2016-03-03 09:36:43
Douglas Rushkoff
March 02, 2016
Plants grow, people grow, even whole forests, jungles, and coral reefs grow
but eventually, they stop. This doesn t mean they re dead. They ve simply
reached a level of maturity where health is not about getting bigger, but about
sustaining vitality. There may be a turnover of cells, organisms, and even
entire species, but the whole system learns to maintain itself over time,
without the obligation to grow.
Companies deserve to work this way as well. They should be allowed to get to an
appropriate size and then stay there, or even get smaller if the marketplace
changes for a while. But in the current business landscape, that s just not
permitted. Corporations in particular are duty bound to grow by any means
necessary. There s no such thing as big enough. Like a shark that must move
in order to breathe, corporations must grow in order to survive. This
requirement is in their very DNA or, better, the code we programmed into them
when we invented them; seeing as how that was close to 1,000 years ago,
corporations have had a pretty long and successful run as the dominant business
entity.
The economy we re operating in today may have been built to serve corporations,
but not many corporations are doing well in the digital environment. Even the
apparent winners are actually operating on borrowed time and, perhaps more to
the point, borrowed money. Neither digital technology nor the corporation
itself is necessarily to blame for the current predicament. What is to blame,
rather, is the way the rules of corporatism, written hundreds of years ago,
mesh with the rules of digital platforms we re writing today.
Since the mid 1960s and the explosion of electronics, telephony, and the
computer chip, corporate profit over net worth has been declining. This doesn t
mean that corporations have stopped making money. Profits in many sectors are
still going up. But the most apparently successful companies are also sitting
on more cash real and borrowed than ever before. Corporations have been
great at extracting money from all corners of the world, but they don t really
have great ways of spending or investing it. The cash does nothing but collect.
In 2009, a study initiated by economic futurists at Deloitte s Center for the
Edge dubbed this the Big Shift. They anticipated the conclusion to which
macroeconomists are now reluctantly coming, that an economy dominated by large
corporations must eventually undergo a system-wide stagnation. As the ongoing
study has discovered, although some digital technology firms, such as Apple and
Amazon, are doing well in the new business landscape, they are still only a
relatively small part of the overall economy, which is losing steam over the
long term. While per capita labor productivity is steadily improving, the core
performance of the corporations themselves has been deteriorating for decades.
What we re witnessing may be less the failure of corporations to thrive in a
digital environment than the limits of the corporate model in any environment
and the acceleration of this decline with each new technological leap.
Incapable of raising the top line through organic growth, corporations turn to
managerial and financial tricks to please shareholders. Boards incentivize CEOs
to increase short-term profits by any means necessary, even if it means
defunding research and development labs and personnel whose value creation may
be a few years off. The strategy works, temporarily putting more cash on the
positive side of the balance sheet. But it only makes the ROA problem worse:
companies end up burdened with more unspent cash and a bigger block of dead,
unproductive assets.
Technology may be involved with all this, but pointing to digital things as
somehow causative is a mistake. Digital processes, applied to the same old
tactics, simply exacerbate the same old problems. Outsourcing to robots is just
another form of outsourcing.
The digital landscape does make the bankruptcy of the corporate model all the
more apparent. The speed and scale on which this is occurring helps us
recognize that we are not in a cyclical downturn as corporations attempt to
compensate for the disruptive impact of digital technology. Rather, we are in a
structural breakdown, as corporatism enhanced by digital industrial
mechanisms runs out of places from which to extract value for growth. The
corporate program has reached its limits. Its function is to grow companies by
turning active economic activity into static bags of capital; in doing so, it
has taken a liquid medium necessary for our economy s circulation and frozen it
in corporate accounts. And if corporations convert too many assets from the
working and business economies into pure capital, then the whole system seizes
up for lack of fuel.
Simply stated, it s harder to make money by working or creating value when the
scales tip too far in favor of investors and shareholders. Eventually, even
investors who ve ended up with piles of cash will have an increasingly
difficult time finding places to invest.
