As always, many thanks for your thoughtful comments that you left in the earlier parts; we're all reading your comments very carefully.
The Dark Side of Network Technology
The free exchange of information that network technology has brought about has also led to a winner-take-all marketplace where the first business to effectively leverage the cloud by going online and taking advantage of “The Network Effect” ends up dominating each field. This has already created huge, shockingly powerful monopolies that stifle competition and innovation in addition to reduce the number of jobs available in a given field.
In the future, as more businesses become fully networked, it is likely that each major category of business will end up utterly controlled by one monstrously influential global corporation. This in turn will concentrate obscene wealth and political power in the hands of a small, elite group, while leaving huge swaths of humanity unemployed and disenfranchised. Unless...
That’s all it took to block an industry giant from gaining control of the entire Japanese market.
Yahoo had lusted after the Japanese auction market for a long time, while planning its strategy of attack. Despite a great deal of skepticism on whether the Japanese would even be interested in online auctions, Yahoo assigned four of their best people to develop the site. At the same time, the leading force in the online auction industry, eBay, was also plotting its entry into the Japanese market. As the development teams in each company worked at a feverish pace, everybody knew that the first player on the scene would have a distinct advantage.
In September 1999, Yahoo Japan launched its auction site, beating eBay to the market by only five months. This advantage, combined with marketing tactics that skillfully targeted new Japanese users, resulted in Yahoo Japan’s essentially completely shutting eBay out of the Japanese market and laying claim to the tens of millions of dollars in revenue that the market produced each year. When the CEO of Yahoo Japan, Masahiro Inoue, was asked why being first to the market was so critical, he answered, “We knew catching up with a front-runner is hard because, in auctions, more buyers bring more sellers.”
The principal that Mr. Inoue stated above, often referred to as the “first-mover advantage,” is one that applies far beyond the online auction market. Being the first to successfully enter a market has always been important to business. But with the introduction of network technology, the importance of being the “first mover” has been elevated to existential levels for businesses.
This is to a large degree a result of the fact that Mr. Inoue states very clearly: more buyers bring more sellers who, in turn, attract more buyers, creating an upward-accelerating phenomenon that means, within only a few months, competitors to that first-mover platform find it nearly impossible to enter the market or survive. Whether discussing online auctions or any other online business, the principle remains the same.
Network technology amplifies the first-mover advantage through something called “The Network Effect.” I can feel readers’ eyes glossing over as I type this, so let me assure you up front that I’m going to keep this explanation as short and sweet as possible.
The Network Effect (also called the Law of Telecosm) essentially states that as more “nodes” (or users) connect to a network, the value of the network (to its customers, shareholders, and other stakeholders) goes up exponentially as opposed to linearly:
Think of it like this: If, at one point, you owned the only telephone in the world, it would be pretty much useless because there would be nobody else to talk to. But when somebody else gets a telephone, all of a sudden your phone is worth a whole hell of a lot more, because now you have somebody to talk to (other than yourself). As more people and businesses get phones, the value of having a phone goes up, as does the value of the entire telephone network. Eventually, everybody wants and needs a telephone, because there are so many people and businesses to talk to. Like with any type of network, as each new person connects to the network, the value provided by the network goes up exponentially, not linearly.
I’ll give one more quick example, just to make sure you understand. If you already get it (or just plain don’t care), feel free to skip it.
Way back in the days when the operating system field wasn’t completely dominated by the kingdoms of Microsoft and Apple, International Business Machines (IBM) was contending with Microsoft in the personal computer operating system market. Having once been partners on the development of a new operating system called OS/2, the competition between the two companies was particularly fierce. While Microsoft and its operating system, Windows, enjoyed a number of advantages over IBM and OS/2, two key factors led primarily to Microsoft ultimately winning the war:
1.Microsoft got Windows preloaded on many thousands of personal computers. This put Windows at a distinct advantage over IBM’s OS/2, which had to be purchased separately.
2.Because of that, many more software developers began to create programs for Microsoft’s Windows operating system. This meant that users who had Windows gained access to a much greater variety of programs.
If you look at the two factors individually, they each appear important but not necessarily critical. However, if you put them together, you see how powerful a combination they make: Developers wanted their programs to be bought by as many consumers as possible, and since computers were coming preloaded with Windows, it made more sense for developers to design their programs for Windows machines.
And consumers wanted to be able to use as many programs as possible, so it made sense for them to choose Windows because it had more programs built for it.
The operating system with more programs (Windows) attracted more consumers; and the one with more consumers (Windows) attracted more developers and programs.
Fast forward a couple of decades, through many repeats of this cycle, and now almost nobody knows what OS/2 is or was, but nearly everybody who has ever used a computer knows about Microsoft Windows.
Now, let’s move on to why network technology poses such a frightening long-term threat to humanity.
As more and more companies in every imaginable industry hook up to the Internet and their business models continue to take more advantage of network technologies, the Network Effect becomes a bigger factor in their industry.
At first, when a business begins to experience the Network Effect, it sees increased growth in the value it can provide to customers. This draws more and more customers to the business which, of course, increases revenues. As revenues go through the roof and the business is able to control an increasingly larger share of its market, smart investors in the industry start to see the writing on the wall and begin to divest from its competitors, investing exclusively in the inevitable champion of the winner-takes-all game that’s been set in motion. The value of the networked company continues to increase by leaps and bounds, giving it even more resources, which enable it to provide even more value to customers and take over an even greater share of customers, profits, investors, suppliers and other limited industry resources.
As the business that first leverages the Network Effect takes off into the stratosphere, its competitors soon become unable to raise money because nobody wants to buy their stock. Even worse, it gets harder for competitors to acquire new customers because they can’t provide anywhere near the same value that the fully networked business is able to give. The competitors’ stock prices plummet, they are forced to lay off many employees, and, eventually, each competitor goes out of business, turning the most networked company into a monopoly.
Without competitive pressures pushing them to innovate, monopolies stop progressing. Their products and services remain the same for longer and longer periods. To make their shareholders happy, they easily generate higher and higher profits by incrementally increasing the prices of their stale products and services, which they can easily do because customers have nowhere else to go. Slowly but surely, the entire category of business they dominate stagnates.
While consumers often benefit from the incredible value monopolies initially provide, in the end almost everybody suffers from monopolization. Society misses out on all the product selection, quality, and value that would have existed in a more competitive arena.
Even more importantly, the gradual disappearance of competitors and their associated partners, vendors, and supporting ecosystem means fewer people are required to operate the less robust industry.
Going forward, as all companies continue their rush toward adopting network technologies in order to exploit the Network Effect and win their industry’s coveted monopoly position (before their competitors do), one industry category after another will become dominated by Goliath monopolies, creating more unemployment and underemployment (where people are forced to take low-paying jobs they don’t want).
The Scariest Category of All
One specific industry category that’s creating more unemployment and misery is that of the pure web tech giants. They are taking greatest advantage of the Network Effect because they are nothing if not giant networks. These are the web and social media companies that we’re all quite familiar with: Facebook, Twitter, Tumblr, Instagram, and Pinterest, to name just a few. Google falls under that category, too, because its primary business model is simply a network scheme that brings together businesses looking for customers with customers searching for the things those businesses offer.
As these web models first evolved, consumers, in their haste to take advantage of the services these companies offer, basically failed to say, “Hey, wait a minute. Your entire business model depends on the relationships, communications, and/or searching activity of me and others like me… So where’s my share?” The result is what I like to call the Great Disappearing Act—in that, massive amounts of society’s productivity, progress, innovation, and value are being exchanged for something worth much less.
For those of you who like numbers, let’s take a look at what’s been happening in America, as an example:
The United States, as a nation, spends the equivalent of twelve million work years (a work year is 52 forty-hour work weeks per year) on social media annually, the equivalent of over $300 billion dollars at the average U.S. person’s salary level of $24,000.So, Americans are giving up $300 billion dollars’ worth of their time and receiving virtually nothing of monetary value in exchange. Facebook, the social network that receives most of that time, generated $1.83 billion from its U.S. users in the fourth quarter of 2014.[v]That means that, in America alone, each year we’re exchanging the majority of $300 billion worth of our time for about $7 billion in revenues forFacebook—a disappearing act of 97% for society as a whole.
Extractive vs. Inclusive Economics
One of the many geniuses that has advised empowr, M.I.T.’s professor of economics and one of the ten most cited economists in the world, Daron Acemoglu[vi], wrote a bestselling book titled Why Nations Fail, in which he discusses how most countries were originally set up to extract as much money from their economies as possible for the benefit of a few elite people at the top, leading those nations to fail economically. That’s called extractive economics.
On the other hand, the nations that succeed economically are the ones that figure out how to be inclusive, meaning their policies and institutions are organized in a way to ensure that any value taken out of economies, such as taxes, are intelligently put back into the economy in ways that help further grow their economies and help their people improve their lives.
Many nations, such as Argentina, Peru and Mexico, were originally built by settlers who arrived from more developed countries with a goal of extracting as much value as possible from these new lands, and who turned the locals into slaves, using force to extract natural resources and send those resources back to the kingdoms that financed their missions. Those extractive approaches to economics resulted in widespread misery, economic failure, and cultural norms that, in many cases, still continue to this day.
In many ways, this is what is happening on the web today. In other words, Facebook’s $7 billion in annual revenues (generated from its U.S. territory) and associated profits—generated from nearly $300 billions’ worth of American’s time—ends up going to a tiny number of Facebook’s major shareholders and a small number employees (relative to its user base; only 7,200 employees as of early 2015[vii]). This is exactly the definition of extractive economics, and, as those numbers clearly illustrate, it’s having a damaging effect on the economy of the United States as well as every country in which Facebook operates. And it’s something that must change, or the world will end up in a very bad place soon, as we’ll discuss in the next chapter. (Addressing this problem was a primary reason that empowr was created. Details on exactly how empowr will help, in the chapter titled “Strategically Leveraging the Network Effect.”
“Now, hold on,” some of you will say. “Society benefits from the services that Facebook, Google, and other networks offer to their users for free.”
I agree. But I argue that the economic value of the services offered by these companies for free to their users, pales in relative economic value to that which society loses in the process, as measured, for example, by the $300 billion of worker time that disappeared in the marketplace. In addition, there are no taxes collected on free services; therefore, funding for schools, roads, and other government services disappeared along with all that economic value.
Today’s social networks rate very low in Overall Labor Effectiveness (OLE), a key performance indicator that measures the utilization, performance, and quality of any workforce and its impact on productivity.
If the economic model of current social networks worked well from a macroeconomic perspective, each dollar’s worth of worker time consumed by the network would translate into something greater than one dollar in economic output. And, of course, that output could be taxed, bringing back more to society as a whole.
The good news is that capitalism is great at motivating people to figure out what the best uses of scarce resources are. And that’s why it’s only a matter of time until someone presents a better model than Facebook’s, which sets the bar quite low since it takes each dollar’s worth of labor and shrinks it into a mere three pennies.
At empowr, we’ve taken another approach, and that’s to first carefully study history to discover what happened over centuries within countries, which are the original large social networks, of course.
What we learned from our research and then spent the next fifteen years attempting to implement is the idea of offering an inclusive alternative to users. When America declared its independence and later collected taxes from citizens, those revenues belonged to its citizens, not to a small number of kings, lords, and knights (as was the case in Great Britain, for example). In other words, tax revenues were spent to build roads and bridges, educate citizens, and protect them—all things that helped average everyday citizens to increase their economic output. The result of this inclusive approach (as opposed to an extractive approach) was that America’s share of global GDP shot up more than thirty-fold—from a fraction of 1% to nearly 30%—in just over a single century:
Finally, some of you will argue that what people are doing on Facebook should not be viewed as work; rather it’s all just communication—or even entertainment, just like watching TV or listening to the radio.
But is there really any question about whether watching TV for hours each day is good (or ended up being good) for individuals or society as a whole? There’s a very simple but strong correlation that can be drawn between when TV started to take up hours of people’s time each day, and when society started getting dumber, less knowledgeable, and less productive, but let’s not go there right now.
Instead, close your eyes and imagine for a moment that with the help of some new technology, we could turn that very same communication and entertainment into actual economically productive activities—converting each dollar worth of time spent in the platform into something greater than a dollar in economic output—creating opportunity for individuals and progress for society. If that could be accomplished without any loss of communication or entertainment value, would you consider it an important advancement?
Building the world's first inclusive online economy
If corporations can figure out how to be inclusive as opposed to extractive, not only will their customers love them like never before (resulting in more loyal customers who spend more money with them per customer), but they’ll also end up making more profits for their shareholders in the long run—much in the same way that the United States now boasts the largest number of billionaires in the world, and why the U.S. government is the most powerful and wealthiest organization in the world, even though it spends all the tax money it collects on serving its citizens.
Being inclusive as a corporation is much harder than it sounds. First, company shareholders have to be convinced that giving back profits to customers is a sound business decision (for them). empowr decided early on to not bring in investors. Yes, that resulted in varying levels of poverty and misery for about 1,000 employees who (because they believed in empowr’s mission) left high paying jobs to work for little or no pay for some or all of the fifteen years it took to develop the empowr platform. As a result of their sacrifices, empowr is now in the incredibly unique position to adopt an inclusive approach to its economics and distribute its profits to its customers, because it has no Wall Street shareholders or venture capitalists to convince.
Without a doubt, other companies that want to take the same inclusive approach will have a much harder time convincing their stakeholders (shareholders, investors, and board members) to go along. The upshot is that, by being the first to do this, empowr hopes to provide a real live example that other companies can show their investors when they, too, set out to win the argument that inclusive approaches will not only attract more loyal customers and revenues but will ultimately lead to higher profits for shareholders in the long run—in the same way that inclusive countries ultimately created more wealth for everyone involved, including normal citizens AND wealthy stakeholders.
In addition to the hurdles presented by company shareholders, giving back profits to customers requires many new inventions and technologies that can accomplish everything from effectively distributing money to customers, to blocking fraudsters looking to take advantage of those distributions. Luckily, empowr has spent the last fifteen years building virtually all of the required technologies, techniques and know-how, and we intend to give all of these to companies of all types, sizes and industries. We’ll discuss this later in this book.
To be clear, Facebook and Google are hardly alone out there as pure network plays that are effectively killing the economy. Skype (with only 500 employees; 2010) is putting massive phone companies (and their employees) out in the cold, as is Automattic/WordPress (322 employees), WhatsApp (55 employees), Mozilla (1,000 employees), Tumblr (271), Twitter (3900 around the world), Opera Software (1,029), Canonical (500 in 30+ countries), Wikimedia/Wikipedia (250), and Craigslist—which has almost single-handedly put newspapers out of business—has a mere 40-some employees in San Francisco.
In the grand scheme of things, the Internet’s Network Effect is just getting started but is already causing mass unemployment, and that’s on top of unemployment caused by automation coming in to replace workers, such as the ways that software and search engines are replacing travel agents, phone operators, video-rental and record store employees.
Or look at what happened in Detroit, Michigan, where assembly line robots and other forms of automation replaced autoworkers in the car, truck, and automotive parts plants once thriving in the 1950s and ‘60s.
Eric Byrnjolfsson, another well-respected American author and academic from M.I.T., described in his book, Race Against the Machine, an exchange between Ford CEO Henry Ford II and United Automobile Workers president Walter Reuther, as they toured a heavily automated automobile factory.
“Ford jokingly jabs at Reuther: “Walter, how are you going to get these robots to pay UAW dues?” Not missing a beat, Reuther responds: “Henry, how are you going to get them to buy your cars?”
The result of all of this is that society’s jobs (that people actually want) are disappearing en masse on the one hand, while, on the other hand, a huge amount of wealth is moving to the tiny, elite parts of society comprised of either owners or essential and highly skilled employees of category-killing monopolies—leading to mass technological unemployment.
In the coming years, nearly every majoyr industry will become very highly networked and automated
To get an idea of the effect that automation and the Network Effect have already had on your life and on the world, let’s play a little game. Bear with me: I promise I won’t take too long to get to the point.
Think of the last time you bought any type of music. Chances are that many of you either haven’t bought music in a very long time or, if you did, it was purchased or rented through one of the giant online music platforms such as Spotify, Pandora, or iTunes.
Next, try and remember when you last purchased a book and where you purchased it. While there are still plenty of places to purchase books, for the time being, the dominant force in the industry, Amazon, is growing larger and more monopolistic every year.
How about the last time you searched for information? As discussed elsewhere in this book, you probably didn’t grab a dictionary or a sports almanac. You almost certainly didn’t go to your favorite shelf full of encyclopedias or head to your local library. I would bet good money that you probably “Googled” it.
Or think of the last time you watched a movie or a show on anything other than a television. It was likely Netflix, Amazon, or Hulu. You may have even been extra sneaky and watched your movie or show on one of the many illegal sites that new technology has given the ability to broadcast pirated videos across the globe mere hours after they air.
The upshot of all of this is that, in every single scenario above, thousands upon thousands of jobs are being made either obsolete or much less important each year, as technology does more of the work in each industry. With each of the business models above, musicians, writers, website creators, telephone operators, truck drivers, movie creators, and the other everyday people who work in each of those industries receive a smaller share of the profits as time goes by.
As all services eventually become more and more digitized, the owners of the networks (and the servers that run the algorithms) end up with a frightening level of control over their particular industries. And every week, they quietly tweak their algorithms to ensure that, gradually, the vast majority of the revenue their industry produces goes right into their pockets.
We won’t have to wait long to see the next generation of technological unemployment. A report from the University of Oxford recently predicted over a 90% chance that fast food workers will be replaced by machines in relatively short order.Another example is that, thanks in large part to websites like Travelocity, Orbitz, and Expedia, over 38,000 travel agent jobs have disappeared since 2002.
Even soldiers and police officers may someday soon have their jobs taken over by machines.Professionals aren’t safe from being automated into obsolescence or irrelevance, either. Legendary tech venture capitalist Vinod Khosla (someone who was early to understand some of empowr’s promise and goals, as evidenced by his repeated aggressive attempts to buy a piece of empowr) predicts that, in short order, 80% of what doctors currently do will be replaced by robots.
And those are just a few examples. Because of growing technological unemployment and the rapid monopolization of entire industries due to the Network Effect along with deteriorating educational systems and dysfunctional governments, the world is facing some huge challenges and will, undoubtedly, face even bigger challenges in the near future. So, to be perfectly honest, as it stands now, things look pretty grim.
Even “grim” might be a bit too sugar-coated, so I’ll just call it like I see it, instead.