Tag Archives: dec

When Incumbents Downplay Disruption…

An unmanned car driven by a search engine company? We’ve seen that movie. It ends with robots harvesting our bodies for energy.

That is a line from a 2011 Chrysler car commercial mocking Google’s self-driving car project.

Another Chrysler commercial was even blunter: “Robots can take our food, our clothes and our homes. But, they will never take our cars.”

Chrysler’s early mocking of Google’s efforts exemplifies the fact that few cling to the status quo tighter than the companies that best understand it and have the most stake in preserving it. It is human nature to value what one does well and look askance at innovations that challenge the assumptions underlying current success. Sprinkle in some predictably irrational wishful thinking and you have the mindset that too quickly dismisses potentially dangerous disruptions.

Ironically, seven years later, those Google “robots” are now mostly driving Chrysler Pacifica minivans. Those robots have taken Chrysler’s cars and driven more than 10 million miles. Chrysler benefits by selling cars to Waymo, the spinoff from that Google project, but not nearly as much as it might have from building the robots themselves. Waymo is valued at $175 billion, about five times Chrysler’s market value.

History brims with other examples.

When Alexander Graham Bell offered to sell his telephone patents to Western Union, the committee evaluating the deal concluded:

Messrs. Hubbard and Bell want to install one of their ‘telephone devices’ in every city. The idea is idiotic on the face of it… This device is inherently of no use to us. We do not recommend its purchase.

Ken Olsen, who disrupted IBM’s mainframe dominance with his DEC minicomputers, mocked the usefulness of personal computers in their early days. He declared, “The personal computer will fall flat on its face in business.” Olsen was very wrong, and DEC would eventually be sold to Compaq Computer, a personal computer maker, for a fraction of its peak value.

See also: Why AI IS All It’s Cracked Up to Be  

Steve Ballmer’s initial ridicule of Apple’s iPhone is also legendary, though the words of the then-CEO of Microsoft were mild compared with the disdain on his face when asked to comment on the iPhone launch.

Years later, after he retired, Ballmer insisted that he was right about the iPhone in the context of mobile phones at the time. What he missed, he admitted, was that the strict separation of hardware, operating system and applications that drove Microsoft’s success in PCs wasn’t going to reproduce itself on mobile phones. Ballmer also didn’t recognize the power of the business model innovation that allowed the iPhone’s high cost to be built into monthly cell phone bills and to be subsidized by mobile operators. (Jump to the 4:00 mark.)

The biggest challenge for successful business executives—like Ballmer, Olsen and those at Western Union—when confronted with potentially disruptive innovations is to think deeply about potential strategic shifts, rather than simply mock innovations for violating current assumptions.

Another perhaps soon-to-be classic example is unfolding at State Farm Insurance.

State Farm released an TV ad that is a thinly veiled attack on Lemonade, a well-funded insurtech startup. Lemonade makes wide use of AI-based chatbots for customer service. State Farm, instead, prides itself on its host of human agents. In the ad, a State Farm agent says:

The budget insurance companies are building these cheap, knockoff robots to compete with us… These bots don’t have the compassion of a real State Farm agent.

As I’ve previously written, AI is one of six information technology trends that is reshaping every information-intensive industry, including insurance. In fact, as I recently told a group of insurance executives, I believe insurance will probably change more in the next 10 to 15 years than it has in the last 300.

See also: Lemonade Really Does Have a Big Heart  

That doesn’t mean that Lemonade’s use of chatbots for customer service will destroy State Farm. But, as State Farm should know, customer-service chatbots are only one of numerous innovations that Lemonade is bringing to the game. As several McKinsey consultants point out, AI-related technologies are driving “seismic tech-driven shifts” in a number of different aspects of insurance. Lemonade has also adopted a mobile-first strategy and is applying behavioral economics to drive other business model innovations.

State Farm executives need to get beyond the mocking and think deeply about how emerging innovations might disrupt their strategic assumptions.

One way to do so is being offered at InsuranceThoughtLeadership.com, where ITL editor-in-chief and industry thought leader Paul Carroll has offered a “State Farm Lemonade Throw Down.” Carroll offers to host an online debate between the two firms’ CEOs about how quickly AI technology should be integrated into interactions with customers.

Lemonade’s CEO, Daniel Schreiber, has accepted. I hope Michael Tipsord, State Farm’s CEO, will accept, as well.

