Why The Next Big Thing Looks Like a Toy? Ft. Apple Vision Pro

What's up, everyone? Welcome back to another episode of Founders Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. As I have mentioned, with the new and improved Founders Journal, I'm going to act as your startup Sherpa, curating the best content for entrepreneurs so you don't have to spend the time looking across the internet. I'm going to summarize all of this content so you don't have to read it for yourself and analyze it so you have actionable takeaways to apply to your business. For today's episode, I'm going to be breaking down a seminal essay by Andreessen Horowitz general partner Chris Dixon. In 2010, Chris wrote an essay that is titled The Next Big Thing Will Start Out Looking Like a Toy, which talks about why the next big technology product always starts out by being dismissed and being considered toy-like. And while I think understanding this essay and Chris's words are always important for entrepreneurs, I think it's an especially timely essay to read with the introduction of the Apple Vision Pro, which has taken the internet by storm since its release 2 days ago. So I'll read the essay and I'll talk you through why it's important and why it's important, particularly today. Let's dive in. The Next Big Thing Will Start Out Looking Like a Toy by Chris Dixon, January 3rd, 2010. One of the amazing things about the internet economy is how different the list of top internet properties today looks from the list 10 years ago. Let's pause there for a second. Why is this amazing? Why does Chris use the word amazing? And why is amazing still true in 2024 like it was when he wrote this in 2010? It's amazing because it shows how much the world changes in 10 years. It's amazing because it demonstrates how new players can come to dominate a market out of nowhere, Even though incumbents are better resourced to seize opportunities, and it's amazing to me how the internet is a true meritocracy. There's no politics or favoritism. There's simply better or worse products, better or worse prices, and how long you've been around doesn't matter. It's about what you offer to the customer today. Let's keep it going. It wasn't as if those former top companies were complacent. Most of them acquired and built products like crazy to avoid being displaced. Let's go deeper here. So let's pause for a second. I want to make this concept feel real to you, not just the concept of top. Companies being displaced, but also what Chris said about the list of top internet properties today looking different from that list 10 years ago. So first off, I'm going to read off the top 5 websites in terms of web traffic from December of 1999. Number 1 was AOL with 53 million unique visitors. People were using AOL for internet browsing, instant messenger, and eventually for search. Number 2 was Yahoo Number 3 was Microsoft. Number 4 was Lycos, which I had never heard of. Number 5 was Excite@Home, which I had also never heard of. The entire top 5 list in 1999 is basically just variations of the same thing, which is some version of browsing the web, search, instant messenger, and email. And that kind of makes sense. At this point, you're still in the early days of the internet, which Chris Dixon, in another essay of his, calls the skeuomorphic era. Basically, he says with any new technology wave, There are 2 phases of innovation: the skeuomorphic era and the native era. The skeuomorphic era is generally a copy and paste of existing behavior. So the early internet was mostly a digital adaptation of pre-internet activities. Letter writing became email, mail-order shopping became shopping online, Yellow Pages became search. And then you have the native era, which Dixon says takes some period of time to enter. So in the case of the internet, he says it was around a decade where you see the introduction of completely new ideas that could not have existed pre-internet. Things like social networks, crowdfunding, social productivity apps. Now what I'm going to do is read off the top 5 websites 10 years later in 2009. 3 of the top 5 are still the same: Yahoo, Microsoft, and AOL. But there are 2 new companies I want to quickly talk about. There's a new top sheriff in town. So number 1 most trafficked website at the end of 2009 is Google with 151 million unique monthly visitors. Now, keep in mind, Google was founded in 1998. So in almost a decade, it became the most popular site on the internet. Chris Dixon will talk more in a minute about why and how that happened. And then number 5 was MySpace, the first global social network. So by 2009, you're seeing this move from skeuomorphic to native innovation on the internet in full display. Let's keep the essay going. The reason big new things sneak by incumbents is that the next big thing always starts out being dismissed as a toy. This is one of the main insights of Clay Christensen's disruptive technology theory. This theory starts with the observation that technologies tend to get better at a faster rate than users' needs increase. From this simple insight follows all kinds of interesting conclusions about how markets and products change over time. Disruptive technologies are dismissed as toys because when they are first launched, they undershoot user needs. Let's pause there. I want to give a very specific example of this. Take Netflix as the example. When Netflix first launched, it was unappealing to Blockbuster's core customer base. Netflix was a fully online experience, but delivery of whatever movie you picked would take several days to get to you, which was of no interest to the mainstream customer who typically wanted to rent a new release on some impulse. So they would drive to Blockbuster and pick it up that day. And this is exactly why Blockbuster wasn't concerned about Netflix in the early days. But as technology improved and Netflix could shift to streaming video over the internet, all of a sudden its offerings became more attractive to Blockbuster's core audience than Blockbuster was itself. There was now more selection, more convenience. It was on demand and all you can watch. Let's keep it going. The first telephone could only carry voices a mile or 2. The leading telco of the time, Western Union, passed on acquiring the phone because they didn't see how it could possibly be useful to businesses and railroads, their primary customers. What they failed to anticipate was how rapidly telephone technology and infrastructure would improve. Technology adoption is usually nonlinear due to so-called complementary network effects. Let's pause there. I want to talk a little bit more about network effects. Just as a refresher, network effects simply refers to products that improve as more people use the product. So telephone adoption was nonlinear because every new telephone user made a telephone network that much more valuable because now you had more people to call and communicate with as a telephone user. Another example, marketplace companies like Uber or Airbnb also have network effects because each additional user makes it much more attractive for a new driver or host to join the platform because there's more business, which then makes it more attractive for new customers because now there are more cars and less waiting times if you're using Uber or more choices of places to stay when traveling if you're using Airbnb. Let's keep the essay going. The same was true of how mainframe companies viewed the PC microcomputer and how modern telecom companies view Skype. Christensen has many more examples in his books. Now, this is an important next point that Chris Dixon will make, so make sure you listen closely. This does not mean every product that looks like a toy will turn out to be the next big thing. Just a quick footnote here from myself. If you want a sense of what Dixon is talking about, that not every toy or toy-looking thing will actually be a game-changing product, all you have to do is simply go to the website museumoffailure.com. There are plenty of things that looked like toys and they stayed like toys forever. Let's keep it going. To distinguish toys that are disruptive from toys that will remain just toys, you need to look at products as processes. When I first read this, I didn't know what he meant. You need to look at products as processes. But if you keep listening, you'll understand. Obviously, products get better inasmuch as the designer adds features. But this is a relatively weak force. Much more powerful are external forces. Microchips getting cheaper. Bandwidth becoming ubiquitous, mobile devices getting smarter, etc. For a product to be disruptive, it needs to be designed to ride these changes up the utility curve. So as I think about this idea again of Chris saying products need to be looked at as processes, basically what I think he's getting at here is that timing and specifically the speed and timing of relevant technological change is an important predictor of disruption in markets. Let's keep it going. Social software is an interesting special case where the strongest forces of improvement are users' actions. Quick note here. I believe what Chris means by this is something like Facebook didn't succeed because of a certain powerful technological leap. It succeeded because it established enduring network effects, because users joined and they contributed to the network in a way that earlier platforms weren't able to do. And okay, Chris continues here saying, As Clay Shirky explains in his latest book, Wikipedia is literally a process. Every day it is edited by spammers, vandals, wackos, etc. Yet every day the good guys make it better at a faster rate. If you had gone back to 2001 and analyzed Wikipedia as a static product, it would have looked very much like a toy. Let's pause here because I in fact did go back to look at Wikipedia in 2001, which you should do as well if you're interested. If you actually want to see what Wikipedia looked like in 2001, Just Google a website called Wayback Machine. Go to Wayback Machine, type in wikipedia.com, and then click on a date in 2001. It is pretty crazy what the platform was at this point. There was no search. There were 10,000 articles on the platform, not 6.8 million, which is what the number is today. And basically things were organized in categories that you could click on and browse as individual articles. So just for shits and giggles, I clicked on the category of history. And while pages like the History of the United States existed, obvious pages like history of modern Greece still had never been created by someone. Think about how important Wikipedia is in your life today to learn everything about literally everything. But if you were interacting with the product then and you were asked, will this Wikipedia thing be huge? The answer would have definitively been no. Let's keep it going. The reason Wikipedia works so brilliantly are subtle design features that sculpt the torrent of user edits such that they yield a net improvement over time. Since users' needs for encyclopedic information remains relatively steady, as long as Wikipedia got steadily better, it would eventually meet and surpass user needs. A product doesn't have to be disruptive to be valuable. There are plenty of products that are useful from day one and continue being useful long term. These are what Christensen calls sustaining technologies. Let's just pause there for a second. I want to give you an example of that. I would consider the current smartphone market, which is defined by incrementality, as sustained innovation. It's back. Go back to the essay. When startups build useful sustaining technologies, they are often quickly acquired or copied by incumbents. If your timing and execution is right, you can create a very successful business on the back of a sustained technology. But startups with sustaining technologies are very unlikely to be the new ones we see on top lists in 2020. Those will be disruptive technologies, the ones that sneak by because people dismiss them as toys. Let's just pause there for a second because that is the end of Chris Dixon's essay. Now, this last sentence in the essay, I'm going to read it again. It reminds me of another great example of disruptive technology. So I'm going to read the sentence and then give you the example. Chris finishes the essay by saying those will be disruptive technologies, and he's referring to what are the technologies that will be on the top of most trafficked website lists in 2020. And he was writing this again as of 2010. He says those will be disruptive technologies, the ones that sneak by because people dismiss them as toys. Another great example is Salesforce. At the time, Cybele and SAP were the leaders in CRM, customer relationship management. Their customers were mostly enterprises, and the way you worked with these companies was simple. You would install and host your software in secure on-premise server rooms. So you would literally have servers In your company's office, in a locked room, you would pay a company like Cybel large sums of money to license their software. Let's call it six figures plus, and then you would pay recurring maintenance and upgrade fees. Mark Benioff, who left Oracle to start Salesforce, had a very simple pitch. He said, "We're going to be the first cloud CRM. There's going to be no physical servers, no ongoing maintenance. Instead of paying a big licensing fee, you're going to pay us Salesforce a way lower monthly or annual subscription." This is before. Like SaaS as we know it existed, like they were the OG in SaaS. Salesforce followed Christensen's disruption theory to a tee, first offering their lower-priced cloud CRM product to small businesses who were used to using pen and paper to keep track of customers because the Cybele and SAPs of the world were far too expensive for the SMB. Little by little, Salesforce improved its product and bridged the performance gap between its product and the incumbents' products to the point where it not only was attractive to the forgotten SMB customer, but it was now even more attractive to the mid-sized and enterprise customer than what incumbents were actually able to offer them. And so that is just a perfect additional example of a disruptive technology by Christensen's definition. Now, while I finish the essay by Chris Dixon, I want to talk about one more thing before we go. I want to put a timely innovation in the context of Dixon's essay and Clayton Christensen's theory of innovation. This episode is being recorded 2 days after the official launch of the Apple Vision Pro, which Apple considers to be the beginning of the, quote, spatial computing era. If you're not familiar with the Vision Pro, I will give you the quick synopsis. But I also linked to a video by Marques Brownlee, which breaks down every aspect of the product. The Vision Pro is Apple's first foray into an AR/VR headset. The product starts at $3,500 and has a 2.5-hour battery life when connected to its external battery source. The Vision Pro allows you to see and experience your physical surround while blending in digital content ranging from photos to movies to work monitors to other applications. Based on what I'm describing, what would you consider the Vision Pro to be in terms of Clayton Christensen's theory? Whether it's a sustained innovation or disruptive innovation, which one would you consider it to be? Well, I would say the answer is neither, because this isn't an improvement on an existing product with the goal of squeezing more profits from your most valuable customers. So it doesn't fit the definition of sustained innovation, but it's also not disruptive innovation. Apple isn't a startup company that's positioning itself against an incumbent by going after a segment of customers that the incumbent has forgotten about or serves poorly. I think about the Vision Pro like I think about the iPhone. This product falls into a third, lesser talked about category of innovation, which Christensen calls new market disruption. He defines it as, quote, when a business creates a new segment in an existing market to reach underserved customers through a new measure of performance, they turn products and services that were once expensive and unattainable into something affordable and accessible to a larger population of people. Now, while I don't think that the Vision Pro has fully delivered on the promise of new market disruption, given its high price point, clunky form factor, and short battery life, I do think it's making augmented reality feel way less like a toy than it ever has. And just keep in mind, the first virtual reality headset was created in 1968. Just as Chris Dixon referred to products as processes, I think the Vision Pro is a process. As technology continues to improve, I would not at all be surprised to see a future generation of this product that not only is mass market, but is delivering society a better new version of phones, computers, TVs, and gaming consoles in a single experience. And that is The Next Big Thing Will Start Out Looking Like a Toy by Chris Dixon, with a little innovation theory by Clayton Christensen thrown in, as well as what this all means for a new innovation like the Apple Vision Pro. Now, I would love to hear from you. How do you like this new format of curation and remix? Are you a fan of me curating the best content from the internet for entrepreneurs so you don't have to, and then breaking it down in a way that feels understandable and actionable within your business? Shoot me an email to alex@morningbrew.com and let me know what you think. As always, thank you so much for listening to Founders Journal, and I'll catch you next episode.