What I've learned from "After the Gold Rush"
|Note: "After the Gold Rush" is a paper that was once freely available at this site. Now you have to register with them in order to download it.|
New technology can be disruptive or sustaining. Sustaining technology is such that allows to do the same thing better (cheaper, faster). It doesn't create new markets or opportunities. Disruptive technology creates new markets and opportunities, sometimes replacing the old technology. Internet isn't inherently disruptive or sustaining.
Dell has been selling a custom-ordered PC through phone. For them Internet was sustaining because they could offer the same product (ability to buy a customized PC) more conveniently. They achieved great success by adopting Web as a distribution channel. Compaq was selling majority of their computers through retail stores. For them Internet was disruptive because when they tried to introduce selling through web they faced great opposition from their retail channels and their internal system (optimized for retailing of pre-made computers) didn't fit well with selling customized PCs through web. They failed.
One can compete on different basis:
As an example: during DOS days functionality was a prevailing basis of competition for operating system. There was a lot of things that DOS programs didn't do. An attempt to combat Microsoft on price would fail since Microsoft was competing on functionality by creating Windows. People would be willing to pay a premium price to get the functionality of Windows even if a replacement of DOS would be cheaper.