Better for Mr. Tipsord to face the question now, while there is ample time to still out-innovate Lemonade and other startups, than to be left to reflect on what went wrong years later, as Steve Ballmer had to do with the iPhone.

Lemonade Really Does Have a Big Heart

Twelve months ago, Lemonade opened for business. For me, it marked the start of a new chapter in the history of the insurance industry. To coincide with their launch, I posted this article after speaking with CEO and co-founder Daniel Schreiber. The headline was “insurance will never be the same again!”

Of course, it was easy for me to make such a grand pronouncement 12 months ago, on the day that Lemonade hit the street. At that time, they had no customers, had not written any insurance and had certainly never paid a claim.

One year on, and Lemonade is up and running. Was I right to say insurance would never be the same again? I caught up with Daniel again to find out!

Disruptive Innovation

First things first, let me set some context. A question I get asked a lot by insurers and industry folk is, “why should we be interested in what Lemonade are doing?” It’s a great question and exactly what they should be asking. (I also point out that they need to be really interested in what ZhongAn is doing, as well).

To massively over-simplify and paraphrase Clayton Christensen, Lemonade has brought simplicity, convenience and affordability to a marketplace where the existing offering is complicated, expensive and inaccessible.

This is why the incumbent insurers need to take note when Lemonade pays a claim in three seconds. Otherwise, they could end up like DEC. Once the market leaders in minicomputers, DEC dismissed the rise of PCs, only to watch helplessly as IBM and Apple ate their lunch with personal computers.

Or Kodak, the inventor of digital photography. The company was too wedded to an outdated business model that relied on people printing their photos. That was until it was too late, and Kodak went from being the world’s fourth largest brand to bankrupt in less than two decades!

Now, it might have taken about 15 years for the demise of Kodak and about 10 for DEC to wake up and smell the coffee. The point being that disruptive innovations don’t take hold overnight; they need time to gain traction and build momentum.

But in this digital age, this speed of change is increasing. This is the key characteristic in the World Economic Forum’s definition of the 4th Industrial Revolution. It took Google just five years to hit a $1 billion in revenues. And Amazon only four!

Just think about this for a second. A decade ago, we didn’t have the iPhone, the iPad, Kindle, Uber, AirBnB, Android, Spotify, Instagram, WhatsApp, 4G. Could you imagine life without these now? Could you conceive that insurance is going to change and for the better?

You trust me, and I will trust you

There is another reason why incumbent insurers should be watching Lemonade very closely. It has addressed the fundamental issue with insurance and customer perception, which is trust, behavior and the conflict of interest.

There’s a ton of research and data that shows customers don’t trust insurers. And for good reason.

Insurers make the product complicated by using fancy jargon that Joe and Josephine Bloggs can’t understand. Insurers get paid up front and then create hurdles and barriers when the customer rightfully asks the insurer to do what they’ve already paid them to do.

And worse, the customer has to prove they are not a liar to the insurer’s satisfaction before a penny is paid out.

“Insurance fraud has become a self-fulfilling prophecy for incumbent insurers,” Daniel said. “They don’t trust customers to be fair and honest. This drives their behavior toward customers. And guess what, customers respond accordingly. Which justifies the insurer’s behavior in the first place. It’s a vicious circle that neither side can break.”

See also: Lemonade’s New Push: Zero Everything  

Lemonade’s virtuous circle

This conflict of interest doesn’t exist in the Lemonade business model. By operating as a tech platform that is also an insurance carrier, Lemonade has separated cost of operations from the pool of risk capital. It has also raised the bar when it comes to total cost of operations at 20% GWP.

Lemonade don’t profit from non-payment of a claim (in the way an incumbent insurer does). The company starts by trusting customers to make honest claims. Which is why Lemonade pays out straight away, with around a third of claim payouts fully automated. No human intervention at all.

Lemonade accepts that there are a few bad apples but works on the premise that most of us are fundamentally decent people.

It is usually at this point that the diehards and old laggards of the insurance industry start throwing fraud and loss data at me. Citing decades of data that proves Lemonade will eventually crash and burn under the weight of inflated and illegal claims.

My response is always the same “hands up everyone who is a bad person.” Of course, no hands go up because the vast majority of us are decent, respectful, honest people.

Which is why Lemonade has now had six, yes ,SIX, customers who have handed claims payouts back.

