The business of digital disruption

It has taken me a shamefully long time to read Will Page’s excellent book Tarzan Economics. Will was Spotify’s economist and before his move into the music business had worked for the Scottish Government. So he has the distinct advantage of being able to wear two pairs of spectacles to look at digital disruption, the policy lens and the lens of the disruptor. The term ‘Tarzan Economics’ refers to the leap businesses need to make from one vine in the business jungle as it descends, to another vine, in order not to crash to the ground. The book combines economic analysis of digitalisation with business advice, and carries off the combination. It isn’t in quite the same league as Shapiro and Varian’s now old classic (1998) Information Rules, but on the other hand is far more up to date and gives us a front row seat for what has happened in the music business.

It was always astonishing to me (see Sex, Drugs and Economics) that the music business reacted to the Napster et al threat by deciding it would be a good idea to prosecute their biggest fans (rather than responding to the demand for unbundling). As Will writes, “If piracy of a particular artist was increasing, the lawyers would be getting worried about intellectual property being stolen, whereas the promotion departments would recognise they had a hit on their hands.” The book identifies the real threat to any content business being the limited amount of time and attention we all have. There are nice examples of more sensible ways of responding (other thany trying to put your customers in prison). One is the Atlanta Falcons having made their stadium a pleasant environment with good, reasonably priced food and no rip-offs. Elasticity of demand is such that revenues per attendee have risen substantially, attending the game winning out for enough people over watching on TV from the La-Z-Boy recliner at home.

The book is structured around (as the subtitle has it) ‘eight principles for pivoting through disruption’. These include for instance tactics for working the dynamics of the long tail and how to price discriminate: voluntary donations can raise more than conventional pricing, for instance, the famous Radiohead experiment in voluntary payment for their album (followed later by release of a special boxed set) being one of the examples here. I found the chapter on the use of data, including Spotify examples, fascinating. There’s a lovely anecdote about Will visiting Richard Thaler, who came up with the answer after the company’s data scientists had failed to discover – despite intense data mining – exactly why Discover Weekly was such a success; I won’t spoil the story.

Will is one of the band of enlightened economists who can think more broadly than many. He gives the specific example here of the limitations of the cost-benefit analysis – for example in deciding whether to invest in a museum; the inspiration and education it provides need to be in the mix along with the visitor numbers and entry fees. Not surprisingly given his Spotify role, he argues that the music industry held on to its damaging old vine for a decade too long but things are looking rosy now – I’m not sure all of the music industry buys into this cheerful, new vine outlook. Nevertheless, it was one of the earliest industries to face profound digital disruption and the lessons are well worth pondering. As Will says, the aim of the eight principles and the examples in the book is not to proclaim answers but to help readers ask the right questions about their situation and pick the most appropriate strategies and tactics.

Whether you are involved in a disrupted business or just interested in digital economics, Tarzan Economics is a terrific read, very nicely written, and with the economic analysis sweetened with plenty of examples. Will will be appearing at the Bristol Festival of Economics talking about it in November.

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Public policy & public interest

I enjoyed another short book I opted for this holiday weekend, Power to the Public: The promise of public interest technology by Tara Dawson McGuinness and Hana Schank. It’s about the process of making policy and implementing it, rather than the analysis, and that’s one of the key points: that delivery of outcomes is integrated with the design of policies and the data on which analysis is based. The three ‘Ds’ are all essential, and linked to each other. I was interested in this book because we also published one (Digital Transformation at Scale) on the UK (the focus here is the US) about the digital delivery of public services, by Public Digital, the team that originally set up the Government Digital Service.

There are some clear lessons from the experiences on both sides of the Atlantic. One is that talking to the service users and administrators is essential because they contribute information about outcomes and barriers that is otherwise unknowable. Another is that thinking about the data that is not there is as important as the data that’s available, and this is why diversity of experience is important in public service delivery – a somewhat broader point than data bias. A third lesson is that the project of digitising services opens the door to changing processes and even policies – it is not just a matter or replicating paper processes online. Automating a bad policy is not a good outcome. A fourth lesson is the way the decision to digitise helps to bring about policy co-ordination that never happens at the level of policy analysis, for delivery is impossible without tackling all the obstacles to success. This means – fifth lesson – that it can be difficult and slow, and requires building coalitions of support.

The book has lots of examples and convinced me. The rapidly-growing ‘govtech’ or public interest tech movement is encouraging – for instance the US has Code for America and now New America, which these authors lead, and the UK has Public Digital, and State Up. One advantage the US has over the UK is the federal system, meaning different states can provide many opportunities to reform, and natural experiments. As McGuinness and Schank note, successful projects do require consistent political support right from the top. Let’s hope that the imperatives of having to deliver better outcomes for political reasons and needing to restore some order to the public finances during the recovery will mean that support is there.

