Why Bezos is right and Buffett is wrong about business disruption

Jeff Bezos and Warren Buffett have a lot in common. They are self-made industry titans, wealthy beyond imagination, incredibly smart, impressively driven.

But in the past few weeks, these men have unwittingly offered juxtaposing opinions on one very important topic: business disruption. Only one of these two esteemed paragons of capitalism can be right. My money is on Jeff Bezos.

First, let’s recap what was said.

Buffet, at his Berkshire Hathaway annual shareholders meeting, declared “the success of the auto companies getting into the insurance business is probably as likely as the success of the insurance companies getting into the auto business.”

 A bit of context may be necessary. Buffet, in case you didn’t know, is a heavy investor in the insurance industry. Berkshire Hathaway even owns GEICO outright.

These were pretty strong words from Buffet, who is characteristically more diplomatic. What provoked Buffet’s atypical response was news about Tesla partnering with Liberty Mutual Insurance to provide auto insurance for Tesla vehicles. Buffet seemed to take this action as something of an affront, which may explain his dismissive tone and defensive demeanor.

Meanwhile, at an Amazon employee all hands meeting, Jeff Bezos sounded a defeatist tone as bleak as the sad little character Eeyore on a rainy day.

“Amazon is not too big to fail,” Bezos reportedly said. “In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years.”

Bezos has made other such statements in the past. But this was the first unequivocal admission that there is no opt-out of this scenario, and the first time he has attached a definitive timeline. It’s alarming, to say the least, when you consider Amazon is currently hovering around $1 trillion in valuation.

Two immutable laws

But here is why Buffet is wrong and Bezos is right. And the answer is quite simple and paradoxically profound at the same time. The fact is, despite all the fancy theories about what businesses need to do to compete, thrive and survive, there are really only two laws that are immutable and irrevocable:

1. Any business or industry which can be disrupted, will be disrupted
2. No business or industry is immune from disruption

In short, Bezos is right. It’s not a question of “if” but of “when.”

Now, Buffet could be proven right about Tesla specifically. Reams have been written speculating Tesla’s imminent demise. Tesla’s mercurial leader, Elon Musk, seems to be into everything, so who knows if this is just another whim or an actual strategic move.

But Buffet is absolutely wrong to be dismissive in general regarding the possibility of another industry or an outsider competing in his space.

It’s disappointing to hear a man of his experience and expertise make such comments, because they reflect the classic error so many king-of-the-hill, incumbent businesses make, as is well documented and popularized by Clay Christensen in his treatise: The Innovator’s Dilemma.

The incumbent business is so tied to its lucrative, cash-generating machinery that it turns a blind eye to any upstart or outsider that begins to encroach on the incumbent’s territory. Oftentimes, the incumbent doesn’t even notice the upstart, which is playing on the sidelines in the lowest, least profitable areas of the industry.

When AirBnB began, it was a way for college kids to find a couch to crash on. Why would the hotel industry care about that?

The incumbent dismisses this and says: “That’s not the important part.” In reality, they are simply justifying doing things the way they always have done them. Why argue with success? If it ain’t broke, don’t fix it.

What Buffet might be thinking is: What does a company that makes electric vehicles know about collision waivers, benchmark rates and personal injury protection policies? But what he should be thinking is: what does an auto company have that I don’t?

And, I believe, if he approached that question objectively, he would soon realize that Tesla’s hidden gem is data: Lots of data. It has amassed millions of miles of user and sensor data that it is aggregating, analyzing and processing via AI (artificial intelligence) to provide continuous improvements to its vehicles and the overall user experience.

This happens to be Tesla’s not-so-secret weapon against others in the auto industry. And here’s the beauty about data. It is not beholden to a business, or industry. It can be applied nondenominationally to compete in other areas as well.

In fact, the depth and richness of data that Tesla has regarding its drivers makes the data that the auto insurance industry currently has regarding its own customers look like child’s play.

This is the way the challengers upset the incumbent. They don’t challenge the incumbent on the incumbent’s turf.  AirBnB was never about couches. It was about providing a whole new process for booking accommodations in an infinite variety of environments, which happens to include hotel rooms.

