Posts about economy

The Great Restructuring

It’s not a great depression, neither is it a great recession we’re going through now. At the Brite conference this week, Umair Haque called it a great “compression,” as an economy built on perceived value reconciles with actual value. This morning, The New York Times finally realized that what we’re experiencing is more than a financial crisis: “Job Losses Hint at Vast Remaking of Economy.” Well, yes, if hints were sledgehammers.

I try to argue in my book that what we’re living through is instead a great restructuring of the economy and society, starting with a fundamental change in our relationships – how we are linked and intertwined and how we act, nothing less than that.

The Times sees this play out in the loss of jobs that won’t return in their industries. That’s merely the symptom.

In key industries — manufacturing, financial services and retail — layoffs have accelerated so quickly in recent months as to suggest that many companies are abandoning whole areas of business.

“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Yes, entire swaths and even sectors of the economy will disappear or will change so much they might as well disappear:

* America may well not be in the auto industry soon. “American car sales have dropped to an annual pace of nine million, from some 17 million in 2007. Even if sales increase considerably, that is likely to leave a lot of unneeded auto factories,” said The Times.

* Financial services will have to be completely remade (by government). “Much the same can be said for financial services, which gave up 44,000 jobs in February.” The Times said. “During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other investments. That industry is unlikely to return to its former shape.” Who knew that The Times was such a master of understatement?

* Newspapers will vanish. Magazines are in worse shape than I would have guessed and many will go. Books‘ channels of manufacturing, distribution, and sales will go through upheaval.

* Broadcast media will become meaningless, replaced by digital delivery.

* Advertising will be next to feel the earthquake avalanche, after media.

* Large-scale retail will shrink and consolidate and then be transformed by a search-and-buy economy. The Times: “The economy lost 39,500 retail jobs in February, and has eliminated more than 500,000 in the last year.”

* The blockbuster economy in entertainment will become harder to support as more attention and money shifts to the tail.

* Business travel – including the convention and conference business – will take a huge hit in the financial crisis and much of it won’t come back, replaced by more efficient communications.

* We can only hope that dirty and political energy industries will shrivel.

* Residential and commercial real estate will have to restructure around a new capital structure. Homes will get cheaper but so much of homeowners’ equity has been wiped out in real estate and stock investments that I’ll bet apartments will be what’s built when building returns. Commercial real estate had its own bubble and it will be hit with a double whammy as tenants shrink and disappear. Construction will, of course, decline.

* Health care was the one sector in this month’s employment report that showed growth. But we know that medicine, pharma, and insurance will undergo a forced restructuring.

* Computers are getting so small and cheap and open that that industry is under growing pressure. As every other device we have becomes smart and connected, I wonder whether the computer itself will begin to disappear.

* Universities are facing competition from each other and commercial newcomers online and have suffered huge blows to their endowments; they will have to change. We should be so lucky that elementary and secondary education will also face such pressure.

* Finally, consumer products of all sorts will have to change in the face of empowered customers and, in some cases, with competition from small competitors given the benefits of scale on platforms (see: eBay, Etsy, Amazon, et al). They will also face price pressure thanks to online comparison shopping and new retail structures.

* Government will grow but thanks to the empowered populace, it, too, will face fundamnetal change.

* * *

There are opportunities here, of course. There always is in change if you’re willing to see and seek it.

* This is the time when startups start. I agree with Reid Hoffman that founding new companies is our way out of this mess. Given the profound nature of the restructuring, starting new businesses – not fixing old, doomed ones – is the only sensible path. “Consider a few start-ups from the past century.” he wrote: “Microsoft, MTV, CNN, FedEx, Intel, Hewlett-Packard, Burger King. Each opened during a period of economic downturn. Today, these brands employ hundreds of thousands of people worldwide. We need to prepare for the next Burger King. By empowering individuals and small businesses, an innovation stimulus can help germinate stable industry players for the long term.” Fred Wilson would disagree with Reid, I think, about government helping to fund startups, but I think we can all agree that creating the right environment for investment could not be more critical.

* Creating platforms to serve small and independent businesses and networks to bring them the advantages of scale are key opportunities in the restructured economy. That is the real lesson of Google in WWGD?. There are three ways to succeed here: Create a platform; create a network; build on top of somebody else’s platform or network. This, I believe, is how large companies will be replaced.

* There are many opportunities to provide services to new, independent players – startups and newly self-employed individuals. At yesterday’s Hacking Education, Scott Heiferman and I tweeted back and forth about the opportunities to build a network of spaces for independent work (the inverse of Starbucks: good with space and services, OK with coffee). Add payroll, insurance, hosting, and all sorts of services.

* Education is a growth opportunity but not in its current institutions. As industries are killed and turned upside-down, present and former employees will need to be retrained in technology, in the skills of starting and running a business, in entirely new skills. In Hacking Education, some participants were building such platforms. I see huge disruption here.

