The Internet's Creative Destruction

Well I think we've said a lot about Carr's book so far. I'll try not to be repetitive, but i think one thing Carr overlooks in the second half of his book is the cycle of creative destruction. As Max mentions, Carr focuses on a lot of the "negatives" that greater internet use and more computing power brings, but the second half is seriously lacking in a discussion of the benefits.

1) No Natural Monopoly after all?

Last week we talked a lot about a possible natural monopoly in the market for utility computing. This week maybe we'll talk more about why utility computing won't lead to a natural monopoly. Dan Jones has already kicked this off in his post describing how distributed computing may counter the effect of greater centralized computing facilities. I argued in my post last week that fears of natural monopoly regarding utility computing were ill-founded. While Carr likes the analogy to electricity, and the use of the term "utility", it seems that he's also not worried that utility computing will lead to a natural monopoly. On p.111 Carr even points out some of the same differences between electricity and utility computing that I mentioned last week, and discusses how "modularity reduces the likelihood that the new utilities will form service monopolies, and it gives us, as the users of utility computing a virtually unlimited array of options." I think Carr's analysis here is pretty solid, and I was pleased to read that he didn't think "utility computing" would turn into what we traditionally think of as a "public utility".

2) Mo' Money, Mo' Problems?

Ross' Post already discusses some of the issues with Carr's conceptualization of greater wealth concentration in that hands of a few. Carr describes the situation of YouTube's founders, who relied heavily on free content provided by volunteer users to cash in on their invention. Carr is right that utility computing, and more broadly the entire Web 2.0 phenomenon, enables just a few individuals (even just one) with the power to create largely profitable corporations while sidestepping the traditional business models that required large investments in infrastructure and more employees.

Carr seems to think that this is just another example of greater wealth concentration in the hands of a few. Where previously a company would "spread" their wealth among their employees, a small Web 2.0 company can extract millions of dollars and spread it among just a few individuals. I think this view is a little shortsighted.

For one thing, in a world dominated by companies operating on more traditional business models, small players such as the three guys who made YouTube would have had no chance. The wave of utility computing (coupled with cheaper bandwidth, cheaper processing, cheaper storage, etc) has the effect of giving people more opportunities to make money outside older, more traditional, business models. Take the YouTube founders: They'd never be able (or at least it'd be much harder) to generate the capital necessary to invest in the infrastructure and employees necessary to run their site directly. Utility computing can allow a few individuals to focus on just the software programming aspect of the site, while they pay a "computing utility" to take care of the infrastructure. This is basically the same trend we saw in the .com boom... "anyone can make a website! Make one and sell something!" Except that now even smaller players, with minimal technical skills, can take advantage of "utility-ized" computing services.

Better examples than YouTube are all the "mom and pop" shops sprouting up on the internet through services such as E-Bay or Amazon.com's "stores". In the .com boom you needed enough resources to build up a website from scratch, either build your own hosting infrastructure or lease hosting space (much more expensive then), and you'd need to promote your site and somehow drive visitors to it. Today, small independent vendors can leverage the user base of E-Bay or Amazon (Or Google through products.google.com) to drive customers to their products, and all the investment they need to make is create an account. In regards to Amazon small stores can even have amazon manage shipping logistics, in a way creating a "logistics utility" that has little to do with the internet & computing power.

My point is while we might have more millionaires like the YouTube guys, we also have a lot more opportunities to become millionaires ourselves. Even if many e-bay / amazone sellers won't become millionaires, they have a much larger market than they would have otherwise. These seem like pretty huge benefits to weigh against the costs Carr describes. A few posters have also already mentioned that just because more individuals are getting wealthier, that doesn't necessarily mean that the poorer are getting poorer.

