Disruption or: Steel Mills, Disk Drives, and Hackathons
Novelty is the stock-in-trade of the annual Disrupt conference operated by TechCrunch, the must-attend show for demonstrating competence in new media business practice.1 TechCrunch’s Disrupt conference moves from city to city like a band on tour. Typically, a Disrupt event includes keynotes, panels, and a hackathon. Addresses and panels are fairly routine stuff. Delivering a keynote at a major business conference is a sign that you have made it, that you are a successful businessperson, even if your firm never turns a profit. A hackathon is something different, common in the world of tech startups but unknown in other industries or professions.
For the uninitiated, a hackathon is typically an 18- to 24-hour work session where a new piece of software is written or an extension for an existing platform is developed.2 These new pieces of software are then judged and given awards. Unfortunately, most of the software produced at these events is relatively similar, with young engineers focusing on chasing established trends.3 Social media is a copy-cat field, especially in the area of app development. This is not a problem with the engineers but with the diffusion of innovation as organized by entrenched actors—hackathons serve goals other than the creation of entirely original ideas. Repertoire Shakespeare can prove an actor; repertoire app can prove a coder.
As a form of labor organization the hackathon is something of a sacrifice—aspiring young engineers join together to create something of potentially great value with little expectation of return. In one sense it speaks to the wealth of the Silicon Valley culture: it is so rich with data and code that vast efforts can be allowed to lay fallow. If rapid work sessions could reliably create scalable, durable code, there would be no reason for anyone to be employed in the industry in the first place. Unlike a barn raising, where the assembled building is possessed by someone in the community, the product of the hackathon is typically owned by a corporate partner. Participation is in essence a tryout for a major player. Song Zheng describes this in a guide to what a hackathon should be where “‘How do you make money?’ should never be asked of a hackathon project. The goal of a successful ‘hack’ is to be mentally stimulating for developers, not profitable.”4 Achievement motivation is useful for both decreasing payrolls and increasing participation. A gold star and a certificate can save thousands in pay. Intrinsic motivation provides a good cover for an intense job interview.
A few major features of Facebook (newsfeed) were created through institutional hackathons.5 Several dozen hackathons in the exception proves the rule that most projects at hackathons are for practice only. Now mature, Facebook emphasizes stability and smooth product development over rapid, chaotic change. Even if the products are often short dated, the labor of the workers is quite real. Hackathons are a powerful instance for capital formation—new objects for investment created through the call to hack. Capital in the sense of this book could also include the affective dimension of styling the business. Or, in the case of Facebook, to create a reoccurring carnival that suspends normal working processes to strengthen the organization.6 Rather than being revolutionary, events of a hackathon are conservative in as much as they strengthen existing allocation of power within the industry.7
What the hackathon represents is not the emergence of an anarchic startup culture or the autotelic creation of applications, but the interface between existing formations of capital and the organization of space. Investors with existing APIs set the terms for collaboration. In very literal terms, they buy pizza and T-shirts. The hackers provide the engineering labor. Judging practices are carefully considered and exist only within the distribution of the sensible—a really revolutionary code might not even be recognizable as something interesting.8 There is no mysterious tacit knowledge to be rationalized, but an overt call by established firms to organize and utilize a well of attention and labor.9
There are only so many things that systems are either designed to do or can do. Changes in the underlying configuration of coding languages and equipment would be revolutionary, but are really quite rare. The microcomputer revolution was truly transformative as it replaced the underlying organization of entire domains of life such as file cabinets, pencils, and correcting tape. It is unlikely that new social network technologies will have any of the impact of the replacement of the typewriter, and that anything that changes the experience of living will be built in a night.
This chapter turns from the idea of securitizing a particular issue of capital stock toward the ways in which the story of a social network firm engages the broader real economy. The companies building new technology at hackathons are not typically social networks in and of themselves, but firms attempting to add social network like technologies to other domains of commerce. Adding this social network layer allows firms to become disruptive—to replace incumbent players by offering replacement products with some social sweetener. Social networks are not simply selling the idea of advertising on the network, but the network itself. Instead of selling advertisements for a local restaurant, Facebook’s final plan likely involves transaction processing; Google could become a hedged fund. In a world with excess capital, social network firms may even have the ability to enter into entirely new markets if only for the fact that they might generate their own sales leads internally. Entering new markets testifies to novelty. Philip Rosen frames the relationship between the romantic individual and novelty excellently: “The digital utopia seems inexorably to push toward a closed circuit of individual subjectivity and image, the conceptuality of one defining the novelty of the other.”10 Understanding the evolution of a term such as “disruption” calls for an approach documenting what a term has meant, what it is its meaning, and what it will mean.11
This chapter is shorter, covering the idea of disruption:
• Three formulations of the history of disruption are considered, with a special emphasis on the work of Clay Christensen. Although Christensen’s formulation of disruption is often taken as authoritative, it is important to keep the other major ideas of disruption from that time period in mind as they inform much of what the term has come to mean.