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Big Tech – the contrarian view

There’s a torrent of material to read about competition (lack of) in digital markets, which of course goes much wider than economics and law. Indeed, I’ve contributed to the many pages written, including in the form of being a member of the Furman Review team. The general theme is that Big Tech does indeed pose a challenge for competition policy, with the individual conclusions running from ‘some adjustment within current framework is needed’, all the way to ‘destroy them’.

What makes Big Tech and the Digital Economy by legal scholar Nicolas Petit so refreshing is its absolutely contrarian perspective. He has coined the phrase ‘moligopoly’ to describe Big Tech, and argues that while there has certainly been increasing competition in digital markets, there is also vigorous competition unremarked by all the commentators. I’d describe what he calls competition as oligopolistic rivalry, but the book does document the ways in which the GAFA and others compete with each other.

Some of the emprical evidence is rather interesting. For example, the book looks at what the big companies describe as the major risks facing them in their SEC filings and all but Facebook claim competition is their 1st or 2nd biggest threat – they would say that of course, but it intrigues me that Facebook doesn’t bother (number 4 or 5 in its ranking). The others do all see each other as their main rivals. Among the book’s other evidence is their high rate of spending on R&D – but I’d like to know about what it is they’re researching, though.

The ultimate question is not about current competitors, however, but about potential competitors. If you believe digital markets tend to winner-takes-all because of network effects, and you can live with concentration because of the large consumer benefits, then what matters is whether new rivals with great technology and products can take the current Big Tech markets. In that case, moligopolistic rivalry along various dimensions is not only fine but anyway inevitable.

The book didn’t win me over in the sense that I concluded there is no reason to be concerned about digital competition. Without intervention, it’s hard to see anybody rivalling Google in search, or Apple and Android in mobile operating systems. To be fair, the author doesn’t argue that there’s no cause for concern, quite. He is issuing a useful warning that we should think carefully and in detail about what harms we believe Big Tech is causing. This book is a distinctive corrective against the current tendency toward groupthink on this subject. As we said right at the start of the Furman Review, Big Tech has brought many benefits, and there is growing evidence about how much people value its products. Anyone certain they know Big Tech needs fixing should read this more nuanced argument with an open mind.

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The digital Faustian pact

James Ball’s The System: who owns the internet and how it owns us is pretty sobering reading, not least as 2020 has turned online access into even more of a necessity than it already was. (Though I can’t be the only person in despair at the prospect of yet another Zoom/Teams/Hangout etc, & mystified as to why some people are so sure we’ll all want to stick with working from home forever now. )

Anyway, the book. It’s a nice overview of all of the dysfunctions of the modern internet – corporate and state surveillance, monopolies, hackers and fraud, and the belated beginning of tougher regulation. It’s particularly good at explaining enough of the origins and technologies to make it clear how things have turned out the way they have. For instance, the reminder that key innovations were funded by the US government so none of the pioneers thought about business models – in contrast to the older communications networks, where billing was an important engineering requirement. A fateful oversight. For hence the toxic reliance on advertising – and there’s a great chapter on this – with its constant need to get people to click.

This book is far, far better on the potential for, and drivers of, surveillance than the over-rated rhetorical doorstop of Shoshana Zuboff’s Surveillance Capitalism book. I also really enjoyed learning from The System about some new things about the physical internet infrastructure – the Border Gateway Protocol was new to me – how packets make their way through the physical network. It’s frankly terrifying, the reliance on a short-term fix that started life scribbled on a couple of napkins decades ago and hasn’t changed too much since.

All in all, although some of the material is fairly familiar now, a very well-informed book and also really well written. For me, worth it for the chapter on advertising alone, which explains the origins of the online ad market and horrifying extent of the tracking targeted ads requires. We have a systemic Faustian pact – great free services in exchange for our souls. If I were in charge of regulating the online world, advertising and the business models would be my number one target. Regulators are supposed to be agnostic about business models – but there needs to be a mixed economy of models for that rule to apply.

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Digital government – not a contradiction in terms

It’s always exciting when a new ‘Perspective’ arrives at Enlightenment Towers, and the latest arrival is Digital transformation at scale by the Public Digital team. As many will know, they were the pioneers of the UK’s Government Digital Service, and the book draws on their experiences of achieving some significant changes in government practice, and citizens’ experience of contact with government.

It is not just about digital transformation in the public sector, however.The lessons apply to any established, large, complicated organisations whose processes have accreted in overlapping or inconsistent ways over time. There are plenty of those in the private sector. Maybe the executives at TSB should have read the book before embarking on their disastrous IT project.

The advance praise couldn’t be more stellar – Martha Lane Fox and Tim O’Reilly call it “essential reading” and “THE invaluable guide to bringing legacy institutions into the 21st century” respectively. There’s early coverage here and an excerpt here.

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