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The Laws of Disruption
Harnessing the New Forces that Govern Life and Business in the Digital Age
By Larry Downes
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In The Laws of Disruption, Larry Downes, author of the best-selling Unleashing the Killer App, provides an invaluable guide for these confusing times, exploring nine critical areas in which technology is dramatically rewriting the rules of business and life.
The Laws of Disruption will help business owners and managers understand not only how to avoid being blindsided by customer rebellion, but also how to benefit from it. It will teach lawyers, judges, and regulators when to keep their hands off the system and it will show consumers the consequences of their digital actions.
In the gap created by the Law of Disruption, golden opportunities await those who move quickly.
In the late 1800s, as in the late 1900s, start-ups were running wild.
Railroad speculators, entrepreneurs, and financiers were busy laying redundant track from one end of North America to the other. By 1900, excess capacity had nearly bankrupted the transcontinental railroads. Operators were unable to charge rates that covered ongoing costs, let alone recover their investments. There simply wasn’t enough freight to meet the capacity. Shippers knew it and forced the railroads to reduce rates to ruinous levels.
To stay afloat, the railroads invented a unique form of discrimination. Most of the transcontinental tracks began in Chicago and ended on the West Coast but took different routes over the mountains. Shippers to and from Spokane, Washington, for example, could use only the Great Northern Railroad. Knowing this, the railroad developed a rate system that charged shipments from Chicago to Spokane the fare from Chicago to the Pacific and then back to Spokane, even if the freight actually stopped in Spokane. These “back-haul” rates made shipping freight to and from the intermountain regions disastrously expensive. Spokane and other towns fought the system all the way to the U.S. Supreme Court.
The lawyer on the Great Northern case was Brooks Adams. The greatgrandson of Revolutionary War leader John Adams, Brooks knew the inevitable result of unfair taxes, whether levied by a distant monarch or a faceless corporation. Reviewing the long history of economic revolutions, Adams argued that legal systems systematically fail to take into account new technologies and their unique properties. Instead, they force-fit new problems into old law. With no clear precedent to determine “fair” rates of rail carriage, the courts had worked their way back to the Middle Ages and the rights of landowners to use the King’s Highway, giving far too much deference to the railroads in the process.
Adams demanded a more pragmatic solution: “There is no ancient and abstract principle of right and wrong,” he wrote in his brief to the Interstate Commerce Commission (ICC), “which can safely be deduced as a guide to regulate the relations of railways and monopolies among our people, because railways and monopolies are products of forces unknown in former times. The character of competition has changed, and the law must change to meet it, or collapse. Such is my general theory.”
Brooks Adams’s “general theory” continues to apply one hundred years later. Today, thanks to almost magical improvements in the capabilities and costs of information technology, each of us is developing a parallel existence. Simple information exchanges through e-mail have rapidly evolved into a virtual environment in which relationships are formed, business is conducted, and new information products and services are developed in large-scale group collaborations. We are now living not only our real lives but also a second, digital, life, where distance is irrelevant, time can be started and stopped, and property can be reproduced in an instant with almost no measurable cost.
Ten years after the start of the Internet revolution, however, the inability of rules optimized for an analog world to keep the peace in the digital age has paralyzed much of the legal system. Conflicts over information use, acutely visible in thousands of lawsuits brought by the music industry against its own customers, will soon be joined by nascent fights over privacy, digital civil liberties, technology standards, network control, information crime, and global commerce. As the distance between innovation and the law that regulates it has widened over the past decade, the most alarming result is the speed with which tensions between the two have increased.
These struggles are side effects of the Law of Disruption. First introduced in my earlier book Unleashing the Killer App, the Law of Disruption is a simple but unavoidable principle of modern life: technology changes exponentially, but social, economic, and legal systems change incrementally. The technology we invent has the potential to change the world at an accelerating pace, but humans can no longer keep up. As the gap between the old world and the new gets wider, conflicts between social, economic, political, and legal systems honed in the age of steam engines and a generation raised on cell phones, iPods, and video games become more acute and more dangerous.
