E Ink Case Study

E Ink Case Study: Concessions of a Disruptive Technology Tuesday, August 3, 2010

Prepared By Brian Coate [email protected] John Coogan [email protected] Francis Piccirillo [email protected] Matthew Wallace [email protected]

E Ink Case Study Concessions of a Disruptive Technology BY BRIAN COATE, JOHN COOGAN, FRANCIS PICCIRILLO AND MATTHEW WALLACE

I

In the Beginning: n 1997, Joe Jacobson founded the E Ink Corporation in Cambridge, Massachusetts.

Although the business

was years away from profitability and success, it attracted significant media attention and financial backing because of its potentially revolutionary idea, “a hardcover book that had hundreds of paper-thin pages in it.

You could take it off the shelf, open it, and read King Lear, for instance. You could close it, press a button, open it up again, and you’d be reading quantum physics.” 1

Only electrophoretic display technology, which

forms visible images by rearranging charged pigment particles using an applied electric field, would make this seemingly impossible device a possibility. Many obstacles stood in the path of E Ink and as a result, the executive team made several concessions to mitigate uncertainty and stabilize their financial situation.

Innovation Classification: With the ultimate goal of “killing paper”, E Ink was clearly attempting to enter the display market as a disruptive technology.

This statement can be retroactively reassessed using recent history, but as the Harvard

Business School case, E Ink shows, in 1999, the company’s goal was to disrupt the traditional market for books by introducing a revolutionary method of obtaining and consuming written text.

“Radio Paper,” as it

was called by the early E Ink creators, would “replace all forms of paper-based communication.” 2 Nearly all forms of innovation fall under two broad categories, sustaining and disruptive. classify sustaining innovations either as discontinuous or evolutionary. the different types of innovation, revolves around the automobile industry.

One can further

An apt analogy, which helps explain A minor, or evolutionary, innovation

would be that of fuel injection, which replaced carburetors as the predominant method used to meter fuel on gasoline engines.

A much bigger innovation, while still sustaining, was that of the automobile.

The automo-

bile created a new market by allowing customers to solve a problem (transportation) in a radically new way (using a mechanical engine as opposed to animals).

1

(Archambault, 2000, p. 1)

2

(Archambault, 2000, p. 4)

Although the automobile was a transformational innova-

E Ink Case Study tion, it was not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. However, they did transform the transportation industry along an important technological vector. The market for transportation essentially remained intact until the debut of the lower priced Ford Model T in 1908 by making higher speed, motorized transportation available to the masses. 3

Just as the Model T was a disruptive technology that revolutionized transportation, radio paper si-

milarly targeted revolutionizing paper-based communication.

E Ink’s Business Model: Business models are inherently difficult to define precisely.

This is due to the fact that not only are there a

multitude of viable options for startups to use, but often, these models are constantly evolving and changing to accommodate the market dynamics of the time.

Unplanned successes and failures can necessitate dramat-

ic alterations of a previously sound business model and force a young company to restructure its goals and forecasts.

While many business analysts have posited methods for defining a business model, we have

found that Taz Pirmohamed provided the most succinct definition in his Note on Business Model Analysis for

the Entrepreneur: “A business model is defined as a summation of the core business decisions and trade-offs employed by a company to earn a profit.” 4

E Ink’s business model encompasses several strategies, all

aimed at reaching their ultimate goal of “radio paper” which had an estimated market potential of $80 billion. 5 When developing the business plan, Russ Wilcox, the vice president and general manager worked with Jim Iuliano, the president and CEO to ensure that E Ink would satisfy three main criteria.

These were “(1) the

market focus must keep the company on its technical path toward radio paper, (2) it must bring revenue in 1999, and (3) the company must be able to grow that business to $20 million in 3 years.” 6

Despite aspira-

tions of creating a thin, flexible display capable of receiving radio signals, Wilcox saw the retail signage business as an important interim market.

E Ink would be able to generate revenue and release solid proof-of-

concept products while still working to scale down the electrophoretic technology to smaller and smaller sizes. Demonstrating the ability to generate revenue was critical to E Ink’s success.

It was clear that functional

radio paper need years of dedication and securing financing for such an advanced, but untested, technology was far from simple.

E Ink’s play into the retail signage market served as a short-term goal and shifted

3

(Christensen, 2003, p. 49)

4

(Pirmohamed, 2002, p. 1)

5

(Archambault, 2000, p. 10)

6

(Archambault, 2000, p. 5)

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E Ink Case Study their planned revenue source from a single stream (radio paper) to a multiple stream system.

E Ink em-

ployed a unit-based revenue model, selling each sign at a price determined by the cost of production.

