Rotman School of Management, University of Toronto

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Walking the Innovation Tightrope

By Emily McCutcheon

As any good entrepreneur can tell you, innovation isn’t easy. At the heart of it lies the tension between long-term strategy and rapid change.

The last decade has seen the precipitous rise of the ‘disruptor,’ especially in the tech industry. Thousands of startups are trying to become the Next Big Thing by revolutionizing the way we look at every-day experiences from hailing a cab to buying milk at the store. Oat milk, anyone?

But as any good entrepreneur can tell you, innovation isn’t easy. At the heart of it lies the tension between long-term strategy and rapid change.

Take a look at the major television networks, for instance. The age of appointment viewing has long since passed us by, and traditional cable networks have found themselves quickly losing market share as people ‘cut the cord’ in favour of online streaming services like Netflix. Much of Netflix’s success came from their content catalogue, which included Disney’s Marvel Cinematic Universe movies, classic TV shows like Murder, She Wrote and the latest seasons of broadcast gems like Brooklyn Nine-Nine.

Even as the price for Netflix increased, the user base grew. A month of Netflix is still substantially cheaper than even your basic cable package. This is important because millennials make up a significant portion of the Netflix user base. Millennials and Gen Z have been disproportionately affected by stagnant wages and an increased cost of living, especially housing, and many cite their financial situations as a reason for not subscribing to cable tv, setting aside the issue of appointment viewing, repetitive commercials, and the other hallmarks of the medium.

Cable companies and major media powerhouses like Disney saw only half the picture: the rise of Netflix meant that streaming platforms with a monthly fee were a viable business model. A basic Netflix plan costs $9.99/month. “Skinny” cable packages cost $25/month and are limited to very few channels while still including the usual flaws and additional fees like box rental and DVR costs.

Let’s compare prices.

Provider

Netflix

CBC Gem

Crave TV

Amazon Prime

YouTube Premium

Acorn TV

Rogers NHL Live

Basic Monthly Cost

$9.99

Free with commercials

$7.99

Free with Prime*

 

*$79 /year or ~$6.58/month

$11.99

$5.99

$200/year = ~$16.67/month including off-season

Mid-Range Monthly Cost

$13.99

$4.99

 

 

 

 

 

Maximum Monthly Cost

$16.99

 

$19.95

 

 

 

 

 

Supposing someone might subscribe to two or even three of these, the cost of streaming surpasses the cost of a skinny cable package. Add in the fact that brands like CBS and Disney are pulling content from Netflix in favour of their own streaming services which run at a similar price, and streaming suddenly becomes less appealing to the market.

In response, many people are cancelling streaming subscriptions and turning to illegal downloads and streaming sites that don’t cost money.

So what went wrong?

When you’re looking at a major market disruptor and thinking how can we do something like that? the solution isn’t always to duplicate their efforts. Lyft and Uber manage to coexist because there is significant enough demand for both services in addition to cabs, public transit, and private vehicles. Users have a choice of how to get somewhere.

With streaming services, the invisible value was consolidation. One or two streaming services made sense to users because the total cost remained less than or equal to the cost of basic cable while adding additional value. As big players fragment the market they make legal streaming a decreasingly viable option for consumers, driving them to illegal downloads and frustration.

True innovation requires that you both anticipate user needs and plan for long-term implications with an overarching strategy. It’s not enough to say that streaming services are the way to go because that doesn’t take into account the customer’s needs, pain points and their willingness and capacity to pay. Instead of responding to a threat (Netflix), these companies created a model that disrupted their own businesses.

Rotman faculty members Anne Bowers and Brian Silverman have experience navigating the tightrope between innovation and strategy. Dr. Bowers has worked extensively on research into financial services, environmental rankings and even online marketplaces like eBay. Each industry works very differently, but the key paths to successful innovation and disruption remain the same. Brian Silverman’s research has often zeroed in on one particular area: the interaction between a firm’s competitive strategy and organizational structure to affect its performance, especially its ability to access and exploit technological capabilities. Today, that affects every industry and every organization. 

Both professors teach in Rotman’s Strategy & Innovation program, a three-day intensive course which helps leaders position their firms not just to respond to threats but to develop new innovations and business models for long-term success.

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