Predicting Innovation Winners and Losers

These days, market futurists and business wonks rarely have a meaningful economics discussion without using the term "disruptive technology" (innovation that so radically improves a product or service that it fundamentally upends an industry). Fifteen years ago that theory was only an abstract idea being kicked around by Harvard economist Clayton Christensen.

The professor first described the phenomenon in a 1995 article and followed it up two years later with his book, The Innovator's Dilemma. The theory gained traction almost immediately, and Christensen has spent much of the past decade applying it to problems, both economic and social. In an e-mail interview with NEWSWEEK, Christensen predicts that disruptive technology's next victim will be the software industry, cautions Apple against getting too fancy with its products, and explains why the recession is good for innovation.

In a 2006 interview with BusinessWeek magazine, you predicted the decline of Apple within three years.

I wouldn't say I predicted Apple's decline. I think a better characterization of my statement regarding Apple would be that I was concerned that it would keep its hardware and software products interdependent, even as the performance of its products began to outstrip the performance levels that mainstream consumers needed. And I think that we're seeing that [now].

Apple has continued to keep its product architectures tightly interdependent, which has allowed it to make really incredible products that are constantly pushing the performance envelope. At the same time, the consummately modular Android platform has seen explosive growth, and for most people, the performance of Android products is good enough for what they need a handheld device to do. Android has seen explosive growth, by many measures outstripping growth in iPhone units. I think that Apple has the talent and culture to continue to make amazing products. But I think that the decision not to break up the interdependence of their hardware and software is a mistake that will ultimately end up costing them.

So, which industry do you believe has been most impacted in the past decade by disruptive innovation?

I think that the newspaper industry has probably been the most affected by disruption this past decade, though in many ways, I think you could extend that to media and publishing more broadly. All of the industry's sources of revenue—subscriptions, advertising, and classifieds—have seen a powerful wave of disruption come through and really clean the newspapers' business out. We're at a point now where we have major metropolitan areas in the U.S. without a solvent daily newspaper. And it has continued on, to the struggles that we've seen in the magazine industry, and in a more nascent fashion, in book publishing and television.

Which industry is next?

I think that software is in for a major shakeup. To people who follow the industry, this won't be new news; [ CEO] Marc Benioff has been trumpeting "no software" for years. But I think we're reaching a point where the migration of software from local devices to the cloud is really accelerating, creating new generations of devices that look, feel, and function very differently from their predecessors. I see this affecting a wide swath of companies.

Which companies have best capitalized on that disruption, and how have they done it?

Cisco is one of the best-run companies out there, and they are an essential component to the continued disruption of a variety of industries, courtesy of the enabling technology of the Internet. Without the services that Cisco provides and has made possible through their products, the migration of business onto the cloud would be more of a notion than a reality.

[Amazon is another example.] It took longer than most people were predicting during the tech boom, but with Barnes & Noble apparently putting itself up for sale recently, Amazon's transformation of the bookselling retail space seems complete … I think if they had listened closely to much of what Wall Street was saying to and about them, they wouldn't be where they are today. But focusing on the unique attributes of their value proposition, and investing where they saw demand was going to be, they've put themselves in an amazing position. I don't think people understand yet how big Amazon cloud services could be in the future—it is already an important element of the migration to cloud computing.

So how has the recession impacted healthy disruptions to a given industry?

Ironically, one thing that many promising startup companies suffer from is having too much capital. Once a company gets burdened with too much investor capital, it starts to think that it needs to grow very quickly. Almost always, a startup's first strategy is wrong. Once they get out into the marketplace and try to sell things, they find that many of the things that they had assumed are untrue, and that their strategy needs recalibrating. But when a company is overcapitalized, the founders can assume that they're right for quite a while before they start to need to depend on peoples' willingness to pay. The more capital, the longer a company can go without testing its fundamental assumptions. Tough economic circumstances tend to keep capitalizations lower, so in general, in the long term, I think that lean economic times can foster a proliferation of disruptive companies.