Just think about this for a moment.

A customer makes a claim (in seconds), gets paid (immediately), finds the situation has changed (later), realizes he got paid too much (oops!), then gives the payment back (you kidding me?).

Could the customer’s behavior be directly related to Lemonade’s behavior?

Yes, certainly! You only have to look at customer behavior at Grameen Bank in Bangladesh to see that trust can be relied  upon. Here, unsecured personal loans are repaid on time without the need for credit scores and debt collection agencies.

You don’t have to take my word for it, either. Hot out of the oven is this video of Lemonade customers in New York.

So, what’s the story, one year on?

Lemonade has been true to its word on the subject of transparency.

Throughout the year, the company has published its numbers, warts and all, for everyone to see. Building and maintaining trust is fundamental to Lemonade’s business model, and this starts with being open and honest.

Daniel has shared with me the latest numbers, and they are very impressive. I won’t repeat them here, because I know the team will be posting them all shortly in the latest Transparency Chronicles. They’re proud of the numbers, and rightly so.

See also: Lemonade: World’s First Live Policy  

All I will say is that Daniel and the team have steered a considered and thoughtful course in their first year. They could have chased the numbers, as many first year startups would do, only to regret the quality of business they end up with.

But Lemonade’s team has stuck to their knitting, have impressive growth numbers, a quality customer base completely aligned to the brand and are now licensed in 18 states (with more to follow).

Our job has only just started,” Daniel said. “Over the next year, we will continue to make insurance easier and better for our customers. One area we’ve started to look at now is the underlying insurance language and the products that form the heart of all insurance.”

Are you surprised?

You shouldn’t be! Lemonade is a highly professional startup and will no doubt become the definitive case study for exactly how “it” should be done.

But has this surprised Daniel?

“There are two things that have surprised us this year,” Daniel told me. “First, the extent of the warm reception we’ve received across the industry and from customers. We hoped customers would like us, but we never took for it granted.

“After all, you can’t beta test a new insurance company. The MVP (minimally viable product) approach simply doesn’t apply to insurance. It’s regulated and has to be the real deal from the get-go, right first time. So, for us, having customers put their faith in Lemonade from Day One has been very satisfying.

“The second is that our faith in humanity and behavioral economics has been affirmed. There will always be people who want to game the system, but on the whole, all our expectations about customer behavior have been exceeded.

“Who would have thought we would have six customers who gave their claim payouts back. That is very gratifying and also humbling for us. And gives us encouragement to continue doing what we are doing.”

Lemonade is live; insurance will never be the same again!

For me, I’m convinced. Historians will look back to Sept. 21, 2016, the day that Lemonade opened for business, as a watershed for the insurance industry.

Which means, of course, that the key question now is, who among the incumbent insurers will provide the Kodak moment? The one who simply missed that the world had changed until it was too late.

What the Apple Watch Says About Innovation

Now that the dust has settled on the long-anticipated unveiling of the Apple Watch, a major obstacle to its success is coming into view: the iPhone.

The Apple Watch has been the subject of breathless anticipation for years because, as Tim Cook said at its introduction, it represents “the next chapter in Apple’s story.” Conceived three years ago, shortly after Steve Jobs’ passing, the Watch is the embodiment of multiple dramatic arcs and aspirations.

It is the first major product developed under Tim Cook and Jony Ive outside of Jobs’ shadow—and thus has huge personal and legacy implications for both men.

The Watch is also Apple’s attempt to catalyze and dominate the wearables category. Given the intense competition in the smartphone market and the widespread view that new killer products, platforms and ecosystems will emerge somewhere at the intersection of the Internet of Things and wearable computing, the Watch is central to Apple’s post-iPhone strategy.

It might seem that the iPhone should be the Apple Watch’s greatest asset. Apple is positioning the Watch as a jaw-dropping, must-have peripheral to the iPhone. Millions of iPhone-toting Apple fans are sure to queue up upon the Watch’s 2015 launch to buy it. But do not mistake early adopters for market validation. For billions of other potential customers, the Watch’s close linkage and tethering to the iPhone could be a fundamental weakness.

In the short term, Apple must convince existing customers that they need a Watch in addition to their iPhone. Apple, however, has yet to offer a convincing case for this.

Long-rumored groundbreaking health apps built on Watch-mounted sensors have not materialized—disappointing many healthcare watchers (including me). That leaves Apple competing against more narrowly focused wearable devices like the Fitbit and Pebble—but at multiple times the price and fractions of the battery life.

