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Software Can Only Eat So Much: A Look At 10 Industries (Part 1)
European Straits #244
Hi, it's Nicolas. In recent editions of this newsletter, I've been contemplating the notion that the transition to the current age of computing and networks isn't an all-encompassing transformation for every industry. On the contrary, various industry-specific factors, such as tangible assets, labor, regulations, and cultural diversity, often hinder software from eating an industry entirely.
In today's edition, as well as the one next week, I will briefly explore 10 industries that exemplify these limitations. For each industry, I will provide links to previous editions for more in-depth analysis. Subsequently, in future editions, I will focus on individual industries, conducting a thorough examination, and eventually, I aim to derive a comprehensive framework from this multi-industry analysis.
1/ Starting with the MEDIA industry, I would succinctly express the following: We have recognized since the Cluetrain Manifesto (1999) that the internet's impact on the media landscape primarily revolves around empowering individuals to contribute as much as, if not more than, organizations.
Initially, this centered on text-based content. For instance, I coded my own website in 1996 while at engineering school to publish essays. Publishing text without permission was more challenging than today's ease with platforms like Medium, Substack, and others—but it was already possible. Nowadays, anyone can reach a broad audience by publishing written words. Capturing and sharing pictures became simpler with smartphones, and video editing, thanks to TikTok, has become more accessible, too.
The transition from a media industry dominated by large organizations to one ruled by connected individuals has profoundly reshaped the media landscape. It has, on the one hand, democratized content creation, offering opportunities for niche-focused audiences and sustainability for creators (at least some of them). On the other hand, it has fueled a fragmented society, amplifying polarization and never-ending culture wars, as evidenced by enduring beliefs such as Donald Trump's election claims.
This transformation in the media industry aligns with what analyst Martin Gurri terms the “Fifth Wave”:
New technologies and dissemination platforms are the necessary cause, but the change itself pertains to the public. It has largely stopped listening, and it has started talking back.
Nonetheless, the empowerment of the public through computing and networks hasn't necessarily resulted in a decentralized media environment. Social media platforms often spotlight only a select few superstar figures, the Joe Rogans of this world. Meanwhile, established institutions like the New York Times have adapted by emphasizing the cultivation of engaged audiences, now prioritizing digital hubs over traditional paper distribution. This shift has posed unforeseen challenges for once-ambitious newcomers like Yahoo, Buzzfeed, Vice, and many others, whose fortunes have waned.
The Internet Killed the Media Star (European Straits, May 2018)
The Tipping Point for Podcasting? (European Straits, May 2020)
The Revolt Against Journalism (European Straits, July 2020)
11 Notes on Yahoo (European Straits, May 2021)
2/ My next case study would be the MUSIC industry, another one profoundly affected by the early wave of the paradigm shift. Initially, it was disrupted by Napster and rampant copyright infringement carried out by the same connected individuals who were reshaping the media industry. Then, the iPhone ushered in a radical transformation with iTunes, offering the unprecedented option to purchase music by the song rather than entire albums. Finally, streaming and its champions Spotify and YouTube have emerged as the preferred method for most people to discover and listen to music.
However, the music industry remains paradoxical, exemplifying the old adage: “The more things change, the more they stay the same.” Undoubtedly, the way we listen to music has undergone a profound transformation fueled by technology. Hardly any of us still purchase CDs, and the majority of our music listening occurs online via our smartphones. The landscape of live music has also experienced a remarkable evolution, witnessing substantial growth and concentration revenue-wise around the most famous and in-demand artists, often at the expense of others. These are all substantial changes that serve as compelling evidence, if it were ever needed, that something significant has occurred.
However, when we examine the industry in its current state, it doesn't appear to have changed all that significantly. Major music labels continue to call the shots, having transformed themselves from record companies into publishing companies. They still maintain control over what truly matters: the rights to songs and their recordings. Despite the perceived contraction of the music industry due to technological advancements, it now contributes more value than it did during the CD/radio/MTV era.
An intriguing lesson can be derived from this paradox exemplified by the music industry: no matter how significantly technology alters the way an industry engages with its market, ultimately, there is a revert to the mean. The once potent incumbents were dominant for a reason: their business was highly defensible. Consequently, as the effects of computing and networks become better comprehended, these incumbents tend to regain dominance, reestablishing a semblance of the status quo.
11 Notes on Warner Music (European Straits, July 2020)
Can Legacy Industries Survive? The Case of Music (European Straits, July 2020)
Five Trends Revealed by the Music Industry (European Straits, December 2020)
3/ Now, let's shift our focus to MOVIES and TELEVISION. As explained just above, the music industry has reverted to the mean because of copyright enforcement, a regulatory mechanism that has facilitated incumbents in defending and even expanding their share of the industry's profit pool in the face of new entrants such as Apple, YouTube, and Spotify. In the movie and television industries, which are increasingly intertwined, copyright issues are also a factor. However, another element contributing to defensibility is the substantial cost associated with producing high-quality movies and series.
Indeed, due to the high costs associated with producing movies and television series, these industries have not witnessed Martin Gurri’s public taking over the value chain all the way up to production, empowered by social media platforms. Instead, two significant developments have occurred.
First, there has been an effort toward vertical integration by downstream players like Netflix, Amazon, and Apple, who produce more and more original content. This has triggered a response from traditional studios, positioned upstream, leading them to diversify down the value chain, all the way to the end customers. A prime example of this is the successful experiment that Disney+ represents.
The end result is that there is now intense competition at every level of the industry value chain, encompassing production, marketing, and distribution. And as many analysts have recently pointed out, this intense competition could lead to a dramatic slowdown in new production and a substantial decrease in efforts to differentiate—with the ongoing Hollywood strikes only accelerating this process. All in all, after a golden age marked by quality and diversity, we must prepare for the movie and TV industry's version of a revert to the mean: new productions will increasingly resemble each other in look and content, and the price for end consumers will stabilize at a higher level.
The public, however, plays a more critical role. Despite the economic challenges that make it difficult for amateurs to compete with professionals in the production and distribution of movies and TV content, there's still a significant impact arising from the widespread conversations, memes, and wikis that users generate on the internet in response to movie and TV content.
While I wouldn't classify individuals empowered by computing and networks as active players within the industry's value chain, it's evident that they are far more active on the periphery, exerting unprecedented influence on how movies and TV series are scripted, cast, produced, marketed, and distributed. Although we've witnessed a revert to the mean, today’s movie & TV industries, enhanced by platforms like YouTube, Instagram, and TikTok, remain distinctly different from their past incarnations.
(Additionally, it seems that movie theaters face long-term challenges, and I'm not entirely opposed to this development because I personally dislike the noise of my neighbors munching on popcorn while I'm trying to concentrate on the movie.)
As for essays, for some reason, I have never written about movies and television. However, when it comes to TV specifically, have a look at these two articles, which reflect two very different periods:
Netflix: The Red Menace (Nicole Laporte, Fast Company, July 2014)
How will TV’s streaming wars end? (Stephen Armstrong, The Financial Times, October 2023)
4/ Here's another industry where we are witnessing a return to the norm: FINANCIAL SERVICES. Let's consider three sets of stylized facts (as an economist would say).
First, rapidly growing neobanks have encountered significant barriers in the form of financial regulations. Without even delving into the cryptocurrency market, two compelling European examples stand out. Revolut, arguably the most successful neobank in Europe, if not globally, has faced repeated clashes with its UK regulator. In its quest to obtain a UK banking license, Revolut was even required to abandon its preferred, multi-layer share structure—a characteristic often associated with successful tech startups. Turning to N26, a less triumphant but still noteworthy player in Germany (where I live), it received an even more straightforward directive from the German regulator: slow down your growth. These incidents collectively send robust signals to new entrants, which can be distilled into a concise message: the tech startup building playbook is not directly transferable to the realm of financial services.
Second, I'm uncertain about the progress made in innovating within the investment banking segment of the industry. For example, several years ago, I penned an essay about Goldman Sachs poised to transform into more of a tech company. While there has been some advancement since then, it appears that the enterprise has ultimately regressed, particularly following the succession of former CEO Lloyd Blankfein by current CEO David Solomon. This regression is underscored by key figures like the former Chief Information Officer and CFO R. Martin Chavez departing from the bank, Goldman Sachs divesting itself of its boldest new ventures, especially in the consumer markets, and a leadership crisis simmering since the start of this year. Similarly, up until last year, I would have eagerly crafted a research essay on Silicon Valley Bank to elucidate how it was foreshadowing the future of investment banking. Little did I anticipate that it was on the verge of upheaval and obliteration (which doesn't render a research essay irrelevant, but certainly alters the perspective).
Thirdly, we must acknowledge a critical point: what room remains for innovation with computing and networks in an industry that has consistently employed them to their fullest potential, albeit within a regulatory framework, since at least the 1980s? In fact, I've long pondered the real impact of these innovations while enthusiastically utilizing products offered by neobanks. Undoubtedly, these neobanks offer more appealing user interfaces than their vintage online banking counterparts, and the convenience of receiving frequent account balance notifications is certainly appreciated. Moreover, companies like Wise (formerly TransferWise) have significantly enhanced my life by facilitating faster and more cost-effective cross-border payments, given my constant international presence.
Nonetheless, as I've argued elsewhere, a significant portion of the innovations witnessed in consumer fintech is attributable to regulatory enhancements as much as entrepreneurial endeavors. Moreover, there's a dimension where success has been elusive: the creation of new financial products tailored to the demands of a modern economy, where both businesses and households possess vastly different needs than in the era of automobiles and mass production.
There's more to explore regarding innovation in financial services, and there will be opportunities to delve deeper into this topic in the future. However, what I observe here is that incumbents and regulators have largely prevailed over Silicon Valley-style newcomers, and the industry has not witnessed significant changes over the long term, particularly in the context of the age of computing and networks. Nevertheless, I'd like to conclude on a more positive note and direct your attention to an in-depth essay about the state of fintech by my friend Ben Robinson of Aperture: Fintech after the crash.
Do Banks Still Have A Future? (w/ Laetitia Vitaud, Medium, November 2015)
11 Notes on Goldman Sachs (Medium, May 2017)
Consumer Credit in the Entrepreneurial Age (European Straits, May 2018)
Reinventing Financial Services (European Straits, May 2019)
What European startups can learn from the success of the fintechs (Sifted, February 2020)
5/ Now, let's shift our focus to the FASHION industry, stepping away from the world of intangible and more or less regulated sectors like music and financial services and into the realm of tangible goods. This transition presents another challenge for tech companies as tangible industries are often harder to penetrate. In essence, the more tangible an industry is, the more challenging it becomes to achieve those coveted increasing returns to scale. No matter how much software you incorporate, if the industry relies too much on tangible assets or is too much about selling tangible goods, then scaling will be a formidable task—and without successful scaling, a tech company will struggle to generate profits, which is another way of saying that incumbents, once again, retain the upper hand.
That being said, the fashion industry is a fascinating area I've held a thesis about for the past decade. What's even more intriguing is that this thesis has come to fruition. My central argument regarding the future of the fashion industry revolved around its increasing speed, with fashion aligning closely with consumer preferences, aspirations, and measurements in nearly real-time, all powered by data gathered from individuals. What I hadn't foreseen was the manifestation of this thesis in the form of a company like China’s Shein, the epitome of rapid and affordable fashion targeting its audience on TikTok.
More specifically, there were two aspects that I had not anticipated. First, the sustained acceleration in pace is at the expense of the environment. Shein customers constantly seek new value propositions, not only because they desire something new but also because their clothes become worn out after just a wash or two. Hence the notion that Shein is an environmental catastrophe and not a sustainable long-term business. The other unforeseen aspect, of course, is the pivotal role played by TikTok in data collection. When attempting to gauge what people would prefer to wear at present, a company like Shein doesn't rely on surveys or suggest the use of connected wearable technology. Instead, they offer ideas and clothing to their most engaged customers, showcased in countless TikTok videos. In response, hundreds of millions of customers contribute engagement data, and that is sufficient to determine what will be produced on the other side of the world and then shipped globally for the delight of customers.
Can it last? Certainly not. With the advent of deglobalization, it will become increasingly difficult to rely on cheap, faraway manufacturing and expect to ship products at a low cost. Additionally, there's a growing societal backlash against the environmental impact of ultra-fast fashion. Moreover, as more mainstream fashion brands go bankrupt in Western markets due to their inability to compete, the industry is likely to undergo another transformative phase sooner or later. Although I haven't covered this topic extensively recently, I intend to shift my focus and delve deeper into the future of the fashion industry in the near future. In the meantime, what do you recommend I read on this matter?
Next week, in Part 2 of this essay, I'll delve into the following industries: restaurants, hospitality, transportation, construction, and healthcare. Sign up to European Straits if you don’t want to miss the next issues 🤗
From Munich, Germany 🇩🇪