Creative Web Destruction: Sites Go Away

from the remember-that dept

As we await the official shutdown of Geocities at the end of the month, Ivor Tossell is reminding everyone that today's internet hotspot -- Facebook, MySpace, Twitter, etc. -- may be completely gone in a decade's time. And, while it's good that sites come and go as the next big thing comes along, it does raise questions for those who are relying on these sites as some sort of archive of a life lived online. It's a good reminder of the importance of either being able to back up certain information -- or control it directly yourself.

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Fascinating To See How Journalists React To Clay Shirky's Thoughts On Journalism

from the microcosm dept

There's still a ton of buzz going on around Clay Shirky's wonderful discussion on business models and changing markets that we discussed earlier in the week. If you haven't read Shirky's post yet, do yourself a favor and read it. It applies to so many industries beyond just journalism. Unfortunately, as we saw in our own comments here, there are still some folks who are having difficulty understanding the key points to Shirky's argument: that business models evolve, but during the upheaval, it's rarely clear how that evolution will shake out.

A few people have sent in journalist Tom Watson's response to Shirky, and it's somewhat surprising. It's as if we read two different things -- even though the links are to the same Shirky writeup. I read Shirky's analysis as a huge burst of optimism. It's a "hey, things are crazy now, but check out what's coming next." Watson read it as an obituary for journalism, apparently assuming that Shirky's tone was to say that journalism is over. He reads Shirky's explanation of why bad newspaper business models failed (they all tried to recreate the old inefficient market) to mean that nothing will succeed. It's as if he skipped over most of Shirky's analysis.

Then, there's venerable TV newsman Charlie Gibson, who apparently was asked about Shirky's analysis (without it being clear if he'd read it) and responded that Shirky is "full of crap." He then proceeded to go back and try to re-inflate every discarded and failed idea in newspaper business models, falsely claiming the Seattle Post-Intelligencer is "gone" (it lives on online) and blaming "young people" for reading the news for free online as well as Google for bringing about the downfall of newspapers.

When asked what to do, he fell back on the idea of charging for news -- but never answered any of the important questions such a plan needs to address. Instead, he just seemed to think that the only way to pay for news is if the consumers each pay for it.

Remember, this is Charlie Gibson. The anchor of ABC World News Tonight. On ABC. Which is free. To consumers. It's supported by advertising. But, according to Charlie Gibson... that's impossible. I guess it's his viewers' fault for watching him for free or something... You want to know why people are turning to alternative sources? Perhaps it's because they're smart enough to realize that when Charlie Gibson -- whose face and voice beams into millions of peoples' homes for free every night -- says that people who get their news for free are destroying an industry, perhaps there are better sources from which to get their news.

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You Can't Wait For The Perfect Business Model

from the what-comes-next:-everything-and-everyone dept

Markets change. Businesses -- and business models -- die. That's often what we're talking about here, with a focus on all of the good (sometimes wonderful) things that come about in their place. But, the process of creative destruction is a messy one at times, and every time we write about an industry going through upheaval, be it the recording industry or the newspaper industry, someone angrily demands in the comments for us to explain "what will replace it." I've spent over a decade trying to answer those questions pretty much every day here -- showing example after example of things that are actually replacing those old models, but they're all experiments. They're new, they're different and they all start small. People always look to explain why that's the exception rather than the rule. People insist that no record label can offer music for free until a new models' been "proven." They insist that newspapers shouldn't adapt until someone explains how they can make the same revenue and the same margins they used to make.

That's not how it works.

Clay Shirky has written up a wonderful and compelling response, to all those people, that should be read in its entirety, over and over again by pretty much everyone, whether you believe in the new models or if you are the skeptic, demanding "proof" before you'll jump off the ledge. Shirky's piece focuses on the newspaper industry (really, the journalism industry), but it applies to pretty much any industry going through a bout of massive creative destruction.

During the wrenching transition to print, experiments were only revealed in retrospect to be turning points. Aldus Manutius, the Venetian printer and publisher, invented the smaller octavo volume along with italic type. What seemed like a minor change -- take a book and shrink it -- was in retrospect a key innovation in the democratization of the printed word, as books became cheaper, more portable, and therefore more desirable, expanding the market for all publishers, which heightened the value of literacy still further.

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn't apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can't predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing. (Luther and the Church both insisted, for years, that whatever else happened, no one was talking about a schism.) Ancient social bargains, once disrupted, can neither be mended nor quickly replaced, since any such bargain takes decades to solidify.

And so it is today. When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won't break before new systems are in place. They are demanding to be told that ancient social bargains aren't in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.