• Disruption is considered as an argument, focusing on the ways that disruption stiches systems of claims together. By invoking disruption, an arguer can gloss over changes in physical and economic processes.
• Strategically, social network firms are mature; they are moving to leverage advantages across sectors and often operating in ways that call the very idea of disruption into question as these firms begin to leverage traditional incumbent firm strategy. For social network firms an important and paradoxical part of a mature strategy would include maintaining business behavior associated with younger companies called unicorns.
In 1996, the term “disruption” wasn’t particularly positive. Turning to conventional dictionaries, there are really three meanings for the term: to throw into confusion or disorder, to interrupt or impede progress, to break or rupture.12 Disruption was ambivalent at best; confusion and disorder are rarely positive. Now one can celebrate being labeled as disruptive, receive a great deal of money to disrupt an industry, and even attend the Disrupt conference. Disruption changed—what once indicated the destruction of something has now become creative. Schumpeter’s creative destruction, where old institutions and structures give way for the growth of new, has been transformed the necessary pain of progress into a masochistic virtue.13 Schumpeter’s critical idea is that change is a persistent feature of economic systems that should not be thrown away prematurely. At the same time, we should be careful to avoid the assumption that all destruction is positive, that the impact of destruction should be amplified, or that destruction should always be accelerated. Disruption was described negatively as there is some value in the continuity of the status quo.
There seems to be agreement in the world of business books that Clayton Christensen coined the term “disruptive innovation,” and that this term is often the key referent for disruption today.14 Unlike other business books, Christensen was clearly embedded in a scholarly conversation with a meaningful bibliography. The term appears on a regular basis meaning simple injunction or difference in works like Foster’s The Attackers Advantage, where disruption refers to the interruption of a past state.15 Christensen’s disruption advances Foster’s and is the focus of this analysis for few reasons: his work has a robust citation history, his work came first, and the continuing citation of Christensen as an authority in this field. Continuing influence is tricky as Christensen’s argument may drift. The focus on Christensen and case study–driven business writing then turns toward the grand economic theory of Downes and Mui in a reading of The Killer App, and the advertising-driven origin of disruption in Jean Marie Dru’s Disruption.16 Organizationally this progresses from the concrete to the ethereal—from administrative theory to textual magic.
The purpose of this history is not to find a definitive starting point for the use of disruption, but to provide depth to the interaction of this term with the others that it so powerfully interacts with, namely, the securitization, valuation, and monetization: disruption is the interface between these ideas and the broader network of businesses. Another way to engage this idea—what happens the day after the IPO?
Christensen’s dilemma
Clayton Christensen’s theory was the opposite of the type of management advice offered in the airport bookstore classic: Good to Great, covering instead the path from average to gone.17 The central question—why do strong companies fail? To answer this question Christensen deploys a series of case studies, building from an initial story about the disk drive industry. In each case the incumbent powers are defeated by some combination of startups, seemingly without warning. Christensen’s paradox supposes that the greatest strength of a company becomes the greatest weakness. Firms tend to cater to their existing contracts and customers: this puts strong firms in a trailing position. Investments in products with no demand would not be productive for their current investors. Why change if the business is winning? New products or markets are ignored in favor of maximizing current returns. Listening to the customer becomes akin to giving the inmates the keys to the asylum, and maximizing margin is nothing more than arraigning the deck chairs on the Titanic. In his cover blurb, Dr. Andrew Groves, Chairman and CEO of Intel, notes that the book is “scary.” With good reason—companies that are about to fall from grace are aware or even happy about new competition but unable to adapt or compete. All the choices have already been made—the next step is the enactment of the fantasy. Feeling beyond the point of no return is compelling, and terrifying. The feeling of control would seem to be doubly important for the supposed captains of industry.
Midway through building his argument, Christensen describes the theory of resource dependence.18 As an approach to understanding the relationships between firms’ behaviors and customers’ needs resource dependence theory focuses on the intractable, irresistible power of the demands of customers. Instead of auteur managers cunningly crafting strategy, firms are much more often the created by their external context. Post-structuralism, enter the Board Room. Disruptive innovation interrupts not just the flow of money, but agency itself. Given the power of external actors to shape the flows of money and power within a company, it would be folly to discuss any disruptive effort without reading the industry as a whole. What this theory does is emphasize the importance of demand—firms need to stay with (or to survive ahead) of the potential pull of customers. What should be even more worrisome for corporate leaders is that organizations consist of many lower-level players who can often thwart even a visionary management.19
The structural arguments behind disruptive innovation theory are not particularly complex. Typically, a new entrant into an established market elects to focus down market where margins are not as rich and the struggle between maximum quality and minimum price is often more easily decided on the basis of cash in the pocket. These are opportunities when an excellent expensive product might be replaced by an average product at a lower price. In the disk industry, many of the established players had focused on maintaining, or, to use Christensen’s terms, sustaining their current position. New entrants were quick to adopt new technologies and focus on fringe products. Established players, due to their focus on sustaining existing relationships, were unable to justify working on smaller disk drives (in both capacity and size). Customers did not see the need for smaller drives and thus the established players in this industry did not focus on those markets. Eventually customers decided that they were interested in smaller drives. At this point, business shifted away from the established firms toward the new entrants. As larger cultural and market forces created a surge of demand in excess of, and transforming the needs of, the existing clients, the former startups were positioned to inherit the high-margin accounts. Customers are fickle.
