Innovation is a term which is widely abused and this abuse prevents us from seeing patterns in how business activities evolve.
It is difficult to see what changes when everything is called an innovation in the same manner that it's difficult to see the difference between commodification (assignment of economic value) vs commoditisation (shift from imperfect to perfect undifferentiated competition) because of the catch-all nature of the term commodification (i.e. it's used to mean both).
Take for example the utility provision of computing infrastructure (as per Amazon) - is it an innovation?
When it comes to computing infrastructure, the innovation of modern computing probably started with the Z3 in 1941. This act of innovation created an entirely new class of activity - computing infrastructure - which has evolved over time through various stages with custom built examples (LEO etc), products (IBM 650 and onwards) and eventually led to commodity and utility provision.
For reference, the full cycle is innovation, custom built, product (with rental services) and commodity (with utility services).
Two things should be noted, firstly that the pathway of evolution is common for activities (and knowledge) though it's not a time based sequence. Secondly, the innovation of the Z3 created a new class of activity rather than evolved an existing class (as with the first phone, the first radio, the first ...)
When it comes to the shift from products to utility, this simply represents an evolution of an activity and not the creation of a new form i.e. infrastructure existed before Amazon. However, it is perfectly true to say that this evolution enables (through creative destruction) and accelerates (through componentisation) the innovation of higher order systems i.e. as infrastructure has evolved we've seen an explosion of innovation in big data, mash-ups etc. This is perfectly normal as commoditisation (the common term used to describe this evolution) creates a cycle with innovation.
So, we have a difference between innovation of a new activity and evolution of an existing activity - both of which we unfortunately call innovation.
To complicate matters there's also the consumer and provider perspective. Whilst electricity is a commodity provided through utility services to consumers, behind the interface (the plug) has been a world of innovation of novel activities (wind farms, solar power, geothermal etc) aiming to create some form of operational advantage. However, it is worth noting that this provider innovation doesn't suddenly turn a consumer commodity into an innovation.
Finally we have terms like sustaining and disruptive innovation. As an activity evolves, in many cases changes to the activity (such as feature differentiation in the product stage) are sustaining and occasionally they are disruptive.
When an activity evolves across a boundary i.e. shifts from products to utility services (as with cloud) then this shift is generally disruptive because the incumbents have huge inertia to the change caused by their past success in the previous stage of evolution (i.e. product or rental vendors).
So the pattern we have is :-
- Innovation of a new activity which is distinct from the evolution it enables.
- Evolution of an activity from innovation, custom-built, product (rental) to commodity (utility services). This process is commonly called commoditisation.
- Sustaining changes dominating within domains (i.e. product)
- Disruptive changes dominating between domains (i.e. product to utility services)
- Enablement and acceleration of the innovation of higher order systems through commoditisation of lower order subsystems (i.e. creative destruction and componentisation)
- A difference between consumer and provider perspective.
Now, the problem with the abuse of the term innovation is we end up with :-
- Sustaining Innovation
- Disruptive Innovation
- It's my product, of course it's an innovation ...
You have no hope with spotting the pattern under such circumstances and it's no wonder that people get confused with this subject. This has severe impacts on management practices but that's a post for another day.
As for Amazon's EC2 it represents an evolution of an existing activity which is disruptive, will enable innovation of higher order systems and for the provider has probably involved some innovative pursuits.
I hate to give up on words, however "innovation" has become so widely abused as to be meaningless. For the future I'm tempted to use the word "Genesis" to describe the creation of a new activity and to put "innovation" in my book of pointless words along with "Cloud" etc.