In honor of the Apple Watch release today, I’d like to talk about something Apple seems to consistently get away with, and why they’re not lucky – they’re good.

One of the most interesting questions surrounding Disruption Theory – the powerful force that explains how incumbents fail and new markets are created – is how badly the theory seems to miss the mark when it comes to Apple. For several years now, there’s been an intense fight between two schools of thought: one camp, including Dr. Christensen himself, maintains that it’s only a matter of time until Apple is swallowed from below by cheaper, modular competitors. As Dr. Christensen articulated last year in Business Insider:

“In the early years of an industry’s life, almost always the dominant products [the iPhone] are proprietary and interdependent in their architecture. … And now I think the Android operating system as a platform, modularity, accounts for about 90% of the units, even while Apple makes all of the profit. So if Apple keeps its strategy of very high prices, their share of that market will diminish. And so ultimately they’ll make a lot of profit on 100 units. And Samsung, if they win, they will be making all of the units in the industry but no profit. Either way you’re screwed, but that’s the theory behind why I said Apple won’t succeed, because in the end modularity always wins.”

The opposing point of view maintains that for some reason, Apple is different: they’ve consistently managed to defy gravity, and they’re likely to continue doing so. Ben Thompson of Stratechery, one of my favourite thought leaders on Disruption Theory, sums up this perspective with three arguments: 1) Apple is selling to consumers, not businesses, so jobs-to-be-done have relatively more emotional than technical components; 2) Apple is actually more modular than people give them credit for, and benefits from that modularity where it counts, and 3) their focus on creating new products and service categories within the new and vast mobile market repeatedly gives them new chances to be the high-end market leader.

Here’s where I come down on the issue: I think Apple’s the king right now, and is positioned to stay that way for a long time. And I think Ben is right: Apple is doing something special that other companies aren’t, allowing them to continually escape disruption. However, although I like Ben’s arguments, I there’s one final line of argument he’s missed that ties everything together and brings the argument back to the fundamentals of disruption theory. In this post, I’m going to articulate what I believe is the reason Apple consistently avoids being disrupted- a reason fundamentally rooted in the Innovator’s Dilemma itself.

—————-

Clay Christensen’s theory of Disruptive Innovation, originally laid out in The Innovator’s Dilemma, was originally conceived to explain how large, incumbent firms ultimately fail. The theory explains what happens when large companies face a threat from a new competitor that, although initially inferior in quality, has some sort of scalable advantage that is maintainable when moving up the value chain. In response, the incumbents tend to retreat up-market where they can retain their competitive advantages and profit margins. These firms ultimately fail when, in keeping with their strategy of high prices, they are slowly squeezed into a landscape where they make higher and higher profits on a vanishing sliver of the high-end market while the vast majority of users switch to their cheaper, disruptive competitors. According to many, including Dr. Christensen, Apple is inevitably heading towards this fate: with Android at 80% market share, Apple’s strategy of building only the highest-quality products at a premium price is untenable in the long term. It’s only a matter of time, by this viewpoint, that Apple will be bled dry as their customer base predictably converts to just-as-good-for-half-the-price modular Android devices. But there’s a small issue with this ‘inevitable’ outcome: it’s just not happening. Apple is putting more distance between the iPhone and their competitors than before, selling more units than ever at higher selling prices, recently seeing the most profitable quarter for a publicly traded company in history. That’s not supposed to happen! What’s different this time?

The key to this puzzle lies in the fundamental framework of Disruption Theory itself. While most people who talk about disruptive innovation tend to focus on what companies are doing, an equally important but neglected component of the framework is what customers require. Disruption theory is predicated on the fact that companies typically improve their products at a faster rate than customers’ needs in a given market application can evolve. With the exception of early adopters in the tech community who jump on every new feature the day it’s released, most mainstream users’ needs evolve more slowly than the rate at which products are improved.

This framework helps explain why disruption happens so consistently: the more the incumbents at the high end improve their products, the greater a gap there is for disruptive entrants to fill, as their cheaper, modular products tend to quickly catch up to most customer requirements. The consensus recipe for incumbents to avoid being disrupted, up until now, states that incumbents should actively disrupt themselves by creating new products at the low end (which compete with their high-margin businesses, and preempt disruption from competitors). IBM did this effectively as they transitioned from the minicomputer to the PC; Intel did it effectively with their chips. There’s a recipe to deal with this, and it’s supposed to work if you follow it stoically. But Apple’s not doing that. They’re up to something very different.

Apple consistently escapes disruption by actively and deliberately driving their own customers’ requirements higher. They don’t create cheaper products to disrupt themselves- they bend their own customers’ requirement curve higher, to the point that even Apple products themselves are not completely fulfilling their customers’ needs.

