At the DisCo Project, we naturally focus on the current, dynamic technology marketplace and the disruption it is continuing to cause to brick-and-mortar and other “legacy” industries. But disruptive innovation is not new and not unique to high-tech. It’s been around for hundreds of years and serves as a key driver of both economic growth and social evolution.

Let’s start with the poster child of disruption, buggy whip manufacturers. In the late 19^th century there were some 13,000 companies involved in the horse-drawn carriage (buggy) industry. Most failed to recognize that the era of raw horsepower was giving way to that of internal combustion engines and the automobile. Buggy whips, once a proud, artisan craft, essentially became relegated to S&M purveyors. Read Theodore Levitt’s influential 1960 book Marketing Myopia for a more detailed look.

Not everyone was obsoleted by Henry Ford. Timken & Co., which had developed roller bearings for buggies to smooth the ride of wooden wheels, prospered into the industrial age by making the transition to a market characterized as “personal transportation” rather than buggies. Likewise carriage interior manufacturers, who successfully supplied customized leather-clad seats and accessories to Detroit.

One might suspect this industrial myopia has been confined to small markets with few dominant players. But not hardly. One of the more famous series of patent cases in history were the battles between Western Union and Alexander Graham Bell in the 1870s, where the telegraph giant (along with scores of others) vainly tried to contest Bell’s U.S. patents on the telephone. Ironically, the telephone was initially rejected by Western Union, the leading telecommunications company of the 1800s, because it could carry a signal only three miles. The Bell telephone therefore took root as a local communications service simple enough to be used by everyday people. Little by little, the telephone’s range improved until it supplanted Western Union and its telegraph operators altogether.

Apart from scurrilous character assassination suggesting Bell had bribed U.S. Patent and Trademark Office clerks to stamp his patent appli­cation first, the patent cases are best remembered for their eventual 1879 settlement. Western Union assigned all telephone rights to the nascent Bell System with the caveat that Bell would not compete in the lucrative telegraphy market. After all, Western Union surmised, no one wanted to have their peaceful homes invaded by ringing monsters from the stressful outside world. Check out this verbatim 1876 internal memo from Western Union:

Messrs. Hubbard and Bell want to install one of their “telephone devices” in every city. The idea is idiotic on the face of it. Furthermore, why would any person want to use this ungainly and impractical device when he can send a messenger to the telegraph office and have a clear written message sent to any large city in the United States?

Epically wrong! But that, of course, is the challenge of disruptive innovation. It forces market participants to rethink their premises and reimagine the business they are in. Those who get it wrong will be lost in the dustbin (or buggy whip rack) of history. Those who get it right typically enjoy a window of success until the next inflection point arrives. Were barbers out of business when, some 200 years ago, doctors began to curtail the practice of bleeding patients, eventually usurping barbers as providers of health care? No, because barbershops moved from medicine to personal grooming.

Disruptive technologies create major new growth in the industries they penetrate — even when they cause traditionally entrenched firms to fail — by allowing less-skilled and less-affluent people to do things previously done only by expensive specialists in centralized, inconvenient locations. In effect, they offer consumers products and services that are cheaper, better, and more convenient than ever before. Disruption, a core microeconomic driver of macroeconomic growth, has played a fundamental role as the American economy has become more efficient and productive.

Clayton Christensen, Thomas Craig and Stuart Hart, The Great Disruption

There are hundreds or thousands more examples we can discuss. Polaroid and Kodak, both innovators in their own right, have faced bankruptcy and virtual irrelevance over the past few years because they could not cope with rapid disintermediation of their photography businesses by digital technologies. Walgreens, CVS and camera shops, meanwhile, have retained a solid photography revenue stream by supporting photo printing from SD cards and even Facebook photo collections.

Some businesses get it and some do not. Disruptive competition drives out those whose world view tries quixotically to preserve the past or to protect economic and social customs from technology-driven change. Disruption is of course not a panacea for all social ills; New Yorkers, for instance, complained as much about the filth and stench of cobblestoned city streets filled with horse droppings in the 19^th century as they did about the filth and stench of paved streets filled with cars and CO2 fumes in the 20^th century. As an economic and competitive matter, however, disruption is a process of continually “out with the old and in with the new.” And it’s been that way for as long as anyone can remember.

Courtesy of Disco Project | Of Buggy Whips, Telephones and Disruption.

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60 years ago, when Harry Truman beat Tom Dewey for the presidency, it was widely predicted by pollsters that Truman would lose. This led to the famous “Dewey Beats Truman” headline in the newspaper proudy flashed by the winning candidate.

The problem, it was later revealed, was that the Gallup organization based its poll results on responses to telephone inquiries. But in the late 1940s, that selection inevitably favored wealthier Republicans, leading to skewed poll results.

Gallup is best known for that one half-century-old blunder. There’s a terrible irony in that. The studious George Gallup did more than anyone to put opinion polling on solid ground.

We have a similar problem today, it appears to me. While telephone subscribership has now become ubiquitous, increasingly many citizens — especially twenty-somethings — no longer use landline telephones, instead going completely wireless. The proportion was 1 in 6 three years ago and continues to increase steadily. Pollsters, however, still base their surveys on landline phone subscribers. In fact, under FCC regulations it is unlawful to telephone a wireless subscriber for a “solicitation” or using an autodialer (a technical prerequisite to modern polling) without either their consent or a prior business relationship. Therefore, despite a non-profit exemption in the FCC’s rules (which, unlike the Federal Trade Commission’s “telemarketing sales rule,” do not expressly exempt political polling), the law is standing in the way of accurate political predictions.

