The State of Technology at the End of 2016

This is the third year I have written an article summarizing the state of technology. In 2014 I described the three historical epochs of consumer technology — the PC, the browser, and mobile — and the outline of the fourth, which I suggested was messaging; in 2015 I refined the fourth to be Facebook specifically (it is clearly WeChat in China) and wondered if Slack could form a similar foundation for the enterprise.

Each of these epochs laid the ground work for what followed: PCs were where browsers ran, and browsers enabled the build-out of cloud services that made mobile so compelling. Then, the omnipresence of mobile devices created the conditions for social media, specifically Facebook, to dominate a staggering amount of attention. What, then, has Facebook wrought?

Well, Donald Trump, for one.

From Startup to Establishment

For most of its existence Silicon Valley has been synonymous with startups; even during the rise of the PC it was Redmond-based Microsoft that became the establishment. The scrappy underdogs were clustered alongside the San Francisco Bay, and disruption was their mantra. And disrupt they have: while the IT era was about making existing companies more efficient, the Internet era has shaken the very foundations on which those companies rest. The media is the starkest example: Google and Facebook didn’t create better newspapers, but rather reduced newspapers — and all other forms of media — to just another piece of content no better or worse than cat GIFs or baby pictures jostling for attention in their carefully manicured gardens.

The pervasiveness of those gardens — not just Facebook and Google, but Apple and Amazon as well, and Microsoft at work — can at times seem overwhelming; these companies are anything but scrappy startups, and their relative market caps — five of the top eight (and the top five at the end of last quarter) — confirm that Silicon Valley is very much the establishment. That establishment, though, is of a far different nature than what came before.

Facebook, the Media, and Trump

The dispute about Facebook and fake news is the most obvious example: while previous claims of bias were about sins of commission — editors and journalists fitting the news to their preconceived notions — Facebook and Google both are being accused of a sin of omission: not actively removing purposeful mistruths from their platform. Critics contend that Facebook in particular bears some responsibility for recent election results, that absent “fake news” Donald Trump would not be the president-elect.

In fact, Facebook is responsible for Trump’s election, but not because of fake news, at least not directly. Rather, as I explained in the spring, the devolution of traditional media driven by Facebook’s commodification of content was not an isolated event: the power of America’s political parties stemmed directly from the fact that media (and its paid advertising model) was the gatekeeper of information. From that piece:

[Facebook has created] a curious dynamic in politics in particular: there is no one dominant force when it comes to the dispersal of political information, and that includes the parties described in the previous section. Remember, in a Facebook world, information suppliers are modularized and commoditized as most people get their news from their feed. This has two implications:

  • All news sources are competing on an equal footing; those controlled or bought by a party are not inherently privileged
  • The likelihood any particular message will “break out” is based not on who is propagating said message but on how many users are receptive to hearing it. The power has shifted from the supply side to the demand side

Screen Shot 2016-03-03 at 12.35.04 AM

This is a big problem for the parties as described in The Party Decides. Remember, in Noel and company’s description party actors care more about their policy preferences than they do voter preferences, but in an aggregated world it is voters aka users who decide which issues get traction and which don’t. And, by extension, the most successful politicians in an aggregated world are not those who serve the party but rather those who tell voters what they most want to hear.

Telling users what they want to hear is, of course, the real reason fake news gains traction: Facebook has monetized confirmation bias with its singular focus on engagement, and while I count that as a lesser evil than active political censorship, the broader point is that everyone and everyone — mainstream media, Macedonian teens, even political parties — are competing on a playing field where by default no one has a louder megaphone than anyone else.

The Rise of E-Commerce

This leveling of the playing field is not limited to media; I wrote this summer about the rise of Dollar Shave Club which leveraged YouTube, social media marketing, and e-commerce to challenge P&G’s Gillette in the market for U.S. razors. It didn’t matter that P&G had the money to build brand affinity with endless advertising and the leverage with retailers to ensure that Gillette dominated shelf space: virality is free, targeted advertising excels at niches, and when it comes to e-commerce, shelf space is effectively infinite.

