Just three short years ago, a New York City taxi Medallion — effectively a permit that allowed the holder to operate a NYC taxi — was worth as much as $1.32 million. The Medallion created an artificial monopoly, since there were only a limited number in circulation. But in a matter of months, the value of the Medallion tanked as Uber entered the scene, destroying that barrier to entry for people wanting to drive passengers around for money. Now, Medallions sell for as little as $500,000 — less than half their previous high.
You’ve likely heard this story before, as Uber’s disruption of the taxi industry has been widely documented. What’s interesting, however, is how Uber completely changed the taxi industry not by competing with all aspects of a taxi service, but essentially optimizing a single aspect of it: the process of summoning and paying for a hired car. Rather than seeking to create new industries like a Facebook or Google, many startups are targeting tiny segments of an industry or business process, rapidly disrupting established industries by avoiding the high-cost, asset-heavy aspects of these industries.
With an app that offers a superior customer experience or new capability, a startup can enter the logistics business without actually purchasing warehouses, or facilitate transoceanic shipments without a single driver, truck, ship, or other expensive asset.
The danger of the digital intermediary
It might seem relatively innocuous for a small startup to enter a capital-heavy industry, attacking only a tiny slice of the overall problem that the industry solves. However, if that tiny slice captures a key customer touchpoint, then suddenly the established players become a commodity.
Uber doesn’t own any cars or employ any drivers, but they do own the customer relationship. When I travel to a new city, I now reflexively book my ride with Uber. The car and driver essentially are commoditized to me as a customer. A competitor that can ultimately connect with your end customer can create a similar effect, making you a commodity even if you own the assets and actually perform the service that’s the core of the product.
Intriguingly, digital technologies make the threat all the more acute in industries that were once seen as safe from startups and other digitally-based competition, due to the high-cost barriers of entering these industries. These industries have not yet been forced to deal with rapidly evolving technologies. While retail has dealt with various digital competitors for decades, industrial manufacturers, defense, logistics, and others are new to the game.
Customers of these industries have also experienced high-quality digital companies in the consumer space, and are far less tolerant of poor customer experiences. While a convoluted “green screen” tool might have been perfectly acceptable to a customer of your organization a decade ago, that same customer is now comparing your experience to Facebook, Google, and other consumer companies. Startups are searching for this experience gap and will happily create a new experience for your customers, and leave the heavy lifting of executing the asset-intensive aspects of the transaction to others.
Identifying the threat
The most successful digital intermediaries usually intervene in an industry where some aspect of the transaction is sub-optimal. I’ve yet to meet someone who enjoyed traditional taxi services, often characterized by dirty and run-down vehicles, waits in taxi lines, and expensive pricing. With acceptable service standards so low, nearly anything with a modicum of consideration for the end customer was an improvement.
Consider your own company and industry for a moment, especially interactions with your customers and partners. Are there sub-optimal interactions that “have always been done this way” and are therefore tolerated? Do you force your customers to jump through hoops since you’re the dominant player in your industry? Are you hearing the same refrains from customers asking for an optimization, yet you’ve never provided it for some reason?
If you’ve answered yes to any of these questions, you’re exposed to the threat of a digital intermediary. Take a look at your company through a set of fresh eyes by putting yourself in your customers’ shoes or engaging independent evaluators. You just may identify the equivalent of a smelly, poorly maintained taxi that you can upgrade before the Uber of your industry does it first.