This morning I was talking with an investor in our fund about how when the internet disrupts industries it often makes them smaller and, from the perspective of incumbents, less attractive. Amazon is doing that to much of retail, MySQL and other open source companies have done it to large swathes of the software industries, Craigslist did it the classifieds industry, and I could go on.
Two forces typically combine – automation takes out cost and the internet is used to displace middlemen – allowing new entrants to offer a radically cheaper product which incumbents don’t want to compete with because it means shrinking their companies. The new product typically starts out inferior in some way allowing incumbents to dismiss it as a competitive threat, but then it gets better and incumbents notice too to mount an adequate response. This is disruption in the Clayton Christensen sense that the word should be used.
Something similar is about to happen to the auto industry.
Autonomous cars will be
- smaller because they don’t need the padding to protect passengers (look at the latest Google cars)
- simpler electronic drive systems
- shared more and/or sold direct
This will put massive downward pressure on car sales, both in volume and $ terms. Smaller is cheaper to produce, simpler is cheaper to produce, shared means fewer cars are sold, sold direct means dealer margins get passed onto the consumer.
What’s interesting now, and this was the main point of our conversation this morning, is that smart execs at incumbents know this future is coming and that it poses an existential threat to their businesses, but are struggling to find a good path forward. Execs at Mercedes, BMW, Ford, GM etc have all read Christensen and I would bet my house they have people shouting at them to wake up, but it’s super hard for them to respond to what is no less than an existential threat. That’s partly because they don’t have the data and software capabilities to succeed in this future and partly because the bulk of management and shareholders have become adept at finding reasons for not embracing strategies which would shrink their revenues, profits, teams and returns for shareholders.