The point is that there isn't necessarily one model that works. And there isn't necesarily a single answer, but what we do know is the economics at play, and the massive changes that will bring to an industry. You can't pretend that a "newspaper" is a scarce resource any more, just as you can't pretend that a song, a movie or even a piece of software is a scarce resource. You can erect new barriers, call for new legislation, initiate lawsuits and call those who love your work the most "thieves," but it doesn't change reality.

But one thing that has been true throughout history, is that even as new technologies come about, and old business models die out, what comes next is better. It's more powerful, more compelling, more efficient and more wonderful than what was in the past -- even if those who came before can't necessarily see the business models that will dominate. We talk here about basic economic principles, and show those who are applying them to new business models (successfully!). I talk about "connecting with fans" and giving them a "reason to buy," while admitting that everyone who does so currently needs to do so in a slightly different way. And we keep seeing that work, and we have faith that the economics at work hold true, and that the new opportunities that we see every day only increase and expand, just as the old models falter and collapse.

The newspaper people often note that newspapers benefit society as a whole. This is true, but irrelevant to the problem at hand; "You're gonna miss us when we're gone!" has never been much of a business model. So who covers all that news if some significant fraction of the currently employed newspaper people lose their jobs?

I don't know. Nobody knows. We're collectively living through 1500, when it's easier to see what's broken than what will replace it. The internet turns 40 this fall. Access by the general public is less than half that age. Web use, as a normal part of life for a majority of the developed world, is less than half that age. We just got here. Even the revolutionaries can't predict what will happen.

Imagine, in 1996, asking some net-savvy soul to expound on the potential of craigslist, then a year old and not yet incorporated. The answer you'd almost certainly have gotten would be extrapolation: "Mailing lists can be powerful tools", "Social effects are intertwining with digital networks", "This points to future ways of managing local information", and so on. What no one would have told you, could have told you, was what actually happened: craiglist became a critical piece of infrastructure. Not the idea of craigslist, or the business model, or even the software driving it. Craigslist itself spread to cover hundreds of cities and has become a part of public consciousness about what is now possible. Experiments are only revealed in retrospect to be turning points.

Everything is an extrapolation at this point. Even the most visionary folks out there can only see so far, and can only build on what they've experienced so far and where they believe things are going. No one knows what will be the exact end result, but many of us know that the end result will be more powerful and, indeed, more wonderful than what came before.

Society doesn't need newspapers. What we need is journalism. For a century, the imperatives to strengthen journalism and to strengthen newspapers have been so tightly wound as to be indistinguishable. That's been a fine accident to have, but when that accident stops, as it is stopping before our eyes, we're going to need lots of other ways to strengthen journalism instead.

When we shift our attention from 'save newspapers' to 'save society', the imperative changes from 'preserve the current institutions' to 'do whatever works.' And what works today isn't the same as what used to work.

We don't know who the Aldus Manutius of the current age is. It could be Craig Newmark, or Caterina Fake. It could be Martin Nisenholtz, or Emily Bell. It could be some 19 year old kid few of us have heard of, working on something we won't recognize as vital until a decade hence. Any experiment, though, designed to provide new models for journalism is going to be an improvement over hiding from the real, especially in a year when, for many papers, the unthinkable future is already in the past.

This is not just true of newspapers. It's certainly true for music (which may even be ahead of newspapers in some regards). It will be true for all forms of entertainment soon enough. We're seeing the beginnings of it in software as well. But that's just the beginning. It's going to happen soon in energy and healthcare, and potentially in many other industries as well.

Sometimes people complain that we focus too much on the music industry or copyright or patents around here. But, from my perspective, that's because those are the leading indicators today of what's about to happen in many different industries that are being fundamentally disrupted from the inside -- as the very fundamental facts on which they based their models are being upended, as what used to be scarce is suddenly infinite (or, at the least, massively abundant). New scarcities are always created along with new abundance, but it's incredibly difficult to see at the time. When people say things like the fact that "music has always been paid for" or that we need to pay for music because "that's what's valuable," they're not just missing the point, they're missing the opportunity.

The economics of the old model have changed in fundamental ways. There is no way to go back, nor any desire to go back. What comes next is exciting and wonderful -- but it will always be fought by those who lived off of the old inefficiencies and hope that they can continue to do so. But for everyone else, we should be embracing the experiments. We should be embracing what's new and marvelling at the innovation and creativitiy we witness everyday that goes beyond just an extrapolation of what happened before, but is an actual embodiment of what comes next.

Shirky started his piece off by noting a story in the 90s from a newspaper guy who discovered that kids were reposting ("pirating") Dave Barry columns on Usenet, where the guy said:

"When a 14 year old kid can blow up your business in his spare time, not because he hates you but because he loves you, then you got a problem."

