BA Business Life – Fighting the Digital Giants

Read this piece at BA Business Life

Most businesses’ biggest fear today, in the digital landscape, is disruption. We all witnessed what Amazon did to the book industry, what streaming media did to music, what Uber is doing to taxi services, what Airbnb is doing to hotels, and other young digital platforms are doing to entire sectors. A business owner can’t help but ask, could I be disrupted next?

Instead of adopting a defensive crouch in anticipation of the next upstart or, worse, abandoning your time-tested best practices in order to imitate their ways, it’s time to disrupt the disruptors. You still have the home field advantage.

In reality, these new digitally charged businesses are more examples of market destruction than market disruption. These aren’t genuinely new business plans that promote the best interests of value creators, service providers, or even customers. They don’t create industries so much as replace them with temporary, synthetic and entirely less fertile ones. They are less an example of so-called creative destruction than destructive destruction.

That’s because these companies are not fundamentally disrupting anything. Sure, they can wreak havoc on a particular industry for a time. But they do it by leveraging huge amounts of venture capital. They are not — as they often claim — replacing an inefficient analogue business with a more streamlined and effective digital one. They are simply funding a temporarily competitive advantage with truckloads of cash.

It’s this funding — and the deep pockets and long runways it allows — that gives Uber the ability to lobby so effectively for favourable deregulation and Amazon the ability to price merchandise at a loss. It’s not their revenue driving their success; these are not structured to be sustainable businesses in their own right. They are built to be ‘flipped’ — that is, acquired by someone else, or offered to the public on the stock exchange. They are momentum plays, in which successive waves of funding provide the leverage to undercut competitors in previously sustainable marketplaces.

So all those disruption-threatened businesses — and those yet to come — are imperiled less by some new technology than the heightened power of raw capital itself, amplified by the scale on which businesses can operate in a digital age. It’s traditional capitalism on steroids.

Besides, for all their talk of disruption, not even the most purportedly revolutionary startups consider disrupting the venture funding model driving all this. They’re happy to disrupt journalism or retail or music, but don’t think to challenge the one industry empowering them to do it. The first thing young entrepreneurs do with their business plans is run to the investment banking industry for venture funding and a clear path to acquisition or IPO. In this, they are anything but disruptive. They simply confirm that the more things may appear to change, the more they are ultimately staying the same.

Investors are certainly crucial for the proliferation of almost any business. Land, labour and capital have always been recognised as the main factors of production. But the inflated share prices and 100x windfalls of digital companies (often before they have ever turned a profit or — in some cases — earned any revenue) turn their capital into their primary weapon. And this also gives investors the loudest, or maybe the only voice at the table.

This is why so many startups are forced to abandon their original, legitimate ambitions for pie-in-the-sky dreams of hitting a ‘home run’. With investors taking a shotgun approach to choosing startups, they must compensate for their low odds of success by demanding a massive win from the few that do. Investing in a sustainable, working company is a failure. Only a sale or IPO with a 100x return is deemed acceptable.

So investors push young founders towards aggressive and extractive tactics. People flipping a company treat it differently to those in it for the long run. They don’t need to think about creating a viable business ecosystem, where suppliers, employees and customers exchange value in a sustainable way. Instead, they look for how to extract value from everyone involved — whether as labour (think Amazon Turks), as capital (like Airbnb hosts’ homes) or as land (the publicly funded roads on which Uber depends).

Moreover, most of these businesses are not genuinely profitable. Uber, alone, lost over a billion dollars last year. Such companies are actually a net negative on total economic activity. Digital disruptors employ on average a tenth of the employees of the industries they have replaced. Further shrinking the pie, they leverage their platform monopolies to squeeze, acquire or simply eliminate partners in their supply chains or distribution channels. People in industries now dominated by platforms such as iTunes or Amazon also make less for their work — if anything at all. The supposedly inefficient markets that were disrupted out of existence actually made more money for their participants. Wages are not inefficiency. As Henry Ford understood, your workers need to earn enough to purchase your products!

To disrupt such disruptors, all a good business needs to do is double down on its connection to those who stand to lose when the marketplace is digitised in this way. Instead of figuring out how to extract value from everyone else in the chain of commerce, figure out how to create value for them — or, better, enable them to create value for themselves and exchange it with one another.

