have been on equal footing. The deciding factor was all the other details.

So, it would not have mattered if yahoo had copied it. They didnt get the details right. But heck--maybe if they HAD copied it, they would have built some local expertise and had some new ideas and come up with something to beat PageRank. Instead, they just licensed it and moved on with their bad business plan. And once more, we can blame it on the inflexibility of the behemoth.

It's a pity we have these institutionalized chilling effects against copying, isn't it? It's a pretty good way to learn and make incremental improvements. Don't teachers tell you to copy notes from their lectures?
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LM, 21 Aug 2010 @ 1:32am

Re: Prime innovation example HP vs HP
Does the rivalry prevent them from sharing technology, or even things as mundane as case designs?
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Anonymous Coward, 21 Aug 2010 @ 1:58am

Sigh... I usually agree with you, and in some cases this may be true but I think you're way off this time.

Just a small example mildly related- if a larger company (think facebook) wants to start doing something a smaller company does (think foursquare, gowalla)
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Modplan (profile), 21 Aug 2010 @ 3:08am

Re:
http://www.youtube.com/view_play_list?p=5B14C683F830A679
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Lucian Armasu, 21 Aug 2010 @ 3:13am

Re: Re:
But they don't tell you to copy from others at an exam, or to copy someone else's homework
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abc gum, 21 Aug 2010 @ 4:41am

Re: Prime innovation example HP vs HP
HP and innovation in the same sentence used to be commonplace, not so much anymore. Sad.
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abc gum, 21 Aug 2010 @ 4:48am

Re:
"Google had a nice new search algorithm"

AFAIK, one is not allowed a patent on an algorithm.
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Hippy Hop, 21 Aug 2010 @ 5:34am

I don’t know what is internet now if yahoo had bought Google early on. I mean, Yahoo did not really think much of search traffic. There will be no adsense, no seo and no othe features Google had offered to liven up internet and make it good for entrepreneurs. Yahoo only think of themselves and not the whole internet.
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Richard (profile), 21 Aug 2010 @ 5:54am

Re: Re: Prime innovation example HP vs HP
Probably yes - and probably a good thing - that way they won't both make the same mistake.
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Richard (profile), 21 Aug 2010 @ 6:01am

Re: Re: Re:
But they don't tell you to copy from others at an exam, or to copy someone else's homework

Classic red herring.

The wrong here is the deception - claiming that the work is your own - not the copying itself.
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TtfnJohn (profile), 21 Aug 2010 @ 8:29am

Re:
As a broad observation the article is true.

The usual behaviour is for the larger, more established company to rest on its laurels until it's far too late to re-establish their position in a given market. Think North American auto industry, IBM in the PC world, Lotus and Borland in PC software and a host of other examples.

What's interesting about this is the peek inside Yahoo! while all this was happening and the illusions they were under as to what it is they did that made them the market leader.

If I thank Google for much of anything other than search it was a few years of peace and quiet from banner ads everywhere, though they're making a comeback which means it's time to crank up AdBlock Pro again on a lot of sites that are littered with the damned things. I'll watch TV if I want to see bad singing, dancing, leaping ads thank you.
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Brian Owenson (profile), 21 Aug 2010 @ 8:53am

Netflix and Blockbuste
Another example of this I think is Netflix and Blockbuster. I wonder, does anyone know if Netflix has tried patents for it's innovation (the original DVD-in-the-mail business)? I don't think they have...and to make Mike's point, Blockbuster tried almost the same exact business model - but too late, and of course they failed.
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Anonymous Coward, 21 Aug 2010 @ 11:55am

Re: Re: Re: Re:
Exactly, of both students studied together before the test and copied each others notes to study off of then there would be nothing wrong with that.
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Anonymous Coward, 21 Aug 2010 @ 11:55am

Re: Re: Re: Re: Re:
if *
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Russ Emrick, 21 Aug 2010 @ 1:27pm

answers an age old question I never figured out
Talk about a light bulb movement. Thank you for answering a question that has always driven me crazy. Why top companies like IBM and GE end up on the ash pile of history (like GM) can be explained by this article.

Sometimes you question your own sanity - asking am I out of touch or a really bad communicator that management simply can't see the problem? Tinkering around the edges instead of attaining competitive advantage or looking "around the bend" has led to many failures. I hadn't figured out the reason for this intentional blindness.
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Gene Cavanaugh, 21 Aug 2010 @ 5:56pm

Buying Google
Great article. I have found again and again that too many people become complacent and myopic in a large company.
Often they also become very self-centered as well, so I continue to think that IP properly used is good; since otherwise big business would tend to crush small companies just because they could (see what Carnegie did to small companies, for example!).
I can't see any rational for copyright, though.
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Sebastian Wain, 21 Aug 2010 @ 7:46pm

They can't even copy
Speaking about yahoo and google, the first can't even copy adwords system! so even when the know about their innovation there is something missing in the capacity to copy the idea.

The same happened with mobile phones and Microsoft, they can't copy stuff like Android and OSX/iPhone because in their heads they try to mimic the desktop in a mobile phone.
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antigone42 (profile), 22 Aug 2010 @ 6:18am

It's ego that causes companies to fail
It largely comes down to ego. Large companies often have a mentality that they're better and smarter because they're bigger. So they overestimate their own prowess and underestimate the upstarts.

