How Clay Christensen predicted Android’s ascendence (in 2003)

I’m re-reading The Innovator’s Solution, Clay Christensen’s landmark 2003 book, because I’m going to be working at Innosight, the consulting firm he founded, beginning this fall. This morning, I realized that he predicted precisely what has happened in the smartphone market: the initial success of a product like the iPhone, produced by a vertically integrated firm, followed by the ultimate ascendence of a phone with a modular architecture – components that can be made by different companies. I’ll start by summarizing his theory, and then describe what this means for the iPhone, iPad, and Apple as a whole.

The theory

Early on in an industry, when the performance of a new product (say, the personal computer) does not yet meet consumers’ needs, vertical integration is the most successful strategy, Christensen says. That’s because integration helps companies constantly improve the performance of their products. An integrated computer manufacturer, for example, can design the operating system and the hardware in tandem. Engineers have a high level of flexibility and they can constantly iterate to optimize the performance of both components. Apple’s vertical integration, according to Christensen, is a key reason why it was so successful in the early days of the PC market.

As performance improves, however, customers are less willing to pay more for a better machine. They might pay more for other features, like convenience, speed, or customization. Or they may seek a lower-cost product.

At that point, the advantage will shift to companies with a “modular” approach. The quality of a computer will not be as high when Intel makes the microprocessor, Microsoft makes the OS, and Acer makes the hardware. That’s because each component has to fit smoothly with products that are designed by other firms, so engineers and designers have less control and less room for flexibility. But the modular approach allows firms to offer a “good enough” final product at a lower cost. This is why Microsoft ultimately trounced Apple in market share.

Does Apple’s late-1990s resurgence contradict Christensen’s theory?

Not necessarily. In the personal computer market, Apple has less than 5% share – as Christensen predicted, it has remained a niche player from a market share perspective. The performance of Apple computers does indeed overshoot the needs of most consumers, who are happy with the lower cost of modular Windows computers. But 5% of consumers have needs that only Apple can satisfy, which is why Apple reaps 45% of the industry’s profits.

What this means for the iPhone …

Only Apple, with the complete control it maintains over its devices, could make the technological leap from BlackBerry to smartphone. Over time, however, smartphone technology has improved and more companies have acquired the ability to compete. Meanwhile, with the last two versions of the iPhone, radical performance improvements have become harder to sustain. In Christensen’s terms, iPhones have “overshot” the needs of many consumers.

Meanwhile, Android has improved enough to be “good enough” for many customers; in some ways, and in some phones, its performance matches or exceeds that of the iPhone. The flexible nature of Android, furthermore, means it can be used in both high-end and low-end phones, so it can reach a wider array of consumers. That’s why Android has captured 51.7% of the market in the U.S. and 75% of the market worldwide.

… and the iPad …

Meanwhile, analysts predict that Android tablet sales will overtake iPad sales this quarter. The iPad enjoyed a shorter period of dominance than the iPhone, because it wasn’t a radically new device. Competitors, who had already raced to catch up with Apple in the smartphone wars, were able to use everything they learned to bring good tablets to market with greater speed.

… and Apple itself.

Apple has succeeded because it keeps launching new products in areas where integration is still an asset. That’s an incredibly difficult record to maintain, but that doesn’t mean it’s a bad strategy. In fact, the only Apple product that has arguably failed — Apple TV — was also the only Apple product that used a modular strategy, since it was designed to fit with television sets made by other vendors. Apple does integration very well, but it has yet to win with a modular product.

What does this mean for the future? Apple has a good chance at succeeding if it introduces a television set that maintains complete control over the television-watching experience. Wearable tech like watches could also be an area of strength. When it comes to electronics in cars, however, Apple is at a disadvantage to Google. It seems unlikely that Apple would be able to develop a great system that could plug into a wide variety of cars made by different auto manufacturers. Google, by contrast, has a proven track record of playing well with others.

But if Cook is worried, he isn’t letting it show. He recently said Apple would have “some really great stuff coming in the fall – and across all of 2014.” Here’s hoping I’ll be selling my old TV on Craig’s List.

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