That being said, the title of this post is Creative Destruction, and I think a lot of what I was just describing focuses on the creative side. Now for the destructive; which Carr doesn't delve into much beyond his wariness of "concentrating wealth". Old business models are being quickly set aside to create new ones. The winners are the YouTube guys and those taking advantage of utility computing services such as those provided by E-bay and Amazon. But what about the losers? If we need less IT infrastructure employees... and we end up having to many of them, what are they going to do? Many of them might be software programmers themselves, maybe they'll take advantage of the utility computing model and create new, innovative services themselves and no longer need to be the "middlemen". Others might go work for the utility computer providers themselves, as they'll likely grow in size. But yet others, particularly older generations in the IT realm might be left out to dry as more-traditional tech roles start to go away. To an extent we've been experiencing this with outsourcing for a while, and I think Tech-workers are a little more mobile and don't expect as much job security as, say, union workers at a Ford factory, but it's still something to think about.

3) The Shifting Newspaper Business

I know the traditional characterization is the "death" of the newspaper business, and Carr surely portrays a grim picture of the newspaper industry, but I think what we're about to see is a phenomenal shift in news... and not so much its implosion/death/etc. I have no magic key as to what the revenue system for future internet-based news outlets will be, but I'm pretty sure they won't be focusing on classifieds and other services that websites like craigslist can provide more effectively and cheaper. (Can you imagine looking up stock ticker symbols in the newspaper anymore?)

Carr points out that traditional newspapers have one thing that blogs, craigslist, local TV news, and other websites don't have: deep investigative journalism. I don't think the market for investigative journalism is simply going to go away, but without cross-subsidization by services such as classifieds newspapers are going to have to find a different funding source. This might mean shifting newspapers more into an investigative journalism role, and let websites, blogs, and other free internet media cover more mundane every-day stuff.

I for one don't buy Carr's suggestion that ad-supported news will only lead to articles about popular products being viewed. Generally, popular articles drive the ads--not the other way around (an article isn't popular because it has a high-priced ad, the ad is high priced because it's going to be displayed next to a popular article). Maybe Carr fears that newspapers will want to display certain product-oriented articles ahead of non-product oriented ones. Search engines would likely make such preferential placing moot, since popular articles would presumably come up on searches regardless of editorial placement on the nytimes.com homepage. I think this "commercialization" fear is telling though, it goes to something Carr said in the first half of his book. Carr described how the idealistic vision of the internet as an information sharing mechanism didn't come to pass and that it became largely an instrument of commerce. It's true that a vast proportion of the internet is dedicated to commercial endeavors. I think it's shortsighted, however, not to consider the vast advances in non-commercial communications, scholarship, and the free exchange of ideas that the internet has enabled. Just because a huge percentage of the net is dedicated to commerce, doesn't mean the smaller percentage dedicated to non-commercial pursuits hasn't grown substantially since the web's inception as well. This notion of a "commercialized" internet may lead to false fears that the more newspapers shift to the net, the less "newsworthy" they'll be and the more "consumerist" they'll be. It's also important to note that the newspaper's product for years has been "the news", simply placing it online doesn't mean that the only thing people will care about is gadget reviews.

Comments

[Christopher James]

I agree with Ruben that newspapers are unlikely to disappear completely, but will have to transform themselves into something new in order to survive and thrive. Their continued viability is possible because they possess something unique and valuable: substantial, quality reporting. While the technological shifts absolutely require a new business model and the separation of the wheat from the chaff among today's newspapers, those left standing will offer an alternative to the frequently overwrought and at times poorly researched work of freelance bloggers. This product will likely consist of more substantial and less-biased everyday reporting and deeper investigative pieces. The former is something that, given the small marginal distribution costs of the web, can be provided by a very few large players. The latter is a market already shared between newspapers and magazines, and there is no reason to believe its demise is at all imminent. So, a vastly smaller number of newspapers will persist, largely carrying on their same core functionality--that of substantial, wide-sweeping everyday news coverage and deeper investigative pieces. Their revenue streams will shift almost entirely online, particularly as the elderly pass on and are replaced by more techno-savvy readership. Online advertising and special subscription and contest features are likely to pay the bills.

