Self-disrupt or self-destruct

This article is an excerpt from "Digital Transformation in Real Estate: A Practical Guide", produced by Unissu. Download the full e-book here

The earliest industries to go through digital transformation, and therefore the most advanced industries today, are those we use or touch on a daily basis; the best examples of this are the automotive industry and music business.

The automotive industry is an easy to understand example of an advanced, ongoing digital transformation journey. Production lines which rely on repetitive movements and processes, i.e. assembling cars, are easily controlled by robots. The faster and more efficiently those robots work, the more cars the plant can produce each day, and at a higher quality. And so it has been that the automotive industry has ploughed huge amounts into research and development to create robots that work faster and more efficiently than humans.

Today, there is not a single major car manufacturer which doesn't use robots on its production line. This means that no time or energy has had to be wasted on trying to persuade the industry to use technology. Instead, year after year, all resources have been put into finessing the technology. And what's more, anyone old enough to remember cars made as recently as the early 90s will agree that build quality has been enhanced to a remarkable degree as a result.

In today's automotive world, we see another stage of this grand transformation journey playing out before our eyes. Where the focus was once on automation and robotics, today the battleground is energy efficiency. With its decades-old reliance on profit driven by internal combustion engines (and the infrastructure, tax rates and regulation based on this paradigm), the incentive for legacy auto manufacturers to embrace hybrid or electric power has been limited. But then, up to the starting line pulls Elon Musk and his range of electric Teslas, looking to generate profits by stealing them away from incumbent manufacturers. He did this by appealing to the environmentally-conscious motorist who also appreciates new technological experiences.

Tesla quickly became the category leader in this field. However, the automotive industry is extremely capital-intensive; Tesla has yet to turn a profit of any kind. Meanwhile, all the major auto manufacturers have released their own range of hybrid and electric vehicles to their loyal customers, often backed with solid reputations for reliability or tax incentives to reduce the buying price. At the cost of short-term revenue loss to Tesla, legacy manufacturers may accumulate all of the future profits.

Thinking about it now, the final point is possibly the most interesting when examining digital transformation in the automotive world. This is because, in addition to building car manufacturing plants, Tesla has been accumulating the supply chain for the batteries which all other manufacturers require and to whom they may end up selling the batteries at a profit. Tesla, therefore, is not only defeating the incumbents who don't respond to the disruption at all, they are ensuring that those who do are forever reliant upon Tesla. Perhaps this is Musk's endurance race after all and another outcome - tails Elon wins, heads you lose.

The story of the automotive industry should demonstrate to the world of real estate that incumbents can often find success in the face of change and external disruption. But only if they act quickly and intelligently can they retain their place at the top. So, the giants of car manufacturing played their digital transformation hand perfectly. The cool cats over in the music industry, however, got it all wrong. And they did so in a very public forum.

Remember Napster? The rise of digital music downloads, coupled with free (and illegal) peer-to-peer sharing technology and increased personal computer ownership crippled the music industry for nearly two decades. What used to be a world of hedonistic excess and immense fortune suddenly withered to a barren landscape. Music stores and record labels found themselves deep within an existential crisis, forced to ask themselves, why are we here? What is the point of us?

Unlike the automotive industry which responded quickly to emerging alternative energy innovation, the music industry completely denied the emerging popularity of digital music. Not only did it fail to prepare, but it failed even to react. Napster showed what was possible if you were willing to be crooked, and a lack of preparation from the record labels meant it took years to stem the flow of illegal downloads.

Then Apple introduced iTunes and the iPod and legitimised the market but still, the big industry incumbents refused to accept that digital transformation was real. One would have thought, of all industries, the world of music would be comfortable with emerging innovation. They have, after all, watched physical formats change from 7" records on gramophones to 12" of turntables, then those changed to cassette tape, onto mini disks (kind of), and finally CDs. It's strange how adamantly they denied the mp3.

Of course, the story of the music industry's temporary demise isn't just about a new musical format. Instead, it's the result of two symbiotic industries, music and retail, undergoing their digital transformations at the same time. It was a perfect storm. In a now infamous story, HMV's Managing Director, Steve Knotts, sat down in a board meeting, circa 2002, to be told that "the three greatest threats to HMV are online retailers, downloadable music, and supermarkets discounting loss leader product". Whilst he agreed that supermarkets were a threat, when it came to the idea of downloads, Knotts became, according to reports, 'visibly angry', shouting that he had 'never heard such rubbish'.

"For the serious music, games or film buyer", he said, "downloadable music is just a fad and people will always want the atmosphere and experience of a music store rather than online shopping." This was fatal. Perhaps HMV could have survived its denial of a new music format. Perhaps it could have survived its denial of a new appetite for a different shopping experience. But it certainly could not survive both.