Analysis, Business, Essays, Startups

Creative Destruction: How Entrepreneurs and the Internet Disrupt Old Industries

Last week, Newsweek (sub. Washington Post/WPO) writer Daniel Lyons published an article entitled A Decade of Destruction, looking at the Internet’s impact on various types of media in the past 10 years. Lyons begins with:

The past decade is the era in which the Internet ruined everything. Just look at the industries that have been damaged by the rise of the Web: Newspapers. Magazines. Books. TV. Movies. Music. Retailers of almost any kind, from cars to real estate. Telecommunications. Airlines and hotels. Wherever companies relied on advertising to make money, wherever companies were profiting by a lack of transparency or a lack of competition, wherever friction could be polished out of the system, those industries suffered.

Ignore the fact that media of all types is meant to catch your eye and—nowadays—your click. Headlines and openers are editorialized for maximum sensationalism. The sad part is that this isn’t even at the highest crux of possible sensationalism: it’s almost true, too.

Lyons, we know that the internet has affected your employer’s business and of Forbes as well (where he served as senior editor previously). If there’s anything that the internet has really killed, it’s print media. Yes, it can be disemminated quicker on the internet. It can be pirated on the internet. It can be much harder to monetize on the internet.

And yes, advertising is hard on the internet. For too long, users have been able to enjoy being able to access information for free, getting used to and ignoring advertising, and condemning more intrustive yet more profitable and novel types of advertising, such as video advertisements and interstitial pages. Indeed, the money that allowed these users to enjoy free and open access to information originally blocked by a paywall leaked from media corporation balance sheets.

This cultured notion of so many things being free on the internet puts pressure on creators and makers of any kind of content or service, whether it be news, technology, data, or any other kind of information service, to go with one of two of the ‘internet consumer-friendly’ options:

  • release your information service for free.
  • release your information service for free and run advertising on it.

And of course, the straightforward but non-internet consumer-friendly option:

  • charge for your product.

Both of these can apply to literally any information product on the web. The former two allow for growth and traction and high losses, while the advertising won’t cover for as much as it did in traditional mediums where there existed one (i.e., print.) The latter allows for big profits.

That isn’t different from the traditional methods of marketing stuff in the real world. But the stigma associated with the dynamic on the internet is completely different: your product is expected to be free and immediately tryable.

Some startups get it. They don’t have a budget that the money could leak from, unless if they were a well-funded venture capital backed business. Profitability and its maximization are key in a top-notch startup environment, and such a leak equates to a startup finding that they had a loophole for everyone to get their product for pennies on the dollar. Devastating.

And that’s the stage that current media companies are starting to face.

Creative Destruction

Lyons brings up an extremely relevant and important point: we “have to endure a period of what economist Joseph Schumpeter called ‘creative destruction,’ as the Internet crashes like a tsunami across entire industries, sweeping away the old and infirm and those who are unwilling or unable to change.” Certainly—the internet, as an abstract entity, is the force that presses older systems to evolve or go away.

Creative destruction, associated with Austrian School economist Joseph Schumpeter, is described in his book Capitalism, Socialism and Democracy.

The technology and entrepreneurship community has its argument against the article, saying that it’s too bad that the companies fail to adjust and that it’s their own fault for taking so damn long to do so. But they have their own bias too: they’re the perpetrators of the creative destruction plaguing these companies. It’s like if radio broadcasting associations told unbudging record companies that they’re being too slow to adjust and are failing as a result. They know. They just don’t know how to coexist.

Entrepreneurs in particular are the largest perpetrators of creative destruction. This is seen in Schumpeter’s work and description of creative destruction, as well as in practice itself. Although the internet wasn’t exactly created by entrepreneurs, the disruptive technology that is being blamed for creating the critical mass needed to create creative destruction was, and still is, created by entrepreneurs.

What are some entrepreneurs doing in the current internet economy? Essentially: arbitrage. Here’s a bit from Lyons.

Newspapers are getting wiped out because the Internet robbed them of their mini-monopolies. For decades they had virtually no competition, and so could charge ridiculous amounts of money for things like tiny classified ads. This, we are told by people who are wringing their hands over the demise of newspapers, was somehow a good thing. Good or no, it’s gone, thanks to Craigslist, which came along and provided the same service at no charge.

Let’s assume for a moment that Craigslist is a regular dot.com (and not as described in the Wired article about Craigslist). Craigslist, the classifieds site, saw an opportunity to cash in on the growing void of decent classifieds on the internet. As a perfect arbitrage opportunity, they were able to execute and drive money away from newspaper sites and to themselves.1 Low operating cost. Attractive value proposition. High volume. High profits. In a general sense of creative destruction, the perpetrators, mostly entrepreneurs, are arbitrageurs, leaving older systems one question: adapt or be obliterated.

The paywall on some sites like the Wall Street Journal giving you a preview of the article and asking you to subscribe is probably the best conversion from the print world to the online world. Sure, you can read on if you’ve got the print version in your hands. Just pick up the paper and read it. But that’s not socially accepted: you don’t walk into a supermarket, grab a copy of the Times, and start reading.

It’s different on the internet. It’s so much easier to go to Google and search “username password wall street journal” and hit Results within the last 24 hours. Instantly, without the glares of supermarket customers, without the shame of leeching off of the store (everything should be free after all, shouldn’t it?), without the physical paper in your hands that you know doesn’t belong to you—there is that information. Not stolen in the traditional sense, but in a modern piracy sense.

So how do you evolve against these virtual paper-nickers? It’s quite tough, and it’s up to the print world to figure out how to weather the creative destruction and reconstruct. Indeed, it may affect the entire media industry itself. With less profits, less profitable items, and the expectation to keep up the same content quality and volume as before, the media industry is going to find it incredibly difficult to reconstruct to adapt to these new needs.

Lyons, however, does not mention the future much. Lyons talks about what has happened in the past and its impact on the past and present. He does not offer any insight on whether these changes are in the long run positive (dare I say—Realpolitik) in perhaps reconstructing the media industry, or are they indeed completely destructive to the continuation of the media industry as we know it.

There are new technologies that will allow us as consumers to reconsider our addiction to free on the internet by drawing us away from the internet on a computer and rather to the internet as the framework for communication. A familiar example is the Amazon (AMZN) Kindle, which over Amazon Whispernet delivers newspapers like you knew them for a fee.

Both parties need to do some reconsideration on their parts. This, along with Gutenberg’s press, digital cameras and film, radio, and computers themselves, is but another instance of metamorphosis and radical change under creative destruction, and for it to be weathered, the same processes of reconsideration and reconstruction will need to apply.

1 In actuality, Craigslist is not so much taking business away from a certain market, but rather destroying their market entirely, as they make a sliver of the money that used to be in the classifieds market, while owning it. It’s like if a competing coffee shop stole all of Starbucks’ customers as they sold good coffee for $0.01 per cup. Sometimes creative destruction equates to market destruction.

  • http://afpr.com AndyFinkle

    OLED is what will ultimately save print media – Everything else (ie Kindle, Walled Gardens,etc) is just a patch.

    @A_F

  • http://afpr.com AndyFinkle

    OLED is what will ultimately save print media – Everything else (ie Kindle, Walled Gardens,etc) is just a patch.

    @A_F

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    Creative Destruction: How Entrepreneurs and the Internet Disrupt Old Industries.

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    well friend The Entrepreneur as the Agent of Creative Destruction … Yet the industry as a whole continued in the old rut. ….. Internet software companies!