Christensen’s case study of steel mini-mills emphasized the capacity to control a market with low-quality goods. Firms like Nucor were not a threat to Bethlehem Steel because their technology, the mini-mill, did not produce large sheets of blemish-free steel. If customers accept only large rolls of top-quality product, the market will not change. Before mini-mills the production of steel required large facilities that required near-constant output. Making steel involves the proper oxygenation and blending of metals at extremely high temperatures in a specialized furnace. Getting that furnace hot and safely moving materials in and out of it is extremely difficult. Mini-mills allowed much smaller amounts to be produced at many more locations at reasonable quality. Other innovations in the use of iron carbide saw the industry faced with oversupply of sufficient goods.20 Good steel can replace great steel if you needed only good steel to begin with. Overproduction of steel is a problem worldwide.21 Oversupply may have been inevitable: the role of small mills could be overstated. Good, cheap steel made quickly has driven the market to failure.
Insulin offers another study, where the replacement product is not lower in quality, but articulated with a new delivery system. Christensen refers to this as performance oversupply.22 Really good insulin delivered in an ingenious way beats really, really good insulin delivered in the conventional way. Eli Lilly’s strategy for success for decades (increasing purity) had overdetermined the range of possible corporate decisions. For users of insulin there is a threshold where good enough is good enough. If perfect is only marginally better than good, the perfection premium will plummet. What unites all of these stories is the theme that a down-market competitor, empowered by a slight technological change, can upset the pricing model that has made a powerful company successful, and further that established companies often are unable to rationally justify changing their businesses.
Disruption comes to refer to a number of ideas ranging from accessing the discount segment of a market to focusing on product innovation. The stories focus on the ways that a small company gets larger. The real-time scaling of innovation structures an unstructured narrative. The break in the continuity of business agency opens space for reader identification.
Stories of fundamentally strong businesses become tragedies where the Achilles heel of the hero is formerly a source of great strength. Although the second section of the book introduces the idea of adaptive strategies against disruption, the gravity well of the critique is too intense. Escaping from the propensity to maximize current results may be impossible. At this point the counterfactual appeal of Glassman and Hassett’s 1990s business classic Dow 36,000 should make sense—they imagine a world where the demands of outsiders have lost their power.23 Dangerous down-market vipers that would threaten your business have been defanged and pessimistic leftists silenced: now everyone can be rich; everyone will buy a Volvo. Brand names offered them protection against down-market entrants. The popularity of the Dow 36,000 theory makes perfect sense.
The qualities that make Christensen’s work so readable are also opportunities for critique. The Innovator’s Dilemma, like all business books, is a synchronic slice; it understands the now even as it makes historical claims. Harvard Professor of History Jill Lepore made a number of useful arguments about flaws in the disruption argument in a powerful essay refuting Christensen’s work after the initial publication of The Innovator’s Dilemma.24 Many of Lepore’s points are resonant with this reading of Christensen, but there are important differences. One of Lepore’s central points of contention with Christensen comes on the diachronic level; over the years the finality of his case studies was not so final. His vanquished firms were never as defeated as he made them out to be, and the victors never quite as dominant. U.S. Steel, for example, was not defeated by Nucor. Eli Lilly remains a major pharmaceutical company. Melodrama requires concrete good and bad guys; there is very little space for ambiguity. In terms of prediction, Lepore is points out that Christensen’s theory driven investment firm lost money and closed. Hindsight does provide Lepore leverage, just as it did Christensen.
Predictions of disruption are the everyday work of the business press. There is no basic business research; application is everything. Thousands of startups have been funded with aggressive valuations because of their disruptive potential; few, if any, have ever been realized. Disruption builds from a narrative sensibility; Boltanski and Thévenot (discussed in the introduction) are particularly insightful on this point. Working in shades, probabilities, and potentialities is space of both communication and business scholarship. Telling the story of disruption to inform practical reason is the primary purpose of Christensen’s work. Translational research always poses this challenge. Survivorship haunts the case study method.25 It is an approach that supposes incompleteness. Conclusions in this approach often hinge on what is complete and persistent. Lepore identifies a key aspect of disruption discourse that will appear later in this chapter: often disruption is a stand-in for change itself. Change is persistent. Betting on the continuation of change is an easy call to make, almost to the point of tautology. Lepore concluded that the history of disruption was, “Transfixed by change, it’s blind to continuity. It makes a poor profit.”26 The Christensen used as a point of reference in this chapter is the concrete Christensen of the 1990s, not the Christensen of today.