Yes, you do have a problem, if you're running that old business. But for the rest of the world, you don't have a problem. You have a revolution and a tremendous opportunity.

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Why The Stimulus Package Isn't For Startups: The Gov't Doesn't Want Creative Destruction

from the startups-are-about-short-term-job-destruction dept

Earlier this week, I was on a fun panel put together by the Telecom Council of Silicon Valley, which was mainly focused on what the Obama Stimulus plan (and the broadband allocation specifically) would most likely mean for the industry. At one point, an attendee in the audience said that he was from a startup, and questioned how he might partake of the stimulus funds -- and I responded, perhaps flippantly, that he was out of luck: the stimulus isn't for startups. That's not entirely true, of course. There will be some token amounts of money handed out to startups, but pretty much everyone on the panel agreed, the administration has made clear that the stimulus package is about creating jobs as quickly as possible, and the administration has made it clear in so many words that this means handing it to incumbents. They've been pretty frank that the stimulus plan has a lot less to do with increasing broadband capabilities than with job creations -- and plans to get funds that show more job creation will get preference over those that actually increase broadband.

And that's why the stimulus package is not for startups -- and is potentially dangerous in the long run. Truly revolutionary startups don't immediately create jobs -- they destroy them. The process of creative destruction takes on those incumbent providers and wipes them out. We're seeing it with plenty of industries today that are challenged by new upstarts that have upset their old business models. And, while most economists should recognize that this process is good for the overall economy, in that it leads to economic growth and more efficiency, it does upset the status quo, and causes many big companies to contract or disappear altogether.

So, think about it from a government bureaucrat's perspective right now. Go back a few decades, and assume someone came to you with a plan to create the internet -- and even accurately described how it would allow a great free exchange of information. The reaction, if you were trying to deal with an economic crisis, would be to focus on all of the jobs it upset. People can share music online? Think of all the job losses in the music industry! People can read news for free? Think of all those newspapers shutting down! But they wouldn't consider all of the economic activity created by the internet -- the billions of dollars and millions of new jobs created thanks to it.

If, today, you had a concept for a totally new technology that would greatly increase broadband access across the globe, in a revolutionary way. It would allow anyone to have super high speed access anywhere. It wouldn't be that costly to create or build or even maintain... and it wouldn't even require making use of existing infrastructure. From any normal calculation this would be fantastic. It would spur enormous new economic growth opportunities and speed along our economy in massively useful ways. Yet, it's exactly the type of project the government would be against right now -- because it would make AT&T, Verizon and others obsolete... and think of how many people that would put out of work, at the same time that the gov't wants to claim how many jobs it's created.

That's an extreme hypothetical, but it's useful in illustrating the point. So, this focus on using the stimulus for short-term job creation is dangerous in that it will likely be used to prop up existing incumbent businesses, because they can create the most jobs most quickly -- by doing very inefficient things. The startups that do things more efficiently end up doing short term job destruction, even if the long-term results would be a much larger, more stable economy with larger job creation.

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Creative Destruction Happens Quickly; Those Who Wait End Up In The Rubble

from the just-a-warning dept

When we talk about the economics of industries that are in transition, such as the newspaper industry or the entertainment industry, we often point out the need to adopt new business models that embrace the economic realities those industries face. Regularly, supporters of those industries respond that it's folly to jump to a new "unproven" business model without real proof that the new business model will succeed -- especially when the old business model is still going strong. There's this belief that the companies in those industries can just hang on while everyone else experiments, and when a new business model is clear, they can comfortably make the switch and everything will be fine. And, it is true, that even disintermediated businesses have a history of sticking around and throwing off cash for a long time after the disruptive technology disintegrates their foundations.

Yet, as this article in The Atlantic points out with regard to the newspaper industry, when "the end" comes, it comes amazingly fast. It is true that old industries can hang on for a while, but they reach a sort of tipping point where suddenly everyone realizes that the emperor has no clothes. And, at that point, there really isn't any time to make the necessary shift to the new business model. Instead, there's just bankruptcy. So, sure, the record labels and the newspapers can wait it out and hang on until there's "proof" that some new business model makes sense. But, by the time that proof is there, their old business might not be.

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Creative Destruction: Time To Make Companies Small Enough To Fail

from the channeling-schumpeter dept

The news is filled with stories of the latest bailout: this time of the US auto industry, and for some reason it has me thinking about Joseph Schumpeter. Schumpeter, as (hopefully) many of you know, was an economist in the first half of the 20th century, who today is probably most well-known for two things: his championship of the concept of "entrepreneurs" and ongoing innovation as the process of economic growth, and the creation of profits, as well as the idea of "creative destruction" brought about by those entrepreneurs, taking down old industries with new ideas, new products and new processes. There is much that Schumpeter got wrong in his analysis (in general, I'm not a huge fan of much of Schumpeter's work), but throughout it all, there were some very important ideas that have been proven time and time again.

