Cloud computing: this decade's great disruptor of markets beyond IT

In a new post in Fortune, Aaron Levie, founder and CEO of Box.net, says cloud computing fits the pattern of disruption first identified by Clayton Christensen in his seminal work, The Innovator's Dilemma. That is, classic disruptors enter industries with low-end products or services targeted at the unserved or underserved markets -- and work their way up from there, eventually usurping the market leader. Christensen uses examples such as Toyota, which entered the market in the 1960s with cheap little cars, or Dell in the 1990s with cheap little computers.

Now, cloud is similarly disrupting the information technology market:

"Cloud-delivered enterprise solutions fit consistently and nicely into Christensen's framework for "disruptive innovation." They offer cheaper, simpler and often more broadly applicable alternatives to legacy models of enterprise computing. They tend to start out as low-end disruptors, bringing cost and performance advantages to over-served customers, but as these technologies mature in their reliability and sophistication, they're spreading throughout organizations and solving some of the most demanding problems. Christensen must be gloating."

Levie reports that there is a new generation of disruptive software providers, built on and offering cloud solutions, that are rising to such disruptive roles:

"Many emerging companies are operating on dimensions that were never easy, possible, or necessary in a previous generation of software....  What do all of these services have in common? They're all solving new problems that the incumbents not only can't attack, they also can't even begin to understand. But before they know it, startups will have pulled away significant market share as move more deeply into the enterprise."

I would like to take Levie's observations a step further.

There have been and are many startups that don't necessarily serve the IT sector directly, but are able to build and offer products and services via the Internet and cloud to disrupt their respective verticals. The travel and entertainment businesses are classic examples. There is also the automobile industry, seeing effects from online dealers (CarFax) as well as new modes such as car-sharing (ZipCar). Consulting work is being redefined by crowdsourcing approaches to solving business problems.  Venture capital and funding has the potential to be reshaped by crowdfunding. Medical services are being delivered online.  Entire new industries are being created in the cloud.

Christensen talks about the paradox that emerges when new technologies commoditize the marketplace. Namely, that when established companies face a disruptive technology that usurps their market, management tends to get blamed for making the "wrong decisions."

However, Christensen points out, more often than not, the besieged executives actually make the right decisions -- going after high-end, high-margin opportunities and leaving the low-margin commodity space for newer, disruptive companies. In fact, as Brian Stoffel recently observed in his own analysis of the Christensen effect: "Christensen argues that great businesses fail because they get out-innovated. And oftentimes, it's not due laziness or complacency; it’s because businesses listen to their customers when they shouldn't."

Thus begins a gradual death spiral as they are continually forced upstream. In essence, once companies are locked into their business models, it's difficult to move to new paradigms. And, ironically, the more responsive the management, the greater the lock-in.

Think of Digital Equipment in the 1980s and 90s, as well as Compaq. Across all product categories, the high-end brands, typically offered as part of well-crafted and expensive interdependent architectures, inevitably will lose out to more modular approaches offered by commoditizers.

Stoffel lists additional examples of low-end disruptors making their presence felt: Amazon disrupting the book market with the Kindle, and streaming video disrupting the movie-rental market. NetFlix's decision to split into two lines of business may be an attempt to disrupt its own business, he adds.

Levie has taken on a disruptor role himself. His company, Box.net, offers an online alternative to on-premises content management software packages. Ironically, disruptors don't start off going after the customers of the big established companies -- rather, they serve customers who may have never had access to such products. As Levie put it: "Just as MySQL classically went up against Oracle without ever competing for customers, many cloud solutions today are similarly disrupting the older guard by initially slipping into the 'just good' enough category. From there, product roadmaps become more elaborate, customers are served in more meaningful ways, and before you know it just good enough becomes great, and then better."

Another example of such disruption is Salesforce.com -- serving a market primarily of small to mid-sized companies that never could afford full-fledged ERP solutions. In fact, Christensen's analysis of commoditized, modular disruptor gradually creating new markets at the low end and creeping upward provides plenty to ponder within the technology space.

This post was originally published on Smartplanet.com