How this will play out in next Tuesday’s elections is unclear to me, as I claim no special expertise in political punditry. But it is revealing that the problems experienced in 1948 are recurring today in a different form due to technological change and the accelerating proliferation of wireless communications devices.

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This is the opening paragraph of an article by this author appearing today in the Fall 2010 issue of Icarus, the newsletter of the ABA’s Communications & Digital Technology Industries Committee, Section of Antitrust Law. “If the issue of broadband reclassification is not addressed with sensitivity to the history and traditions of FCC common carrier regulation, one can all too easily arrive at conclusions that simply cannot be squared with the legal framework applied to telecommunications for more than 30 years.”

The highly polarized debate over so-called net neutrality at the Federal Communications Commission (FCC) exposes serious philosophical differences about the appropriate role of government in managing technological change. Neither side is unfortunately free either from hyperbole or fear-mongering. And neither side is completely right.

Read the whole essay. It’s provocative.

Note: I have not appeared as counsel for any party to the FCC’s current net neutrality NOI proceeding and was not paid to write this essay (despite what my colleagues and clients in the public interest community may claim). I represented Google in the past but now am ethically precluded from doing so because my law firm has a conflict of interest, being adverse to Google in an employment age discrimination case before the California Supreme Court. The article nonetheless does not reflect the views or opinions of my firm or any of my clients, past or present.

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Just yesterday I finished a federal appellate brief to the U.S. Court of Appeals for the Ninth Circuit. GCB Communications, Inc. v. U.S. South Communications, Inc. The case is about an arcane area of telecom regulation — payphone compensation — but presents some serious legal questions regarding the role of federal courts and the authority of regulatory agencies like the FCC. It’s even got a constitutional (due process) question.

So the moral of the story is that little cases (this one involves all of $18,000) can raise big issues. Now, as explained in the brief, the court of appeals will decide whether awarding legal fees of some $80K on a lawsuit in which the plaintiffs won less than $20K is a sensible result under a federal law allowing “reasoanable” attorneys’ fees.

Oh, first the court has to agree that my clients should have lost at trial under the law and the evidence introduced!! (For the non-lawyer audience, that’s because the court could reverse the trial court judgment “on the merits,” in which case the plaintiffs, now “appellees,” lose, and not have to reach the issue of legal fees.)

Here’s my favorite line from the brief:

Lawsuits as economic blackmail should not be rewarded with hugely disproportionate attorneys’ fees, especially when a complaint is used principally for monetary leverage.

What do you think about that?

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I’m not sure I agree entirely with the political motivations, but the legal analysis here seems right.

If Chairman Genachowski announces, as expected, his intention to reclassify the Internet as a telephone system, he will be reversing 30 years of precedent starting with the Carter administration FCC’s “Computer II” decision and definitively settled with respect to broadband Internet access by the Clinton FCC in 1998. Turning sharply left from Carter and Clinton indicates a pretty extreme shift beyond the mainstream of American politics.

Such a shift is unjustified, because free-market Internet policy has been a tremendous success. The Internet — in the absence of regulation — has flourished into a remarkable engine of economic growth, innovation, competition, and free expression. Such triumph argues in favor of continuing existing successful policies, but with today’s announcement the FCC shows it is more interested in satisfying a left-wing political constituency than continuing sound policy.

Posted via web from glenn’s posterous

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Our friends at Google have decided to enter the instant messaging (IM) market with a product called “GoogleTalk.” Google Talk Launch Sends Clear Message to Rivals [The Guardian]. That’s an interesting move, but they still have to contend with the incompatibilities among the various different IM standards. And it raises the old dot.com bubble question of whether search sites provide services (which Google has done better than anyone) or want to leverage search into more “stickiness” and expand into “portals.”

See, the issues never change, just the acronyms.

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For those who thought the excesses of the dot.com boom all got washed away in the subsequent bust, the optical fiber telecommunications industry has some disappointing news. Prices for access along the vast expanses of long-haul fiber optic networks built in the late 1990s and 2000 haven’t finished falling to earth. Wired News: Bandwidth Glut Lives On.

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In another stunning example of judicial myopia, the U.S. Court of Appeals for the Ninth Circuit has held that cable modem service is “telecommunications,” and thus subject to sharing with independent ISPs. Big Win For Brand X [Forbes.com]. The issue here is not that the court reversed the Federal Communications Commission — which happens all the time, with good reason — but rather that the Communications Act bases regulatory treatment on the categorization of services. If the court had found, like the FCC, that cable modem services are “information” services because they connect users to the Internet, that would have led to the opposite result.

This illustrates that the rules governing communications, written before the Internet explosion of the mid-1990s, hardly make sense in an era of technological convergence. In short, the rules are broken. For a more in-depth examination, see the presentations I have made on this subject, as long ago as 1996. Then I called this penchant for labels and the conflicting technolgoical and regulatory histories of circuit switched (telephone) and packet switched (Internet) networks a “war of two worlds.” Some things never change!!

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