Read the summary below and get the key insights in just 10 minutes!
- How digital technology “vaporizes” businesses and products,
- How to harness the power of “switchboards,” and
- How Google, Amazon, eBay, Craigslist, Uber and Airbnb vaporize existing business models.
“Software-Defined Society”
Architect, author and futurist R. Buckminster Fuller (1895-1983) was fond of saying, “Let’s do more with less.” In 1938, he coined the phrase “ephemeralization” to describe how technology makes more with less material and how physical objects either shrink smaller or disappear altogether. Fuller believed this process fueled productivity. Looking ahead, he found that “three great currents” define the commercial world: unstoppable globalization, “dematerialization into knowledge” and infinite networking.
As businesses go digital, they become either software or software-derived. Amazon, for example, is a software-defined company. These entities are “adaptable,” expansive and multifaceted. As operations gain in information intensity, they shed their physical aspects and become more of a “service.” Uber, for example, has almost no physical assets: It owns no cars, garages or service stations. Yet it rules the market it invented. Amazon built its retail dominance with no stores.
“As goods become information intensive, they begin to lose the characteristics of physical products and take on the properties of a service.”
Physical items contain data, but in the digital future, that information will be unlocked. Consider the once legendary Tower Records store on famous Sunset Boulevard in Los Angeles. After enduring for 36 years, it closed in 2006 because digital music “vaporized” it. The forces that smashed hard-copy music retailing now vaporize every industry on Earth, including yours. The technology – smartphones and wireless broadband – and scale of business vaporization are vast.
“A software-defined society can be open or closed. It can favor mass participation, or it can enable control by an elite.”
The Analogy of Vapor
As you learned in chemistry class, when a liquid or solid becomes vapor, its molecules become unfastened and rapidly and widely disperse. Similarly, information vapor flies through the air to billions of smartphones. And the velocity of that dissemination is continually increasing. The speed of mobile networks increased 1,000 times in 10 years. The initials WWW used to mean the World Wide Web. Now your smartphone brings you “Whatever, Whenever” and “Wherever.”
Data in various forms arrive at your smartphone via specific tools called apps. Each app performs a function. The interface between your phone and your apps gives you ever-greater “curatorial power” over how you get, review and implement information. At the same time, apps lock you into particular vendors, for instance, for shopping or music. They shape your perception of the realm they control. Even when you pay no fees, your apps take value from you in the form of priceless data about you.
“Any part of your business or product that can be replaced by pure digital information almost certainly will be.”
A software-defined society will become what its citizens demand: “open or closed,” fully participatory, or controlled by “an elite.” Its processes can remain opaque or be available for inspection, review, revising and upgrades.
“The process that killed music retailers is now rippling across society like a seismic wave, reshaping one industry after another.”
Digital Networks
In October 1968, two computers communicated over ARPANET [the Advanced Research Projects Agency Network]. Today’s Internet began in 1983 when the Transmission Control Protocol/Internet Protocol (TCP/IP) replaced ARPANET That year, 1.4% of Americans went online. By 1995, 14% of US homes reached the Internet through dial-up modems. By 2013, 74% of American households were online.
In comparison, mobile networks grew by explosive leaps. In 2000, 109 million Americans had mobile phones used mostly for voice calls. By 2010, 300 million Americans – 91% of the population – had mobile phones. As of 2015, 3.4 billion of the 7.3 billion people on Earth owned mobile phones. In 2014, Google said that more than a billion people used Androids and Apple said 800 million used iOS phones. The breadth of smartphone ownership – and the expanse of the remaining potential market – mean that any business that can go digital will.
“Consumers are just finally beginning to understand that we don’t really own our smart devices and IoT (Internet of Things) gadgets.”
“Big data, cloud computing, crowdsourcing, open software and proprietary software platforms” fuel this “seismic shift” to digital commerce. Such “closed ecosystems” built on proprietary software and can link together. These unstoppable disruptions mean that long-held economics ideas about how markets grow and change are out of date. Apple, Google, Amazon, and such assume monopolistic qualities. They invent their markets, control access to them and extract their data.
Buckminster Fuller “saw ephemeralization as the path to ever-increasing living standards for humanity without depleting the planet’s resources.”
“Switchboards”
When telephones first appeared, AT&T, the sole provider, focused on wiring urban centers. In the western US, where vast distances between rural customers made wired service less profitable, consumers started their own networks. Ranchers and farmers wrapped existing barbed wire fences around crude glass insulators and hooked up household phones to create local, shared “party” lines. But problems occurred when people wanted to speak with someone who wasn’t on their line. The solution was an operator sitting at a switchboard. Today, as then, switchboards control communication. Vaporized switchboards have become the nexus of wealth and power.
Vaporized businesses depend on their networks. Digital companies – like Google or Amazon – act as switchboards that connect people to other people and, more significantly, connect sellers and purchasers. Other switchboards include eBay, Craigslist, WhatsApp and YouTube.
“Once a company accepts Apple’s or Google’s operating system, it loses control of the customer experience and tends to become just another generic device maker.”
Airbnb is also a switchboard. It doesn’t sell lodging; it sells information about lodging. Airbnb operates as an exchange center between those needing accommodations and those with rooms to spare. Because it owns not a single hotel room, employs not a single maid and provides no room service, it has minimal money invested in infrastructure and spends nothing on mortgages, upkeep or insurance. Airbnb reaches far more people than any hotel chain, yet its relentless collecting and filtering of customer data means it provides more personalized service than any hotel chain can.