The law of disruption and the birth of the killer app
Disruption for Larry Downes and Chunka Mui in The Killer App is the space created by the exponential increase in technology versus merely linear human growth.27 Changing technology is so dramatic that it is beyond human control. By the time of the writing of The Killer App, stories about innovation had taken on a vernacular quality through named laws. Underlying disruption are the twin forces of Moore and Metcalfe’s laws: computer power is rapidly increasing (Moore’s Law), and networks are more valuable as they become larger (Metcalfe’s Law). To visualize this relationship in their writing, the authors use a graph with a bundle of curves appearing on the same axes, with slight curves being present for the rate of change in business, society, and regulation, with one exponential curve for technological change dwarfing the rest.28
Downes and Mui go as far as to cast disruption as being something of a malevolent agency: “The Law of Disruption is relentlessly opening closed markets, exposing corporate waste, and laughing in the face of government intervention.”29 The lack of human motivation to cause change is inverted into the agency of disruption. Disruption laughs. Their summative vision for the law of disruption is that the forces of Moore and Metcalfe are invisible powers to be compared with “earthquakes and volcanoes are the manifestations of complex interactions between geological forces beneath the surface of the Earth.”30
What is remarkable about the appearance of disruption in The Killer App is the way in which technology is inserted into accepted economic theory. Instead of taking an approach to the reading of public culture or a sector as the site of disruption or Christensen’s analysis of a particular product market, the theory of the market itself is taken as providing the force that is disruptive. This is accomplished through the interplay of two important ideas introduced by Ronald Coase: the theory of the firm and the theory of transaction costs.31 The theory of the firm posits that issues in contract law and communication make it difficult for firms to create contract relationships that are clear enough to secure what they need from potential partners. Firms respond to these inefficiencies by integrating additional units into their company; once internalized there is no need to create a contract and efficiency increases at least in as much as middle management can be controlled. An integrated firm captures the profits of both the supplier and the manufacturer. Coase’s theory of transaction costs argues that in a world with no transaction costs, resolving the damage of tradable negative externalities is best done through a market mechanism. These are fairly heavy conditions. These are two important ideas for understanding the world today.
Explaining the benefits of vertical integration and issues in contract writing is a topic for introductory classes in many fields. The theory of transaction costs, often referred to as the Coase theorem, has a far more conflicted life. The theory has a very limited scope of application: to a hypothetical world with no transaction costs and tradable externalities. As a thought experiment this is useful for understanding the conditions under which different sorts of remedies might be optimal. The idea of the Coase theorem has strayed from this limited application to be a way of providing an authority warrant for the argument that private markets are always best at distributing negative externalities despite communication problems. If something bad happening could be equally well resolved by negotiating between two parties, they likely will arrive at the best solution through a contract as long as they have equal information, no transaction costs, and the bad thing (the negative externality) is tradable. Negotiating about who should provide parking in an urban center could be quite effective. Negotiating about who should compensate persons exposed to radiation would be much less productive as the damage is done. Coase’s examples tend to be incremental and interruptible. The world of bargaining for negative externalities is very limited. This break between the theory of transaction costs in a limited sense and the deployment of the theory as a vision of the perfectibility of the market is crucial to understanding contemporary neoliberal politics: Coase is the brand name under which deregulatory impulses now are sold, even if they fail to fit with Coase’s analysis. Expanding negotiation to apply in cases where there are high transaction costs or non-tradable externalities pushes the argument to the breaking point. Coase was not nearly as doctrinaire as those applying this theorem. This will shape the debate over the legacy of Coase going forward.32
The explanation of the enactment of their two-force model of disruption in actually existing discourse networks is that technology has provided a complete, knowable network with unlimited computing power, that accurately distributes externalities. With this counterfactual space of friction-free transactions in place, the communication and contractual difficulties that had driven Coase would be reversed. Any benefits of integration could be captured through contracts. Every externality would be tradable. The firm would dissipate into a self-organizing post-corporate economy. It only makes sense then that Downes and Mui are interested in algorithms and devices that replace even the need for humans to purchase things or do much of anything else: they are imperfect aspects of a perfectible technical network. If you assume omniscience and telepathy, your ideas about the economy can get strange fast. Technology in The Killer App gains the magical power to make perfect communication possible, all in the service of the idea of transaction cost optimization. Or, as Downs and Mui argue, “It is a great time to be a schizophrenic [sic].”33
Downes and Mui arrive at a position curiously inverse to Christensen. Instead of starting down market, disruptive innovators for The Killer App start up-market, “cherry-picking” the most lucrative customers.34 Disruption is now the opposite of what was described by Christensen. Adapting to disruption would suppose that a firm would change their relationship to the ownership of physical things and thus become a holding company organizing the efforts of a diffuse network of agents who would be left holding the bag while the first-tier firms buy and sell it. This is basic post-Fordist organization, referred to in this text as the law of diminishing firms. By installing the size of the network and the density of transistors as the engine of business development, the agency displacing aspects of Christensen’s writing are carried through with a renewed intensity. It is not merely your engagement with your network that causes your firm to fail, but the invisible structure of the universe. Instead of presenting a theory of disruption as a matter of industrial organization, this is a theory of disruption as technical force.