Apple is also touting Apple Pay as a killer app that will attract consumers to the Watch. But, while Apple Pay is an intriguing service-oriented strategy for Apple, there is no need for consumers to buy an Apple Watch to use it. Apple Pay will work fine with just the iPhone.

For now, it seems that Apple has higher hopes for the Watch as a fashion accessory than as a category-defining killer app. But even that highbrow aspiration has ample skeptics who question the Watch’s fashion chops and business potential.

In the long term, when and if compelling apps emerge for the Watch, Apple will have to convince Watch enthusiasts that they need an iPhone in addition to the Watch.

This might not seem like a limiting factor given that there are more than 300 million active iPhone users. But imagine if the iPhone were just a peripheral to the Mac, thereby limiting its addressable market to Mac owners. Or imagine if the iPhone had to be tethered to the iPod. Do not such scenarios, in retrospect, sound implausibly shortsighted?

Both the Mac and the iPod were great products with loyal followings at the iPhone’s introduction. Apple, however, did not limit the iPhone to its predecessors’ market niches. As shown in Figure 1, the result was a blockbuster that lifted Apple far beyond those earlier products. The iPhone has grown to represent more than half of Apple’s revenues and perhaps even more of its profits.

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Figure 1 — Apple Device Sales

Now the iPhone has a loyal following but a small share of the smartphone market. Will Tim Cook limit the Apple Watch’s success to iPhone owners, or will Cook free it to dominate the potentially larger wearable devices space?

Freeing the Watch is a strategic imperative.

History tells us that market-leading technology products like the iPhone inevitably fade. The companies that depend on them must innovate into the succeeding categories or fade as well. Kodak, Polaroid, IBM, DEC, Nokia, Motorola, Blackberry, Intel, Sony, Dell and Microsoft are among those fading or faded companies.

All of those other companies underutilized disruptive advances in information technology for (at best) incremental enhancements to their dominant products. By doing so, they missed out on new killer products, business models and industries that coalesced around the new platforms enabled by those technology advances.

Thus, Kodak wasted decades trying to deploy digital photography (which it invented) as an enhancer to its dominant film-driven businesses. Microsoft was slow to the web and the cloud and killed its early e-reader and tablet devices because of internecine struggles over how those new categories related to its Windows and Office businesses. The list goes on: IBM did not lead in minicomputers. DEC and every other leading minicomputer maker missed out on personal computers. Motorola and Nokia were killed by smartphones, and Blackberry is near death.

Limiting the Watch to a peripheral role in the iPhone-centric ecosystem would repeat the same mistake made by those earlier market-leading technology companies.

That’s not to say there is not a lot of money to be made in the defend-the-cash-cow approach. Just look at the more than $650 billion in revenue and nearly $250 billion in earnings that Steve Ballmer delivered in his tenure as Microsoft CEO. Ballmer achieved those impressive numbers by defending and milking Microsoft’s dominant Office and Windows products. Ballmer, Microsoft and its investors missed out, however, on the market value created by Google, Apple, Facebook, Twitter and others that capitalized on search, big data, cloud computing, mobile devices and social media. Ballmer’s inability to grow beyond the core products that he inherited stagnated Microsoft’s market value for a decade.

Likewise, Tim Cook could nurse Apple’s iPhone-driven revenue stream for a long time. I doubt, however, that Tim Cook would be satisfied with a value-creation legacy comparable to Steve Ballmer’s.

It is too early to dismiss the Apple Watch’s potential to transcend the iPhone. We’ll get a measure of Apple’s foresight when it releases the software development kit (SDK) for the Watch. That will show how fundamentally tethered the Watch is to the iPhone and whether Apple has laid the groundwork for the Watch to be standalone at some point.

The real gut check for Tim Cook is further out in time, when technology and creativity enables wearable devices like the Watch to not only stand alone from the iPhone but also to replace it.

Will Tim Cook allow the Watch to cannibalize iPhone sales—as Apple previously allowed the iPhone to eat away at the iPod and risked the iPad’s doing the same to the Mac? Or will Apple stagnate as competitors and new entrants out-innovate it? Will Apple fade away as the riches from new killer apps, devices, ecosystems and business models that coalesce around emerging wearables-centric platforms flow to others?