Data Capital Disrupts, Except When It Doesn’t

Paul Sonderegger

OracleVoice – 5/28/15

Clayton Christensen made disruptive technology famous in his classic The Innovator’s Dilemma, in which he asked why some well-managed market leaders get out-maneuvered and crushed—or disrupted—by new entrants.

Since then, disruption has become a conference, a punch line, a start-up staple, and the subject of a New Yorker exposé. All of which is to say Christensen was clearly onto something. You don’t create a cottage industry by being flat-out wrong.

The problem is that Christensen’s essential insight—technological advances enable new products and services that change the terms of competition in existing markets—got conflated with the prediction that David always beats Goliath. Both of these ideas, the first one true and the second not, have huge implications for the rise of data capital.

The first implication is the massive disruptive potential of data capital. Digitization and “datafication” turn old activities into new digital services targeting non-consumption: customers who previously lacked the money, skill, or time to buy or use the old product. This is the case with Uber for car-hires (not enough money or skill to get a ride exactly when wanted) and Netflix for DVD rentals, initially (not enough time to go to a rental store).

The moral here is not that every company will be disrupted, but that no company is immune. Every company creates value through activities that both use and produce information. As a result, every company has some degree of exposure to data capital.

The second implication is that it’s not clear who will win between new entrants and incumbents in different data capital disruptions. In The Innovator’s Solution, Christensen points out that incumbents can use new technologies to improve products and services for existing markets, raising barriers to entry against invading disruptors. Data capital is just such a barrier.

In fact, incumbents have a huge advantage in amassing data capital because they have a higher volume of interactions with customers, suppliers, and partners, thereby producing a larger amount of data. If they quickly use this data to make even more data by feeding it into algorithms and analytics to tailor interactions and improve future iterations, Goliath can dominate the battlefield. Witness the lack of disruption among financial services companies despite the industry’s rampant digitization and datafication.

But that doesn’t mean digital disruption isn’t happening. It’s happening in ways big and small.

Just think about the hotel room key, which is headed for extinction. Like so many tasseled woolly mammoths, room keys were once huge, majestic things that roamed carpeted halls and lobbies by morning and evening, sleeping their days away behind the front desk. Now they’re just bits on your phone. At Starwood hotels, for example, you open your door with a mobile app. Not even a key card is required.

But don’t let nostalgia for the glory days of hotel totems distract you from the real lesson here. The precipitous fall in the atoms-to-bits ratio of keys is a microcosm of data capital’s disruptive effects.

Picture that old room key. It’s solid metal, about the length of your thumb, attached by a metal ring to a flat metal slab that flares into a rounded end or braided tassel, capped with brass. What information does it carry? The room number is stamped on the slab or the cap, maybe the name of the hotel as well, and, crucially, the unique shape of the key itself embodies information to open the lock on your room and only on your room. That’s a lot of material for little information, a high atoms-to-bits ratio.

One way to cut that ratio is to get rid of the physical thing, and along with it the costs of its production, distribution, maintenance, and replacement. The digital disembodiment that turns keys into cards and then into bits also separates music from discs, books from bindings, and news from paper.

Study Atoms-to-Bits Ratio

Whatever product you make today, re-examine it as an atoms-to-bits ratio. Is there a way to digitize the information that thing carries and deliver it as a service through a smartphone or connected device? If so, what value does the physical object still provide in the eyes of your customer? If it’s not great enough, digitizing rivals will hunt that thing to oblivion. Parking meter makers, beware.

But the bigger payoff comes from reducing the atoms-to-bits ratio by increasing the bits side. Data comes from activity—that’s the first law of data capital. But what activities could a room key know about, other than unlocking doors?

Back to the digital room key. A hotel key card slips into your pocket or wallet and goes everywhere with you. It’s not necessarily part of other activities in the hotel like going to breakfast, to the gym, or hanging out in the lounge.

But it’s along for the ride. If it had the right sensors and connectivity, it could track the equipment you used in the gym or where you parked your car. It could capture how long you had to wait in lines and which ones. It could sense your movement through the hotel at different times of day and how quickly.

This data, in aggregate, could provide hotel management with valuable information about which amenities should be expanded or cut, where more or less staff is needed, and where common room layouts need to be modified to improve traffic flow.

This is essentially what Disney did by turning its key into a wearable MagicBand with low-power sensors and wireless communication, and what Starwood did by harnessing smartphone hardware with a mobile app.

In each case, the firm saw the data that wasn’t there, and imagined new ways to capture it and use it. This is the art of digitization and datafication, which, when done well, can disrupt or hold would-be disruptors at bay.

And this is part of the wonder of data capital. Its tactics are open to new entrants and incumbents alike. In the land-grab for data-producing activities, don’t be surprised to see more physical products and high-labor services disappear into the ether. But don’t be surprised either when today’s market leaders are data capital’s biggest flag bearers.

 

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