A recent article in The Economist, citing the work of Ryan Raffaelli at Harvard Business School, points to what it calls a “paradox” in the aftermath of disruptive innovation. Some old technologies, after being rendered obsolete by better and cheaper alternatives (indeed even after whole industries based on them have been decimated), manage to “re-emerge” to the point that they sustain healthy businesses. Think mechanical Swiss watches, now enjoying strong sales. Or fountain pens, or vinyl records. Or small-batch, handmade goods – from vermouth to chocolate to pickles.
We could add our own favorite example: pinball. In our HBR article “Big Bang Disruption”, we describe the devastation of arcade pinball machines wrought in only a few years by Sony’s PlayStation home video console. From a historic high in 1993 of 130,000 machines sold, sales fell over 90% in the next five years. By the end of the decade, only one producer—Stern Pinball—was left making new machines, and with arcades closing daily, it looked as if it, too, would soon be facing game over.
But Stern found salvation in a new customer segment of aging baby-boomers who wanted arcade machines for home rec rooms and man caves. Today, the company does roughly $50 million in total sales, with the home market accounting for over 80% of them.
That’s a healthy company. Yet the industry will always remain a shadow of its former self, even as the products that disrupted pinball have revenues in the billions. This is typical of the stage of Big Bang Disruption we refer to as “Entropy,” when the supply chain supporting products and services displaced by a disruptive innovation collapse into a kind of economic black hole. Consolidation shrinks the market down, often to one remaining, integrated producer, who can still profit by serving a small group of legacy customers.
That vestiges of old technologies linger on, capable of being resurrected into viable businesses again, doesn’t seem strange to us. Indeed, it’s part and parcel of the digital disruption remaking every aspect of the global economy. The very technologies that likely disrupted the legacy industry in the first place are the same ones devoted practitioners are using to forge new supply chains and digital platforms for a more efficient, better connected version of the old market. The same disruption is driving both the decline and, later, the re-emergence. There is no paradox.
Consider the re-emergence of artisanal goods. No doubt you are aware of the explosion of the market – some call it a movement – in handcrafted products. At times, it seems, the borough of Brooklyn has become one giant artist colony, with everyone working on something—whiskey, woodworking tools, the reinvention of the egg cream—targeted to a small but impassioned fan-base.
Who are these makers if not the revivers of dying or, in some cases, long extinct technologies? Yet it’s thanks to new digital tools such as Etsy, an Internet marketplace selling hand-made goods from around the world; and Kickstarter,the “crowdfunding” site that mediates donation-based funding for a range of products and services, that these artisans can now find and serve their tiny, global markets of customers. These are segments that would have been impossible for individual artisans to organize in a cost-effective way before the rise of the Internet and electronic communication tools that cut out expensive middlemen and asset-heavy enterprises.
The growth of Etsy, fast becoming the leading storefront for handmade products, shows how small products can generate a big bang. Similar to eBay, it provides a platform and marketplace tools to connect buyers and sellers, including digital storefronts and buyer-seller rating systems to establish all-important virtual reputations.
Etsy charges a 20-cent listing fee per item and takes a 3.5% cut of sales. Since achieving first-year sales of $175,000 in 2006, it has increased that number by four orders of magnitude: in 2013, Etsy sold $1.35 billion in merchandise. A survey of its 5,500 U.S.-based sellers revealed that 88% are women, nearly all working from home. For a fifth of them, selling through Etsy is a full-time job.
And digital capabilities also benefit the production, not just the distribution, of Etsy’s goods. Etsy’s creators benefit from global markets for sourcing raw materials, for example. Other small-scale sellers benefit from more affordable web hosting, design, and manufacturing, all of which are fueling much of the growth in cost-effective handmade and customized goods and services.
Thus, artisanal soap-making has grown from just a handful of producers in 1986 to over 150, most in Oregon, who now have their own trade association. Much of that growth was made possible thanks to Etsy, where handmade soap represents over 5% of all products being offered on the site.
The point is not that most consumers will ever care enough to choose soap that is made with goat’s milk, or lard, or without any animal product. On the contrary, the point is that it isn’t necessary for most consumers to do so. With handmade soap selling for $4-6 a bar, while mass-produced soap retails for about $1, sellers can do fine with small, loyal customer bases.
Meanwhile, crowdfunding platforms such as Kickstarter are solving the most difficult problem facing small businesses and sole proprietors whose ideas require substantial upfront investment—raising the necessary capital. In 2013 alone, Kickstarter users funded nearly 20,000 projects and committed nearly $500 million.
Among these are thousands of projects posted by producers of art, crafts, design, fashion, and food–including a recent campaign that raised $55,000 for potato salad (don’t ask). Together, artisanal categories account for at least 20% of all Kickstarter campaigns and over $100 million in user donations.
The Economist sees these developments as a rejection of the disruptors. “[T]he more that disruptive innovations like the internet boost the overall productivity of the economy,” they write, “the more room there will be for old-fashioned industries that focus on quality rather than quantity and heritage rather than novelty.” But the Japanese artisan offering hand-tooled wooden ballpoint pens to willing buyers around the world uses the same digital tools that make possible low-cost retractable gel-ink pens.
And the performance breakthroughs achieved by disruptive technologies aren’t the only ones by which consumers choose. Hand-crafted or artisanal goods might look better, last longer, and outperform mass-produced goods, at least for particular uses or users.
A digital smart watch keeps time more accurately than a finely-crafted Patek Phillipe, but the latter performs in other ways. As The Economist notes, “people do not just buy something because it provides the most efficient solution to a problem. They buy it because it provides aesthetic satisfaction—a beautiful book, for example, or a perfectly made shirt—or because it makes them feel good about themselves.”
Nostalgic goods. Artisanal goods. Disrupted technology goods. Each of these are businesses whose customers are devoted, but few and far between. Fortunately, in the digital age we can have our Turkish Taffy and eat it, too. Today’s rich trade in heritage goods is happening because of disruptive technologies, not in spite of them.
(featured image: Hanselmann Pottery)