* Of course, there are opportunities to remake the fallen industries. At Davos, in a session I ran, business guys reinvented the bank under radical transparency. In my book, I started to rethink the auto industry in the image of the computer industry: disaggregating the car so we can reaggregate it from many new suppliers. Many are working on new scenarios for news. I see huge opportunities in rethinking and remaking advertising from the ground up. Every one of the collapsing industries listed above will be replaced – in a different image, at a different scale – and that presents opportunities.

* * *

But all that still doesn’t reveal the extent to which our society is changing. At Brite, Haque addressed some of this as he talked about a “metacrisis” in our “zombieconomy” in which we have understated cost and overstated value. He talked about reconceiving thin vs. thick value creation; about Google as an example because it creates principles more than strategy; and about the new principles of a new economy, built around stewardship, trusteeship, guardianship, leadership, partnership.

I said from the audience that his prescription sounded like a moral imperative. Another member of the audience said it sounded like dialectical materialism (I had earlier joked in my talk at Brite that I vaguely sounded Marxist talking about how all the change I outlined in media came from no longer being bound by the means of production and distribution). Haque responded that though both our contentions might be true, he was declaring an economic imperative. He previewed that view sometime ago when he wrote what I came to call Haque’s Law: “As interaction explodes, the costs of evil are starting to outweigh the benefits.”

Now back to the start: We are linked in new ways. Because of that, it’s hard to build a business model anymore out of screwing people – since when you do, we the screwed can rise up and be heard and fight back and make evil too expensive. Our interconnectedness is also what made the complex derivatives – the toxic assets – that triggered the financial crisis possible – but that is all the more reason why we will demand transparency, our best antidote to evil. That will change how business is run in fundamental ways.

And so there is our Great Restructuring, Great Rethink, Great Reboot, call it what you will: The change in our society and how it is structured are both causing and necessitating change in the economy and its industries. The crisis is bigger than it appears in the rear-view mirror. It’s more than jobs lost and companies folding. It’s a new economy built on a new society that we are only just beginning to recognize if not understand. That is WWGD? – and its sequel.

: LATER: In typical eloquence, Yochai Benkler expresses the restructuring in his response to Paul Starr’s lament about newspapers and the future of democracy:

Like other information goods, the production model of news is shifting from an industrial model–be it the monopoly city paper, IBM in its monopoly heyday, or Microsoft, or Britannica–to a networked model that integrates a wider range of practices into the production system: market and nonmarket, large scale and small, for profit and nonprofit, organized and individual.

This will be the case, I argue in WWGD? and now here, not just for digital and information enterprises but for others. Education was built, it was pointed out often at Hacking Education, for an industrial age, to turn out factory workers. It was also built in an industrial model: every student off the assembly line the same. The future of education will be a magnificent mish-mash of – to quote Benkler – market and nonmarket, large scale and small, profit and nonprofit, organized and individual. Computers and their software are made this way. Cars may be. Banking, I think, will be a similar mix (nonprofit? yes, credit unions). The bottom line is the shift from an institutional economy to a network economy.

: LATER: This post seems to have caused Bruce Sterling a bad trip. Sorry about that.

: “The new normal will be a lot different from the old normal.”

Now more than ever

Friend Stephen Baker, author of the wonderful The Numerati, wrote a kind review of What Would Google Do?, eloquently summarizing its key message and also making a point I hope others see: that now more than ever, in the midst of crisis and permanent change, we should look to companies that see the world in new ways. Steve wrote:

It’s full of ideas, and it’s perfectly timed for the economic storm we’re experiencing right now. The way Jarvis sees it, most of our industries and institutions developed in a time of information constraints. People made money or achieved power, whether in publishing, banking, insurance or education, by leveraging the information they had access to. They profited from scarcity.

Information, in the age of Google and the Internet, is no longer scarce. It no longer takes time to travel from one place to another. Knowledge no longer requires the movement of atoms. Our brains are linked. That is the revolution Jarvis describes. Of course, we’ve all been aware of these changes brewing since the dawn of the Internet. But Jarvis does a very good job pulling it all together. Readers of his blog will be familiar with many of his arguments, from his push for transparency, links and “publicness” to “small is the new big.” But the book forces him to synthesize more than on the blog, and to tie these phenomena together.

Jarvis was at work on this book before our economy dive-bombed. But as I mentioned, our economic situation makes the book more relevant, not less. This economy is on its way to tearing down the inefficient structures built in the age of scarce information. Understanding and adapting to the forces he describes are no longer simply competitive issues. For many–journalism and publishing are front and center–it’s a matter of survival.

(I might add here that the Numerati are leading actors in this drama. The information revolution he describes creates the rivers of data they feed on. And there are no bigger Numerati on earth than the triumvirate running Google, a company entirely built on the analysis of data and the statistical correlations between what we’re looking for and the advertisements most likely to interest us.)

Thank you, Steve.