The impact of this theory of the market is muted in the conclusion, where the ontological vision of Moore’s Law as earthquake is replaced with a theory of the channel. Companies could seemingly adapt to change and become disruptive if they add “an e-mail culture” but that responding to the world rending force of disruption requires “trauma equivalent in force (but faster in velocity) to the movement from an agrarian economy to an industrial one.”35 Hyperbole is always in fashion. Like all books in this genre, the third act requires that the intended audience have some capacity for change and survival. The theory of disruption in this book supposes that there are insatiable forces that drive the inversion of economic conditions that appear in the form of a post-institutional demon known as The Killer App.
The reason why this book matters is that it represents an inversion of the sort of disruption proposed by Christensen that might appear right alongside it on a popular business reading list. Disruption for Downes and Mui inverts everything we already knew about market processes and in this shift it pushes the disruption vernacular into an increasingly high conceptual orbit.
In the ether
Jean-Marie Dru’s Disruption supposes that disruption means affective change. Disruption is a practice of interruption into the everyday life of a client. Conventions are disrupted by visions. Disruption is a form of poetic self-realization. Disruption in this sense is not a matter of producing a new product or doing anything physical (there is no mini-mill or perfect transaction market) but the process of selling the aura of difference. In this third approach, disruption exists because you say that it does.
For Dru the move to collapse the claim to value into the business process is understandable: his object for analysis is advertising copy. The impact of disruption happens in textual and affective waves the entire way down. The appeal of contemporary figurations of disruption would make sense as well because so many basic monetization processes are tied to advertising. In this sense even the ethereal approach to disruption plays a powerful role in legitimizing monetization stories’ deployment in the discourse of securitization. Advertising is the ultimate industry for a disruption story as it is an industry that has been constantly cycling through disruption.
The case for including Dru’s variant on disruption extends beyond the reflexive use of this idea within and for advertising, but to the sequels to the book. By the point of Dru’s third book on disruption, the argument is no longer prescriptive but historical. How Disruption Brought Order is not even necessarily an evaluation of a particular process but a guide promising a strategy for the institutionalization of the unconventional.36 This process of creating an ongoing revolution is intended to operationalize the advice of popular writer Peter Drucker in implementing a Schumpeterian version of creative destruction—an idea that seems to resonate more with Downes and Mui and less with an advertising industry representative.37 Dru has distilled the process for disrupting advertising and entire industries down to a relatively simple formula: hold a disruption day, what would become a hackathon, “when participants are invited to imagine the future of their company while wearing the hat of an innovative business leader, such as Steve Jobs or Richard Branson.”38 Although the Steve Jobs imagination exercise is just the beginning of the disruption process, the remainder of the exercises that Dru proposes for disrupting industries from computers to body wash seem to be creativity games. The special activity proposed seems to be located in the day itself, meaning that disruption is something you do with a speech act, not something you do with a product and a price point. After the initial run of the creative process, where conventions are disrupted by visions, the visions are worked backward toward the conventions and the conventional news media, which Dru considers to be a foundation of his method.39 The conclusion of his recap on the recent history of disruption advises that companies should think of themselves as brands.40 This advice is not particularly revolutionary. What is important is the way that changing companies, cultures, and business continuity are described. Disruption tales make it credible that the mere application of a few games or a new brand concept could effortlessly transform an industry.
Arguments about the nature of a thing are important; they stage other arguments. Contrarian arguments often turn to ontological claims for this very reason; claims about entire categories of things can do a lot of heavy lifting with very little effort expended in the proof. The definition of society dramatically affects sociology. In the first iterations of the disruption argument as proposed by Christensen the term describes the replacement of incumbent products with adequate lower price point competitors. As disruption evolved it took on the character of distant reactions to those competitive shifts. Disruption becomes visible as its signs ripple through industries, not in the price patterns of a particular good or even in the success or failure of a case study. How industries and businesses are understood as moderators between individual transactions and capital markets are argued about through claims about action across the scene. Unfortunately, this means that Lepore’s answer to Christensen means little for the trajectory of the argument—disruption lives in the prospect of ongoing action through a complex network, not in the theory or even an example. Disproving disruption by disputing the points is very difficult. Disruption takes on a life of its own—an implication of activity unmoored from the original theory is powerful.
