Creative Destruction

I’m reading The Master Switch by Tim Wu, which was recommended to me by Jerry Neumann (side note: Jerry recently produced an awesomely useful VC bot which tracks announced investments as they show up on vc sites).  If you’re interested in the technology industry, you should definitely read it.   It addresses some interesting themes that are essentially timeless:

Theme 1: Information Industry Power Tends to Centralize

In The Master Switch, Wu reviews the 20th century and effectively makes the case that every American information industry started out free and open, but eventually became restricted, with power centralizing around a monopoly or cartel.  This theme rings out as alarming while today’s debate over net neutrality plays out.  Right now we’re seeing a narrowing of the competitive field for data providers (AT&T / T-Mobile merger) while all of our data is simultaneously moving to the cloud, becoming more dependent on the network.  From here, it looks like the Internet may be heading down a similar path as its predecessors; time will tell.

Theme 2: Innovation Causes Creative Destruction 

A related, slightly less ominous theme that the book touches on is the concept of creative destruction.  Economist Joseph Schumpter gave us the modern definition of the term, which refers to the idea that, when  businesses reach a steady state of maturity and future growth is unlikely,  entrepreneurship often unleashes an innovation that destroys the old industry and restarts the growth process. This process can be painful in the short-term for an economy, but is widely considered to be long-term beneficial.

Creative destruction occurs in all business sectors and industries, but at a high frequency in the technology business.   Typically, an innovation on an existing technology is adopted by an early set of enthusiasts, then it hits the mainstream when its value becomes proven, replacing the previous generation technology in the process.  For a leader to survive a changing of the tides, it often must release a new product that cannibalizes its current cash cow.  Because leaders are usually focused on short-term earnings to keep the equity markets happy, they rarely make the change in time.  We recently witnessed this with RIMM, but (to Wu’s point) this has been happening since Western Union refused to see the telephone as a viable threat to its telegraph business in the early 1900′s.

Aside from the tech industry,  innovation is the eventual cause of creative destruction in most large, slow growth industries.  As Chris Dixon has observed,  the Internet has been the agent of disruption in a many industries and will likely disrupt many, many more in the coming years.  Music was the first to go, but now news, politics, commerce, advertising, marketing, film & television, human resource management, operations and finance have all been disrupted by Internet-based innovations.  Predicting which industries are next, and how creative destruction will manifest is where the biggest opportunities exist.

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I work in a Seed Stage private equity fund, K2 Media Labs, focused on businesses in digital media, mobile and gaming.

Posted in Business, Economics, Media & Technology
5 comments on “Creative Destruction
  1. [...] willingness to commit to the change and adapt to the new marketplace. I discussed this in an earlier post about creative destruction, but I think it take real leadership on the part of Reed Hastings to avoid killing the new business [...]

  2. Paka says:

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  3. Hleok says:

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    • Miho says:

      I loved the suggestion of wine or bread. I alaerdy practice the other restaurant rules, but I have one other suggestion. Restaurant dinners are nearly always large enough for at least 2 meals. I will often ask for a take-home box WITH my meal and put at least half of my meal in the box BEFORE I eat. This works on the road, too, if you have a cooler and hotel room with a microwave.

  4. Alright alright alright that’s exactly what I needed!

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