In fact, true innovation often comes from the mind of one person or a small group but the ego of the large company doesn't allow them to accept that they've been scooped. Engineers are particularly prone to this problem. (I'm an engineer and have worked with engineers all my life).

I experienced this with a company I started in the early 80's. We had a great product but it followed a different paradigm than the existing ones. The competition saw our success and tried to compete by making their own product flashier, but continued to build on their existing designs which were fundamentally flawed. As we took their market share, they kept trying the same strategy, piling on higher end hardware and glitzy UIs, but still missing what made customers buy ours instead. They kept doing this until it was too late and our product was the industry standard and theirs was marginalized.

I see this time and again. Corporate ego getting in the way of good business decisions. It's a cycle that every company is doomed to repeat. Ego is human nature.
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Lyle, 22 Aug 2010 @ 2:08pm

Innovators Dilemma
See the Innovators dilemma about the whole subject. It deals with disk drives, as well as steel. The leading company listens to what its customers say they want and tried to deliver. Meanwhile an innovator crawls into the bottom of the market, and delivers a 10x better value. The cleanest example is steel. Nucor and others started making re-bar, which is apparently quite easy, so the big guys said there is no money in re-bar, let them have the business. The New guys moved up the chain using mini-mills (i.e. recycling used steel only) no blast furnace, and eventually got to the continuous casting of strip steel which was the high margin product. As a result they drove the big guys into a shrinking market.
Part of this is to follow JP Morgan (the banker not the bank) who thought that innovation disturbed the market and was best suppressed. Carnegie it appears innovate all the time to always be the low cost producer, so that when the boom came he could clean up financially. Morgan bought him out when US steel was founded and essentially the US industry did no major enhancements on its own. The European industry having been destroyed in WWII build the basic oxygen furnace over the open hearth, and ate us steel makers lunch so they had to deploy the basic oxygen furnaces, and then the mini mills did it again.
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Bob Chalfant, 22 Aug 2010 @ 7:29pm

Re: Prime innovation example HP vs HP
Thank you Paul. I always tell my students that if someone is going to eat your lunch, it better be you. Senior management is afraid to upset operating managers by allowing (funding) internal competition, so their 'S' curve becomes the obsolete one.
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Joe, 23 Aug 2010 @ 5:13am

wish we could see this type of stuff in other fields
I know that we all know that the music industry is dead as we knew it, but it still manages to sue people trying to extract their middle man fee wherever they can.

The movie studios are still kicking, probably because they can adapt in mild fashions, but it would be nice if they didn't use lawsuits as a way of scaring off consumers and instead actually adapted their business model to fit the current day. Why not release movies for viewing online at a higher fee than going to theatres assuming at least 3 people will watch, so you charge 3 times the price? I'd pay $30 to watch a new release in my home with my kids, but do they let you? No!

Finally I would like to turn everyone's attention to TV, the model is dying, they had a good solution (hulu) then they decided to add a "Plus" model. Which is ok, but why not embrace what hulu is and maximize the targeting against M18-24, M25-34, and W 18-24, and W 25-34 and really use it along with their current upfront sales. They can sell the adspace two ways, one the old way and the other targeting the younger audiences via hulu. Offer highly competitive super demo targeted ad space with on demand viewing for the "harder" to reach target! But nope, what they do is lump all the content in a "channel" that they choose. Seems pretty stupid if you think about what they wasted.

Sorry for rambling, it is really early in the AM, but at least I can see how fubar the TV networks are.
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nasch (profile), 23 Aug 2010 @ 9:30am

Re: Buying Google
Did Carnegie do whatever this is it did by using patents? Why do you think it's a great article, if you then disagree with its most basic point, namely that IP doesn't provide the protection to small companies that many people believe, because big companies can't copy them effectively anyway?
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Cris Bjelajac (profile), 25 Aug 2010 @ 11:03am

Re: Innovators Dilemma
This is a great book. A HUGE, AWESOME, GREAT book. Everyone should go read this. I will loan you my copy.
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David Locke, 28 Aug 2010 @ 4:52pm

Cash Cows and Separation
Christensen says that the innovation should go into a separate company, a startup. But, the cash cow lives in the late market of the technology adoption lifecycle. This is the place where industries converge, and the infinite game is played. It too should be a company of its own.

If each cash cow had its own company, then no cash cow would get in the way of innovation.

The parent company would start to look like the huge conglomerates. Of the the CEOs of ITT once said, "What Synergies? There are no synergies." Stop looking for scale advantages and synergies.

Cows shouldn't kill.
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Eugene (profile), 1 Sep 2010 @ 6:51pm

Re: Prime innovation example HP vs HP
In Dale Carnegie's old "Winning Friends and Influencing People", there's an anecdote about a factory supervisor that almost exactly mirrors your example. Seeing productivity drop to an all-time-low, he decided on the novel idea of just setting up a chalk board with everyone's name, and turning production into a contest. Boom. Problem solved.

See it turns out people do better work when they actually interested in the outcome. Who'da thunk?
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ATIG, 2 Jan 2011 @ 8:02am

Patent Theft as a Business Strategy
Dear,

Business Strategy http://huff.to/doiPtr .
All The Problem Is that and honest legal adviser is crucial.

Thanks,
Sami
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