Saturday, September 22, 2012

The Cockroach Theory: Why Little Things Matter (even for Apple)


When I was a young investor, I spent a lot of time listening to the wisdom of the old hands around me, like Don Allen and Curt Kittelson.  One of the things they taught me was the Cockroach Theory:

Stated simply, the Cockroach Theory is "there's never just one."  Investors apply the theory to stocks, especially when they hear the dreaded phrase, "accounting irregularities."  Whenever a company has accounting problems, it's rarely an isolated event.

Essentially, there are only two states, Clean and Infested, and all it takes to shift from one state to the other is a single cockroach.

I was discussing the Cockroach Theory with an experienced angel investor over breakfast yesterday, and we decided that it applied to Groupon, in spades.  Their accounting issues showed up before the IPO, and haven't ceased since then.  "They've killed that entire space," the investor said ruefully, especially since he had some investments in that area.

My insight today is that the cockroach theory applies to products as well.  Once something happens to shake the user's confidence, it's almost impossible to recover that confidence.  It's especially true in our app-centric world.  If Office crashes, you don't have much alternative.  But if a free or $0.99 app crashes, you just stop using it.

That's the danger that Apple faces with its faulty mapping software.

People call Apple a cult for good reason.  I doubt many of the people pre-ordering iPhone 5s can even name a single new feature of the phone (a fact hilariously illustrated by this Jimmy Kimmel video).

Apple depends on the faith of its fans--they buy because they believe that St. Steve is a reliable guardian of quality.

Apple may think that its fanboys will always buy its products, and a few mapping errors may have seemed acceptable.

But the danger of this attitude is that letting the customers see a cockroach is a phase change, not an incremental hit.  If people decide that Apple has lost its way without Jobs, its products will shift from Clean to Infested.

The same holds true for your own products.  Squash your cockroaches before they reach the user, or you may find yourself permanently in the "Infested" category.

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