The Collapse of Complex Business Models

http://www.shirky.com/weblog/2010/04/the-collapse-of-complex-business-models/

by nathanperetic • 16 years ago

278 64 16 years ago

jerf4• 16 years ago

In passing, it contains a great description of why "creative destruction" is not merely an interesting sidebar to our economy, but a critical element to our continued success. Which is more disruptive, "creative destruction" or "societal collapse"?

Efforts to politically block creative destruction out of economy should be fought as if it were the matter of life or death that it is.

kiba2• 16 years ago

People often confuse creative destruction with societal collapse.

anamax• 16 years ago

> People often confuse creative destruction with societal collapse.

If you're in the buggy whip biz when it fails, its destruction is a form of societal collapse.

Remember - a recession is when your neighbor loses his job. A depression is when you lose your job.

People fight to keep their "phony, baloney jobs" because said jobs are their jobs - the phony, baloney is external to them.

plesn• 16 years ago

IMHO, if there is a safety net allowing failures (condition to creation/experiments), I call it creative destruction. Otherwise, it's a question of threshold: will the system collapse or not.

Edit: of course, those are not totally orthogonal notions, and those can be quite interleaved at different levels. (e.g. a company collapses, but it's employees aren't supposed to be left dying under a bridge and can integrate/create another one)

jerf4• 16 years ago

I'm not sure what you're getting at exactly, but I would suggest that such people need to brush up on their definitions. Creative destruction is when an obsolete industry or practice is allowed to fail. Some people lose jobs, and find other ones later. It hurts.

Societal collapse is when we all starve to death because we are all critically dependent on modern industrial agriculture. It kills.

There's a difference. Preventing creative destruction is choosing to avoid pain now with death not-too-far-from-now. I am not being metaphorical. The article cites examples where just that happened; all those collapses were accompanied by carrying-capacity reductions, which is a rather dry technical way of saying "lots of people died".

A society full of people who don't get this distinction is a rather scary prospect, but alas, more people now than ever before get this and it's still probably nowhere near enough.

(Questions about whether our society is facing just such an inflection point right now left as an exercise for the reader, as well as what "pain-avoidance" measures are currently floating around that might qualify.)

joe_the_user2• 16 years ago

In the book Fat And Mean, (http://www.amazon.com/FAT-MEAN-Corporate-Managerial-Downsizi...) David Gordon essentially argues that corporate downsizing often involves survival of the most bureaucratically adept rather than the most productive. Overtime, more complexity and less productivity result.

You could apply this reasoning in the rest of the article also...

hga• 16 years ago

When a company is downsized to 0 employees it doesn't matter who were the most "bureaucratically adept" and were the last to turn out the lights.

It's "creative destruction", not "creative downsizing".

jerf4• 16 years ago

There's a danger of letting the perfect becoming the enemy of the good when you start to analyze capitalism. There's a lot of "Capitalism has a problem -> Capitalism isn't perfect -> In theory, social structure X doesn't have that problem -> Social structure X is better!" that goes on, but there's two obvious problems with that: Theorizing about most commonly debated social structures is mostly unnecessary now as somebody has tried it and odds are pretty decent social structure X does in fact have that problem in practice, and of course you can't slam the question of which system is better down to just one attribute.

I bring this all up to make the specific point that while it is absolutely true that a bureaucratically adept person can game the system in a capitalistic society/company, I don't know of a single alternative social structure where a bureaucratically adept person has less power. Excepting maybe anarchism (not advocating, just pointing it out). Bureaucratic-adeptness is rewarded roughly in proportion to the centralization of authority. Most people's solution to the problem seems to involve more centralized authority, which seems actively inimical to solving this problem.

joelhaus• 16 years ago

Creative destruction is the theory of evolution applied to economics.

It will always be in the interest of some to hinder the pace of change; however inevitable it may be. Side note: Who Moved My Cheese? is a great parable on dealing with change and I recommend it often.

kiba2• 16 years ago

The government is like a train going full speed to their doom as chaos is introduced into their system. When they die, they often explode spectacularly, like a violent revolution in China.

sp332• 16 years ago

If the USA didn't have a functioning democracy at the time of the industrial revolution, there would have been a Marxist uprising here as well.

ThomPete• 16 years ago

In some ways that seems to be what Clayton Christensen talk about in his "Innovators Dilemma" although he speaks of products development.

