Five Huge Industries That Never Saw Disruption Coming

May 18, 2015 • Blog Post • By Quartz Creative

IN THIS ARTICLE

  • Competition is accelerating between venture-backed startups and industry titans due to scalable infrastructure
  • Startups in the telecom, finance, food delivery and athletic industries are attempting to set new standards of innovation

Snapchat. Simple Bank. Instacart. Acorns. Athos. Six years ago none of these companies existed; today they're major players that all industries are looking to for inspiration.

In 1960, the average major corporation lasted for 60 years—but today, it gets wiped out after only 15. With billion-dollar budgets for technology, marketing, and big data at their disposal, why are flagship public companies failing faster than ever before, and industries experiencing major disruption?

In a word: infrastructure.

Every one of the companies in this story—Snapchat, Simple Bank, Instacart, Acorns and Athoswas founded in 2009 or later. Each of these companies went from startup to multi-billion dollar monster in less time than the average Fortune 500 CEO holds tenure: about 4.6 years in the US.

Once a "horizon three" problem, startup competition has become unbearably fast for legacy players, creating disruption industry wide. CIOs once presumed their infrastructure would act as a barrier to entry, but they failed to see startups solving many of the same problems they had solved at far greater expense, using off-the-shelf components, rented infrastructure and grassroots community support instead of patents, proprietary tech and marketing.

Heres how five huge industries got caught off guard and are experiencing total disruption.

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FORRESTER

The trojan horse that shocked the mainstream media

In late 2013, a tiny Los Angeles-based startup called Snapchat was the subject of a bidding war between Facebook and Google. The app’s disappearing messages intrigued younger users and baffled their parents, creating a private network that kids worldwide embraced. The sale never happened, but Snapchat made headlines anyway—for growing to a valuation of $4 billion in only two years with a 22-year-old at the helm.

The incredible valuation is even more impressive given its low infrastructure costs. In fact, the entire Snapchat system lives on a PaaS, or Platform as a Service, allowing it to piggyback on the host’s massive computing resources for a fraction of the cost of building and maintaining separate infrastructure.

That’s right: Quite a strategy. Everything from the front-end of the Snapchat mobile app all the way down to the petabytes of data generated by its users: everything lives on third party servers. Today Snapchat’s 100+ million users send 700 million snaps per day network-wide, but never once has the company’s engineering team had to migrate a database, shard data, or worry about backups. In fact, in late 2013, when the company was valued at $4 billion, the entire Snapchat team only numbered about 20.

Without fear of scaling, CEO Evan Spiegel has been free to focus on business development. In Fall 2014, he announced a payments partnership with Square, disrupting shocking legacy payment processors by suddenly allowing young smartphone users to send and receive money through Snapchat—without banks, credit cards or checking accounts.

Then Spiegel announced content distribution partnerships with television networks like CNN, Vice, ESPN, and Food Network, creating a third rival for Twitter and Facebook. For major cable operators, it’s just another nail in the coffin. Like Netflix, the company also is developing its own content. The first Snapchat-produced TV show “Literally Can’t Even” debuted in February 2015 with episodes lasting only five minutes each. As of Spring 2015, Snapchat was valued at roughly $15 billion.

How a billion-dollar bank with no branches appeared from thin air

In the bleak period that followed the 2008 recession, a number of new financial services companies launched with the goal of disrupting legacy banks. A three-person banking startup called Simple, armed with just $10 million in capital, decided to take on the incumbents with two secret weapons that were all but inconsiderable to banks at the time: focusing on customer service and technology.

Simple has no physical branches, no paperwork, and a fraction of the employees of most banks. The company issues Visa debit cards, stores money with a banking partner called Bancorp, and allows users to manage their money entirely through the web. When the bank first launched in 2009, it was a revelation. Users could dispatch paper checks from an automated mailing center, set automated budgets, or monitor their checking account balance. But it wasn’t quite the same as a real bank, and users hovered around the 10,000 mark—too small for the big-cap banks to notice.

When the company launched its apps for iOS and Android in 2012 and 2013 respectively, everything changed. Suddenly, a few taps could automate 100 percent of the work once performed by human tellers or automated phone systems. Today, the Simple mobile app can take deposits using the phone's camera, schedule recurring payments, mail paper checks, reset your debit card pin, or put a hold on your card if lost. It even serves as an instant-messaging portal with customer service reps so you never have to call.

In February 2014, CEO Joshua Reich made an unexpected move, selling the company to Spanish bank BBVA for $117 million. Simple continues to operate independently through its user-friendly applications, but now has access to the massive capital of one of Europes oldest banks. BBVA gets an even better deal: 100,000 new American customers making over $2 billion in transactions per year. Not just any customers, but early adopters, whose data and product feedback will be far more valuable than the data of traditional brick-and-mortar bank customers could ever be.

How personal shoppers can be a retailer's best friend

In 2015, delivery is anything but special. Hire-a-messenger services like Delivery.com, WunWun, and PostMates have added to the throngs of messengers that zip around American cities today, but perhaps none has done so as profitably as Instacart.

With an incredible $275 million cache of venture capital, Instacart has succeeded wildly where other delivery services have floundered by turning the delivery model inside-out. Rather than pay an hourly gig worker simply to transport goods, CEO Apoorva Mehta’s insight was to use delivery workers as personal shoppers instead, sending them into retail stores to pick up entire lists of goods. Recently, Instacart even announced those same personal shoppers have the option to become employees. For as little as $4 plus tip, city residents save hours navigating crowded stores—not just the few minutes’ walk back home.

