When I worked at SGI, our best customers were not asking for low-end cheap PC card graphics. But every year those Nvidia and ATI cards got better and better, and eventually, our customers bought those.

Kodak’s best customers in the early 90s were not asking for digital cameras; they were inadequate in terms of quality. And Kodak had a huge chemistry, paper and film business to protect. They were scared that if they offered digital solutions, their traditional businesses would suffer.

When Craig’s list got started, the advertisers of the NY Times classifieds had no interest in the relatively small online audience. As a result, the NY times and other mainstream media outlets missed the opportunity for online classifieds, losing the business to Monster, Hotjobs and Craig’s list, none of whom had been in the classifieds business previously.

The leaders in auctions before the Internet were Sotherby’s and Christie’s. Ebay had no experience in auctions.

Zagats owned populist restaurant reviews but they did not want to cannibalize the sale of their books so refused to do a completely free version on the internet. That opened up an opportunity for Yelp, and the rest is history. Now their book sales are going to zero and they lost the online business too.

In technology and in life, underdogs often drive innovation. This makes sense. People with less to lose take greater risks, and are hungrier. Sequoia capital, the VC behind successful companies like Apple, Google and Cisco, says they prefer first time entrepreneurs because they are hungrier. Many of their most successful founders have been first-generation Americans, with very little to lose.

Steve jobs, in his address at Stanford’s commencement in 2005 talked about lightness of being a beginner after being thrown out of Apple. “Stay hungry, stay foolish” he advised. This is all the same effect, at a personal level versus a corporate level.

I love that entrenched, successful players continue to miss disruptive opportunities. Entrenched players have so many advantages in terms of capital and brand. Disruptive technology levels the playing field, giving promise to the words in the Declaration of Indepence that “all men are created equal.”

In Digital Photography, we are seeing the power of disruptive technologies play out right now.

Panasonic is leading the pack in introducing micro four-thirds cameras that take photos approaching that of an SLR, while dispensing with the mirror, pentaprism and mechanical shutter. Makes sense. Panasonic is an also-ran in digital cameras. You don’t see Canon and Nikon racing to remove the mirrors and put electronic viewfinders in their SLRs. Why would they?

Shutterfly, Snapfish and Kodak all but owned mainstream consumer consumer photo and video sharing with their print-oriented offerings. Then one day they woke up and realized that facebook, something they had not considered photo sharing at all, was the largest photo sharing network in the world. Oops. Did it hurt them they they did not innovate their core sharing capabilities for 5+ years? You bet it did.

And finally, the one nearest and dearest to my heart: smart phones are attacking point and shoot cameras from the low-end. And of course, Canon, Nikon and the other traditional camera companies are mostly ignoring the opportunity because their best customers are not asking for these types of devices.

You can see where this is going. Put a slightly better camera on an iPhone, add video and an LTE or Wimax network connection and smart phones will be better consumers cameras, with more convenience and lower cost (since consumers are all going to carry smart phones) than traditional point and shoot cameras.

The camera companies did not miss the transition from film to digital (well, most did not miss it, Leica and Hasselblad did). It was a fairly straight forward transition for them. Film cameras were becoming increasingly electronic anyway, and digital photography just brought a few more components over from analog to digital.

But the movement to smartphones is a completely different animal. Because these are sold differently. The smartphone is a subscription-based device that runs on the public networks and has a significant service component. The traditional camera companies have no experience providing high quality software and services. It would require a tremendous amount of learning on their part to make the transition, and a hunger to do it.

What does it take to not have disruptive technology put you out of business? It requires vision and the willingness to cannibalize your own business with what will likely be a lower margin product competitor.

Who does it well? The first example that comes to my mind is Amazon. They are ruthless. Knowing that electronic books will someday replace paper books, they entered the electronic book market and had the lower-priced Kindle versions of the books compete with the paper-based books on Amazon’s site. They invested significant money in doing the Kindle development, entering a field they knew nothing about: the design and manufacturer of portable mobile devices with wireless connectivity.

Seeing the possibility that Google could effectively compete with Amazon by selling links to Amazon’s competitors, Amazon sold links to their own competitors right on their pages! Amazon market place sellers who offer a lower price are ranked ahead of Amazon’s own offerings in search results. I bow down before them. They get it.

Everyone likes to bash Microsoft for missing the internet and paid search. True enough, they were protecting their business model of shrink-wrapped software and failed to embrace ad-supported software as service quickly enough.