This is in many ways what the "good enough" paradigm is all about.

pquerna• 16 years ago

really good insight into the media industry, I've worked more on the inside of it under IAC, and I totally see this expectation that people will pay these media mogels for content -- I also worked at Joost, on the relative outside, trying to provide media in new ways, and the inability for the current generation of content owners to adapt is still staggering.

Even look at the recent moves of content owners and Hulu, trying to add pay-per-view charges, instead of being advertising supported. They have made a 'good' platform for viewing the content, even owned by one of the old players, NBC, but they are still looking to force the choice upon the consumer, rather than adapting their cost structures.

Perceval2• 16 years ago

Mancur Olson made a similar point in his 1984 book The Rise and Decline of Nations. His argument is that as time goes on, special interests and entrenched bureaucracies take what was a simpler system and load it up with exceptions and complexity. The more complex they become, the less capable of collective action they become, leading to overall paralysis.

This is an extension of his argument from his Nobel Prize–winning 1971 book The Logic of Collective Action.

easp• 16 years ago

Thanks for the reference. I've long wondered if a societies collapse could be precipitated by an excessively complex system of legislation.

michael_nielsen2• 16 years ago

Olson didn't win the Nobel Prize. You're thinking of Elinor Ostrom's book "Governing the Commons", which extended Olson's work considerably, and which led to Ostrom's prize.

Thanks for the tip on Olson's 1984 book, which I'd never heard of. Curiously enough, while reading Shirky's article, my mind kept turning to Olson and Ostrom, and their work on collective action.

Perceval2• 16 years ago

Right you are. I've read both, and knew that Ostrom got hers recently, but thought that Olson had received one as well. Oh well, still a tremendously influential book.

wdewind• 16 years ago

thanks, just ordered Rise and Decline of Nations...

josh33• 16 years ago

It seems like these collapses are not caused by bureaucracy. Rather, they are caused by an inability of large companies and complex systems to focus on value creation for the market/group/people/person they are serving. People pay for things that add value to their lives if they can't do it themselves for free. These large corporations seem to focus too heavily on improving the bottom line, which is another way of saying "raise revenues above expenses, or cut expenses below revenues". Both of these are by products of real value creation, and should not be the focus, but the realized result of a focus on serving the target.

Daniel_Newby3• 16 years ago

Pournelle's Iron Law of Bureaucracy: the people who work for the bureaucracy will always gain control of the people who work for the organization's goals.

steveplace• 16 years ago

I think Olson's full text is here: http://bit.ly/btbF1l

helwr• 16 years ago

this is most visible in 20th century architecture, think of gradual elimination of everything external, ornamental, unnecessarily complex in order to scale.

A long way to simplicity: from Gothic cathedrals to Woolworth building to WTC

Splines• 16 years ago

Is it happening in the computing devices world as well? Is the move to the iPhone/iPad a shift to simplicity?

It's interesting to note that your architectural example and Apple's devices are similar - the iPhone, to outward appearances, is quite simple to use. The innards however, are probably just as complex as any other modern operating system.

Periodic• 16 years ago

The interface and outward appearance is simple, but the internals most certainly are not. There are still hundreds of components from dozens of manufacturers combined to make a physical product. In the case of the iPhone there's one of the largest mobile operating systems on there.

Computer chips are getting more and more complex as well, now with more levels of caching and inter-core communication.

I think we have a long way to go before we get simpler computers, but that does cause us to wonder if we will get to the point that they are just too complex.

jimbokun3• 16 years ago

There may be a better case for simplicity on the server side. Sun made their original fortune from selling ever bigger and more complex machines, until people figured out they could get equivalent or better results with multiple cheap Linux boxes.

rayval• 16 years ago

Yes very good point.

Simplicity on consumption (user) side can require massive scale complexity on the production side.

iPhone is grandma-level simplicity to use, but hard to replicate by competitors (despite massive investment by Nokia, Microsoft, RIM, etc, they have not been able to replicate the iPhone user experience, an experience which goes beyond the device to the ecosystem of AppStore, iTunes, etc)

Another example is Google search, which from the user perspective is one simple text-entry box plus one graphic and 12 words of text on the page. But on the other end of the wire is a server farm of a million machines and rocket-science algorithms, software infrastructure and operational processes.

moultano• 16 years ago

This is one of the few blogs which I always feel smarter for having read.

donaldc• 16 years ago

From the article: Against that background, though, they were worried about a much more practical matter: When, they asked, would online video generate enough money to cover their current costs? ("They" are the network broadcasters.)