It's important to revisit his work, as we're seeing a sudden influx of economic philosophy "battles" between different schools of economists over how to deal with the financial crisis. The new Keynesians still believe that through government tweaking, we can guide the economy to some sort of "soft landing." The more free market-focused economists fear the end result of such tweaking. The split in schools of thinking has become significantly less pronounced than in the past, and ideas seem to permeate back and forth among these and other economic philosophies, but some core beliefs are common across most economists, and they've been shown to be correct time and time again.

Competition and Innovation

Innovation, driven by competition, is the core of economic growth. Competition drives companies to keep innovating, creating better and better products (often for less and less money). Companies that rest on their laurels get beaten in the marketplace, and that's good for everyone (except, temporarily, employees and shareholders of those companies). It gives the public better products, made more efficiently, and it keeps companies from becoming burdens.

Encouraging competition should be a key goal of government, but in most cases that means staying out of the way. Unfortunately, things don't always work out that way, and the government has often been much more involved than necessary, later causing problems. This is often seen in a rush to send antitrust lawyers after a company for being successful, but not when it's doing any actual harm on the market, or preventing any real competition from happening.

We also see it as a problem in the government's intellectual property policies, which often do little to encourage innovation, and plenty to hinder it by creating defacto monopolies.

If the government should be involved at all, it should be to enable (not create) the infrastructure that's necessary for further innovations. It should be enabling the next generation of entrepreneurs to be creating the next great businesses.

Too Big To Fail

But, rather than doing that, we see the government looking to prop up non-competitive, non-innovative behemoths that are being called "too big to fail." These are companies that, often with the help of government regulations and subsidies, have become so intertwined in the economy, that a failure on their part really would cause significant ripples throughout the rest of the economy. While there are some who suggest they should be allowed to simply fail anyway, the economic risk in doing so is quite large -- in part, as a result of bad gov't policies for many years, abused and exploited by these companies.

Simply giving these companies more money and new regulations isn't going to make a difference. It only puts off the inevitable, and potentially will make things even worse when the problems resurface. The regulations and "oversight" will seem like a good deal at first, but over time the companies will twist the regulations to their advantage. They'll create new and larger loopholes, and the regulations won't do what they're intended to do, but will instead have created massive new problems. It's what almost always happens.

Creative Destruction

So perhaps it's time to go back to Schumpeter, with a big twist. If we grant the premise that some of these companies are too big to fail, and they absolutely need gov't bailouts to make them work, then why not set the terms of the bailout as being that they need to use the money to become small enough to fail? That is, they can get the money, one time only, and then need to look at breaking themselves up into separate pieces (even competitive pieces) that, by themselves, are no longer too big to fail.

The end result is that you aren't left with the same terrible situation, while also creating a new generation of "spinoffs" that can innovate and compete against both older firms in the space, and new upstarts that can more readily enter the market, rather than face a few giants. That way we're enabling more competition and innovation, leading to economic growth, while dismantling the structure of "too big to fail."

It's not quite that simple, of course. But, on the whole, it makes absolutely no sense to be "bailing out" companies that are too big to fail while leaving them as too big to fail. The end result is just going to keep sucking in more bailout money and wasting it, rather than encouraging innovation and competition.

A Cold Douche

This, obviously, is not the "creative destruction" that Schumpeter was talking about at all. In fact, at times he toyed with the idea that companies too big too fail were where the market would eventually end up. But, he also recognized the power of destroying old industries and setting the path for new innovations -- and he knew that the process was often messy, tied to business downturns.

In economist Robert Heilbroner's excellent The Worldly Philosophers, Heilbroner recalls sitting in Schumpeter's class at Harvard during the Great Depression:

When he lectured on the economy at Harvard in the midst of the depression, Joseph Schumpeter would stride into the lecture hall, and divesting himself of his European cloak, announce to the startled class in his Viennese accent, "Chentlemen, you are vorried about the depression. You should not be. For capitalism, a depression is a good cold douche." Having been one of those startled listeners, I can testify that the great majority of us did not know that a douche was a shower, but we did grasp that this was a very strange and certainly un-Keynesian message.

And, indeed, this economic restructuring is a good cold shower (though, some may prefer douche), but we don't get that sort of restructuring when the government is propping up exactly what needs to be restructured.

So, let's repurpose creative destruction with a clear plan: if you accept government bail out money because you're too big to fail, then that money needs to be used to make you small enough to fail.

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