Upstarts first put one toe onto the sidelines, then change the playing field, and then they change the rules altogether. They don’t play the game as it exists. They disrupt.

Once the disruption happens, the incumbent is essentially paralyzed. It is locked into its machinery of people and processes, cranking out products and services the same old way. It must either sacrifice that entire legacy or risk fading away, losing more and more market share to the upstart. Change is hard, very hard, and sometimes impossible.

It’s what happened to Kodak with digital cameras. It’s what happened to Blockbuster with Netflix. It’s what happened to Sun Microsystems when Dell and others commoditized desktop computers and servers. It’s what Uber and Lyft are doing to the taxi and limo service industries, and, as noted, what AirBnB is doing to the hotel industry, and on and on.

Buffet should look more seriously at outside competition. And while he’s at it, he might want to scrutinize what is happening with emerging technologies such as blockchain, the distributed ledger system that has gained tons of notoriety via crypto-currencies, but has, perhaps, far more practicable application to industries such as insurance and finance.

Blockchain might ultimately be a boon to the insurance industry.  It has the potential, for instance, to eliminate fraud, a $40 billion a year problem for the insurance industry today, according to the FBI.

It is also likely to disrupt virtually every aspect of every process that exists today. And once those processes are disrupted, a very handy opportunity for an upstart opens, an upstart that is unencumbered with the legacy of this is the “way we do things around here.” The upstart will then completely upset the traditional insurance industry with a brand-new way of “doing things around here.”

Amazon is the new Sears

Bezos, conversely, is predicting and even anticipating this disruptive event. In his comments to employees, he went as far as to compare Amazon to Sears.

It’s hard to appreciate now, but Sears was the Amazon of its time. It was the paragon of retailing, right to the very tip of its landmark Sears Tower, which at the time of the company’s apex, was, appropriately, the tallest building in the world.

Like Amazon, Sears grew and grew. It had its own product lines for appliances, tools, and clothing. And then it ventured completely outside its traditional core business. It went into insurance, the brokerage business and real estate. It went into credit cards and credit card financing. And does anyone remember Prodigy? This was Sears’s joint venture with IBM for an online service, long before the World Wide Web.

There’s been lots written about the demise of Sears, but, at the risk of over simplification, Sears took its eye off the ball. With the massive holdings in so many adjacent industries, it did not react quickly enough to discount stores, factory outlets, WalMart and online retailing.

And when it did react, it was too little, too late. It went from an attitude of “if it ain’t broke, don’t fix it,” to “it’s broke and we don’t know how to fix it.” Sears attempted to return to its roots of retailing, downsizing itself out of existence in the process. The rest, as they say, is history. A history that Jeff Bezos now tells us is inevitable.

Now, the skeptic or cynic might be reading between the lines regarding the Bezos comments, since the timing was coincident with rumblings from the White House about possible anti-trust action against Amazon, Google and other tech giants. Amazon may also be next in line (after Facebook and Google) for the proverbial slap on the wrist from the European Union on charges of predatory pricing.

And what Bezos didn’t emphasize to his employees was just how disruptive Amazon has been and continues to be. The company, which started out with the goal of “being the bookseller to the world,” has taken over e-retailing, is making its mark in streaming video with Amazon Prime, in brick and mortar with Whole Foods, and it has essentially created and dominates the cloud computing industry with Amazon Web Services.

But Bezos is simply emphasizing that as rich and powerful as he and his company are, there is no one individual or company that is invulnerable.

Moreover, he emphasized in his message to employees this cold hard fact: the pace of disruption is accelerating. The average life cycle of companies has decreased from 100 years to around 30 years.

When you consider that Amazon was founded in 1995, you can easily do the math to see that his company is racing headlong toward its 30-year anniversary. Is his timing off? Maybe, maybe not. But consider some precedence in the matter:

Blockbuster made it to the ripe old age of 28 years.

Scott McNealy, the CEO at Sun, used to quip: “Eat lunch or be lunch.”  Sun got eaten. It took about 28 years.

The pace is accelerating. No company or industry is immune.