The battle between innovation and the law has reached its defining moment. Nothing can stop the chaos that will follow. Chaos, however, is necessary. The normal evolution of legal systems is slow and incremental. But disruptive technologies, whether railroads or the Internet, ultimately demand dramatic transformation. In science, Thomas Kuhn referred to these breakdowns as “paradigm shifts.” In business, Joseph Schumpeter called them “creative destruction.” For both men, the process was identical. Bold new experiments, usually the work of young practitioners, directly challenge the core beliefs of the established order, forcing a difficult but critical period of reinvention, followed by another period of normal evolution.
In law, we call it revolution—the replacement of one form of government with another.
The Internet revolution is now demanding rules that fit the realities of digital life, particularly the unique properties of information. As an economic good, information can be consumed simultaneously by everyone; in many cases, it becomes more valuable the more it is used. Next-generation media companies including YouTube, Facebook, Wikipedia, Six Apart, Scribd, MySpace, and Twitter exploit those features. They enable a growing community of users to produce, modify, and collaborate on a remarkable range of content. While some of that content is their own, much of it is under the control of large corporations. No matter, say the users. Bits are bits.
As content owners become increasingly desperate to protect their information assets, worlds are colliding. Digital life thrives on cooperation, recombination, and added value. Industrial-era laws, most visibly of copyright and patent, stand conspicuously in the way. It may not take much to overcome them. The Pew Internet and American Life project reports that 72 percent of Americans between ages 18 and 29 say “they do not care whether the music they download onto their computers is copyrighted or not.” In China, even the idea that information should be treated as a kind of property was unheard of until the late twentieth century. Laws that can’t be enforced are laws in name only. Game over.
This book is the story of these and dozens of similar struggles going on right now. It goes beyond the headlines to reveal the new forces, driven by technology, that will ultimately determine their outcome. For the most contentious features of digital life, I describe nine emerging principles that are shaping a new legal code. These nine principles—the laws of disruption—derive from the economic and environmental conditions of digital life. They are the change agents of the Law of Disruption, closing the gap between legal institutions of the past and those of the future. My goal is to help you learn to harness these principles, both for business and for personal gain. To that end, a “Fast-Forward” section at the end of each chapter offers guidance for policymakers, business leaders, and consumers hoping to avoid the pitfalls, smooth the transition, and exploit the opportunities of a fundamental transformation of law already in progress.
It may seem strange to argue, as I will throughout this book, that markets generally work better than traditional forms of government in establishing rules for disruptive technologies. After all, we are now witnessing the most dramatic market failure since the Great Depression. Business was largely left alone to manage its own affairs, and business proved unequal to the challenge. Greed, fraud, and irrational behavior took over, silencing the voices of reason. Banks collapsed, bubbles burst, and venerable institutions went bankrupt overnight. There was plenty of destruction, to paraphrase Joseph Schumpeter, although there was little evidence of creativity.
Given this sad history, market forces may seem a poor choice to drive the creation of a new code of digital life. As we will see, the alternatives are worse. Judges have little access to the kind of expertise or experience necessary to understand the unique features of innovative technologies. Legis lative power is intentionally limited by a variety of checks and balances, including competing international, federal, and local bodies, as well as the separation of powers between legislators and the judiciary. Lawmakers are often beholden more to special interests and lobbyists than to their constituents. Regulators, likewise, are too often the spokespeople for the industries they oversee, particularly at the moment those industries are threatened by innovation. As Winston Churchill said, “Capitalism is the worst system, except for all the others.”
Regardless of who writes the new laws, one thing is clear. Revolution is coming. This book will teach you to see the warning signs. It will help you profit rather than perish from the seismic shifts already in progress. It will show you ways to smooth your own migration to digital life, and to understand the weakness of the laws that are now in place to regulate it. It will give you the tools to help speed the development of a new code better suited to the accelerating pace of technological change—the new code of the laws of disruption.