Ulti-

mately, recouping the fixed costs incurred by research and development would be necessary, but in the shortrun E Ink would merely use the revenue generated by retail signage sales to lower their burn rate and offset the variable costs of production. The cost drivers at E Ink closely resembled most technology start-ups, major fixed costs to develop the first versions of E Ink displays and minimal variable costs until the displays went into production.

By the end of

the case, E Ink had yet to mature past the first stage of development and the majority of their total costs consisted of fixed costs. The three critical success factors Mr. Iuliano had outlined to Mr. Wilcox focused primarily on revenue drivers, but in the long-run, E Ink would need to focus on different points.

First, although E Ink would offer a

product with superior features, they would still need the ability to command a price premium for their displays without a commensurate increase in costs.

Secondly, developing economies of scale to lower costs as sales

volume increased would ensure long-term profitability and the ability to meet market demand.

Other Viable Business Models and Their Advantages: While there are a endless number of revenue stream permutations each resulting in unique revenue models, most fall into five broad categories, Subscription/Membership, Volume or Unit-Based, Advertising-Based, Licensing & Syndication and Transaction Fee. 7

As mentioned above, E Ink chose to use a Unit-Based revenue

model, but Mr. Wilcox could have used a “Licensing & Syndication” model as well. Licensing the newly developed electrophoretic display technology to larger, established display companies would allow E Ink to generate revenue by charging the display manufacturer a fee to produce displays using E Ink’s technology.

Major display manufacturers benefit from having already offset major capital expenditures

and dissolved their fixed costs over many years of profitable production.

Using the manufacturing facilities

already in place at traditional, liquid-crystal display factories would allow E Ink to tap into significant economies of scale and begin generating revenue sooner and without the need for major investment in production facilities.

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This would reduce their long-term profit and ultimately prevent them from ever cornering the display

(Pirmohamed, 2002, p. 4)

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E Ink Case Study market.

Ultimately, keeping manufacturing within the company allowed E Ink to ensure the highest quality

production as well as create a tight knit culture, even between the more distant aspects of the business.

Technological and Structural Considerations for Business Model Choice: E Ink’s business model selection is highly defensible for two reasons. nology, gauging technological uncertainty was vital.

Second, maintaining E Ink’s inclusive, inspirational culture

was necessary to encourage continued innovation and rapid growth. E Ink avoided several technological difficulties.

First, as an unproven, disruptive techBy beginning production on retail signs,

The larger displays had lower resolution requirements as well

as less rigorous technical specifications regarding small defects.

E Ink’s retail displays were easier to pro-

duce than the miniature screens used in today’s E-Book readers but still fetched significant prices due to their size and advantages over traditional signs. 8

More important than E Ink’s decision to pursue multiple

revenue streams was their persistent focus on culture.

A small company’s culture can lead to significant ad-

vantages over incumbents and E Ink certainly used that to its full benefit.

In an interview with Anthony

Tjan, Zappos CEO Tony Hsieh touched on a few points that he believe are the cornerstones of nurturing a culture of success at a start-up.

“Company culture stems from intrinsic factors and needs to be established

early rather than reverse-engineered,” 9 says Hsieh, speaking from his experience at LinkExchange, a tech venture which he and a friend sold to Microsoft in 1998 for $265 million.

Iuliano had doubts about E Ink’s

ability to maintain the interesting, fun, exciting culture, which had drawn him to the company in the first place.

It seemed impossible to keep every employee on a first name basis with one-another as E Ink ex-

panded to additional locations and defined more unique business units.

Iuliano clearly had the right idea

though, because he did everything reasonably possible to establish culture around the intrinsic factors that inspired the founders as opposed to attempting to reverse engineer it.

Crossing the Chasm: Geoffrey A. Moore described the concept of “Crossing the Chasm” as a difficulty marketing a product where “early majority” adoption relies heavily on “early adopter” acceptance.

At the time of this case study, E Ink

had been primarily working on concept development and the testing phase of product development. Recently however, E Ink had hired a new management team experienced in high technology startup companies.