I think that Carr overestimates the impact of this shift on the actual content of news stories. There will always be those--even if in the minority--who prefer solid, dependable coverage from a reputable source. Like Ruben, I'm skeptical regarding his contention that the componentization (for lack of a better word) of news stories will lead papers to write stories guaranteed to draw significant ad click-throughs--but for a different reason. I think Carr's logic is sound that in a world where newspapers are accessed and read not via a coherent whole daily edition, but directly, story by story, through search engines, it makes sense that papers would produce stories sure to generate high click-throughs and thus significant ad revenue. However, my empirical sense is that there are a sufficient number of generalized goods (clothing, electronics, food, etc.) that appeal to the masses, and which could be used as companion advertising to stories which don't have a clear, specific tie to a particular product or service. After all, we see plenty of ads in today's newspapers which are only loosely coupled to the section of the newspaper in which they appear.

[Edward Somers]

I’d like touch a little on the economic concerns. My understanding of economics isn’t particularly strong, so I might be missing a few things here. Ruben’s positive examples of new potentials for growth were interesting, but I don’t think give the full scope of potential concerns- potentially the further decline of the middle class.
The system Carr describes, as Ruben points out, seems one that has massive rewards for innovative super-winners, but diminishing rewards for the modestly creative market participant. In the past this wasn’t the case because technology brought an increase in production and efficiency, while concurrently opening up new avenues of economic opportunity. But what Carr is describing is an increase in production/efficiency coupled with an overall foreclosure of opportunity.
Furthermore there are human limitations to consider. Under a traditional regime a larger portion of the population is able to share in the surplus because the threshold of ingenuity was lower (skillful arch welding), now it’s much higher (devising a truly innovative service product like YouTube). Basically the pie is getting bigger and bigger, but there are fewer empty seats at the table- maybe we don’t care because as Ross pointed out, this is technically more efficient from an economic perspective.
But I guess one conclusion of those two points is that socio-economic mobility might become increasingly difficult, and from a social planning perspective maybe we do care. Maybe the harm to the poor as the rich gain a larger share of the overall economic pie is the loss of opportunity to move to higher levels of personal economic gain.
The comparison to Tom’s corn and Mary’s cars is certainly a familiar and correct example, but I think an incomplete comparison. In Carr’s model Mary’s Computer builds cars, Mary herself is bumped down to harvest corn, and Tom does nothing (collects displacement insurance?). While it is true that the economy overall is more efficient, the welfare of individuals will likely fall.
I guess the economics answer to that is to take the gains won by the small group of computer super-winners and do a naked transfer of wealth to the displaced workers- a more European welfare-state (training or insurance in the short term). This too has problems I think due to the political realities of this country- our concepts of personal property and entitlement to the fruits of our own labor. Anyone in Ohio or Michigan will tell you that the job assistance/further training really isn’t enough to restore a former middle class worker to his/her past economic status. For some reason, we haven’t been able, as a practical matter, to achieve the appropriate wealth transfers so that the displaced individuals are better off, or at least no worse off.
Suppose we ignore the individuals that are displaced and only focus on future workers, who will know what they are getting into and plan appropriately. What Carr seems to be getting at is the loss of possibilities for even those future workers because there will be simply fewer positions in mid and high salary paying jobs, which computers will do- even those with college educations are suddenly applying at Starbucks. Unless other education-intensive industries grow in magnitude of positions, there will be increased competition for those jobs computers can’t do- (law maybe?)- thus putting downward pressure on those wages/salary. I wonder how long we can keep pushing workers up the technology tree until we run out of places to put them.
Again, I don’t know that this will be the case- maybe all the displaced workers will somehow create new industries where computers can’t do the work, I don’t know. But baring that, there seems to be a real concern that the middle class will be shrunk and mobility will be extraordinarily more difficult than it is today.
It is also worth pointing out that these potential outcomes aren’t inherently “unfair” or “unjust”- clearly the outcomes he describes are the product of free choices and increased efficiencies of technology. But as a normative concept, what structure of society would we prefer, I think his words carry some force.