Sounds from the article like the correct answer is "never", or at least "not until after your organization is dead", though the author didn't come right out and say it.

rbanffy2• 16 years ago

The question then is not whether to run to the mountains, but when to run to the mountains.

ekanes• 16 years ago

If you're interested in this, you should check out The Innovator's Dilemma by Clayton Christensen. He walks you through how large companies (most of his examples are from the hard drive industry) are often structurally incapable of embracing the revolutionary change which will inevitably overtake them.

http://www.amazon.com/Innovators-Dilemma-Revolutionary-Busin... (not an affiliate link)

gamble• 16 years ago

Seconded. The Innovator's Dilemma is a classic, and remarkably free of the usual business press BS.

It's particularly interesting today, as we're waiting to see who will survive the transition to SSD. Five years ago, who would have thought Intel would be king of the hill?

jimbokun3• 16 years ago

They must have read that book.

Daniel_Newby3• 16 years ago

If you count embedded SSD, Apple and Samsung share the throne.

kevinp2• 16 years ago

"Charlie Bit My Finger" is a specious example. It's a 56s clip like one you'd see on America's Funniest Home Videos, a program filled with viewer-submitted content and a counterargument to "By Moms, For Moms." Two questions raised here: How does "Charlie" stack up against American Idol, Dancing With The Stars, and the Superbowl in terms of total viewer-hours? More important, how many of us are willing to sit through 1.5h movies with "Charlie" production values?

krig2• 16 years ago

I'm not going to claim that you've missed the point since I can't speak neither for the article or for you, but my take on his argument and example was different.

It's not that Charlie is just straight off replacing Dancing with the Stars. No one is saying that people will spend the same amount of time they do watching TV now watching crappy youtube clips. It's that maybe, there just isn't a market for the kind of entertainment Dancing with the Stars represents - it's just becoming too expensive. I'm not sure that's true, but I do think the market for traditional TV/entertainment in general is shrinking. That, I think, is the core argument: That maybe, there is no way to answer the question "so, how do we continue making this much money?" without letting people down. Perhaps there is no way for these big organisations to make all their money doing what they do. Perhaps people like the guy who posted "Charlie bit my finger" will find some way of monetizing that, in small scales. Perhaps not.

The thing that people don't like to hear is that things change. So maybe the days of entertainment are over, maybe no one can work in show business, maybe copying that floppy really killed the radio star - yes, maybe. That's what progress does - new opportunities grow from the corpses of old businesses.

jimbokun3• 16 years ago

Maybe, perhaps, possibly, or maybe, perhaps, possibly not. Without data, it's all just speculation.

"It's that maybe, there just isn't a market for the kind of entertainment Dancing with the Stars represents."

The irony there is that Dancing with the Stars represents an extremely successful attempt on the part of television networks to cut costs and increase profits. "Reality TV" costs far less to produce than dramas or sit-coms with real actors and directors, but remain perplexingly successful at attracting viewers and profits.

What I find more interesting is the remaining opportunities for dis-intermediation. I went back and forth between the TV and the computer for the NCAA basketball tournament games. The online version allowed you to pick any game at any time, including previous games. Why should watching an NCAA basketball game take me to the channel of the local CBS affiliate on my cable system, instead of ncaa.com? Why are there bidding wars to carry the Superbowl, instead of the Superbowl being broadcast at nfl.com and the NFL taking all the revenue for themselves?

I'm curious if there are still any reasons for networks to intermediate between content producers and consumers, or if it is just an anachronism we have not yet moved past.

kevinp2• 16 years ago

Shirky wrote, "Expensive bits of video made in complex ways now compete [emphasis mine] with cheap bits made in simple ways. 'Charlie Bit My Finger' was made by amateurs, in one take, with a lousy camera." That's akin to writing in the early 2000s that since movie and TV products like "Blair Witch," "Survivor," and other reality TV programs became so popular, it meant that the public was losing its appetite for video of high production values, and that this was likely to become a permanent trend.

The talk in Edinburgh last year mentioned at the top of Shirky's piece was to UK TV executives. Here's a Reuter's headline about it: "TV executives meet in Edinburgh as ad drought continues." Here's a bit of an article from the Guardian published 2 days ago:

"Analysts double the forecast for television market in 2010

A report says that bullish spending by advertisers has led to the revised predictions for 2010

Bullish spending from TV advertisers has led analysts to more than double the forecast for year-on-year growth in the UK market, with ITV set for a boost of up to 30% in the second quarter."

