On Structural Change, Part 2

At the end of Part One, we asked:

How does the Internet achieve such a dominant influence in order to manhandle such business giants? And which industry or company is next on the hit list?

Life at the Core and Life Out on the Edge

Who's to tell, but we can make a fair wager that the next victims of structural change will come from the list of companies that make a living by distributing digital information, from radio stations to newspaper operations, from music companies to the movie business, from TV to telephones. The list goes on and on, as described in the next section. The nature of structural change driven by the Internet is to realign the rules of production and distribution. The changing rules demonstrate what we might call Technological Darwinism - the survival of the fittest in a rapidly changing economy.

Pick any industry that relies on information production and distribution over private networks and you have an industry that is ripe for disruption, transformation or even elimination, all because of innovation and technological change brought on by the Internet. Because at the root of this structural change is the way we communicate with each other in our modern society, and increasingly we use digital tools and networks to communicate, because they make things easier and cheaper, a potent combination. And let's not forget that more often than not, digital is more fun and sexy! Smart marketers like Apple understand this and usher in consumer change by making products so attractive as to be irresistible (see iPod and iTunes).

The communication we employ may be straightforward and direct, as with telephone calls or emails, or may involve the transfer of information through websites. It may involve commercial transactions as in marketplace activities like advertising, buying and selling, or it may involve distributing recorded data as entertainment (music and video). Or it may involve using the Internet to manage activities in the field or to monitor remote infrastructure. What all these activities have in common is that they're fundamental to the human experience of life on this planet. We communicate because we live complex lives in a society and we do things together.

As we walk through this analysis, an important concept to note is that of core and periphery. We use the circle as a graphic illustrator of this concept. Individuals and groups out in society are seen as being located on the periphery, the outer edge of the circle in these graphics. Those in the middle are active in the distribution process, at the core. As distributors, they occupy a vital space when they facilitate communication between those out on the periphery through the distribution services they offer.

The first networks in society were human-based, where information passed from lips to ears, what came to be known as "word of mouth." Think of the days of the Town Crier, back before a printing press gave power to the written word, and most were illiterate, at any rate. From this point forward, analog communication advances improved on word-of-mouth.

It wasn't long after the type was set and printing presses got inked up that distribution networks sprang up to communicate information over newsletters, broadsheets, pamphlets, newspapers, and books. The first information distribution networks in the modern sense, then, gained great power by providing something everyone wanted but few could deliver: vital information printed on paper, providing a quantum leap in utility over the old oral tradition. To reach the many people out there on the edge with the printed word, one needed to go through the core company that had the capacity to print and distribute printed materials. Or, one needed to work with a mail service. Either way, one had to go through the middle to get to the edge.

Of course, from the distributors' perspective, the world was now divided between those who paid for the distribution service - subscribers, as it were - and those who did not.

And that's about as far as technology took us for quite a long time, until great leaps in innovation began to roll out in the early 20th Century, starting with the invention of the telephone and the company that developed to commercialize the technology, AT&T, aka "Ma Bell."

With the advent of the telephone, two-way oral telecommunication was born - that's where we get the name - the "tele" stem means "distance." In a sense, people could communicate much as they did by "word of mouth," but over long-distances, assisted by technology. It's an understatement to say that this leap was a big hit - it was in fact transformative, as it changed the way that society functioned. AT&T was destined to grow into a corporate giant based on its near monopoly in telecommunications, which became such a vital service that in time Congress would pass a law to promote Universal Service, collecting a special fee from every phone user to subsidize service to hard-to-reach areas and populations. It had become unimaginable in modern society not to have this distribution service to go from one edge to the other, and people paid dearly for it, especially when the communication was over a long-distance or from country-to-country.

Broadcast media of commercial radio and television, subsidized by commercial advertising, ultimately led to the next significant fee-based distribution network in this analysis, the rise of Cable TV starting in the middle of the 20th Century. Originally designed for areas where broadcast signal strength was weak, cable television companies became strong distributors of entertainment content and the number of TV channels exploded from the small handful that had been available over the airwaves. Cable TV became a mammoth new industry, growing to rival telecommunications in size and revenue. In the sense that the communication ran in one direction out to the consumer, cable TV was more like the printed word, and less like telephone.

And so it went into the 20th Century. With the advent of analog pagers and cellular telephones, people could take messaging and their conversations with them as they went about their daily lives, first in their cars and then as equipment improved, as they walked from place to place. Into the 1980s and 1990s, cellular phones grew more and more popular. But as with the other distribution services above, the subscriber had to sign a contract for services and go through the powerful distribution companies. Relying on licensed radio spectrum, the cellular companies required massive capitalization, so only a few were available to offer services, but more competition was apparent in this market from the start than among the wired telephone and cable TV companies, which tended to enjoy more exclusive positioning in less competitive regional markets.

By now, one can see a pattern emerging. Large, well-capitalized distribution companies arise to provide distribution services that are highly valued by customers who cannot otherwise connect with each other or with the information they seek. In most cases, these companies managed to avoid significant competition in one or both of two ways. First, government-sponsored monopolies and permitting requirements raised the complexity of this business as well as the costs to compete. Second, market dynamics accomplished the same limiting function, raising various barriers to entry, such as the costs to dig and lay cable, the very high costs of gaining spectrum rights through FCC auctions, and the costs of supporting large bases of subscribers, from billing to customer service.

About this point in the analysis, the conversion from analog to digital technologies began to offer cost advantages to the distribution companies, but the conversion was a double-edged sword. Even as digital efficiencies enabled cost reductions that made their businesses more profitable (e.g., fiber optic backbones reduced the cost of long-distance dramatically), the same digital efficiencies lowered the barriers to competition that had protected their markets. Advances in digital technology brought about the structural changes that we describe in this analysis, and the effects of such changes continue to unfold.

And one more thing to note at this point: remember the graphic above where the print-centric viewpoint of "subscribers" and "non-subscribers" was described? That becomes the perspective of the distributor: the world is divided into subscribers and non, and the rationale to generate revenue is to convert non-subscribers to subscribers...but from the perspective of all of us out on the edge, we are going about our lives and communicating away, much of the time around the edge in "word-of-mouth" activities. We only feel like subscribers when we have to pay bills or deal with the companies that give us these services. Otherwise, we're just humans living our lives. This is a key distinction that we'll bring up later in the analysis.

More next in Part 3, where we start to look at the impacts of the Internet and other digital advances...