Amazon is seeking to do the same thing for all physical goods, and the potential effects are massive. Just consider Amazon Prime’s two headline features — free shipping and Prime Video — and then consider three of the primary industries in the consumer economy: consumer packaged goods companies leverage their size to secure shelf space in big box retailers; both are reached by people driving their cars. These three industries are the largest TV advertisers, and Prime is taking aim at all three: Prime Video and its competitors are increasingly dominating non-live television viewing, and there are no commercials, while Amazon Prime obviates the need to visit retailers, and its infinite shelf space means niche products are much more viable.

This transformation echoes the impact of Facebook on the media: a dramatic leveling of the playing field. The advantages of scale that guaranteed success in the post-war era just don’t matter very much when advertising is cheap, shelf space is infinite, and shipping is free. And, just as Facebook’s breakdown of the media broke down the political parties, Amazon’s break-down of physical retail will have its own knock-on effects: carrying household supplies is a major reason to own a car, for example, which means Amazon is a laying the foundation for a service like Uber to shift from being a car supplement to a full-on substitute.1

New Opportunities

There is a certain symmetry to Dollar Shave Club and Donald Trump: both began by targeting niches and leveraging social media, but more importantly, the companies and institutions most invested in stopping them found themselves powerless to do so because their point of leverage had been circumvented by the Internet. That certainly ought to strike fear into the heart of any executive or politician whose institution is predicated on the old world order, but it is also an unprecedented opportunity to build something new.

To that end the most exciting companies in technology are those enabling just that: new companies for a new world without gatekeepers. Companies like Square, making it easy to accept payments offline, and Stripe doing the same online; both are expanding into adjacent services that make it easier to get a business off the ground. It has been encouraging to see Zenefits get its act together: the HR company and its competitors make it far easier and cheaper to grow a new business. And today’s giants play a role as well: AWS has made it dramatically cheaper to start any sort of company with an Internet component, and Amazon.com’s marketplace model means small companies can leverage the billions of dollars the company has invested in fulfillment — or they can go to Etsy, holding off the giants, with a share price that is up 50% on the year. Facebook has a role to play as well: a Facebook page is much easier for a small business to set up and is much more discoverable than a web page, and its advertising products are approachable and measurable in a way that even newspaper ads never were.

Who is Being Disrupted?

One of the ironies of The Innovator’s Dilemma being Silicon Valley’s favorite business book is that Clayton Christensen was writing for a completely different audience than your stereotypical techie. With his theory of disruption Christensen offered a compelling explanation for how it was big company managers, equipped with the best education and aided by the best consultants armed with the latest in best practices, fell prey again and again to upstart competitors with seemingly inferior products; technologists took it as a manual.

What remains so compelling about Christensen’s work is not its analysis of disk drives or steel mills but rather the focus on incentives, and how managers failed precisely because they did what they were supposed to do: meet the needs of their best customers in a way that ensured the viability and continued growth of their business — at least in the short term. The problem came when new technologies that were inferior for current customers’ needs made it possible to serve completely new customers at lower prices; rational managers at incumbent companies dismissed those technologies, allowing new entrants to serve those markets, but given that inferior technologies improve far more quickly than user needs grow, those new entrants eventually threaten incumbents with cheaper technology that is just as good, if not better.

The risk for the technology industry is that we are now the incumbents: we have a stake in keeping things exactly as they are, and we build products for ourselves — we’re our own best customers. That, though, cedes the future to the powerless — those with nothing to lose under the current system will by sheer necessity build the new.

That is why we need more companies like those above, ones that work for everyone, enabling the application of human creativity and ingenuity to the creation of a new world order. I know at this moment in history that seems optimistic, but the truth is that a new world order is inevitable; the question now is who will shape it.

  1. This is already reality in major Chinese cities []