9.7 The Economics of Purifying Innovation

Marcos Antonio de Lima Filho, PhD.

The purifying selection of innovations, as demonstrated in the previous section, carries substantial economic implications. The replacement, discontinuation, or outright rejection of a technology invariably leads to the destruction of capital invested in its development. However, this process is not entirely detrimental. These purifying shifts can serve societal interests by halting further resource allocation towards ineffective or detrimental technologies. The development of supersonic transport, for instance, ended up subsidising the super-riches travelling between New York, London, and Paris.

Therefore, purifying selection generates value, and it is not a coincidence that this form of natural selection is one of the most common in nature. Purifying innovation is thus a form of creative destruction that merits more investigation.

To get an idea of the economic gains that purifying innovation can offer, consider the cost savings generated by a manufacturer after removing CD/DVD drives from its laptop line. Apple has completed this transition and removed this component from all of its MacBook models since the end of 2012. Since then, the firm has sold over 110 million laptops (units sold from Q1 2013 through Q4 2018, when Apple ceased disclosing unit sales). Multiply the quantity of sold laptops by the approximate cost of each optical drive. Add to this figure the 30% cut from each software purchase made through the App Store, Apple’s proprietary software distribution platform. In total, Apple generated billions of dollars with this purifying innovation.

Smartphone manufacturers are also creating value by discontinuing the 3.5mm headphone connector, as shown in Figure 9.5.1. Cutting this component reduces manufacturing costs, while also encouraging the adoption of Bluetooth headphones and earbuds. Since wireless headphones can be up to 10 times more expensive than their wired counterparts, this new market segment can sustain higher revenues and profit margins.

The termination of these features (and their supporting components) had far-reaching implications on the productive order, since it drove suppliers out of the value chain. For their respective suppliers, the removal of CD/DVD drives from laptops and headphone jacks from smartphones was not welcome news. These purification trends destroyed the capital and expertise that component suppliers had established, whilst simultaneously enabling manufacturers to reduce the costs of their finished products and expand into new markets.

Technological rejections, in contrast, prevent changes to industrial orders. Why should manufacturers spend millions to incorporate a novel feature in their products, services, or systems if it does not prove valuable to users? Purifying selection protects the value chain against the inefficiencies introduced by suppliers that add cost without delivering value. Many disruptive innovations fail to achieve their promised benefits, falling victim to the purifying selection of markets.