Phillip Rosen developed a theory of the indexical trace to distinguish between the digital and the analog—both are expressing the same sort of ontological commitment to prove that they were somewhere, to establish the existence of the past.41 Media provides the proof of existence of what came before and hints of the mode of production.42 Audiences are engaged both because they retroactively add aspects of the indexical relationship and because they hold themselves distant. The knowledge of the happening, of the undefined (or audience defined) change animates the argumentative scene. Disruption is not an image or a fragment that interpolates an argument but a testimony to the nature of things and actions in reality that sets other arguments in motion. As a form of historical work in itself, the indexical trace appears as a figure of the digital, providing both evidence of a radical break with history and a break in itself; disruption is much the same.43 Arguments about the nature of new media, ranging from relatively banal corporate tropes to the founding of the MIT Media Lab, depend on an indexical argument for novelty, for a break with prior history.44 Business research in particular can benefit from an idea of the indexical. The mode of case study compilation has a deep narrative dimension—there is no computational depth metaphor coming to rescue business from the humanities.
Disruption simplifies and imagines action into the scene. It is the training montage of the fight movie. It is the flashback of the melodrama. Relatively simple terms like “digital,” “disruptive,” and “internet” have deep wells of meaning as indexical terms which depend on their incompleteness. Concrete details about equipment or even the real details of examples about the market itself are omitted. This also adds an important rhetorical dimension for understanding how worlds are articulated together; we describe the things, the feelings, and the actions that exist in any network of associations. An indexical argument is answered with an alternative explanation, not defensive answers to the internal surface of the action.
Figure 3.1 Monetization matrix with disruption.
Moore’s law is perhaps the most famous of indexical arguments about technology.45 The public formulation of the argument: computing power doubles every eighteen months, so it is safe to assume that computational limits will be transcended. In a more technical sense, the number of transistors in a given space doubles every eighteen months. This was true. Engineering changes. Increasingly power is dependent not on transistor density by on cooling. Chips work better (or worse). Heat dissipates. Each individual electrical action requires heat to be produced between two points, even of those points are very close together. The hotter the transmission medium, the more resistance: more resistance, more heat. A feedback loop. Electric stove burners work on this principle. As electricity is applied to the resistor (the coil) it gets hot. The most recent innovations in extreme speed processing are increasingly not focused on using more transistors or even different structures of busses and chips, but in enhanced liquid cooling systems.46 Although Moore’s argument is referred to as Moore’s law, it is not a scientific law. It isn’t ideal gas law or Ohm’s law. Moore’s Law only has force because it has disavowed the dimension of electrical engineering as dissipating heat in favor of a form of technological power. The inexorable march of processing power is a much more stable referent than the increased dissipation of heat or a multifaceted discussion of processing design. It is a slogan for exponential growth. Perhaps the most telling, Dan Woods, a contributor to Forbes magazine, used the phrase “creates a Moore’s Law for data” to describe the indexical relationship inherent in increased production of information.47 Even in a world where the basic idea of doubling computing power is no longer true, Moore’s Law still means a great deal.48
The appearance of Metcalfe’s law, the idea that larger networks are more valuable, becomes a practical ontological truth through the disavowal of its origin in network math.49 Larger networks are larger: they have more nodes and more edges connecting them. Networks are not symmetrically valuable; in fact often times distant notes can be a drain on the center of a network—meaning that Metcalfe’s law only really make sense when edges and vertexes have some real value. Although an airline network diagram might show Miami, Dallas, and Austin as three nodes, they are quite different. Dallas and Miami are hubs for a major airline; Austin is a small city destination. Networks are uneven. Some nodes are worth more than others. Some connections cost more than others. Attempts at evaluating network centrality demonstrate this problem. There is no universal method for determining what the most important node in a network.50 Determining the correct measure of centrality depends on an evaluation of the network and what centrality really means.
Evgeny Morozov uses a similar argument in his critique of internet-centrism—the internet is a real thing, but its characteristics as a physical system are often ignored for the purposes of treating it as a magical source of energy and action.51 Stuart Brand’s “information wants to be free” or Zuckerberg’s “privacy is no longer a social norm” does very similar work as indexical arguments.52 Information does not want anything in a very literal way; the idea that people might be interested in sharing basic information as a matter of culture is another matter. Privacy on contemporary social networks refers boundary negotiation.53 Boundary negotiation entails a complex trade-off between competing interests with high stakes for individual communicators. This tends to mean that people are willing to make some exchange of information for access to the goods of publicity. Or in direct response to the idea of Metcalfe’s law, the expansion of the network makes uses more reticent to share, decreasing the value of the network as it expands.
Where do unicorns go when they grow up?
TechCrunch, the sponsor of the Disrupt conference series, maintains a leaderboard of unicorn companies, the Unicorn Leaderboard.54 Rival Fortune maintains the Unicorn List.55 At first glance these pages seem like a sort of joke about business discourse. Unicorns are magical, mythical horses with one horn. It seems hard to believe that more traditional firms would accept a label associated with a flimsy concept. Yet, “unicorn mania” is sweeping the economy.56 Although slightly cartoonish, the TechCrunch leaderboard does a fine job of collecting information about these unicorn firms as well as their investors in a tabular format. It is not uncommon to see multiple rounds of investment, marked as series A–G, for each company. Unicorns tell the story of the magical super startup imagined as if it were a fully developed firm. Collected onto a single leaderboard, individual entrants in many markets appear to be a single cohesive force, rather than an array of diverse firms. This is also a strategy for allocating network effects more rapidly; absent a unicorn list it seems likely that press coverage would be slower in coming.