Compare that to similar value propositions from legacy grocery delivery services like FreshDirect or Peapod. They own fleets of refrigerated trucks, employ thousands of logistics workers to package and transport goods, and house their groceries in massive, centrally located warehouses. To the end user, the value these services provide is the same—they even operate e-commerce sites and mobile apps like Instacart’s. But for the principals of the business, the overhead is drastically larger.

Instacart uses your local retail stores as its warehouses. It has built up software databases of what’s in stock at popular destinations like Whole Foods Market, allowing users to pick specific items and brands, even specifying what to replace if something is out of stock. Instead of owning warehouses, Instacart simply owns your shopping list, telling your personal shopper where to go next.

When your shopper is done, they deliver your goods to your door in reusable fabric tote bags. No loud trucks, no purchase order, no cash tip, and no box-cutters are required to unpack your groceries.

At its core, Instacart is just software. It coordinates your shopping list with your personal shopper, allows you to communicate with them, and arranges payment. With such a narrow scope, it’s no surprise that Instacart has expanded to 16 urban localities in just two years, employing over 4,000 shoppers worldwide. Its network is so lightweight, in fact, that the company is now aiming for the $1 trillion worldwide grocery market—nearly all of it yet to be brought online.

Who’s afraid of the one-button investor?

Investing is scary—especially for people approaching retirement. Left to navigate a massive industry of financial advisors, asset managers, and broker-dealers peddling their own “research,” many people become cynical about investment professionals.

But that cynicism creates an interesting problem: secrecy. Instead of giving their financial advisors or accountants total control over their financial affairs, many pre-retirees have taken to investing significant proportions of their retirement income themselves. The result: a massive cottage industry of online trading platforms, subscription-based newsletters, investing shows, books, conferences, online courses, and other costly DIY tools have siphoned billions away from traditional asset managers.

Now a DIY investment tool, Acorns, has shaken the industry to its core. Created by father-son team Walter and Jeff Cruttendon, Acorns is a deceptively simple mobile application that connects to your debit or credit card and monitors what you spend. The app then “rounds up” your daily purchases, placing the remainder in an investment account.

The real genius of Acorns is how it merchandises investment products right inside the app. Rather than choose from a library of financial instruments, users simply choose one of three risk levels: low, medium, or aggressive. The app pipes in key market data in real-time, allowing users to make informed changes to their positions right from their phone—a phenomenon dubbed “micro-investing.”

Suddenly, the biggest asset managers are realizing what they’d missed. Not just because Acorns has grown to over 300,000 investment accounts in just two years, capturing over a million debit and credit cards—but because 75 percent of Acorns’ investors are under 35. When Generation Y hits 65, other companies’ “pre-retirement” marketing will be decades too late, giving Acorns a dominant position among Millennial customers.

Robot trainers lure you out of spin class and into the app store

Gym memberships are in decline, but not for the reasons you’d think. Group exercise club chains like CrossFit and SoulCycle have put the $21 billion U.S. fitness industry on its heels and a handful of software startups like ClassPass have made instructor-led exercise more affordable and convenient, too.

All this competition has gutted the margins of gyms nationwide, leaving big gym facilities like Equinox struggling to compete and adding on-premise perks like gourmet food and WiFi.

But while the brick-and-mortar gyms are locked in competition, a disruptor is approaching from the wings. Its not a gym, or a robotic personal trainer, or DIY fitness videos. In fact, its just a pair of shorts. But they could someday replace exercise coaching—the most profitable part of the businesswith something far more accurate and personal.

In Spring 2015, exercise enthusiasts everywhere began receiving shipments of exercise shorts from a Northern California-based startup called Athos, headed by CEO Dhananja Jayalath and his team of five exercise technologists. The response has been mind-blowing.

While FitBit might have started the personalized fitness revolution, Athos takes it to its ultimate sci-fi conclusion. Durable, flexible EMG sensors that send real-time muscle feedback to your phone are woven into the fabric of Athos shorts, telling you how hard each muscle group is exerting itself. A small pod that mounts to the hip of the garment acts as an on-board processor, sending pre-calculated insights to the users phone in milliseconds via Bluetooth LE.

On your phone, you see an X-ray map of your body, with muscles lighting up yellow, orange, or red as you exert them in real time. Not only can you be sure to reach muscular failure—the hallmark of a good workoutbut you can also receive on-the-fly feedback to adjust posture, balance, or intensity for maximum results and minimal risk of injury. A pair of Athos shorts costs less than $300, about the cost of three personal training sessions in Manhattan.

Nowhere is Athos more disruptive than in professional sports, where hundreds of millions of dollars are spent on coaching, performance monitoring, therapy, and motion-guidance hardware for sports like golf, tennis, and baseball.

With such sophisticated hardware and marketing, youd think Athos was the product of a multibillion-dollar company. In fact, the Athos concept began as a crowdfunding campaign in 2012, which culminated with a $12.2 million Series B funding round last summer.

Once Athos shirts begin shipping, the sportswear maker will be competing with wearables heavyweights who would have eaten Athos alive just a few months ago. Jawbone, one major competitor founded in 1999, took nearly 10 years of R&D to raise a Series B. For Athos, a seed round of $3.5 came just months after their Kickstarter campaign launched; the rest of their $15.7 million took less than a year of fundraising. Judging by Athoss speed to market, a 15-year average corporate lifespan may become less shocking—and more advantageous for consumers.

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