But Microsoft did see the potential for game consoles to replace personal computers and invested heavily there, building the class-leading Xbox system into a profitable business.

Just happened to be that their vision was wrong there. Turns out that game consoles don’t replace PCs. They are additive to the consumer’s home. It is smart phones like the iPhone, probably in larger form factor, that replace PCs, and that opportunity they did miss. Or more accurately, they invested but could not see beyond the windows paradigm when developing windows CE.

Apple is no underdog, but in smart phones, they were the underdog. They had no business in mobile phones, nothing to protect, and certainly no mobile customers to lead them the wrong way.

I wonder what will get disrupted next? Exxon by solar energy?

When users upload photos and videos, we first move them to our own servers. In the background, we send the data to S3. If Amazon S3 goes down, we can buffer data for up to two days before we notice. By buffering, we remove the real time requirements of Amazon S3 being up for our users to upload data. We can’t buffer indefinitely, but we are betting than an Amazon S3 outage longer than 2 days is very rare. We always believed short outages would occur. In fact this, is is not the first one.

For serving photos and videos, we act as our own content distribution network (CDN) and cache the hot data. That means that users can view most recent photos and videos, including what was recently uploaded.

All this caching and buffering is done outside of Amazon. We don’t use Amazon’s compute cloud (EC2) for that. We have considered moving more of our system to Amazon Web Services. It is unfortunate that EC2 was built to require S3 to be up in order for to it run. New instances are loaded from S3. So an S3 outage is correlated with an EC2 outage.

Photo and video sharing services that did not plan for S3 outages were completely down yesterday. We estimate that most of the cost savings for our business comes from outsourcing the storage. While we could save some additional money by using EC2, it is not as dramatic as the S3 savings. Hence, we will have to carefully consider before we put all our eggs in that basket.

A personal computer is best as an internet terminal, replaceable with a different computer as needed, provided you install the necessary software. And I believe in the long run most consumers won’t buy general purpose computers. But we live in the here and now.

I am not 100% converted to cloud computing in my personal life yet. There is lots of legacy stuff I setup years ago. At home I have a Mac Pro desktop with 3 drives running the latest version of Leopard. Two of the drives were purchased about 3 years ago at the exact same time: 450 GB Western Digital SATA drives. I installed them in my Mac Pro (the Pro has 4 bays) and setup a software RAID 1 (full mirror).

On my personal RAID I keep my iPhoto library (I sometimes use iPhoto as part of my workflow), my iTunes collection, in progress iMovie projects and a VMWare Windows XP instance.

Well, I got back from a business trip to find that I had basically lost the whole RAID. The RAID was not mounted. I rebooted and it mounted. I checked on it in Disk Utility and found that one of the drives were marked FAILED and the other was marked S.M.A.R.T. failure, which is a early warning system built into drives telling you it is about to fail. The RAID was marked “degraded,” which means not providing redundancy, and some information in the Disk Utility interface recommended that I replace the one drive that was hanging on and move the data ASAP. I tried, but got errors when copying the files.

So I lost all the data. No big deal. The music is on an iPod, although a few months of ITMS purchases are not synched. The photos I care about are all on Phanfare and the VMWare instance is just a standard XP config with MS Office and some other files.

But I was really trying to NOT to lose that data. I had a RAID, the drives were fairly new, the home office is climate controlled, the computer is rarely moved, we have smoke alarms and heat sensors and the computer is on a UPS to protect it from vagaries in the power grid. And yet I lost it all.

Morale of the story: Keep your stuff in the cloud. I am going to find a service that will keep my iTunes collection (anyone have experience with mp3tunes.com?) in the cloud. And I am going to finally pull the trigger and stop maintaining personal files like tax records on home servers (that is not my only RAID- the other one is a DELL HW RAID in the basement waiting for a flood).

I tried Jungle Disk and it looks pretty good. Jungle disk is a SW layer that sits atop Amazon S3 and lets you store your files on S3 and pay only Amazon’s rates for storage and bandwidth. (Note that I don’t think the average consumer needs the complexity of Jungle Disk and personal S3 accounts, but some of the underlying applications I use don’t yet have good enough online services).

If I can’t manage to keep my data intact at home, I suspect you can’t either and frankly, why try? There is simply no comparison with the type of monitoring, redundancy and security you can get from an online service versus rolling your own in your basement.