Everyone talks about investing in the next Amazon or Google. However, identifying innovative products and companies is surprisingly difficult.
Alexander Bell, inventor of the telephone, tried to sell his invention to Western Union – a big telegraph company. Western Union was not interested and stated, “This telephone has too many shortcomings to be seriously considered a practical form of communication. The device is of no value to us. What use do we have of an electrical toy?”
Western Union’s decision is considered one of the worst decisions in business history – the telephone would go on to make Western Union’s telegraph business obsolete.
It is difficult to make predictions – especially about the future!
Mark Twain
How can highly paid executives at a successful company not spot the next big thing? There are two key reasons:
Visualizing the Future
It is difficult to visualize the future. The iPhone is the most successful product ever. But when it first came out, pundits predicted it would flop. They lamented the fact that there was no physical keyboard.
The reviews were pretty brutal:
- Bloomberg: The iPhone’s impact will be minimal. It will only appeal to a few gadget freaks. Nokia and Motorola haven’t a care in the world.
- PC Magazine: The iPhone is deeply flawed. Apple will sell lots at first and then sales will plummet.
- MarketWatch: The one phone fits all concept is ridiculous. Apple needs to roll out many variations, or the iPhone will immediately become passe.
- TechCrunch: The iPhone will bomb.
- BusinessWeek: The iPhone will never be a threat to BlackBerry.
If there is something new that is totally different than what we have seen before, we struggle to imagine how it will be used. We like familiar things, which is why most new products are tweaks to existing products.
This logic applies to other areas also. For example, most blockbuster movies are reboots or sequels. Just look at the top five movies of 2022: Top Gun, Dr. Strange, Batman, Jurassic World, and Spider-Man!
Rate of Improvement
The other reason innovation is difficult to predict is that people underestimate the rate of improvement.
Pundits were forecasting the demise of the iPhone based on what they saw in the first version. But the iPhone improved tremendously in the coming years, driving a lot more usage.
Compare the camera on the first iPhone to the camera now. No one buys an actual camera anymore because the iPhone camera is so good. Most of the things we do on the iPhone today would not be possible on the first iPhone.
Most of the apps we use were not there when the iPhone was launched. The AppStore itself debuted a year and a half after the iPhone launch.
Within a few years of its launch, Apple improved the iPhone tremendously. No one could have predicted the rate of improvement back in 2007 when the iPhone launched.
As the iPhone continued to get better, its sales exploded:
In Summary
It is difficult to identify the next big thing because people cannot imagine a totally different future from what they are used to, and people underestimate the rate of change.
The irony is that once an innovative product succeeds, the opposite happens – people find it hard to imagine how life was before:
