Paper & Blocks

Back in my research/consulting days, I made the rounds with a presentation titled: The Attention Imperative in Financial Services. To briefly summarize its contents:

Wealth management firms have a hard time acquiring clients.

Customer acquisition costs (CAC) can be upwards of $2,000.

Why?

Because clients do not live their lives with the ‘long-term’ top-of-mind.

That is, most people do not wake up everyday thinking about their investment portfolios.

To hack customer acquisition, these businesses would have to go where their customers live: in the short-term.

The short-term has the attention of the consumer.

The short-term from a wealth management perspective has nothing to do with the portfolio, but everything to do with funnel that feeds it.

Payments, personal financial management apps, stock trading… even chequing accounts have more short-term engagement than a retirement portfolio.

Firms that start with a successful product in the ‘short-term’ where consumer attention lived would have a much easier time moving into products that were more ‘long-term’ in nature.

Those that start with long-term products (like wealth management firms) should add products/features that were short-term in nature to act as a wedge to compete more effectively in their long-term market.

What I didn’t realize at the time was that I was talking about a broader pattern, something I’m going to call the temporal theory of disruptive innovation.

Disruptive Innovation

Far from being just a cliche, ‘disruption’ or ‘disruptive innovation’ actually has a specific definition.

In Clay Christensen’s classic theory of disruptive innovation, a challenger enters at the bottom of an existing market, builds a simpler more suitable product for that underserved niche, and eventually moves up market to displace the established market-leading firms whose attention was too focused on the high-end.

Disruptive innovations are made possible because they get started using a low-end foothold. The challenger focuses on serving the least profitable customer who has been forgotten about by the incumbents and is happy with a good enough product.

Example: Airbnb

In 2008, Airbnb set out on its path following the disruptive innovation formula to upend the hospitality industry.

The simple idea that people with spare bedrooms or couches could connect with strangers on the internet and offer them a place to stay has now birthed a giant company that is taking on (and beating) the traditional hospitality industry.

The firm started with a low-end foothold: couch surfers and budget travelers.

Built a simple, low-cost and intuitive product for that niche: hosts with vacant accommodations enabled by a technology platform that created trust and facilitated transactions.

And eventually moved up market to displace established firms: many Airbnb accommodations today rival even the highest-end hotel rooms.

Airbnb was a ‘disruptor’ in every sense of the word and they have successfully displaced and competed with the long-standing hospitality industry.

But Airbnb is also an example of something else: the temporal theory of disruptive innovation.

The Temporal Disruptor of the Real Estate Market

Here is a Wall Street Journal article from earlier this week:

“Airbnb is launching a listing service for rental apartments with some of the biggest landlords and property managers in the country, a bid to expand its business in multifamily buildings…The site will act as a listing platform for rental apartments, similar to Zillow or Apartments.com, but it will only include units where short-term sublets are allowed. Tenants who sign a lease can sublease their units for a fixed number of days a year…”

Source: https://www.wsj.com/articles/airbnb-aims-to-attract-big-landlords-with-a-cut-of-its-rental-sales-11669781739

That’s right, Airbnb is getting into the apartment rental game (longer-term leases, to be exact). And why not? The company was forced to pivot as the pandemic locked would-be travelers in their homes and forced an entire society to give working-from-home (WFH) the old college try. No longer were Airbnbs required by just traveling tourists, they were now in the crosshairs of nomadic WFHers looking to book stays for months at a time as they set-up shop in new locales. The natural extension of this market for Airbnb was to look further down the duration chain, whose next link was the traditional 1-year apartment lease.

Markets can be defined by any number of characteristics: customer segments, product features, price levels, etc. What Airbnb is doing here is defining markets by duration or time: that is, they are time-segmenting the market for personal accommodations.

They disrupted the market for short-duration stays. They succeeded in entering the medium-duration space during the pandemic. Now they are setting their sights on the long-duration market. Heck, maybe they’ll set their sights on Zillow and the rest of the real estate market one day.

Airbnb’s exploration of the duration chain started in the short-term and has transitioned into the long-term. They are a temporal disruptor in every sense of the word. But what does that mean?

The Temporal Theory of Disruptive Innovation

Disruption happens when a smaller company successfully moves upmarket to challenge the larger and more established businesses.

The temporal theory of disruptive innovation states that disruption takes place when a smaller company focused on building a foothold in a short-duration market successfully moves up the chain into a long-duration market to challenge larger and more established businesses.

More specifically: a challenger enters in the short-duration side of an existing market, looking for the highest transaction throughput activity possible. From there, the challenger builds a simple product to solve an immediate customer need that allows it to capture some market share in the short-duration domain. Using that short-duration domain as a wedge, the company then moves into the long-duration side of the market to displace the established firms who now lack the short-term wedge.

To break that down piece-by-piece:

A challenger enters in the short-term side of an existing market, looking for the highest transaction throughput activity possible: By having higher transaction throughput, the market naturally has another valuable resource: consumer attention. Although markets with consumer attention are often crowded, they also tend to have the benefit of lower switching costs and lower CAC. For example, in the market for shelter/accommodation, the shortest-duration segment of the market with the highest transaction throughput is the hospitality industry. People love browsing for different stays in different cities on the Airbnb app. Switching costs are generally low, where if you did not like your two-day stint at apartment ‘X’, then leave a poor review and some helpful feedback and move on.

The challenger builds a simple product to solve an immediate customer need that allows it to capture some market share in the short-duration domain: The company must be competitive in the short-duration side of the market. This can come through price leadership, feature differentiation, branding, distribution power, network effects, or some other competitive advantage. The point is that the company finds a way to compete in the short-duration domain. For Airbnb, this just happened to be through the path of disruptive innovation. Yet, the more important element of that strategy to their future [long-term rental] plans was the fact that by winning in short-duration stays, the company was building trust, getting in transactional reps with their customer base, and capturing consumer attention along the way.

Using the short-duration domain as a wedge, the company then moves into the long-duration side of the market to displace the established firms who now lack the short-term wedge: With an established customer base, a degree of trust, and a foothold in an adjacent temporal market/segment, the ‘disruptor’ now has a wedge to move up the duration chain and enter longer-duration markets. This wedge is a competitive advantage for firms in the longer-duration markets who may lack similar capabilities. Most long-term apartment lessors, for example, do not also offer short-term stays, let alone have a strong existing brand and customer base in that space. To the extent that firms can win (or at least compete) in short-duration domains, they will have a leg-up on the competition should they choose to expand into long-duration markets.

Caveats and Characteristics

Of course, every framework has its limitations. The temporal theory only applies specifically to ‘service’ industries where the market can be time-segmented as mentioned above.

Another way to think about this is through the type of relationship with customer has to the consumer need/want or job-to-be-done the industry addresses. There is a spectrum which starts at transactional needs and extends to relationship needs with a lot of grey area in between. Legal services, for example, can be organized along this spectrum. Sometimes a client will have a transactional relationship with a lawyer [short-duration], coming to them when they need to drum up a last will and testament or are thinking about selling their home. On the other end of the spectrum, clients may want a relationship-based arrangement with their lawyer [long-duration], putting them on retainer, waiting for a need to arise.

Building on that, the theory is most useful in situations where short-term actions add up into long-term results. The wealth management example off the top is a good illustration, where short-term savings habits add up into a long-term nest egg. Since the long-term nest egg has low transactional throughput, there is no feedback mechanism for the customer to see their progress, and so it lacks the ability to grab and hold consumer attention. Consequently, wealth management services can be effectively paired with a spending card or trading account which has more of an impact on the customer in the short-term.

Note that the theory also applies in reverse. That is, for challengers entering new markets, if that market is long-duration, it will be challenging to ‘disrupt’ or make significant competitive headway without the short-duration wedge. It’s largely why robo-advisors (like Wealthfront or Betterment) did not see the traction that their VCs were likely expecting and it is why the market for traditional apartment rentals has not seen a major competitor… yet.

Temporal Disruption is Everywhere

While we have so far relied upon Airbnb and the wealth management industry to illustrate the idea, there are a variety of other industries where temporal disruption may apply.

Education, for example, is a time-segmented industry where long-term results (ie. getting a degree) is the product of many short-term actions (ie. completing semesters, completing courses, completing projects/exams, etc.). Universities compete in the longest-duration area of the chain. Colleges and trade schools compete in the middle. Online learning platforms are the ‘disruptor’ here, and they have entered in the short-term.

In fact, Coursera, the market leader in the online learning space, has a concept of ‘stackable content’ that illustrates this idea perfectly.

Coursera offers their learners individual short-form projects that can be completed in as little as a few days/weeks. Complete several of these projects and you are on your way to completing a course (ie. the projects ‘stack’ into courses). Complete enough courses and you can earn a Specialization. Complete enough Specializations and you can come out with a Certificate or Degree. Stackable content makes for the ultimate temporal disruptor. Coursera has taken something long-term in nature (getting a degree), broken it down into smaller units with higher transactional throughput, and is competing on the short-duration end of the spectrum.

Another example can be seen in commercial real estate. WeWork followed this path, despite some strategic mishaps along the way. They took what is typically a long-duration service (ie. 10+ year office leases), broke that down into smaller units (ie. short-term co-working arrangements) and used it to compete for the short-duration end of the market.

WeWork then used this as a wedge to begin competing for the Enterprise market, where larger companies still relied on long-term leases.

Summary

Without getting into details, there is likely shades of this situation in personal transportation (Uber to car leases to car ownership), personal health (ClassPass to annual gym memberships), medicine (from telemedicine to family practices) and a variety of other service-based industries.

From financial services to commercial real estate, disruption can come in a variety of shapes and sizes. The time-segmented lens is just one more way to look at making competitive progress in a long duration service-based industry that is difficult to disrupt.

Attention is one of the most valuable assets in the world and the temporal theory of disruptive innovation gives this idea the respect it deserves.