[Frank_B]

I think the main cross-subsidy problem is not in advertising, but in content. Many newspapers imagine themselves as professional organizations with some sort of editorial responsibility to the public. When news was bundled, it was acceptable to package stories about Africa along with the stuff that actually sells papers.

But Web 2.0 is indeed lean, and it does rely on consumers to choose, focus, and even create content. With unbundled news, there's no way for Brittany Spears coverage to cross-subsidize war correspondents in places few people have heard of, let alone care about.

Insofar that we think newspaper editors did a good job of making people eat their broccoli, the public will be less informed about some topics.

As it happens, I'm not impressed by most newspapers' editing, but I think Carr has a strong argument here. There will almost certainly be fewer expensive correspondent journalists. From the humanitarian perspective, these are perhaps the most valuable journalists in the world: alerting the international community to atrocities. But from the newspaper's perspective, they're economically untenable, and there will almost certainly be fewer of them in the future. I find that a little scary.

[Ruben Rodrigues]

In response to Edward's comment, I can see how a shift to more computerized services and industries can leave the "less techie" behind. But what I was trying to convey in my post is that one of the positive effects of greater utility computing is the ability of for "less techie" people to take advantage of computing resources that we previously reserved for big corporate players. (The E-Bay & Amazon.com examples, also etsy.com is a good example for small craft makers). That being said, it's maybe unrealistic for the unemployed factory worker to start his own online business, but I don't think you can consider those issues without also thinking of the positives.

For those who are left behind, I'm not sure what you do. As Edward mentioned, retraining doesn't seem like so great an option. Perhaps going forward the american workforce has to have a lower expectancy of permanent employment and plan accordingly. With "techie" professionals I think this is already the case.. no computer programmer thinks he's going to work at X company forever (unless he's at some of the biggies like Microsoft or Google).

As to Frank's comment on newspapers, I'm not sure the market for bundled news simply goes away online... though I think it's true the "unbundling" effects to come into play since more people can search for stuff directl. That doesn't mean people aren't going to still "bundled" displays, such as the NYTimes homepage. I'd be interested to see how many hits to NYtimes.com involve deep-linking to individual stories, and how many involve visits to their pages displaying multiple headlines. Not sure they release such info, but it'd be interesting to look at.

[Edward Somers]

I agree entirely that we ought to look at the positives as well as the harms. You are completely right that the tech revolution is opening up new doors to groups of people that may or may not have been precluded from upward mobility. My concern, and I think what Carr might be hinting at, is that the raw number of new doors opened will be smaller than the number of old doors that are closed.

You're right that job permanence is going to be an unrealistic vision for the average American worker. I simply suggest that the practical social/economic outcome from that scenario (although technically more efficient) is negative overall- unless we can come up with some better ways to redistribute wealth.

[Ruben Rodrigues]

I guess we're pretty much on the same page then. Maybe I lean a little more on thinking that there are more doors opened than closed... but... I've really no way to determine if that's true.

[Edward Somers]

Judging the number of doors opened vs. closed is really tough to tell, but I think we can find proxies for it in Carr's income share statistics and the general acknowledgement that the middle class might be shrinking. Establishing causation with the growth of computers is something else entirely. I think Carr notes this briefly on 145, pointing to a Columbia Professor's research and Bernanke speech from last year, which both assert that computers are the dominant cause of middle class wage stagnation of the last 20 years. I agree, I don't have any way to judge the causation claim either- it seems like a lot of people are just as willing to blame it entirely on free trade. It certainly is possible that computers are adding more opportunities than they're taking away and the downturn in the numbers is caused by outsourcing- Frankly, I've got nothing intelligent to say in that blame game.

Regardless of its cause though, I think we all agree that the reduction of the middle class might be something we're facing and as a possibility it has very real harms in the loss of social mobility, human dignity and increase in crime.