Among the pride of the blessing of unicorns Uber, Airbnb, Snapchat, and Pinterest share some important characteristics. Snapchat and Pinterest seem to be social networks. Uber and Airbnb use social network like interfaces to engage existing markets. As disruptive plays, these businesses make sense. Reducing transaction costs and increasing inventories of goods are traditional means to expand a business. Uber depends on the continuing stock of taxi cabs that are augmented by their newly recruited drivers to create an increasing supply of cabs in service, keeping wages relatively low. At the same time Uber is positioned to maintain a flexible labor force that provides the capital for what would otherwise be a lower-margin, locally coordinated business. Airbnb depends on individuals to provide the rooms to be used for their distributed hotel concept. By providing transaction facilitation, Airbnb offers users real value in the construction of an alternative network of hotels. These businesses fuse social networks and another business concept. The other business concept is ultimately the driver of leads and thus of transactions through the social interface. Social interface making is interesting work, but ultimately not limited to new players in established markets.
On the other hand, the final money-making vision for established social networks is often to enter into an existing market by virtue of the network effects from their social network products. The ultimate example: Facebook’s final business plan would be to become a transaction processor. The feature, known as payments in the messenger app, is the first step in becoming a financial institution. William Foxton, writing for The Telegraph, identified this as “disruptive” innovation.57 His logic is sound, large financial institutions are not well regarded, many households are under- or unbanked, and in many emerging markets mobile banking has been far more widely embraced than it has been in the United States. Well-capitalized retail banks can be a powerful pro-social force; the same is true of postal banks. The reason why this market would seem to be ripe for disruption is the difficulty of the banking process itself. Banking is a capital-intensive business that runs at a very low margin. Facebook would be better off not becoming a bank.
Target stores mistakenly moved into groceries, not because they were interested in the grocery business itself (this is low margin and high capital) but because of the prospect of increased foot traffic through their stores.58 For social networks, the product they have already cultivated is like the grocery store; they are trying to move into general merchandise. Target soon discovered that the grocery business, the Canadian retail market, and online shopping were difficult businesses. Walmart is successful in these areas because of heavy investment, not luck.
Instead, if Facebook could become a credit card company or even a major transaction processor, they could have a meaningful financial business. Even with ambitious growth, Facebook looks financially like CBS; if they can parlay their success as a communications firm into another sector, they might build a business that could support an incredibly high valuation. Unlike other industries that would actually require fulfillment these payment processing industries entail less risk. Pure transaction processing is a higher-margin industry as there are no loans to be made. Robert Byrne and Jason Hanson, principals for the consulting powerhouse McKinsey, argue that the prospecting of an integrated payments-advertising experience is the future of retail and banking: “To capitalize on this opportunity, merchants need payments solutions that integrate adjacent business services and enable new functionalities that enhance loyalty programs and advertising performance.”59
Facebook adds features regularly that look like the business that unicorns might add. Many unicorns exist because Facebook or another established social network player has yet to leverage their capacity for networking to absorb their industry. What would Uber be if Facebook purchased and deployed Lyft across their network? Airbnb with the strength of a Facebook network backend would be unstoppable. Google, now Alphabet, attempted to institutionalize this capacity through their “moon-shots,” an effort to use success in coordinating search advertising placement into dominance in other sectors.60 This cyclical conception of disruption is exactly what Dru was arguing for, and what Christensen missed in his concrete discussion of market positions. The final act for an alchemic monetizing disruptor is the transformation of reality itself, thus the penchant for extreme opportunities like space flight and immortality. Acting magically makes a company magical.
Unicorns are made for the purposes of stoking excitement and building media coverage. They are special animals that deserve special levels of press attention. The network effects created by this attention allow these firms to build their network like communication infrastructure and thus engage in the industries they have targeted. At the same time, any firm that has an established business might do the same by cultivating a new social network interface. Lepore was on point in showing the ways in which Christensen overplayed his hand; established players do fight back and they can win. The performative making of a unicorn completes the work of the indexical argument that a social network like startup might disrupt and thus gain access seemingly to an entire industry. This is the outcome of alchemy—the network is turned to gold. Horn glue can be worth a fortune, assuming you can find a business that will allow a horn to be affixed to its forehead.