The Platform Monopoly
The corporation has always depended on people in order to execute its
functions. It needed our arms, legs, mouths, and brains to function. Digital
technology, though, might finally give corporations the autonomy they need to
make decisions without us, and even without the bodies they need to execute
their choices in the real world. They can be software running software.
No question, digital technology has created tremendous new avenues for growth.
Apple, Google, Facebook, Amazon, Microsoft, and many other corporations have
created new opportunities and new millionaires. But as a result of their
extractive, monopolistic practices, the landscape is left with less total
activity and potential for growth. The pie is smaller, or at best staying the
same, but these digital businesses have managed to get bigger pieces of it,
making it harder for every other corporation around including themselves, in
the long term.
In large part, this is because they re still operating as if they were
twentieth-century industrial corporations, only the original corporate code is
now being executed by entirely more powerful and rapidly acting digital
business plans. What algorithms do to the trading floor, digital business does
to the economy. In the purely rational light of the computer program, a digital
corporation is optimized to convert cash into share price, money and value into
pure capital. Most of the people enabling this have no reason to believe it is
harmful to the business landscape, much less to human beings.
At worst, argue today s generation of technopreneurs, we are undergoing a whole
lot of creative destruction. That s the process, first coined by Marx but
popularized by Austrian-American economic philosopher Joseph Schumpeter,
through which the economy achieves a natural churn. Simply put, it s a
description of the way young companies with superior technologies or processes
invariably unseat established ones. Old ways of doing things are replaced by
better ones. There s pain as companies go out of business and people lose jobs,
but ultimately there s gain as the new market establishes itself.
This rationale has been enough to keep most thoughtful Silicon Valley
entrepreneurs from worrying too hard about the repercussions of their actions.
After all, digital corporations will necessarily carry out corporate code
better than their predecessors. For example, last century s retailers mailed
out catalogues and then used sales feedback to adjust the offerings for the
next quarter. A digital company will A/B test its web page, display ad, or
online catalogue in real time. Every interaction is a test of a bigger/smaller
font, a higher/lower price, friendly/formal language, and so on. The thousandth
time a page is rendered, it has evolved into a much better selling mechanism.
Each and every choice and process can be made more efficient, more responsive
to market conditions, and more persuasive to users. And why shouldn t companies
optimize for victory? It s only creative destruction. Either get with the
program or get run over by it.
That s the sanguine interpretation of creative destruction, held by the winners
since industrialism began. If you re the unhappy victim of a plant closing, the
resident of an abandoned community, or the owner of an undercut small business,
you are an unfortunate but necessary sacrifice to business innovation and
free-market competition. Free-market advocates celebrate create destruction as
the way that scrappy young upstarts come and unseat the most powerful companies
on the block. But Schumpeter also suggested that each new winner takes over its
sector in a much more complete way than its predecessors, potentially
destroying more businesses and opportunities than it creates certainly in the
short term. It s like big fish swallowing up smaller ones until only a few
really big fish remain. And with enough influence, those big fish can change
the rules and further disadvantage those who would rise up to eat them.
Creative destruction accelerates whenever there s a major new technology
capable of fostering entrepreneurial activity, so the fact that we re seeing so
much churn right now shouldn t surprise us. Nor should it upset us, not if we
take Schumpeter to heart and accept that without pain in the form of lost
employment and social destruction, we won t get gain in the form of new markets
for capital. But the entrepreneurs fomenting today s upheavals appear more
aware than their predecessors of how to create monopolies, leverage networks,
and exploit their technological advantages. The digital difference is that
monopoly-favoring regulation needn t occur at the political level when it can
be embedded in the operating systems themselves.
Uber, as we ve seen, means to be the creative destroyer of the current taxi
industry. It bills itself as a way of connecting drivers and passengers.
