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FotoNation:  Why new entrants to an industry often see opportunities incumbents don’t

This past Friday’s Wall Street Journal reported on a terrific little Irish-based company, FotoNation, that has achieved breakthrough growth by using software algorithms to solve problems that have bedeviled the photography industry for years.  Red-eye, auto-focusing on empty spaces when there is more than one face in the picture, and plain old snapping photos when your subjects aren’t ready have been fairly intractable problems.  FotoNation’s breakthrough idea was to use software algorithms to manipulate the images. 

Take red-eye, which occurs when flash photographs reflect back the color of blood vessels in people’s eyes.  FotoNation was able to develop an algorithm that can recognize when red-eye occurs and correct the image before it is even stored on the camera.  This first breakthrough product was legitimized by Nikon’s inclusion of the software in its CoolPix product line in 2003.  According to the Journal, last year 80% of the 100 million plus digital cameras had red-eye reduction installed.  Another innovation gives camera makers a way to improve the way pictures of faces are shot.  Face tracking software allows for some interesting innovations, such as beign able to keep two faces in focus even when they are not at the center of the picture.  Eran Steinberg, the firm’s founder, notes that 80% of consumer photos have faces in them.  Also in development:  Software that recognizes when people are smiling and warns the photographer not to shoot the photo if they aren’t. 

,  FotoNation recently was sold to Tessera Technologies of San Jose for a reported $39 million. As part of Tessera, the group hopes to extend its reach beyond digital photography to medical devices, automobiles and even home security. 

The reason I find this story fascinating is that it combines several themes having to do with breakthrough growth. 

Incumbency blinders.  The first is that photography incumbents simply didn’t see the opportunity in software to solve their problems.  Why not?  As Eran Steinberg notes, “Traditional camera companies look at improving image quality with glass.  We asked, “how can you do things to the image?’”.  This is a classic example of how opportunity can be created by looking at solving problems in a different way than incumbents in an industry do.  Often, problems and solutions become part of a standardized recipe – it isn’t until some newcomer demonstrates a radically different approach that growth takes off.  In the most serious case for incumbents,such a shift can lead to the destabilizing ‘disruptive business models’ that our colleague Clayton Christensen has made so recognizable.  In this case, the innovation actually made the offering better for incumbents, even to the point that consumers might purchase a new camera just to gain the performance improvements. 

Changing the attributes in a customer’s experience.  A second theme that this case illustrates is that there are often rich rewards to be gained by eliminating negatives in a customers’ experience.  In this case, amateur photographers have for years put up with red-eye, fuzzy faces and the like simply because no one found a way to eliminate these negative aspects of the experience.  With software, these negatives can be eliminated, turning a ‘tolerable’ feature that people put up with to one that is actively dissatisfying.  If our theories are right, eventually these dissatisfying features will become enraging, making red-eye reduction and so forth a ‘non-negotiable’ in the product category. 

Deep innovation in the core business.  A form of innovation that doesn’t get nearly the amount of attention that it deserves is when major innovations in technology, process, or business model serve to reinforce and sustain the core business.  In this case, FotoNation’s products are ways in which the traditional core business of camera companies can be strengthened, even though it is a radical departure from the traditional technologies they use. 

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