Disrupting disruption
The power of the disruption argument to explain relationships of cause and effect should not be underestimated. Tracing supply and demand in the disk drive market, the steel market, or the insulin market is difficult, and many of the key factors in these stories cannot be cleanly mapped onto each other. There are commonalities, especially in terms of preference level, but there are also stark differences. Many of the theories of discourses of disruption that play out today depend on network effects conjoined with new interfaces or raw increases in computer power. The power found in sheets of atoms in graphene has some real referent, as do network effects.61 It is not merely the size of the network that is important for understanding value, but the prospect that the network is knowable. This is the founding problem of Big Data—it is data about something. No matter how fancy the mathematics, the insights produced by the analysis must be implemented in the real world.62 Disruptive innovators seemingly have access to the entire market utilizing the network of causal relationships between suppliers and customers reimagined through a single indexical claim. All of the weird, complex, unpredictable fabric of the real world is supple in the disruption story. Notice that these innovations are presumed to expand rapidly; they scale as if they are a visual projection—speed is easy when it is imaginary. In contemporary use the value and structure of the world depend on what has been identified through our synchronic-diachronic study: a combination of down-market entry with surprising innovation in the moment and the reversal of economic processes in the historical story. Disruption appears differently depending on the context and timeframe.
In traditional value chain analysis as theorized by Michael Porter, a business can be broken down to the steps by which value is added to a final product.63 Some steps are more rewarding than others. Transforming flour into dough may add more value than adding seeds to the field to grow grain. Value added can be charted along the chain of the business. The ideal scenario for a private equity firm requires purchasing an inefficient company, quickly adding or removing failing units from their business process, and holding an IPO for the revitalized company. Immaterial goods and labor can also be read through this model. Finding the weakest and strongest activities of a firm is essential. Private equity firms and venture capital investment represent an important approach for adding value to companies. Buying and selling companies to each other makes sense in this world. In the early days of this organizational model there were a sizable number of companies that could be transformed quickly; as the decades have drawn on the prospect of rapidly creating value through buying and selling a company has decreased dramatically. There are only a handful of successful national fast-food chains. Not a thousand. You can only fix Burger King once: there is only one home of the Whopper. On the other hand, as I argued in the introduction to this book, the process of selling the combination of businesses is rhetorical and the value of a business is created through careful stagecraft and performance. If the roadshow is good enough, almost any burger could have that flame-broiled taste: if only in an investor’s dreams.
With dramatically more money seeking a relatively small number of opportunities, the future of venture capital is not bright. Despite the claims to novelty of businesses in Northern California there are still businesses in other parts of the world, even some of the much loved unicorn crowd. Investors do not provide money out of the goodness of their hearts or to intellectually challenge developers: they want a real return. Unicorn mania may be resolved by acute pocket book nerve pain.
Returning to the fake news as discussed in Chapter 1, we find that eventually any product may settle toward the minimum acceptable level. In Chapter 1, the discussion of monetization fake news was posed as a site of arbitrage where down-market spaces were suddenly opened by the short circuit of the ad exchange. This is also a strong example of disruption in action. To visualize this, consider an idealized ecology, where overhead is positively associated with quality and popularity is negatively associated with quality.
Figure 3.2 Disrupting the news.
The dashed lines are demand curves set by any number of means; in this example the social demand curve opens both the high quality–low popularity space and the low quality–high popularity space. These demand schedules could, of course, be changed in any number of ways depending on your view of the public good.
As the preference level required for the editorial content of news drops, the possible regions for profitability dramatically increase. In the legacy era, the distribution constraints held the curve higher than it would be now. The constraints existed in both industry norms and practical implementation. Eventually, if the quality of content was not controlled by distributors and remunerators like Google and Facebook, the curve would approach the axes. Cheap, popular, low-quality content could overwhelm the industry. The relationships presented here are simplistic to make a point: the fake news explosion of the 2016 election indicates that there is no natural preference level that would protect the public sphere. Thus in the wake of the election activist strategies included subscribing to major news sources to pool capital in the upper-left region of the graph, and more importantly major advertising facilitation platforms like Google enforcing quality standards. As overhead drops toward zero firms become more dependent on other actors for distribution. In the longer run, the intervention of state actors may reframe the relationships in this market. Some spaces in this market could be foreclosed to block propaganda; others could be curtailed to shape public debate. At least in the formulation provided here, shortly after the election Google added a circuit breaker: they no longer place ads on fake news sites.64
Disavowed through the image of monetization and disruption are the real gritty characters of business. Disruption spackles the story of business smooth. After disruption, the landscape must be resettled through the legal system. Compared with the indexical world of disruption the world of litigation is very different. So much of the techno-utopian discourse of Silicon Valley depends on ever-expanding freedom and a self-organizing world; this world has always been a creature of the legal system. This chapter has proposed that a major feature of this bubble is cross-subsidy between different communication markets. In a prior distribution of power in the industry, these models would have faced substantial scrutiny. Now it is not only possible for a firm to use revenue and attention from one sector to pollinate their efforts in another, it is assumed. This is not to say that these efforts are equally accepted in all jurisdictions. In the following chapter, the dynamics of this market for intellectual property rights are read against the activities of dominant social media firms. The results are not simply a critique of certain aspects of intellectual property litigation, but a dialectical recognition of the interaction of state force and legitimation into what is otherwise a gauzy fantasy.