Bits of Destruction: Blame the Internet

The news is full of stories this year end about the impending bankruptcies of retailers, newspapers, auto manufacturers, banks, and a host of other businesses that have been the mainstay of corporate America for the past 100 years or more.

Clearly the economic downturn is the direct cause of most of these failures but I believe it is only the straw that broke the camel's back in most cases.

The internet, now closing in on 15 years old in its mainstream incarnation as the worldwide web, is in many cases the underlying cause of these business failures.

Bits of information flowing over a wire (or through the air) are just more efficient than physical infrastructure.

I'm typing this on my Blackberry in a hotel lobby in Berlin. I'll hit send, and it will be published and read by roughly 5,000 people today. Compare that to what it takes to get the Tom Friedman column 'Time To Reboot America' which is sitting in front of me in the International Herald Tribune newspaper printed and delivered to me. Printing and distribution infrastructure cannot compete with bits on a wire and we are going to see that infrastructure end up in bankruptcy a lot in the next 12 months.

Let's look at banking. Money is information too, and is increasingly flowing as bits. I can't think of the last time I walked into a bank branch. I use a debit card wherever I can, and I can't wait until I can tap my Blackberry when checking out like many people in Japan and Korea already do. These bank failures have more to do with risky lending and owning securities that are toxic than anything else, but we also know that a bank today is very different than a bank 20 years ago. I am positive that we'll see entrepreneurs reinvent what banking is in the coming decade and it won't look a thing like Bank Of America (BAC) or JPMorgan Chase (JPM).

And what about retailing? I had breakfast last week with a person who has been in retailing for more than 30 years and has been operating at the highest levels of the industry. He said that he expects every category to be winnowed down to one dominant retailer with all the others going by the wayside. This too has the internet as an underlying cause. ComScore says that online holiday shopping this year has been flat with the year before, and I've seen reports that offline retail is down 6-10 percent. The fact is that consumers have finally come to the realization that shopping online is easier, cheaper, and often a better experience. Physical retail will survive, but it will be a smaller industry in the next decade, and those that do survive will need to give consumers a very strong rationale to get in the car and come to their store.

The internet has also made the auto dealer model of distribution a questionable approach in this day and age. Consumers can research a car, use auto lead generation services to work one dealer against another, and totally commoditize the dealer channel. I remember back in 1998, ten years ago, the Gotham Gal and I bought a car that way over the internet and had it delivered to our house. We never even went to the dealer. I'm not active in the auto market and barely drive a car these days, but I have to believe the dealer-based distribution system is not the most efficient model for getting cars into consumer hands anymore. I hope that any restructuring of the auto industry that happens takes advantage of a newer, more efficient distribution model.

I could go on and on but will stop here. If you want to get a longer riff on these ideas, get Jeff Jarvis's book, What Would Google Do?, where he imagines Google operating in many different industries and thinks about how they would approach them.

This downturn will be marked in history as the time where many of the business models built in the industrial era finally collapsed as a result of being undermined by the information age. It is creative destruction at work. It's painful, and many jobs will be lost permanently. But let's also remember that it's inevitable and we can't fight it. Technology and information forces are unstoppable and they will reshape the world as we know it regardless of whether or not we want them to.

Comments

[Rokjok777:]

Excellent article that echoes thoughts I've had for several years. I recall living in the Bay area in 1998 and looking at the Oakland Tribune. There was a listing for all of the ships arriving and leaving the Port of Oakland. Arriving from Thailand: ship full of 1" cold rolled steel pipe. Departing for Thailand: ship full of 1" cold rolled steel pipe.
The internet allows the guy who has the pipe in Thailand to find the guy who needs the pipe in Thailand. It's as simple as that. Think of all the economic activity that doesn't happen because those two guys can find each other.
With the relatively friction-free flow of information, the world's standard of living will even out...and not to the benefit of the "first" world"!
We had better "reboot" urgently and quickly. Start with the $700 billion in annual military adventures...
We moved to Australia in 2005 after Bush was re-elected....I could see disaster looming. Sold my California house at the tippy top! My wife says it was luck but I've repeatedly told her otherwise.
I think we'll find the bottom sometime in 2009 (25% lower?) and then stay there for five or so years. Long enough for the new order to fully emerge. Social unrest in the meantime....?

2008 Dec 26 03:57 PM

[Tony Petroski:]

Wow. You are really with it. Berlin, Tokyo, Korea...you must be really smart and trendy. It was an honor to read your insights.

2008 Dec 26 10:49 PM

[Lightway:]

Great article, but online vendors and business models still have limitations. And actually this article sounds like something written during 1999-2000, during the .com era, when there was a line of thinking that pretty much life as we know it was all going to go online.

However, some things just don't work exclusively online. I've been in the information technology industry for over 10 years now, and I think the best formula is leveraging the a brick and mortar supply chain or distribution network, but backed by the free flow of information. This leads to things like quicker order fulfillment, intelligent forecasting, improved collaboration, etc.

But brick and mortar is still very important. Most people still don't feel comfortable buying a car without test driving it first, or buying clothes without seeing how they fit in them.

Then there are delivery premiums. Typically it's alot cheaper to stop by the local home improvement store and pickup that 100 pounds of gravel than to order it online and pay that extra $30 delivery fee.

Online business has certainly transformed our world, but sometimes, seeing, touching and experiencing a purchase will never be replicated online.

2008 Dec 27 05:18 AM

[morph366:]

I agree with your main point that internet commerce has transformed and essentially broken the business models of many bricks and mortar businesses.
However, the transition towards a more digitallly based economy would have been more gradual and not produced the kind of eponymous financial crisis we have seen this year. For that we have to look at the folly of those who ran major banks/funds relying on quants in the investment banking world who claimed that they had financially engineered the end of a boom/bust financial economy

2008 Dec 27 08:47 AM

[E Nuff Sed:]

You make good debating points - but the internet cannot disintermediate everything, the success of Google and Amazon notwithstanding.

For example I still need to test drive a car before I buy it. I cannot see dealerships disappearing. As my assets have grown, I feel the need of a personal relationship with a banker. All these industries are increasingly using the internet to extend a deepen relationships with clients but are also equally reliant on brick and mortar installations.

2008 Dec 27 08:29 PM

[momomiester:]

The reality still is king. You can live in your own little cyber world but the need to physically do things is still prevalent. Clicking your mouse ain't going to take out the garbage.

2008 Dec 29 12:45 PM