Posts about greatrestructuring

When innovation yields efficiency

Much of the innovation we’ve seen lately hasn’t led to growth but instead to efficiency – that is, shrinkage.

I’ve been mulling over Mike Mandel’s cover story in last week’s BusinessWeek, in which he tried to puncture another bubble: the belief that we’ve had a rich decade of American innovation. He argues that there’s actually an “innovation shortfall” and he uses economic stagnation to plead his case. Now I’m not economist (that’s a straight line) and so I won’t argue about the impact of other events on growth – starting with the so-called financial crisis.

But as I thought through the major innovations of the last decade, many of them have not led to economic growth; they haven’t added money to the economy but left it in the economy. Thus measuring innovation’s impact in the revenue, growth, productivity, and market cap of large companies may not be valid. Instead, we are seeing innovation take money out of their pockets, leaving it with their customers. What they, in turn, do with that extra money and what impact it has on the economy is an entirely different question – and that impact is likely seen in any case not in large companies but in individual consumers and in small businesses. But I think the proper measure of the changes in the last decade is the innovation dividend. See:

* craigslist is blamed for destroying (that’s from the publishers’ perspective) $10 billion in classified ad value annually**, replacing it with its reported $100 million revenue. Newspapers act as if that was their money – as if they had a God-given right to it – but, of course, it wasn’t. When Craig Newmark spoke with my students at CUNY, and they asked him why he didn’t maximize revenue at craigslist and sell it for billions and then use that money for philanthropy, he told them that he thought he was doing more good for the country and the economy by leaving more money in the pockets of the people who were doing the transactions he now enabled. He cut out a gross inefficiency born of the monopoly that newspapers held over the means of production and distribution. If you try to measure his innovation’s impact on the economy with old methods and metrics – built on the assumptions of the old economy – you can’t see it. He didn’t make companies grow or become more productive. He added efficiency.

* Amazon, eBay, and the internet as a whole are blamed for destroying large swaths of the retail marketplace. But again, they brought efficiency in a number of ways: price transparency, which leads to lower prices for customers; critical-mass efficiency; the reduction of brick-and-mortar and staff costs; and I’d imagine a reduction in distribution and warehousing costs. The net result is fewer jobs, less rent, less waste (that is, books on shelves that get pulped; now they’re made just in time), and lower prices. Again, more money is left in the pockets of the transcators. The impact of innovation on retail is seen in shrinkage and efficiency, not growth.

* Google is blamed for destroying media but, of course, all it did was give advertisers a better deal. It dared to compete. Google did this not just by creating abundance rather than selling scarcity born of control of those means of production and distribution. This created a more efficient – read: less expensive – marketplace for advertising. More important, Google revolutionized advertising by selling performance, proving a return on investment. So the money that didn’t stay in the pockets of people buying and selling cars and homes, thanks to Craig, now stayed in the pockets of retailers and manufacturers thanks to Google. More efficiency. In What Would Google Do”, I argue:

We have shifted from an economy based on scarcity to one based on abundance. The control of products or distribution will no longer guarantee a premium and a profit. . . . We are entering a post-scarcity economy in which Google is teaching us to manage abundance, challenging the bedrock rule of economics, first written in 1767: the law of supply and demand.

Old rules and measures and analyses can’t track that.

* Web 2.0 is credited with making it much faster, easier, and far less expensive to start new companies. That is the other innovation dividend – the innovation that happens on the back of innovation. But this is happening, again, not at a large-company level but at a small-company level. Measuring spending on innovation, then, becomes another unreliable metric. The economics of innovation itself have changed.

The reliability of the standard metrics and analysis matters greatly because profound – and expensive – policy and economic decisions are being made on the basis of them and I’m not at all sure they’re valid anymore, or at least as valid. They miss too much of the change and impact and value and dynamics in this new economy. They lead us to bail out GM and Chrysler. One could argue, as George Will did in yesterday’s Washington Post, that that the bailout violates even old rules:

The administration’s deepening involvement in designing and marketing automobiles through two crippled companies ignores this truth: Capitalism is a profit-and-loss system, and the creative destruction it produces is supposed to clear away failures such as Chrysler, freeing capital for more productive uses.

But that capital, once freed, may not go to building huge new ventures. It may go to building small new ventures. It may stay in the pockets of people doing transactions and now instead of spending it on Toyotas, it may go to banks. You won’t see all the impact – except negatively – on the Dow Jones Average and the Fortune 500; those were the measures of the old economy. We need new measures.

** I had said craigslist and the internet replaced $100 billion in revenue in newspaper classified, which was an attempt to calculate over the life of the web, but that was difficult to calculate, so I changed the figure to $10 billion, the difference between classified revenue at its height in 2000 and in 2008.

Great Restructuring III: The war over change

The emerging war we’re seeing now is over change. I’m not talking about the post-9/11 resurgence of debate over Samuel Huntington’s Clash of Civilizations – though that’s certainly a front in this war. Instead, I’m talking about the clash over change within civilizations, the attempt by some to forestall its inevitability, and their attacks on those who enable, predict, and embrace change as if any of those actions cause change. It’s actually rather fatuous to set up a dispute between those who want and don’t want change, those who think change is good or bad. Change is inexorable. The question is not what you think about it but what you do about it.

I’m seeing this personally as attacks on me get more emotional for merely predicting the obvious: the fall of newspapers. Predicting it doesn’t cause it, but sometimes you’d think that’s the case. There’s a lot of attempted messenger murder going on.

I see it in a boggling dispatch from Brigadoon in today’s Observer (the Guardian in Sunday suit) in which Henry Porter goes so far over the edge to liken Google to “something that is delinquent and sociopathic, perhaps the character of a nightmarish 11-year-old,” calling it a moral menace. “Despite its diversification, Google is in the final analysis a parasite that creates nothing, merely offering little aggregation, lists and the ordering of information generated by people who have invested their capital, skill and time.” He doesn’t want to see that in the link economy, Google does precisely the opposite: adding value with its links. If you think those links are so awful, then reject them.

Frighteningly, that’s what’s almost being suggested in another quarter of the Guardian (where, full disclosure, I write, consult, and podcast). But true to my American ways, I must issue my declaration of independence from this line of thinking: “The Guardian Media Group has asked the Government to examine Google News and other content aggregators, claiming they contribute nothing to British journalism.” Pass the aspirin. This from the same organization that wants its content in the fabric of the web via its API – the ultimate expression of the link economy and of thinking distributed, thinking like Google, that is? (As with all thing media in the UK, this has something to do with the BBC.)

The Guardian should know that something is amiss when it finds itself in harmony with the commander of the death star, Rupert Murdoch. To whom I’ll say, fine, cut yourself off from Google search and see how long that hunger strike lasts. The assumption here is that Google owes them something because it caused change and change is hurting them. No, Google exploited change. It did what these publishers should have done. They didn’t. They’re losing and they’re looking for someone to blame – other than themselves.

But let’s move – please – beyond newspapers and Google. Look at Europe last week, at the silly if larcenous protestors and their futile fight against globalism – we’re all connected now; that’s the essence of our change – and their insipid signs: screw the consumer, death to capitalism, end currency.

Robert Kagan wrote in The Washington Post Friday that Obama and the Americans represent too much change in Europe.

“They don’t want more excitement. . . . The creative destruction of the business-oriented political economies of the Anglo-Americans is too violent and unstable, too brutal and unpredictable. Better to regulate more tightly the international capitalists who can cause havoc through their inventiveness. Better to be less rich than less secure.

Americans are creators of turmoil. Europeans see them the way the ancient Greeks saw the Athenians, as “incapable of either living a quiet life themselves or of allowing anyone else to do so.”

Surely, they wish, they can legislate and regulate the change away.

To me, the lesson of our current turmoil is that change is inevitable – indeed, I argued here and here that it is millennial shift we are experiencing, our passage to a new age – and that resisting that change, trying to delay or protect against it, is what is leading to the death of great swaths of the newspaper, music, auto, and retail industries and their imminent replacements by new players who understood, embraced, and exploited change. There’s the difference. There’s the war. Rather than complaining about and resisting change, the wise course seems clear:

1. Recognize the inevitability of this change.
2. Try to understand it. (That’s why I wrote the book and think another may be in order.)
3. Rush toward the change; seek it out, embrace it.
4. Find the opportunities in the change and exploit them.
5. Recognize, too, the turmoil, uncertainty, and risk of the change and try to soften the impact but don’t let that stop you from 1-4.

Why Google should want Twitter: Currency

Here‘s a good clue as to why Google should be interested in Twitter. It’s not just search. It’s currency. Google isn’t good at currency. It needs content to ferment; it needs links and clicks to collect so PageRank can determine its value.

But in this report (full PDF here), Google chief economist Hal Varian and analyst Hyunyoung Choi demonstrate that Google search trends are good at predicting the present. That is, rather than waiting weeks or even a month to get aggregated figures on auto, retail, home, or travel sales to be collected and analyzed and released, Google search patterns can give a good indication of sales now.

Note that to do that, Google’s value is not in its analysis of content but in its collection of our behavior, which is faster.

Of course, Twitter is even faster, even more immediate. It collects what we’re doing and talking and thinking of doing right now. I’d love to see Varian et al take its data and put it through their algorithms.

Imagine the value of that knowledge, harnessed, for retail and manufacturing forecasting, stock and currency trading, and politics. There’s the vein of value in Twitter. Monetizing it may not come from advertising but from knowledge.

When analyzing the value of enterprises in the digital economy, it’s important to figure the value of its knowledge. I argue in my book that Amazon is really a knowledge company, that delivering books and stuff – atoms – is the price it pays to know more about our shopping than any other company on earth. Google knows the most about what we’re looking for. With maps and mobile, Google is also trying to be the company that knows where we are. Facebook knows the most about our relationships. And Twitter is headed to knowing more about what we’re doing and thinking. (Next: just wi-fi the brain.)