JCThoughtscream• 16 years ago

Current business models reach their complexity specifically because of the technologies and social pressures they've evolved into - it may be that the only way to adapt to new technological paradigms is to start completely over.

A critical rupture from the status quo seems necessary. Right now, what we're doing is trying to attach a rocket engine to a canvas-and-balsa biplane when we really should be designing around the engine instead. And the design for that only superficially resembles the Kitty Hawk glider.

MikeTaylor• 16 years ago

See also: The Collapse of Complex Computer Programs, at http://reprog.wordpress.com/2010/04/01/the-collapse-of-compl...

mojuba• 16 years ago

Nice post, Mike.

The software complexity realm is a bit more enduring compared to other industries. Complexity here survives better and lasts longer probably because the demand for software in general is so huge that even the ugliest dinosaur can live a long and happy life: think Microsoft, Oracle - still the richest companies despite overwhelming complexity of their software and the process itself. The death of Netscape, I think, can possibly be explained by the incredibly poor quality on top of complexity. (Which is a hint as to when to expect the death of Microsoft and Oracle.)

ippisl2• 16 years ago

I think it's more enduring because complexity is recognised as the core problem of software development , and a lot of smart people work on this problem.

Also it's much easier to change a complex piece of software than a complex organization.

thaumaturgy2• 16 years ago

I think Avatar, and other popular films like it, make the best counterpoint to this article.

It seems obvious to me that as more and more users find more content online, there will be a "thinning of the herd". Some shows and networks will simply fail to find a way to adapt to the new market; others will survive, or even thrive. It's not really happening yet because traditional television viewership still eclipses its online counterparts, but it's coming.

Anybody could have downloaded and watched Avatar while it was still in theaters; yet, people paid to see it because it offered a unique in-theater experience. Other movies get expensively produced only to get meager box office results. They don't offer a modern theater experience, and customers aren't motivated to do anything other than download it or wait for the DVD. There must be at least a few entertainment executives that realize this, and it's likely to affect what they're willing to produce.

barrkel• 16 years ago

I don't think it's a counterpoint. Avatar relies on a whole infrastructure to amortize its costs, specialisms that make it feasible to create. But that infrastructure wasn't built to make Avatar. It gets by on regular fare - and the profitability of that regular fare is fading.

thaumaturgy2• 16 years ago

Well, much of what made Avatar special was actually built just to make Avatar; that's what Cameron does. But I get your point.

It's complicated, though, because while the budgets for movies continues to climb, the individual production costs continues to go down. Businesses like Industrial Light & Magic keep building blockbuster special-effects laden movies, and the techniques that they use to accomplish that become a less expensive foundation for future projects.

So, so far, I don't see that the profitability there is fading. Pixar is certainly doing fine, and I suspect that Cameron can pretty much work on whatever he wants after this.

And, as the technology continues to progress, the need for other aspects of costly production will go down: movies will require less actor time, fewer cuts, fewer sets, less props, fewer models...

dmoney2• 16 years ago

If a society has a complexity threshold, why is ours so much higher than, say, the Romans'? Perhaps scientific and technological development keep pushing the threshold higher, or mitigate the effects of smaller collapses.

Or maybe societies just collapse with some set probability, and we've been lucky so far.

chipsy2• 16 years ago

Technology is definitely a factor in allowing more complexity.

We didn't have the idea of "total war" until the 1850s and the Crimean War - nations in prior eras didn't have the resources to conscript the bulk of their fighting-able population, equip them, transport them, supply them, and command them. Industrialization allowed for en-mass conscription, the railroad made transportation and supply chains efficient, and the telegraph and refined clockwork made it possible to run a war on an intricate schedule.

Today our big change is in information technology, allowing the government to enact more powerful policies with less overhead. If we can do this right, we'll enjoy both the smallest and most efficient governments in history.

smallblacksun• 16 years ago

Has any government ever gotten smaller without a revolution/foreign takeover? Honest question.

jackfoxy• 16 years ago

I think the author gets a little carried away with his thesis in blaming the fall of the Roman empire on complexity.

netcan2• 16 years ago

This is very true for public companies.

If the correct solution (say, maximum profits over the next 100 years) for newscorp is to become 1/3 its current size, it probably can't do this. As a public company it would probably collapse completely instead. The best it can do is keep taking chances on growth even if they are less rational then alternatives.

resdirector• 16 years ago

To anyone who found the themes here interesting, I'd recommend Brave New World by Aldous Huxley.

The Collapse of Complex Business Models

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