“As ever more industries evolve by replacing physical infrastructure with pure digital information, it’s crucial for every person in the organization to understand the value of data assets owned and managed by the company.”
Switchboards serve as connectors, traffic routers and – if you choose not to go through their services – communication blockers. They also demonstrate the considerable market power of “human laziness.” Habit drives customer retention. You can’t scale up a digital business unless you control its switchboard, but once a switchboard achieves market dominance, it becomes difficult to dislodge. Customers habitually return to services they know.
Switchboards survive on “speed and scale.” Customers want to find what they are looking for quickly. Businesses want revenue to come in as fast as possible. Sellers want to reach the largest possible community of customers. Consumers want a variety of choices. Sellers want to be on a site with the most customers; customers prefer sites with the most products. Hence, Amazon is successful at operating across “geography, language, national borders and currencies.”
“It is possible to build a network without a switchboard, but it is impossible to scale a digital business without one.”
“Customer Licenses”
You don’t truly own any smart product you buy. Lack of ownership is a crucial principle of vaporization. You are only licensing what you have. The day Apple no longer upgrades or supports certain systems, your “ownership” of the related piece of gear becomes worthless. And you can’t do anything about it except upgrade your hardware.
“Once the market leader has been established, it is very hard to displace because it enjoys not only an enormous knowledge advantage but also the benefit of human laziness.”
As customers come to love their Apple or Android in-car entertainment, the leverage that Apple and Google have over automakers will grow. What will automakers do if Apple stops servicing the existing systems already in place? As self-driving and electric cars come to the fore, automobiles will become like smartphones. They will become primarily platforms through which consumers pay for apps. Car sales will be only the first step in app sales and in launching a whole new kind of brand dependency.
“Ecosystem Connections”
Anything that can be connected will be. The market for cars using Apple or Google “entertainment systems” grew at ten times the speed of the general auto market. Projections suggest that of the 92 million cars that will sell in 2020, 75% will offer connectivity. Car manufacturers are in a bind. Do they spend on R&D and production to create their own systems, which will likely not draw consumers? Or do they become dependent partners of Google and Apple?
“The process of vaporizing physical things and replacing them with digital substitutes is the biggest trend affecting manufacturing, distribution, retail and marketing in the 21st century.”
Apple CarPlay is already in 15 manufacturers’ cars and Android Auto is in 20 – General Motors, Audi, Honda and Hyundai among them. Ford and Fiat Chrysler offer both. Car companies strive to keep Apple and Google products separate from their own hardware and software systems.
“Uber is not just a ride-sharing service…It is vaporizing car ownership.”
Many manufacturers license Blackberry’s QNX system, which is compatible with Apple and Google entertainment and runs purely automotive functions efficiently. These automakers are now in a double bind; they depend on Blackberry staying in business and on Apple and Google continuing to support their now-older systems.
The Impact of Uber
Like Airbnb, Uber owns minimal physical assets. With negligible infrastructure costs, Uber connects millions of riders to thousands of people who do possess physical assets: their cars. Uber allows drivers to extract surplus value from that physical asset. Even as it enables car owners to make money, Uber vaporizes private ownership of cars. Every Uber driver takes nine cars off the roads. The 2008 economic crash, the relocation of suburban populations back into cities, the limited amount of parking in those cities and other related factors fuel Uber. Three primary elements of vaporization drive Uber’s success: 1) millions of connected cellphones with apps that provide customer recognition, real-time locations, mapping, and secure digital billing and payment; 2) a growing preference for “access instead of ownership”; and 3) people who need work and can earn money as drivers.
“Sooner or later, the leaders at every company will begin to realize that they face the prospect of vaporization.”
Critics point out that Uber assumes no responsibility for its drivers’ health, safety, expenses or minimal employment. That’s commonly true of similar “on-demand mobile services” (ODMS) or “app-enabled marketplaces” (AEMs).
Such ODMS and AEMs merge three fundamental aspects of vaporization:
- “Mobile” – Smartphones and apps enable drivers’ connection to customers anywhere.
- “Market” – Uber doesn’t retain any drivers on salary. Drivers work the hours and locations they want. They, like their customers, may be anywhere. Uber also offers its customers data about its drivers, something taxi passengers never receive.
- “Services” – Uber transforms the elements of car ownership, bus riding and taxi hailing into a single service – rides on demand.
Vaporizing Monopolies
Uber also vaporizes the taxi medallion monopoly. Every municipality with taxis sells medallions – badges that permit taxis to operate. Thus, taxis have been a monopoly supported by government regulation. Because medallions create “artificial scarcity” and because industry and government combine to limit the supply, medallions were once a fantastic investment. While drivers benefited little from the medallions’ ever-increasing price, taxi companies and those who financed medallion acquisition profited. Consider New York City, with its 175 million taxi fares a year. Only 13,437 medallion cabs served all those riders. That’s roughly 3,500 fewer than the 16,900 medallions that city regulations permit.
Some cities – including Portland, Philadelphia, Chicago, Los Angeles, San Francisco, Orlando, and others – have sued Uber. Taxi drivers in other cities have sued as well. Some states and nations – Thailand and Spain, for example – ban the service outright. These lawsuits demonstrate another quality of the vaporized economy. Vaporized businesses sidestep or ignore the regulations that restrict them. Uber decided to build its revenue in defiance of regulations and sort out the legal issues in court. Uber never could have achieved its staggering growth if it had waited for permission. Vested interests can fight with their antiquated tools, but Uber and other vaporized businesses are already unassailable commercial realities. More will follow.[/text_block]