It’s completely contrary to the standard playbook, and it’s outright genius. By actively driving their customer requirements higher through tightly coordinated introduction of new, highly demanding use cases – which the version 1 of a typical Apple product usually doesn’t completely satisfy – Apple accomplishes two goals. First, they achieve powerful platform loyalty and lock-in: when your customers demand a product so good even Apple can barely meet expectations, there’s little chance they’re going to drop down to a second-tier competitor, now matter what the cost savings. Second, they shield themselves from the scaling advantages of their modular, lower-end competitors. When the ceiling for user experience keeps rising, low-cost Android phones are easily able to scale outwards towards new first-time users but have no way to eat into any of Apple’s core customers.

—————-

How does Apple accomplish this? Let’s look at the original launch and subsequent rise of the iPhone as an instructive case. In 2005-2006, rumors circulated that Apple was going to ‘put a phone inside the iPod’, which sounded like a very sensible idea provided they could get the mobile operators on board. The iPod was hugely popular, and handset makers had already attempted similar products (remember the Motorola Rokr?); the world was ready for Apple to claim the high end of the market just as they had with the original iPod. Then, the bombshell: Apple didn’t put a phone into the iPod; they put an entire computer into a phone! The conversation immediately turned from pre-emptive praise to confusion, amazement and (in some cases) outright hostility. (‘Why on earth do I want all these functions on a tiny screen with no keyboard and no 3G? My PC works totally fine for this! There’s no way this will succeed beyond a niche market.’) RIM and Microsoft employees even accused Apple of lying to the public: there was no possible way, they claimed, that Apple could deliver on these promises. And at the time, the naysayers were nearly correct: the original iPhone didn’t have 3G, had no App store, needed to be synced with a computer, and in many respects was barely able to meet hugely inflated customer expectations. But we all know what happened next.

Fast forward ten years, and Apple is running the same playbook with the watch. In the past few years, as Pebble, Galaxy Gear and other Android Wear products have hit the market, everyone pretty much knew that Apple was going to release a wearable; it was just a question of what and when. Yet most people (myself included) figured it would be a product in the form of: ‘Apple is putting the notification tray inside a watch. Cool.’ Then came the announcement last September, and the chatter from the critics immediately changed. ‘This launch was confusing! They showed way too many features that work perfectly fine on the phone and make no sense in the watch form factor, and give no clear use case for why I even need this watch in the first place. I just don’t see it succeeding beyond a niche market.’Sound familiar? By consistently creating tension between expectations and product, and pushing consumer demands higher (almost to the point of self-parody at times), Apple manages to consistently bend their customer requirements’ curve upwards, and out of their potential disruptors’ reach. What Apple understands that other companies don’t is that the key to not being disrupted doesn’t lie within your products: it lies within your customers’ expectations.

—————-

Let’s return to Ben’s argument for why Apple avoids disruption: their focus on creating new products and service categories within the new and vast mobile market repeatedly gives them new chances to be the high-end market leader. We can now see that this is empirically correct – Apple does in fact remain relevant by consistently introducing new categories – but Ben’s argument doesn’t explain why Apple specifically has succeeded where others failed. Let’s look at a company who tried to create a mobile empire, but didn’t succeed: Microsoft. Many people love to make fun of Microsoft for failing to become a big player in mobile, yet don’t realize that Microsoft wasn’t late to the mobile party- it was actually too early.

Microsoft didn’t ‘miss mobile’ at all. Where they failed – and where Apple succeeded – was their inability to bend their customers’ requirement curve upwards. In the mid-2000s, Microsoft had all the money, all the momentum, and everything working in their favour – AND they had an early mobile strategy centred around Windows Mobile which, at the time, were considered pretty good. Yet they got their lunch eaten by iOS and Android. What Ben’s perspective doesn’t quite hit, and what I hope this post explains, is why Apple stands alone here. Microsoft didn’t lose out on mobile because they failed to create new product categories. Microsoft lost mobile because their products exceeded requirements; Apple won mobile because their customers’ expectations exceed what was available to them.

In summary:

• Disruption theory states that companies typically improve their products at a faster rate than customers’ needs in a given market application can evolve, leaving them exposed to disruption from below. The traditional advice for businesses seeking to avoid disruption was to disrupt themselves preemptively with lower-cost products developed in house.

• Apple avoids disruption by a completely different mechanism. Instead of creating new, low-cost product curves, Apple actively bends their customers’ requirement curve higher, to the point that even their own products cannot initially meet expectations. In doing so, Apple is repeatedly able to raise the ‘ceiling’ on user experience, and prevent lower-cost competitors from converging towards their level of quality.

• What Apple understands that other companies don’t (notably, Microsoft and their failed entry into Mobile) is that the key to not being disrupted doesn’t lie within your products: it lies within your customers’ expectations.

• Apple’s resistance to disruption isn’t a flaw of disruption theory; it’s a triumph of the framework.