According to this way of thinking, it is primarily a platform and payment
system, not a taxi or limousine service. By calling itself a platform rather
than a taxi dispatcher, Uber has been able to work in a regulatory gray area
that slashes overhead while inflating revenue. This is how Uber can be valued
at over $18 billion while many of its drivers make below minimum wage after
expenses. Meanwhile, the company s path to success involves destroying the
dozens or hundreds of independent taxi companies in the markets it serves. On
the surface, it s the creative destruction of centralized taxi commissions and
bureaucracy. The result, however, is the elimination of independently operating
businesses, replacing them with a single platform. Former business owners
become Uber s unprotected contractors. Market pricing and competition are
replaced by a monopoly s algorithmic price-fixing.
Creative destruction? Perhaps, but with a twist: the new businesses of the
digital era aren t stand-alone companies like stores or manufacturers, but,
like they say, entire platforms which makes them capable of reconfiguring
their whole sectors almost overnight. They aren t just the operators; they are
the environment.
To become an entire environment, however, a platform must win a complete
monopoly of its sector. Uber can t leverage anything if it s just one of
several competing ride-sharing apps. That s why we see Uber behaving so
aggressively toward its competitors (being accused, for example, of making and
canceling calls to drivers of other companies, wasting their time and energy
and then advising them to change platforms). It s not that there s too little
market share to go around; it s that Uber doesn t mean to remain a taxi-hailing
application. In order to become our delivery service, errand runner, and
default app for every other transportation-related function, Uber first has to
own ride-sharing completely. Only then can it exercise the same sort of command
as the chartered monopolies on whose code these modern digital corporations are
still running.
Union Square Ventures founder Fred Wilson worries aloud on his company blog
that digital entrepreneurs are more focused on creating monopolies and
extracting value than they are in realizing the internet s potential to promote
value creation by many players. Wilson is excited about the possibility of new
platforms that allow new sorts of exchange, but, he says, there is another
aspect to the internet that is not so comforting. And that is that the internet
is a network, and the dominant platforms enjoy network effects that, over time,
lead to dominant monopolies. The fact that digital companies can build
platform monopolies brings creative destruction to a whole new level.
None of this is ever about bringing more value to people or heaven forbid
helping people create and exchange value on their own. Digitizing the
corporation simply affords it ever more efficient and compelling ways to
extract what remaining value people and places have to offer. It s simply
running the original and unchallenged corporate program as efficiently as
possible, carrying out a thirteenth-century template for converting value into
capital but doing it faster and better every day, learning and improving with
every action. This is why we re seeing the extremes we re now witnessing: we
took a program that used to require human actors to execute and put it on a
digital platform.
Ironically but irrefutably, this is not good for business. As more value is
sucked out of the economy and frozen in corporate storage, companies return on
assets erodes even further. As corporate algorithms battle one another for
platform monopolies, the extraction of value and opportunity from the real
economy worsens. An app swallows an industry and has nothing to show for it but
shares of stock with no earnings. On a digital landscape running only corporate
code, corporations themselves end up in the same predicament as musicians and
everyone else: a couple of winners take it all while everyone else gets
nothing. Making matters worse, in a successful corporate environment, total
economic activity decreases, remember, as money is sucked up into share value.
It s as if the business world is morphing into a video game. We can only wonder
who the eventual winner will be. Sergey Brin, Mark Zuckerberg, Jeff Bezos ?
They re playing a winner-take-all competition. Google is trying to leverage its
platform monopoly to become a shopping platform, Facebook is leveraging its
monopoly in social media to become an advertising service, and Amazon is
leveraging its store to become a cloud service.
In the corporate program, there s only room for one.
This article is adapted from Throwing Rocks at the Google Bus: How Growth
Became the Enemy of Prosperity (Portfolio, 2016).
Douglas Rushkoff is Professor of Media Theory and Digital Economics at CUNY/
Queens, a digital literacy advocate for Codecademy.com, and a lecturer on
media, technology, culture and economics around the world. He s the author of
Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity.