PARDON THE DISRUPTION - CHAPTER TWELVE

in #technology5 years ago

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DISRUPTIVE TECHNOLOGY’S
IMPACT ON THE ECONOMY

After eons of the hunter gather economy, millennia of agricultural economy, centuries of industrial economy, decades of the information economy, and now the beginning stages of an economy that hasn’t really found a name, perhaps economic eras are evolving at an exponential rate as well– they’re just getting started about twenty generations later than the disruptive technologies correlated with Moore’s Law.

In March of 1776, a book was published that, though not considered terribly noteworthy at the time, is today considered by many a seminal tome on modern capitalist thinking and is used still today. That book was An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith. Though the intent of the author in this book is widely misused – especially among elected officials trying to score political points – the concept of the "invisible hand," whereby the public interest benefits when individuals and companies aren’t constrained in the pursuit of their own economic interests, continues to relate to the changes in the economy.

I see an interesting connection – another “invisible hand,” if you will – to the recent evolution of the American economy. Industries that once were strong – providing millions of jobs and yielding great profits – have been seemingly undone by some mysterious power that unwound the mainspring on their clocks, rendering them relics in the economic museum of history.

I have chosen a few to highlight: newspapers, music stores, higher education, retail real estate, and manufacturing. (The warehouse/ distribution/logistics industry was covered in an earlier chapter). Some of these assessments tell the story after the fact; others reflect what is happening today and offer an outlook for their near-term futures.

a. Newspapers

The demise of the newspaper industry has been one of the sadder stories among all of the commercial downfalls. Once a proud giant as the biggest provider of news and swayer of opinion, it is now a shell of its former self. It was hit with the confluence of multiple disruptive technologies within a short time, which proved too much to overcome. Craigslist siphoned off the classified ad income; television (and the advertising revenue that goes with it) became the news medium of choice, and free online information severely damaged the subscription base. Throw in a good old-fashioned Great Recession and its impact on real estate advertising, and the die was cast.

The story I’d like to tell isn't so much about newspapers themselves as it is about the clocks discussed earlier. It's about not recognizing trends until it’s too late. In 2011, I was briefly the County Manager and Economic Developer for a small, poor, rural county in northeastern North Carolina. Washington County's population was under 13,000, and had been shrinking over the last two censuses. The good people of Washington County were blessed with several things, among them nature’s beauty, rich farmland, and extensive pine forests.

Decades earlier, Weyerhaeuser built a huge paper mill and wood processing plant on the banks of the Roanoke River outside of Plymouth, North Carolina. The plant paid excellent wages and was the dominant employer in the region. At its peak, over 4,000 workers made a good living for their families working there. Like many mills throughout the US, and especially in the South, it was the center of a wood and paper products operation that provided the best living that an able-bodied person with a modest education could ever make. At age 16, you did your best to get a job at the paper mill and hence, quit school.

Some 20 years ago, Weyerhaeuser and Domtar entered into a joint agreement whereby Weyerhaeuser would retain control over the wood products business while Domtar would take over the paper manufacturing. As the newspaper industry started its decline, the mill diversified into the production of fine writing paper. Job cut after job cut echoed the continuing demise of the newspaper business and the end of letter-writing brought on by email.
No futurists or trend-watchers were on hand to sound the alarm that something must be done to provide different sources of income for the workers there. The local attitude was: "It'll come back. It always does." Only this time it didn't. The clock didn't reset.

The Great Recession did its damage to the lumber business as the housing industry suffered. 400 people now work between the lumber mill and the wood fluff operation that replaced the paper processing. Generations of local citizens spurned an education to follow the dream job at the mill and now, for all intents and purposes, their lot has been cast. What sad irony that the newest County Manager in Washington County is the long-time Social Services Director. No one could be better suited to fill the most prominent need.

b. Music Stores

In 2007, roughlydrafted.com performed an extensive evaluation of the music store industry entitled “Did iTunes Kill the Record Store?” They asked a simple question: “Who killed the record store? Was it the iPod, iTunes Store, or is the real killer still on the loose?”

It’s interesting to go back and see how the industry looked through the lens of that time. With the advantage of the last five years of data and analysis, it’s much easier to assess the role that the disruptive technology of iTunes played. At the time, other factors seem to have a more pronounced influence.

According to the Recording Industry Association of America, in 1991 there were 9,500 chain record stores in the United States. But by the early 2000s, the world of the music store was going through a significant transition. Virtually every music chain was having financial trouble, and many were being bought out. By 2003, Transworld, the largest record store chain the US (operating principally as f.y.e.), had bought out Camelot, Wherehouse Entertainment, CD World, and Musicland with its Sam Goody and Suncoast branded stores. In 2004, Tower Records, the eighth-largest recording retailer and “Retailer of the Year" the previous three years, entered bankruptcy protection. HMV closed all its US stores that same year. Virgin Megastores reported losses of $495 million in 2005 and 2006. f.y.e. closed over 100 locations in 2009, and 52 more in 2012.

By 2007 the number of chain record and music stores had fallen to 2000. Mom-and-pop record stores had been equally devastated in numbers. Today, in 2013, the number of chain stores has fallen well below 1000.

Several trends were actively in play in the music business in 2007 that are largely considered historical anecdotes today. The first is the type of recording that dominated the market. Vinyl records and 8-tracks had already been vanquished from the market in the decade prior to 2007. Music sales migrated from cassette tapes to CDs and by 2007, according to the RIAA, 87% of all music purchased was on a CD.

Another factor that was hugely important in 2007 was the effort to prohibit consumers from copying or "ripping" CDs. Record labels spent huge amounts of time and effort on DRM-encrypted discs that were designed to inhibit copying. Like the VHS versus Beta battle years before, DVD audio and SACD fought an internecine war in which nobody won. These new formats, despite better sound quality, were never accepted by the public and garnered only 2% of the music market in 2005.

Once Microsoft's Windows Media DRM online music program failed to generate significant sales – and with online piracy on the rise – Apple's iTunes was reluctantly given the green light by the recording industry.

Here the historical perspective becomes interesting. According to the article:

“In the years [from the DRM debacle through 2007], Apple has sold over two billion songs, and sales are rapidly increasing. Still, downloads only amount to 5-6% of the music sold over the last couple years, depending on who's counting.

“That means Apple's iTunes Store–which sold the vast majority of those downloads–didn't have enough sales to kill the record stores, despite the graphic comparison of percentages of change printed by the Washington Post to suggest otherwise.
“The huge percentages of growth really highlight that online music sales have rapidly expanded from nearly nothing just a year or two ago. Online sales were tiny in the 2003-2004 period when the record stores began their steady decline.

“Today, web retailers--including Amazon--are together selling more music on CDs than Apple is selling in FairPlay downloads. Internet sales amounted to 8.2% of all music in all formats outside of digital downloads.

“Even adding Apple's digital downloads to physical CD sales over the Internet fails to add up to a killer blow to the music stores; the shift to web based sales has largely only served to replace the direct mail sales by formerly sold through record clubs.

“The Internet didn’t kill music stores.”

Much of the remaining analysis captures the importance of what happened over a five-year period from 2002 to 2007. The article cites changes in traditional business models as the main culprit in the demise of the record store. The record is clear: from analysis and anecdotal evidence, record stores had basically one product to sell (music), whereas competitors like Walmart and Target (and to a lesser degree, department stores and Starbucks) were selling music at much lower prices to attract traffic to their stores and weren’t concerned about the profitability of music sales.

The lens through which traditional analysts assessed the demise of the music store during its final days only took into account the most easily recognized scenario – the traditional price competition model. They cited Walmart and its pricing structure as the killer of the stores.

The “Walmartization” of music sales has another effect cited by the authors. Music stores carried not only current hits, but also an extensive back inventory of music much like a catalog store. Walmart and other recent adopters to music sales would rarely carry anything in the music inventory other than the most current music. Walmart has since attempted to resurrect its price-disruptive methodology by trying to sell musical downloads cheaper than iTunes – principally through Microsoft's online technology. To date, it has not been effective.
With sales margins pressured, music stores couldn't afford to retain the ample inventory they had once carried. Someone wanting music from several years back had only two options: iTunes from Apple or online CD purchases (led by Amazon).

The author of the article affirms Apple’s strength in catalog album purchases: “Sales growth in iTunes was actually stronger in catalog and deep catalog albums than in recent releases, underlining that the iTunes Store is picking up the broader, older album sales that dying record stores are leaving behind after being finished off in their attempts to compete in sales of recently released albums against the big box retail stores offering those same albums at cost.”

In 2004-05, CD sales dropped 8%. Album downloads increased nearly 200%.

Walmart and its pricing policy may have started the downward spiral of the music store. They certainly were going to win in the on-site retail store battle. But clearly music did not have to be building-retailed to be sold. Amazon proved that. And Apple got a leg up on everyone.

Even now, in a world of post-real estate music sales, the very concept of “owning” music is being challenged – by the very people procuring the songs. As getting to play the songs you want to hear when you want to hear them is the only true goal, music services like Pandora and Spotify have joined the process, making cloud-based access to music free (or cheap). Access has replaced ownership. For those who grew up in a world where the hi-fi was a piece of furniture, receivers and turntables and tape decks and speakers were a must, and the only place to get music to play on them was at a retail site dedicated to selling vinyl or taped music, the concept that all the music you’ll ever need is a gadget that fits in your hip pocket seems almost other-worldly. Apply that same level of change to almost everything we do, and, again, you’ll get a glimpse of where all of this is going.

c. Higher Education

A confluence of trends has just come together in the economy, an intersection of Great Recession and joblessness, rapidly escalating higher education costs and college education debt. And if things transpire in the fashion and with the timing some are predicting, higher education will go through a bigger transformation than any other sector of the economy.

I initially addressed this issue in an article I wrote for “The Futurist” magazine: “Educating the Future: The End of the Mediocrity” (March/April 2013). The cycle of not meeting workplace qualification demands, colleges bearing blame for the shortcoming, very high cost, and deepening debt still continues – but the game is changing. And technology is the reason.

By now you've surely seen the hyper-inflation related to the costs of a college education – particularly a private one. Perhaps you’ve felt this pain yourself. The increases in price for this kind of education have vastly overshot the paltry growth in the incomes of most American families. To accommodate this part of the American dream for their kids, American families (and to a greater degree the students themselves) have taken on incredible levels of debt to fund the educations. This is happening on so massive a scale that student debt now exceeds all credit card debt in the U.S.

In September 2012, the Pew Research Center released a report on the breadth of student debt that had been undertaken in the U.S. One report stated: “About one out of five (19%) of the nation's households owed student debt in 2010, more than double the share two decades earlier and a significant rise from the 15% that owed such debt in 2007, just prior to the onset of the Great Recession, according to a Pew Research Center analysis of newly available government data.

“The Pew Research analysis also finds that a record 40% of all households headed by someone younger than age 35 owe such debt, by far the highest share among any age group.”

The source of this educational quest for the Holy Grail is the decades-old institutionalized thinking that reinforced the notion that a college degree affords a great future of living "the good life." Potential workers have been told for generations: "You must get a college degree to succeed." And that’s what they’ve done. To compound the frustration and make the college education debt situation even crueler, employers are increasingly saying that many of today's college graduates don't have the knowledge and background that their companies need.

The second trend that is emerging is the proliferation of online college education. Phoenix University and others have taken advantage of the convenience of online learning and, again, the institutionalized thinking that a college degree – any college degree – is the ticket to prosperity.

However, this development has a new component that may threaten the business model of the for-profit online university as well. MIT, Stanford, Harvard, and other highly regarded universities are offering standard courses online for free – but without the course credit. Top-flight U.S. colleges and universities, now numbering over 40, are participating in one of at least thirteen different free (or nearly free) online, unaccredited educational systems: Khan Academy, Udacity, edX, Coursera, and TED ED being among the biggest. They’re collectively known as Massive Open Online Courses (MOOCs). This disruptive technology democratizes knowledge to such an extent that its potential impact can only be compared to the advent of free public education over a century ago.

Further, there is a common refrain among many employers that they are frustrated with the college graduates they hire not having the exact pool of knowledge to contribute immediately. So instead of gauging applicants’ specific knowledge – which is expensive and unreliable – they have done the exact opposite by requiring ever more advanced degrees, thinking that this will cure the problem. Wrong again.

Early adopter employers are looking more closely (and becoming more accepting – especially in social media development) at bringing knowledgeable workers – who are not necessarily credentialed graduates – into their workplaces. They will be perceived to be the Bill Gates, Steve Jobs types – brilliant, driven, non-traditional tech savants. Apple has even allowed application developers as young as thirteen into its prestigious Worldwide Developer Conference. Clearly, a college degree is no longer an absolute necessity to make intellectual contributions to the economy.

The fact that some companies are already migrating toward testing for knowledge – regardless of any claim of educational accomplishment or degree – is a huge development. This is the first signal that it will be knowledge – not necessarily a degree – that successful companies of the future pursue. Of course, the connection between course completion and application to the workplace will go through some growing pains in this process. But this is no worse than the current situation, where companies aren't able to properly assess the abilities of college graduates to contribute. Mozilla Badges and Smarterer are two assessing systems already available, Mozilla being the more standard, and Smarterer the more customized to the company.

Late adopters (government and higher education, in particular) will still insist on academic credentials for their employees. The same is likely to prove true of older mainline, hierarchical companies, and of course businesses located in less connected areas of the US, with slower clocks. This disparity in the rate of adoption will cause major confusion in the education and business marketplaces. Degree or direct knowledge?

The private sector's acceptance migration to online, non-degree education will happen in on an irregular timeline, starting with higher technology, social media, and communication services. It will find some acceptance over the next ten years in manufacturing and sales-dominated organizations, and will end some 10-20 years later with government and education. Of particular interest will be the timing of acceptance of non-degree status among professional organizations that have a large say in professional membership: the ABA and AMA for lawyers and doctors, the NCARB for architecture, the ABET for engineering, the CPA for accountants.

As the knowledge-base concept catches on with employers, and because the debt incurred by students (especially at private colleges) seems ever more insurmountable in a deflating wage market, high school graduates will be adjusting their priorities. Not quite sure about this knowledge versus education thing, young high school graduates will still follow the more traditional path by seeking some sort of degree. (Old habits die hard.) But worried about the potential debt, they will more heavily than ever apply to cheaper, state-supported institutions.

Kiplinger's Personal Finance's 2012 Top 100 "Best Values in Public Colleges" includes schools from over 35 states. Every state represented on that list (and undoubtedly the same holds true for states with colleges outside the Top 100) has at least one public university that admits over 50% of all applicants. That implies that a reasonably good student could qualify for the less expensive in-state tuition at at least one college in his or her home state. As a proud alumnus of the University of North Carolina at Chapel Hill (ranked #1 best value in the U.S.!), I may be blind to some factors that influence the choices of college enrollees who elect to go to private colleges and pay up to four times as much for their educations. I am missing the point of whatever advantage they perceive in smaller schools. But my best assessment is that those decisions moving forward will largely be made in the direction of the prestigious, the well-connected, the unique, and the geographically close – not the mediocre.

With the $30,000-$65,000 total annual cost of college still staring these applicants in the face, even for schools without an outstanding or even a good academic reputation, more and more 18-year-olds will seek the less expensive path and experiment with the benefits of community colleges. These shifts in education trends (toward state-supported universities and community colleges) will have several downstream effects. The first is that state-supported colleges and universities will get many more applicants. At some point, the stress of growth will max out what each campus can take – even the capacities of online and virtual courses may become strained. With a higher number of applicants, public colleges will undoubtedly grow more selective. This will make the schools harder to get into. In addition, some schools, such as N.C. State University, have announced that they are slowing the growth of undergraduate enrollment to focus more on post-graduate offerings. The old C average/800 SAT applicant may not find that any of the less expensive state-supported institutions have room for him any more. And when four-year institutions aren't available, the next best solution is increasingly community college – even for those students who in the past would have readily gone to a four-year state-supported college.

This change is being facilitated by state legislatures that are promoting ease of entry into higher education by allowing credits at community colleges to count towards four-year degrees at state-supported four-year institutions upon transfer. Despite the possibility that such a move may cheapen the value of the degree from a four-year school (which needs to be monitored diligently), the move to starting higher education at the community college level both promises to lower the risk of debt and provides more educational flexibility.

The combination of high private college costs, the debt being undertaken to attend those colleges, the uncertain value of a college degree in the workplace, and a new work paradigm that is beginning to stress knowledge over a degree from any college or university all come together to pressure private colleges in general – and mediocre private colleges first.

We're not talking about elite private schools here: the MITs, Stanfords, Harvards, Vanderbilts, and Davidsons. Nor the schools with unique curricula, geographic identity, those with support from heavy endowments or sustained backing from religious organizations. Better students who want degrees from prestigious universities – public or private – are certainly entitled to pursue them. We’re talking about those private colleges with no discernible academic advantage over public schools – and perhaps little over community colleges – at two to four times the cost (the difference likely being the ultimate debt amount). This confluence of very high cost – funded through debt with uncertain workplace benefits – with a cheaper (though no less uncertain) alternative may have a devastating effect on small, mediocre private colleges. That is the base case for how mediocre private colleges will be tested moving forward.

This will ring the death knell for scores if not hundreds of marginal colleges throughout the U.S. Some will be absorbed into state university systems or community colleges; some will merge with larger, healthier schools. Others still will transition to become part of online universities as a first step toward closing their campuses.

Without passing judgment on the possibility or likelihood of a huge change in education, don't you privately wonder how at least one college you know of (or perhaps several small colleges) stays in existence? Why parents pay $30,000 to $60,000 per year to a school carrying little prestige and even marginal academic standing, and promising only uncertain outcomes? Or taking out student loans of this magnitude with the remotest of odds that the repayment doesn't horribly impact the household's economic future? If any of those questions make sense to you, then you already have a good feel for what might happen.

The bottom line is that higher education will go through a metamorphosis in the next twenty years that leaves the landscape looking much different than it does today. Meeting the needs of the workplace – whether for companies still operating in the jobs paradigm, those providing contract work, or for entrepreneurial efforts – will remain a central issue. But changes in the workplace, where companies no longer really want employees (as evidenced by cuts at many of America's largest companies in the name of "increased profitability") – have been more abrupt than those in the higher education system. The workplace cuts, both those caused by a depressed economy and those undertaken as restructuring initiatives, have come faster than any educational workplace preparation or retraining could ever respond to. And that is a large part of the problem.

Businesses are not getting what they expect; higher education is starting to feel the pinch as it increasingly is blamed and cast as out of touch with the marketplace; and the education consumer is wary of creating huge debt for an education that may not give him much a leg up in the job market. And now another educational paradigm – free, quality online education – has emerged that may better serve the business community and threatens to permanently disrupt the core of the education system as we know it.

No one knows how many jobs among the educated will be lost if my predictions are born out. What is a closed college campus worth? What will become the new maturing period and process for the traditional college cohort of 18-21 year-olds? The generational disconnect over what a college experience represents reveals another level of social disruption. To borrow from an old laundry soap ad: when flummoxed over how to clean her children’s dirty clothes, “What’s a mother to do?”

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Dear @clayrawlings

Amazing piece of work. Long and it takes some time to read, but surely it's worth it. Are you a professional writer?

ps.
I just had a chance to read your memo:

Sorry to be missing in action. I published a book last month on mediation and today I am publishing a book on personal injury. A man can only write so much, right. Hope to be more involved next weekend. Your friend, Clay

Would you mind sharing with me some information about your book? Is it available online? Can I buy .pdf somewhere ? Let's support growth of your business :) Let me be your client :)

Cheers
Piotr

Upvoted and resteemed

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Wow. Beautifully written.

Thanks, man.

I am so loving your philosophy on where we are heading!

Thanks, @straighttalk. I am convinced the doom and gloom people got it wrong. Better days are ahead. The present is the best it has ever been. People who talk about how great it was in the "good old days" have romanticized their memories and that feeling of nostalgia tricks them into thinking the past was better. By every metric you can measure it was not.

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I have full story in word format but though wait for your post and read it through

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