This is the real promise of digital business. It’s not about magnifying the extractive nature of industrial age corporatism, but rather expressing the more distributive nature of the digital age.

eBay did this quite explicitly. The auction site wasn’t about destroying some existing industry, but creating a new one based on the peer-to-peer architecture of the net. Thanks to eBay, millions of people began making exchanges that would not have happened otherwise. They weren’t taking business away from anyone so much as enabling new exchanges of the unused items in people’s attics and basements. It’s not extractive, but additive. In this respect, Google’s YouTube, which cuts people in on the ad revenue generated by their videos, is a step above Facebook, which will actually charge you in order to reach all your followers with your content.

This more distributive quality of digital networks ushers in a sensibility very different from the winner-takes-all extremes of industrial capitalism on digital steroids. And it’s a sensibility that informs not just digital businesses. As members of a digital age, we can’t help but be influenced by the environment in which our society is operating. Just as the Industrial Age led us to think in terms of one-size-fits all global solutions and market conquest, the Digital Age leads us to think more in terms of networks, shared resources and distributed processes.

The business landscape in a digital age is correspondingly connected and mutually reinforcing. Things don’t stay still — like money in a bank vault. Everything circulates. Compared with their industrial age counterparts, truly digital investors would come to value flow over growth, ongoing revenue over the accumulation of capital. And to achieve this, all members of the value equation must be served.

The ones who are truly disruptive in a digital age are not those who extract value in extreme ways, but those who are willing to let people in on the winnings. Walmart, for example, is now imperilled by a young upstart — not some digital business scheme, but a company with a digital business sensibility: WinCo, a chain of about 100 stores in the Western United States that operates as a fully employee-owned co-op. As such, it doesn’t have to worry about destroying the local economies in the places it operates, and enjoys goodwill and better employee retention.

In this sense, WinCo better exemplifies business in a digital age than Uber or Amazon. And this is the sort of disruption that can be inflicted on the so-called disruptors: radical efforts at distributing the proposition for value creation.

It’s a matter of exploiting the peer-to-peer emphasis of a networked society, and looking for ways to — dare we say it — help other people make money. No, not the quick-triggered investors who want to pump and dump your business. But your real stakeholders who are in for the long term — and not just because they gave you money, but because they are your workers, your customers, your suppliers and the people who live in your neighbourhood.

The way to connect with them will depend on your particular business, but it will always take the form of acknowledging their status as stakeholders — or making them stakeholders when they’re not.

So what if a cab company employs an app like Uber, but makes its drivers co-owners of the platform? Even if the drivers are merely doing the research and development for a company that will one day use robot vehicles, at least they are participating in the future profits they created.

Why can’t a local supermarket — seemingly threatened by online grocery delivery services — make its parking lot available to the local farmers market on Sundays? It could even charge for space, and then sell unsold produce on its shelves the following week. It’s not surrendering to the competition so much as compensating for its own extractive nature. Yes, a dotcom national food delivery service will win in a war of one extractive enterprise against the other. It has a much bigger war chest. But if the supermarket leverages its connection to the people and neighbourhood in which it operates, it turns itself from just another extractive corporation into part of the fabric of the circulating local economy.

Even local banks — almost an iconic representation of extractive capital — can compete against the peer-to-peer lending platforms by integrating themselves into their communities. They can augment traditional lending with local crowdfunding, using their technology and financial expertise to help communities invest in their own businesses and downtown. Yes, such banks would lose their monopoly on lending, but they would become the locally trusted enabler of investment and inspire the sort of loyalty that could resist the well-funded digital competition of the startups.

These practices may sound like compromises, but they’re actually the long-term strategies that have been employed successfully by family businesses for centuries. They know that their children and grandchildren will have to answer for the tactics they employ today. If they want to be around for the long run, they understand they have to keep their customers, workers, and communities healthy. That means sharing the wealth by enabling distributed prosperity.

If you want to disrupt the disruptors, you’ll have to think that way, too.

Dr Douglas Rushkoff is a lecturer and commentator on media, technology, culture and economics. His latest book, Throwing Rocks at the Google Bus (Portfolio Penguin), is out this month