3 Myths of Disruptive Technology

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Do you really care that Sony (NYSE: SNE  ) ended the long, interesting, and lately miserable life of the MiniDisc Walkman, a Paleozoic music player that should have died shortly after Apple's (Nasdaq: AAPL  ) iPod first got popular? No? I didn't think so.

Except that you should care, if only because of the technology's endurance. Sony created the MiniDisc for audio playback in 1992. All it took was 19 years and one of the most successful consumer-electronics products in history to finally off the format.

Myths, busted!
MiniDisc is one of several technologies to survive years past what pundits considered to be its useful life. Here are a few others, most taken from recent history:

  • The iPhone kills feature phones! No doubt, the iPhone has been a huge winner, and to this day it remains largely responsible for the App Economy we now live in. But are feature phones dead? Hardly. The tens of millions of digital Swiss Army knives Americans carry amount to just 33% of the mobile-phone market, Pew Research reported recently. That leaves feature phones as a still-healthy majority of phone sales.
  • Streaming video kills DVDs! Yes, DVD sales have been suffering for years thanks to iTunes, Netflix (Nasdaq: NFLX  ) , and YouTube, among others. You know what else the numbers say? While DVD sales fell 13% last year, pressed discs still brought in $2 billion in revenue. Digital delivery accounted for roughly $700 million in sales over the same period, according to the Digital Entertainment Group, a Los Angeles-based researcher. Indeed, there's enough of a market for DVDs that Netflix has decided to introduce distinct plans for those who want nothing to do with streaming.
  • Cloud computing kills Windows! Most of you already know the story here. As big a fan as I am of the cloud-computing model, it'd be more than a little presumptuous to predict the utter end of the PC anytime in the next decade. After that? Maybe. Until then, let's remember that Microsoft's (Nasdaq: MSFT  ) Windows business segment did $17.8 billion worth of business in fiscal 2010, a 21% improvement over the year prior.

Please bear these examples in mind the next time Wall Street's hyenas screech about the antiseptic market power of disruptive technology. Yes, disruptions matter. I've enjoyed multibagger returns as a result of investing in disruptions. Just remember that not all disruptions (or disruptors) are equal. Before you plunk money down on a promised disruption, check to see whether it fits into one of these three categories of myths.

Myth No. 1: The "it's a better mousetrap" myth
Cheaper, better, or faster. Ask an engineer to describe what's so special about a tech product, and chances are you'll hear one of those three words. When you do, get skeptical. Incremental improvements are great, but they're meaningless if users don't see the benefit of having them. This is why functionally awesome tablets from Samsung and Motorola Mobility (NYSE: MMI  ) haven't dampened enthusiasm for the iPad. Consumers and developers like their iCandy.

Myth No. 2: The "if we build it, they will come" myth
Some products and services are cool. But "cool" isn’t a market. Just ask any of the investors who spent billions funding Webvan, a cool concept -- i.e., home delivery of groceries -- that died for lack of consumer interest. Only now, 10 years after Webvan's demise, is (Nasdaq: AMZN  ) starting to take this would-be market seriously.

Myth No. 3: The "we've created a new category" myth
I'm far too much of an optimist to subscribe to the saw that says there's nothing new under the sun. But for every groundbreaking product introduced, thousands more come to market promising to tweak something that already exists.

Tweaks are fine, of course. The iPod was a tweak of existing MP3 players. Tweaks become problems only when the companies behind them bill said improvements as legitimate breakthroughs that (ahem) "create a new category." Intel (Nasdaq: INTC  ) is the latest to play this nonsensical game with notebooks it calls "ultrabooks." In reality, they're super-thin laptops that borrow features from tablets. Cool? Yup. Desirable? Probably. New category? Not a chance.

A better class of disruptions
For investors, the lesson here is to be skeptical of technologies that claim to be disruptive. Very often, the technology being disrupted limps along just fine for years after the upstart arrives, and that's assuming the disruption is successful. History is littered with Webvan-like tales of woe.

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Fool contributorTim Beyers is a member of theMotley Fool Rule Breakers stock-picking team. He owned shares of Apple at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of Microsoft, Intel, and Apple and has bought calls on Intel.Motley Fool newsletter services have recommended buying shares of, Microsoft, Netflix, Apple, and Intel, creating diagonal call positions in Microsoft and Intel, creating a bull call spread position in Apple, and buying puts in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

Read/Post Comments (2) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2011, at 9:13 AM, deemery wrote:

    This article is ill-informed.

    Let's consider first the '3 busted myths'.

    For #1, capturing 33% of a market in 4 years is an accomplishment. What's more important is to look at the trends. The proportion of smartphone usage continues to grow significantly.

    For #2, have you looked at CD sales lately? DVDs are following the trajectory of CDs, and that's significantly downward. Music was easier to sell digitally because it required less bandwidth. We're now at the point where video bandwidth is not a problem.

    For #3, too early to tell. But a lot of what drives Windows sales are not consumers with choice, but IT department mandates. And that's changing, too.

    Now for the 3 core myths:

    better mousetrap: If the mousetrap is -significantly better- (and a major emphasis here is "easier"), that mousetrap will tend to take over. Examples: CDs, DVDs over cassettes and VCR tapes. The issue is whether/when the mousetrap overcomes the 'inertia' of existing products/services.

    build it and they will come: One answer: iTunes Store

    new category: I guess you can join Steve Ballmer in believing that tablets are 'just PCs'.

  • Report this Comment On July 15, 2011, at 9:41 AM, techy46 wrote:

    Old techonolgy never dies, but old product forms do. A smart phone is a hand held personal computer capable of making a voice call. There's very little new technology in a smart phone mostly just new and smaller forms of old technology, What drives Microsoft sales is that it's the only software brand that encompasses enterprise applications for business intelligence, client OS, enterprise resource planning, integrated development environment and relational database. Enterprise IT is not about socializing apps and games it's about generating return on invested human and monetary capital.

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