Britannica

The textbook that I use in class - Begg, Dornbusch and Ward - has a nice example of creative destruction. The Encyclopaedia Britannica was launched in 1768 and became the market leader for general reference books. Some key stats:

• 1990 annual sales £450m
• Price = £1,000
• Marginal cost of printing a set = £150
• Marginal cost of door-to-door salesforce = "several hundred £s"

And then along came Microsoft's 'Encarta'. The key innovation is that Encarta was a piece of software available on a CD-ROM at a marginal cost of just £1. From recollection it was bundled with many new computers. Britannica had to respond, and did so  - it fired it's direct salesforce, directed marketing towards online, and focused on it's reputation as being a more encompassing and definitive resource than it's rivals. Now:

• Price of Britannica (hard copy) = £1,000
• Price of Britannica (DVD) = £60
• Price of Encarta (DVD) = £40

And then along came Wikipedia. With >75,000 active volunteers, >10m articles, >100 langauges and evidence that it is as accurate as more authoritative sources. (As an aside I should point out my own policy on using wikipedia - it is an excellent entry point to many topics and often provides an excellent way to develop an understanding of a topic. But it should not be used as a primary source or taken as a definitive account. In short, treat it as you would a conversation with someone in a pub - or as Reagan famously said, "trust, but verify".)

So both of these innovations - first software then open-source collaboration - have asked major questions of Britannica. Some businesses can redefine their competitive advantage and continue to prosper. Others cannot, and the scarce capital they consume can be allocated to more pressing needs.