The Collapse of Simple Business Models

Clay Shirky on the destruction of over complex business models - he uses Tainter's hypothesis for complex societies:

Early on, the marginal value of this complexity is positive—each additional bit of complexity more than pays for itself in improved output—but over time, the law of diminishing returns reduces the marginal value, until it disappears completely. At this point, any additional complexity is pure cost.

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

(Jared Diamond, Paul Colinvaux, Josef Schumpeter and others have all made similar points btw)

Translating this into companies and business models rather than societies gives an interesting thought experiment - take Web TV for example:

The most watched minute of video made in the last five years shows baby Charlie biting his brother’s finger. (Twice!) That minute has been watched by more people than the viewership of American Idol, Dancing With The Stars, and the Superbowl combined. (174 million views and counting.)

Some video still has to be complex to be valuable, but the logic of the old media ecoystem, where video had to be complex simply to be video, is broken. Expensive bits of video made in complex ways now compete with cheap bits made in simple ways. “Charlie Bit My Finger” was made by amateurs, in one take, with a lousy camera. No professionals were involved in selecting or editing or distributing it. Not one dime changed hands anywhere between creator, host, and viewers. A world where that is the kind of thing that just happens from time to time is a world where complexity is neither an absolute requirement nor an automatic advantage.

The really interesting thing is how this evolves - as you know, our view of Web TV is that its more of a cycle, a process of "creative destruction" as the new cheap thing destroys the old expensive thing, but over time either develops complexity of its own or is over-ridden in its won right. In other words the "invisible hand" just rearranges the players in the game. (For more details read here)

Shirky actually gives as an example the evolution of Web Hosting, which - if you roll it forward another half turn - proves my point:

In the mid-90s, I got a call from some friends at ATT, asking me to help them research the nascent web-hosting business. They thought ATT’s famous “five 9’s” reliability (services that work 99.999% of the time) would be valuable, but they couldn’t figure out how anyone could offer good web hosting for $20 a month, then the going rate. No matter how many eventual users they assumed, $20 didn’t even seem to cover the monthly costs, much less leave a profit.

I started describing the web hosting I’d used, including the process of developing web sites locally, uploading them to the server, and then checking to see if anything had broken.

“But if you don’t have a staging server, you’d be changing things on the live site!” They explained this to me in the tone you’d use to explain to a small child why you don’t want to drink bleach. “Oh yeah, it was horrible”, I said. “Sometimes the servers would crash, and we’d just have to re-boot and start from scratch.” There was a long silence on the other end, the silence peculiar to conference calls when an entire group stops to think.

The ATT guys, part of a company so committed to the sacred dial tone it ran its own power grid, had correctly understood that the income from $20-a-month customers wouldn’t pay for good web hosting. What they hadn’t understood, were in fact professionally incapable of understanding, was that the industry solution, circa 1996, was to offer hosting that wasn’t very good.

Not so fast, Clay, I was doing roughly the same job at the time, but for a Telco. And the truth was that you made nearly no money at $20 a month, and about the only people who could afford to do it were kids in back bedrooms or cheap outer zone industrial estates (I know, I met enough of them).

But roll forward from Shirky's 1996 to 1999 and Web Hosting had changed completely, Exodus et al had redefined it as a $200 a month game (at least - S1,000 was more like it for a cage) and that was where the industry really made money. The $20 game was just not sustainable. And the Telcos came in at the $2,000 level plus, with Dial Tone levels of service, and customers who had eCommerce sites or other mission critical systems used that as they needed the uptime and reliability.

In other words, very low complexity new industries are often unsustainable themselves, and thus very short lived.

(I must point out there is now a $20 industry again,but that is 7 cycles on of Moore's Law plus a one off benefit from all the infrastructure sold at pennies in the dotcm collapse)

In summary therefore I would argue for our Creative Destruction analytical model, which is a continuous cycle between Old, Complex models being destroyed by new, simple models in a "Pirate World" free for all, which are themselves destroyed by emerging complex models from the New Industry.