Like other fiat currencies, Bitcoin is a network-backed currency: It derives all its value from the network effect — also known as Metcalfe’s Law. (Monetary economists call this the hot potato effect.)
Many people think that Bitcoin is flawed as a currency because it is not backed by something beyond itself. They are wrong. Bitcoin is flawed as a currency, but it is flawed because of its fixed supply, inherent in the protocol. Contrary to what many Bitcoin proponents argue, fixed supply is not a desirable characteristic of money because it would make monetary policy impossible. And remember, monetary policy is very important because it solves the problem of price stickiness and money illusion. In particular, bad monetary policy causes recessions (and disastrous monetary policy causes depressions).
Thus any currency that does not allow for monetary policy is inferior to the current model and is not likely to be mass adopted in the long-run — unless, of course, it finds some other solution to money illusion. But so far, I have not heard of any solution to money illusion other than monetary policy. To become widespread, Bitcoin needs a central bank that can adjust the money supply to prevent recessions. (Actually, a central bank is not needed if money supply adjustments are built right into the protocol, which would be very interesting, but I digress.)
Now, this does not prevent Bitcoin from being a platform for currencies. I have discussed before that it is likely that central banks will create their own crypto-currencies, and the easiest way for them to do so is to simply fork the existing Bitcoin protocol. Central banks would then be able to change the supply of money by leveraging the network effect (read the post to get a full description of how).
And if Bitcoin is forked to create official central bank money, bitcoins mined today will still have value in the future. But that value will be determined by central banks in the future, and means that today’s value comes from Bitcoin being a platform, not Bitcoin being money.
It is difficult to analyze the iPhone as a low-end or high-end disruptor because of its diverse functionality. It just does so many things.
As functionality extends, the price of each function falls, making the iPhone a high-end disruptor to consumers valuing all of those functions. (Think of a college student using multiple apps.)
On the other hand, as the performance of each function improves, the iPhone becomes a low-end disruptor to consumers valuing one specialized function. (Think of a film director using the camera.)
This same characteristic applied to PC’s decades ago, and is likely to repeat with the Apple Watch.
Recently I published a simple framework to explain disruption from above. The framework depends on measuring innovation using affordability instead of performance (the measure classically used in Christensen low-end disruption). In that post, I claimed that the iPhone can be viewed as a high-end disruptor to iPods. However, to be a high-end disruptor, the iPhone must have become cheaper than iPods over time, and many people have pointed out that they have not. Something similar could be said about PC’s disrupting typewriters from above.
I stand by my claim, however, because the price of the iPhone has fallen — dramatically, in fact. Let me explain.
Remember, when thinking about disruptions, we have to think in the realm of the job-to-be-done. So the first question we need to ask is: What job-to-be-done did the iPhone disrupt? Well it disrupted many, actually. Many.
In relation to the iPod, the iPhone disrupted the job of personal mobile music. Think back to 2007 when the iPhone was introduced. If you bought an iPhone ($1000) simply as a replacement for an iPod ($400), it would have been a very expensive iPod. However, if you bought an iPhone as a replacement for an iPod and a feature phone, the cost for the iPod function would only be $500 (the other $500 allocated to the phone function). That’s still more expensive than the stand-alone iPod cost, but that’s just the start. Now add in the iPhone’s function as a digital camera and the cost of each function drops even further to $333. Now add in the functions of a GPS, mobile browser, email device, calendar/scheduler, alarm clock and all of the millions of apps in the App Store. As functionality extends, the price of each function falls drastically. In fact, for most current iPhone users, the cost of their iPod is $0, since they would have likely still purchased their iPhone without the music app. And this applies to nearly all of the iPhone’s other functions. The iPhone is the ultimate high-end disruptor.
But the iPhone is also a low-end disruptor if looked at from the right point of view. Imagine a user that needs only one specialized function of an iPhone. For example, a documentary film-team might purchase an iPhone simply for its video camera function. From the view of professional film-makers, the iPhone is a very low-performing, inexpensive video recorder. But the video function is much better than it was in 2007, and it is getting better every day. Just last week, the TV series Modern Family aired an episode shot entirely with the iPhone. This is classic low-end disruption.
It is thus difficult to analyze the iPhone as a low-end and high-end disruptor because of its diverse functionality — it just does so many things. As functionality extends, the price of each function falls. At the same time, the performance of each function is constantly improving. The iPhone has so much functionality and is constantly improving that it disrupts everything, from multiple angles. The same thing can be said of PC’s decades ago, and explains why PC’s were eventually preferred over typewriters for even the most cost-conscious consumers. And it is likely that we will see a similar phenomenon play out with the Apple Watch.
Extending functionality doesn’t mean better performing functions, necessarily, it means more functions to solve more jobs. This is why I do not subscribe the theory of new-market disruption, which I think is just another misclassification like Ben Thomson’s obsoletion. Instead, you can think of the term new-market disruption as describing a product that disrupts several jobs-to-be-done, from both the low- and high-end, by extending functionality and improving performance.
The iPhone example reinforces the fact that low-end disruption and high-end disruption are idealized special cases of a general disruption phenomenon which occurs by innovating along both performance and affordability. It also reinforces the need for a synthesized framework.
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