The Google economy

I think there’s something more fundamental happening in Google’s rousing quarterly report yesterday than we’re seeing in the news reports about it (which are mostly eating crow over predictions to the contrary).

I think we’re seeing a new definition of “the economy.”

The old definition meant and measured the performance of big companies and their impact on each other. This was especially the case in media and advertising, which served only companies of a certain size because only large companies could afford to advertise in large outlets. But Google’s marketplace for advertisers of all sizes represents the small-is-the-new-big economy: no limit of small enterprises that can now add up to a critical mass. The fact that it is an auction marketplace also means that this economy is more fluid; it fills in voids.

So for example, when there’s an economic downturn that affects, say, travel, that will affect a magazine like Condé Nast Traveler; airlines and hotels of a certain size will advertise less and there aren’t new advertisers to fill in that void at Traveler’s price. But on Google, if American Airlines and the Ritz aren’t buying the keyword “Paris” this month, there are no end of advertisers who will step in to buy the word. The price of that keyword may decline. But in Google’s very broad economy, the prices of other keywords (e.g., “credit”) may rise.

And because this is a pay-per-performance marketplace and Google is motivated to continually improve relevance and performance, it is not a market driven by scarcity of space or audience. That makes it hard for old measures of the economy and media to figure it out. It doesn’t march to static metrics like fuel costs affecting prices and dollar conversions affecting passenger miles, all of which affect paid ad pages.

This is apparently what threw Comscore’s measurements into a tizzy as it tracked what it thought was a drop in clicks on Google ads while Google said it was tuning its ad placement to improve relevance and performance. There was another variable in there that old economic measures could not predict. Were we clicking less because we were poor and depressed or because Google tuned an algorithm? No way to know. After causing a storm with this measurements, Comscore tried to back up and say that it wasn’t necessarily saying that Google would earn less; the market didn’t listen and punished GOOG by 100 points but last night it punished Comscore’s stock in retaliation.

This is also one of the many factors making old-style media — and, in some cases, economic — measurement inaccurate and irrelevant. I’ve been saying that measurement by sample is useless because you can’t possibly get a big enough sample to measure all the niches; Nielsen, Comscore, and the entire industry will fail in a small-is-the-new-big economy because they can never measure and add up all the smalls. They will also fail because measuring how big a media outlet is has become almost irrelevant: An advertiser buying in Condé Nast Traveler cares how many people read the magazine because the assumption is that everyone who sees the magazine sees that ad. But online, a sponsor buying ads at the magazine’s site,, cares only about the specific people who saw the ad when it was served on specific pages, and so the size of the overall site is largely irrelevant except as a filter to decide where to consider buying ads or as a bragging right for the site. (This is why, when I served on committees for the Audit Bureau of Circulations in the mid ’90s, we discovered that audits of total site audience were meaningless — nobody wanted to pay for them — and all sponsors wanted audited was the serving of their own ads.)

But the pity is that ad agencies and stock analysts, reporters, and stock buyers still pay attention to these outmoded measurements and the companies that push them. That’s why GOOG went down 100 points while the company’s revenue soared 30 percent. They were selling on the wrong measurements that led to the wrong assumptions. But mere methodology won’t help. Why?

The Google economy is just different.

(Disclosure and caveat: I bought GOOG at 512 and now don’t feel quite so stupid for it, but I did feel stupid in econ class.)

: LATER: The NY Times headline this morning said that “Google defies economy.” Perhaps that’s a typo. Should it be “Google defines economy”?

Davos08: Brainstorming uncertainty

I’m in a fairly remarkable session: a huge room filled with hundreds of WEFers around tables to brainstorm economic uncertainty and decide what the problem is (and we should be worried that debating the problem vs. the solution is probably the biggest reason to worry).

The format is working well, bringing out the essential ideas of the smart people (me not included) here. And, again, we perhaps should worry that there are so many ideas about what’s wrong. At my table, I heard fear of the inability and ignorance of decision makers to figure out what’s wrong: kneejer political reactions and the risk of protectionism. I heard that economic models don’t work — as one person said, maybe the $100 bbl of oil we fear is really a $60 bbl, given the fall of the dollar. There was a lot of talk about instant information among customers and debate over the benefit and danger of that. I heard about the unwillingless of companies and governments to acknowledge and manage to the realization that they are part of a global economy and one person blamed the buzzwording of globalization. Problems from other tables: talent; the environment; energy, short-sighted thinking (said one: it’s too late to talk about 2008); a lack of U.S. leadership.

Now we’re asked to vote, with little gadgets, for the single greatest threat: recession, income inequalities, rise in energy and commodity prices, global credit crunch, mismanagement of the current crisis, a collapse of confidence, protectionism, overreaction to the threat of recession, lack of coordinated response and leadership. Winners (if you want to call it that): recession, mismanagement, lack of coordinated response followed closely by lack of confidence. The bottom: greater income inequalities. That will be a controversial choice.