8

(Archambault, 2000, p. 5)

9

(Tjan, 2010, p. 1)

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E Ink Case Study In order to achieve initial sales, the new management team decided that retail stores were good candidates as “early adopters”. Market research showed that electronic ink signs would provide good value to the customer, and provided significant profit potential for E Ink ($600 million projected market size). This type of tactic, called a “penetration strategy”, allows a company to introduce its product or technology by focusing on a single niche market. This would not only facilitate initial sales, but also help E Ink refine its technology and manufacturing. It was easier to develop the technology and manufacturing for larger scale, lower resolution displays than it would be to develop the technology and manufacturing for their end goal (and much larger market) of “radio paper”. The management team had confidence in electronic ink technology’s marketability, specifically in the retail signage market. Success in the (relatively small) retail signs market would constitute as a group of early adopters and help E Ink refine its technology and manufacturing methods, but the issue of “crossing the chasm” still wasn’t addressed. Geoffrey A. Moore states “the notion that part of what defines a high-tech market is the tendency of its members to reference each other when making buying decisions-- is absolutely key to successful high-tech marketing.”10 E Ink’s “Technical Path to Radio Paper” diagram shows their plan of capturing the retail signs market, then the portable displays market, and finally the paper market. The problem with this strategy is that portable electronics consumers or manufacturers will not look to retailers like J.C. Penny when making buying decisions. It may make more sense for E Ink to find a niche within the consumer electronics market that would be more cohesive with their targeted “early majority” market of portable displays.

Challenges Facing E Ink Adoption: Originally, E Ink had planned to enter the radio paper market by 2003, enabling users to update the information on their flexible paper-like display with radio waves. This $80 billion market could potentially make the current display market of LCD and LED displays obsolete.

However, even seven years after their original

forecast, they still use non-flexible backplanes and do not have color.

E Ink is far from trumping the media

display technology that exists today, but they could still be a disruptive technology in the making. The primary obstacle slowing the adoption of E Ink’s products is uncertainty.

Consumers naturally feel fear,

uncertainty and doubt when considering which new technologies to adopt and this is a major roadblock to many disruptive technologies. nalities. 10

Fortunately, the value of E Ink’s displays does not come from network exter-

The displays work as stated, regardless of whether or not a large number of other users adopt

(Moore, 1991, p. 57)

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E Ink Case Study them.

Upon its incorporation, E Ink operated under a primarily business-to-business revenue model, selling

first to large retailers and then eventually consumer electronics manufacturers.

E Ink’s leadership focused

intensely on proving that electrophoretic displays were technologically viable to ease potential customers’ fear of technological uncertainty and demonstrate E Ink’s applications. ing a need to consumers can be difficult.

As with any disruptive technology, illustrat-

Consequently, developing strong relationships with consumer elec-

tronics manufacturers is critical for E Ink’s successful transition from its second stage (consumer electronics) to its planned third stage (radio paper).

Alternative Opportunities: Many different manufacturers have used E Ink technology to enhance their products and reduce costs, but there appear to be several other applications for electrophoretic displays E Ink has yet to explore. navigation displays must be clearly visible in all conditions to ensure safety and usefulness. are visible in direct sunlight and unaffected when traveling during the day unshielded.

Nautical

E Ink displays

Additionally, their low

power requirements make them prime choices for use on sailboats without substantial power sources.

Every

football game uses first-down markers to show how many remaining plays the offense has before turning the ball over.

The National Football League is constantly finding new ways to employ the most recent technolo-

gical advances.

Viewership consists of one of the most highly targeted markets for consumer electronics and

including E Ink in the field equipment would provide a high-tech alternative to traditional first-down markers while raising awareness of E Ink’s versatility. for flexible backplanes.

Lastly, a major breakthrough in E Ink’s technology could allow

One possible application for flexible electronic ink displays lies in military camouflage,

which would benefit from the ability to change textures based on the surroundings.

A soldier with the ability

to appear covered in leaves while walking through a forest, and then instantly change to a solid desert pattern upon changing locales could have a major advantage in combat.

Funding for Armed Forces research

products is traditionally ample and the government has been integral in the development of many technologies.

All of these could prove to be beneficial interim markets to boost profitability, increase adoption and

further progress E Ink towards the ultimate goal of radio paper.

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E Ink Case Study Works Cited Archambault, S. (2000). E Ink. (T. Amabile, Ed.) Boston: Harvard Business School Publishing. Christensen, C. M. (2003). The innovator's solution : creating and sustaining successful growth. Harvard Business Press. Eaton, K. (2009, June 1). E-Ink's Sale Clears Path for Color Kindle in 2010. Fast Company . Levie, A. (2010, July 24). Always Keep a Few Tricks Up Your Sleeve. (A. Bryant, Interviewer) Moore, G. A. (1991). Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream

Customers. New York: HarperBusiness. Pirmohamed, T. (2002). Note on Business Model Analysis for the Entrepreneur. (R. Hamermesh, Ed.) Boston: Harvard Business School Publishing. Robbins, S. (2010, July 28). Advanced Entrepreneurship: Your Every Move, Your Culture. Harvard Business

Review . Tjan, A. (2010, July 14). Four Lessons on Culture and Customer Service from Zappos CEO, Tony Hseih.

Harvard Business Review .

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