Wednesday, July 29, 2009

Anthony Bourdain on Detroit...

Tony Bourdain on Detroit:

Detroit. Where just about everything cool originated. As angry as one gets looking at block after block of abandoned row houses in Baltimore and wondering how the hell that happened, it's mind boggling to see how far Detroit has been allowed to fall. But what a truly magnificent breed of crazy-ass hardcase characters have dug in there. Of all three cities we visited, Detroit, oddly enough, even while looking the jaws of death straight in the face, remains closest to being a true culinary wonderland. This is due entirely to the successive waves of migration and immigration from all over the world, when people came to MAKE things in America -- each group bringing their own food and traditions. Detroit IS the story of America, for better -- and worse, and I think we've missed that, allowed ourselves to look away. Detroit, after all, made us who we are. Literally. A country of cars, highways, car culture, upward mobility, rock and roll, rhythm and blues, and what were once, unlimited dreams. Whatever happens next, Motown, Eminem and the Stooges' "Fun House", at least, shall surely outlast the automobile.


*sniffle*

I love this town.

Here's a missing scene from the Rust Belt episode.

Thursday, July 23, 2009

The Knowledge Economy That Isn't

The online revolution really is just that: A Revolution.

For 15 years now, we've heard the phrase "The Internet Revolution" so often that it's a cliche, but most times, the authors throwing about the phrase didn't realize how right they were.

They never saw this coming, and many still don't. The hype about social media today sounds just like the hype about "multimedia" of 15 years ago. Is multimedia huge? Absolutely! So much so that it's practically ubiquitous today, and we don't even need to reference it as it's own entity anymore. Social media (and the Internet as a whole) will travel this same path. But what did we learn from multimedia and the dot-com bubble of the late 90's?

The Internet has greatly increased the power of the consumer, it has greatly benefited the consumer, and it has destroyed many traditional businesses in the process. I've been obsessed with this "Innovation Deflation" for weeks now, since Jeff Jarvis wrote this piece, and all the gears fell into place.

All the flap these days about how much Twitter or Facebook is worth is probably going to look pretty silly a decade from now. The answer will likely be "not much" in terms of dollars, even if it's profoundly valuable to it's users, much like the Internet itself.

So what are the signs of Innovation Deflation? They're pretty easy to spot. Look for industries that are suffering from contraction, losing revenue, cutting jobs, all while the end user or consumer is being better served. Craigslist and iTunes are the classic examples. They may be making a pretty penny, but they are supplanting entire industries that were worth tens (if not hundreds!) of times what these companies are worth.

Here are some more signals I've seen in just the last few weeks:

Marketing: Josh Bernoff at Ad Age writes:
Spending on digital marketing will double in the next 5 years, but ad budgets won’t. [...] Six out of ten marketers we surveyed agreed with the statement "we will increase budget for interactive by shifting money away from traditional marketing." Only 7% said "we have no plans to increase our marketing budget."

Unlike the last recession, digital marketing is no longer experimental. Now it looks more like advertising is inefficient, relative to digital.
(H/T Joe Trippi)

Music: Brad Stone writes an article in the New York Times titled, "Artists Find Backers as Labels Wane":
The major labels — Sony Music, Warner Music, EMI and Universal Music — no longer have such a firm grip on creating and selling professional music and minting hits with prime placement on the radio.

Much of that has to do with the rise of the Internet as a means of promoting and distributing music. Physical album sales fell 20 percent, to 362.6 million last year, according to Nielsen, while sales of individual digital tracks rose 27 percent, to 1.07 billion, failing to compensate for the drop.
Markets: James Altucher write for the Wall Street Journal, The Internet Is Dead (As An Investment):
Let's face it. Electricity greatly improved our quality of life. But I'm not going to get excited about buying a basket of utility companies. Same for the Internet. Can't live without it, but can't live with it (in my portfolio).
More importantly?
Don't just ask me. Ask the best. Nobody can figure out a business model.
It may simply be that there isn't a business model to be found. Have you run across any more examples of these efficiencies that benefit the consumer by deflating bloated and inefficient old markets? Share them in the comments!

Wednesday, July 22, 2009

More Mass Market Deflation

Courtesy of Brad Stone at the New York Times:
Polyphonic and similar new ventures are symptomatic of deep shifts in the music business. The major labels — Sony Music, Warner Music, EMI and Universal Music — no longer have such a firm grip on creating and selling professional music and minting hits with prime placement on the radio.

Much of that has to do with the rise of the Internet as a means of promoting and distributing music. Physical album sales fell 20 percent, to 362.6 million last year, according to Nielsen, while sales of individual digital tracks rose 27 percent, to 1.07 billion, failing to compensate for the drop. Mindful of these changes, in the last few years marquee musicians like Trent Reznor, the Beastie Boys and Barenaked Ladies have created their own artist-run labels and reaped significant rewards by keeping a larger share of their revenue.

Sound familiar? In an earlier post, I wrote:
Every business model relying on intellectual property law (patent and copyright) is heading for massive deflation in our lifetimes. We've seen it with the music industry and newspapers already. The software industry is starting to feel it with the maturity of open source software, and the migration of applications to the cloud. Television, movies, and books are next. I've come to question the ability of copyright and patent law to foster innovation, but leaving that aside, the willingness of people to collaborate and share, and the tools provided for it on the internet, may render these laws obsolete.

Friday, July 10, 2009

The NYT Book Review on Chris Anderson's Free: The Future of a Radical Price

One of my favorites, Virginia Postrel, offers a solid review of Chris Anderson's new book, Free: The Future of a Radical Price in the New York Times.

She just nails it:

Opponents of the free-content argument too often reject the idea that free content is the future simply because they don’t want it to be true.[...]

“No man but a blockhead ever wrote except for money,” Samuel Johnson said, and that attitude has had a good two-­century run. But the Web is full of blockheads, whether they’re rate-busting amateurs or professionals trawling for speaking gigs. All this free stuff raises the real standard of living, by making it ever easier for people to find entertainment, information and communication that pleases them.

Business strategy, however, seeks not only to create but to capture value. Free is about a phenomenon in which almost all the new value goes to consumers, not producers. It is false to assume that no price means no value. But it is equally false to argue that value implies profitability.


Enjoy the whole article, it's more than just a review. It offers Postrel's usual keen insight, helping us to read between the lines.

Tuesday, July 7, 2009

The Highlight Reel

Mike Masnick, CEO and Founder of Techdirt, flatters me far more than I deserve, citing my recent post, Intellectual Property and Deflation of the Knowledge Economy:
The Citizen Media Law Group points us to an even better explanation of this very point, by Eric Reasons, noting that artificial scarcity is facing massive deflation. It's such a great concise way of making the point, I wish I'd thought of it:
Every business model relying on intellectual property law (patent and copyright) is heading for massive deflation in our lifetimes. We've seen it with the music industry and newspapers already. The software industry is starting to feel it with the maturity of open source software, and the migration of applications to the cloud. Television, movies, and books are next. I've come to question the ability of copyright and patent law to foster innovation, but leaving that aside, the willingness of people to collaborate and share, and the tools provided for it on the internet, may render these laws obsolete.

He then explains why he believes deflation is the right term:
Why is deflation a better descriptor? Because as businesses whose product is reliant on intellectual property shrink due to Internet-based efficiencies, consumers are reaping the rewards of these efficiencies.
Exactly. The reason old business models are at risk is because the free distribution of content is simply more efficient due to modern technology, and it's about as close to impossible to hold back economic efficiency, once enabled. Artificial scarcity is based on pretending you can hold back that efficiency.

Masnick then goes on to point out that I'm being a tad negative, in which he's absolutely right. Of course, that post was largely a reaction to all of the cheerleaders I have heard touting a "knowledge economy" as our sanctuary. I merely wanted to issue some caution not to take that point for granted.

There's some great discussion going on over there in the comments section. Dive in!

--

Joe Trippi generously linked my post (The Economic Reset Button) in his Eric Schmidt on Innovation.

I'm pretty sure it was to grab the video of Jeff Jarvis and Eric Schmidt, but still... If Howard Dean's 2004 National Campaign Manager, and author of The Revolution Will Not Be Televised wants to link you, you're gonna take it any way you can get it, and you're gonna damn well link him back.

--

Finally, a smattering of tweets for The Economic Reset Button:

@dromescu

@convagency

@luvalawa

Most notably, @williamfischer dragged @jeffjarvis over for some comments on the post. Color me flattered!

--

If I get linked by either Clay Shirky or Larry Lessig this week, I'm throwing a party.

Sunday, July 5, 2009

Innovative Deflation

In recent posts, I have:

...Questioned whether Intellectual Property Law spurs innovation or hinders it.

...Suggested that one need not change IP law to have it lose in the long run to the culture of free (or the "culture of participation", if you prefer Craig Newmark's lingo).


...Claimed that we shouldn't abandon traditional economies in favor of a "knowledge economy" that may not be the panacea that some claim it to be. This comes largely out of Jeff Jarvis' recent thoughts on innovation yielding efficiency more than it yields growth. I argue that this efficiency doesn't just shrink some markets in isolation, but can lead to deflation of the economy as a whole. Innovative deflation.

I wanted to dig into this last point a bit more and get a discussion going on how to substantiate or dismiss such a claim: "Is the knowledge economy ripe for growth, or is it the means by which traditional economies are shrunk?"

My argument is two-fold. First, that the Internet is an all-encompassing agent of change for the global economy, allowing efficiencies that bring down prices and increase services, but also cost jobs and lower wages, without replacing them elsewhere. Second, that it does not replace the lost jobs and wages with new equivalents, because so much of the displacement is owed to the burgeoning "culture of free", and that this trend will likely increase over time, not decrease.

The Deflationary Pressure of Internet Efficiencies

Maybe the reason we're having such a hard time finding out ways to monetize various internet services like Twitter, Facebook, and Youtube, is that they can't be monetized, (See Mark Cuban's "When You Succed With Free, You Are Going To Die By Free") or at least not at replacement rates to the industries and services that they're supplanting. This is exactly what they print media is finding out the hard way as it tries to shift to an online model.

The fact that the Internet allowed efficiencies that pressure traditional industries to shrink (as Jeff Jarvis puts it) is fairly self-evident. These examples either have happened already, or are being ushered in in the very near future:
  • Online music sharing prompts the RIAA into agreements with iTunes and Rhapsody, etc.
  • Social Networking reduces the need and efficacy of radio play for promotion of music.
  • Craigslist undercuts the print media's business model based around classified ads.
  • Online news reduces the relevance of the print media's daily news cycle, and eliminates the need for the production and delivery of news on paper.
  • Social Networking gives access to news events as they happen, further reducing the relevance of the daily news cycle, and the need for editorial story selection, as we editorialize for each other directly.
  • Retail locations reduce in scope and relevance due to online shopping.
  • Efficiencies in targeted online marketing greatly reduce traditional marketing's influence (whose monetization model was built around grossly inefficient metrics, such as magazine circulation, instead of click-through.)
  • Social Networking further reduces the efficacy of traditional advertising as we announce and review goods and services for each other.
Each of these is likely to (or already has) cost jobs and are not likely to replace them. Too many of these jobs relied on the traditional inefficiencies of their business models--inefficiencies that have been *eliminated*, not just shifted to new markets. The closer the markets are to intellectual property, the faster they fall.

Lastly, all of these displaced professionals are going to go seeking work in still-viable markets, if they can attempt the transition at all. The labor supply will increase as both knowledge markets and traditional markets restructure to take advantage of new efficiencies, and that restructuring will include taking advantage of the aforementioned increase in labor supply. Hours will be cut. Wages will fall. So too will the cost of living fall as these efficiencies are passed on the consumer. The balance between these two forces will be the key to determining how painful the transition is.

The Increasing Supply from the Culture of Free

The last time there was a major shift in the economic base was the transition to mass markets/mass production/mass media in the 20th century. It gave us lots of things that society didn't really have before, but most importantly--and I'm not joking here--it gave us weekends.

I could lay out a long argument here, but I could not do it the justice that Clay Shirky did at the Web 2.0 conference in 2008. You should immediately jump over and read the whole transcript, but here's the key passage:
If I had to pick the critical technology for the 20th century, the bit of social lubricant without which the wheels would've come off the whole enterprise, I'd say it was the sitcom. Starting with the Second World War a whole series of things happened--rising GDP per capita, rising educational attainment, rising life expectancy and, critically, a rising number of people who were working five-day work weeks. For the first time, society forced onto an enormous number of its citizens the requirement to manage something they had never had to manage before--free time.

And what did we do with that free time? Well, mostly we spent it watching TV.

We did that for decades. We watched I Love Lucy. We watched Gilligan's Island. We watch Malcolm in the Middle. We watch Desperate Housewives. Desperate Housewives essentially functioned as a kind of cognitive heat sink, dissipating thinking that might otherwise have built up and caused society to overheat.

And it's only now, as we're waking up from that collective bender, that we're starting to see the cognitive surplus as an asset rather than as a crisis. We're seeing things being designed to take advantage of that surplus, to deploy it in ways more engaging than just having a TV in everybody's basement.
Shirky lays out a whole series of examples and data that backs up his assertion that, as a culture, we are heading permanently towards more participation, and that this participation is based on our ability and desire to harness our free time not just for consumption, but for creation, and sharing.

Much of the efficiency of the Internet is based solely on the nature of the medium, but the real game changer isn't HTTP, or increasing bandwidth into our homes--no traditional industries would suffer from that if we didn't fundamentally change the way we interact with each other with the Internet, which is exactly what the culture of participation is.

Would the RIAA have opted to sell you a song for $1, even though the technology existed to do so if they weren't competing with free peer-to-peer music sharing?

Would the worlds most popular web server (Apache), or the OS it runs on (Linux) ever get written if individuals didn't collaborate with the ease that the Internet allowed them to?

These efficiencies that are causing traditional markets to shrink are largely created by our culture of participation.

Putting it All Together

The culture of participation is forcing efficiencies that can have deflationary effects on our economy. This allows us to purchase more with less, but also gives us less to purchase with, if it is forcing upon us lower wages and fewer work hours. What it may give us is *more free time* (whether we want it to or not). So if that free time is part of what allows this culture of participation to help create these efficiencies, and the efficiencies create more free time... Then you have not just deflation, but a deflationary spiral that doesn't end until the traditional economies (based on real scarcity) have absorbed the new efficiencies.

Jeff Jarvis, at the Aspen Ideas Festival, asked Eric Schmidt, CEO of Google, "Is what we're going through right now more than a recession or a financial crisis, or is it a fundamental restructuring of the economy and society, going past the industrial age of mass production/media/marketing into something based on knowledge and abundance?". Kai Rysdall followed up with his own question to Schmidt: "Do you not then believe that this economy has, over the last two years, been fundamentally reset?". Schmidt's answer was:
Where's the data? Almost all the money, and all the people, and all of the capital, is *not* going to where you described [a knowledge economy]. It's going into traditional businesses and traditional industrial and service operations.
Where did the money go? To traditional enterprises based on "atoms, not bits" (to borrow one of Jeff Jarvis' excellent terms). Surely part of this is due to the heavy government involvement trying to preserve failing traditional industries in the face of innovative deflation, but a lot if it is returning private investment in the economy, trying to make their own smart decisions. The market isn't going to buy into a bubble with no solid monetization scheme, especially after the lessons learned from the dot-com bubble of 2000.

So if the knowledge economy isn't much of an economy, what economy will be left standing? While these traditional industries are likely to be greatly impacted by the kinds of efficiencies that Jarvis cited, they can't escape the laws of supply and demand because they're still based on real and scarce resources (unlike intellectual property, where supply is constricted largely due to laws and not actual scarcity) . That these are the very same industries that Schmidt cited as the beneficiaries of much of our recovering economy is no coincidence.

We're told to believe in our future in a knowledge based economy, but nobody has really figured out how to make real money of it. Of those who are making money off of it (Craigslist, Google), they are making pennies per dollar in the old markets that they've upset or practically eliminated with their innovation. This isn't because we haven't found the right monetization scheme yet. It is because innovation is leading to efficiency and not growth and that is exerting deflationary pressure on bloated industries. Moreover, it is largely being done by us, the end-user, in our free time, because we want to create and share, not just consume.

Thursday, July 2, 2009

The Economic Reset Button

[Update: This accidentally became a series of posts on a theme.


Does Intellectual Property Law Foster Innovation? Where I question the efficacy of patent and copyright in a socially networked world.


Intellectual Property and the Deflation of the Knowledge Economy - Where I toy with the idea that the Knowledge Economy may not turn out to be much of an economy, especially when it comes to Intellectual Property


The Economic Reset Button - (this post) Where Jeff Jarvis asks Eric Schmidt whether or not this is a fundamental shift in the economic base


Innovative Deflation - Where I ask, "Is the knowledge economy ripe for growth, or is it the means by which traditional economies are shrunk?" ]

Below is an exchange between Jeff Jarvis and Eric Schmidt at the Aspen Ideas Festival. This is a very important 5 minutes to watch. Is our economy fundamentally shifting away from mass production/mass markets towards a knowledge economy?



Moreover, if my previous assertions are anywhere near correct, is this desirable from an economic standpoint for the U.S., given our current policies? I asked if there any real money to made in a "knowledge economy" in the long run:
Because as businesses whose product is reliant on intellectual property shrink due to Internet-based efficiencies, consumers are reaping the rewards of these efficiencies. Fewer people are employed by this sector, but fewer consumers are having to pay for products previously only produced by this sector.

To quote Jeff Jarvis from a different post:
Craigslist is blamed for destroying (that’s from the publishers’ perspective) $100 billion in classified ad value, replacing it with its reported $100 million revenue.

If we outsource mass production--the parts of our economy that are actually governed by the laws of supply and demand (scarcity)--and shift it towards a knowledge economy headed for deflation (abundance), what's left?

Don't get me wrong, I'm not at all proposing trade barriers, tariffs, or other forms of ineffective protectionism. I have no illusions that the bubble of a manual labor middle class has long burst in the U.S. However, we shouldn't be clinging to it until it sinks the whole ship. Isn't there some way to decouple the costs of production labor from the product? Robotics and automation? Lower wages? Less attractive benefits? I'd rather have GM making competitive cars in America and paying out lower wages to fewer people, than having no GM at all when we realize that the knowledge economy is really becoming a knowledge commune.

Is production an all-or-nothing game in America? It seems the only option we're given is to pay for it at traditional levels and wait until U.S. production collapses in on itself or exits the country, because we're unwilling to let wages and benefits fall to meet actual demand. In short, does GM exist to make affordable and desirable cars, or does it exist to employ people?

Given the amount of current consumption of intellectual property (copyrighted material like music, software, and newsprint; patented goods like just about everything else), couldn't we take advantage of this deflation to help cushion the blow of falling wages? How much of our income is dedicated to intellectual property, and its derived products? If wages decrease at the same time as cost-of-living decreases, are we really that bad off? Deflation moves in both directions, as it were.

That isn't to say that we're not in for a rough ride no matter what. As private citizens, we're reeling in our outstanding credit and tightening our belts, as we should be. One would hope that the government would learn from our good example. Instead, it's trying to reinflate a bubble that can't hold air: The housing market; General Motors; Chrysler; "Green Technology" as a fictional oasis for labor; The whole damn finance industry that was only sustained by, and lived to sustain, our now corrected bad spending habits.

Every bit of economic policy coming out of Washington is based on trying to maintain a status quo that can not be maintained in a global marketplace. This can temporarily inflate some sectors of our economy, but ultimately will leave us with nothing but companies that make the wrong things, and people who perform the wrong jobs. You know what they say: "As GM goes, so goes the country."

Retraining for a knowledge economy is fine in the short run, but it is no panacea. Craigslist doesn't employ the number of people it displaced in the newspaper business, and we can use this as a model for many of the effects of a knowledge economy. We should let supply and demand govern costs where it can, in the land of atoms, and preserve production at some level in this country, even if it's not the level we're comfortable with. These falling wages will provide incentive (for those who are able) to move slowly into more productive areas of our economy over time, to cushion their transition with the decreasing costs of living brought on by the information age, and not find themselves jarringly displaced at the collapsing of the next bursting economic bubble.