Understanding Second-Order Effects
Throughout modern history, technological breakthroughs regularly surpass the people who invent them. The gap between the potential and the humanly possible, the chief by-product of the Law of Disruption, inevitably leads to dramatic change in the short term. But the real transformation comes later, as human systems—economic, social, legal—struggle to catch up. This chapter introduces the Law of Disruption and its key drivers, Moore’s Law and Metcalfe’s Law. Together, they have built the foundation for our new existence, our digital life. Now comes the hard part: creating a new body of laws to regulate it, to keep the peace, and to ensure its prosperity.
KILLER APPS IN THE MIDDLE AGES
Disruptive Technologies change the world. But not in the way you might think.
In the darkest days of the Middle Ages, a Germanic king adapted the rigid metal stirrups used in Asia, making them instead from flexible leather. Now soldiers could balance themselves on horseback and still fight, making them far more effective. The stirrup saved Europe, and these new mounted cavalry were celebrated forever after as knights. But that’s just the beginning of the story. To maintain the new fighting force, knights needed a source of income. Rather than pay them himself, the king granted the knights the right to collect rents and other tributes from farmers in their domain. Feudalism, landed nobles, and serfdom were born. More knights required more land, and the king began to take it from the church. Church and state, and the rise of the latter, established a long-lasting pattern of interaction.
The first-order effects of the stirrup were dramatic. Medieval society was saved. The Catholic Church survived and continued to provide social, cultural, and legal continuity with the long-dead Roman Empire. The king emerged as the first leader of a new and powerful empire, the forerunner of modern Europe. On Christmas Day in the year 800, he took the crown from Pope Leo III’s hands as the pontiff was about to coronate him, and placed it on his own head. His name was Charlemagne—Charles Magnus, the Great—emperor of the Romans.
The long-term consequences of Charlemagne’s simple innovation were, in some sense, even more stunning. The social, economic, and legal systems that developed to support the mounted troops persisted for nearly a thousand years, long after the actual advantage of the stirrup had been neutralized. Charlemagne’s empire, in some form, lasted until the age of Napoléon. Even today, you still can’t buy property in parts of central London without paying tribute to the Duke of Westminster.
The stirrup is a classic example of what I described ten years ago as a killer application, or “killer app”—a technological innovation whose introduction disrupts long-standing rules of markets or even whole societies. Killer apps establish new industries and transform existing ones. They can even create new empires. Their own inventors may have little idea of the uses for them that people will ultimately discover. And the real impact is often felt long after their introduction. The stirrup, crop rotation, reading glasses, iron rope, the steam engine, railroads, the telegraph, antibiotics, automobiles, the atom bomb, the semiconductor—this is just a short list of inventions whose dramatic introductions were followed by even more dramatic changes to the civilizations that used them.
Saying that the stirrup created medieval Europe is a stretch, but not a big one. As historian Lynn White Jr. put it, “Few inventions have been so simple as the stirrup, but few have had so catalytic an influence on history.”
THE THREE LAWS OF DIGITAL LIFE
Charlemagne had the stirrup. We have the computer.
The information age, like the feudal age, began with a simple innovation. On November 6, 1952, Dwight D. Eisenhower was elected president of the United States in a rout. Although Eisenhower was expected to defeat Adlai Stevenson, no one imagined so lopsided a victory. No one, that is, except a Census Bureau computer named Univac. Univac had been built to tally the census, but its operators programmed it instead to process election results. After only 1 percent of the vote had been counted, Univac correctly predicted an Eisenhower landslide.
Univac weighed 16,000 pounds, performed about 1,000 calculations per second, and cost $750,000. It was the first commercially sold computer in the world, and the first to be used for business applications (General Electric programmed it to calculate its payroll in 1954). It was also the first to be programmed for a task it was not initially designed to perform—a trend that defines modern computing to this day. The Census Bureau’s machine was the first; by 1957, forty-six had been sold.
Nearly sixty years after Eisenhower’s election, there are now more computing devices in the world than there are people, and their numbers are doubling every few years. The semiconductor, or “chip,” was first added to a calculator in 1967, to a toy in 1978, and to a toaster in 1983. A personal computer was first marketed in the early 1980s. Despite unfathomable advances in the computer’s power and abilities, the price of computing has dropped steadily for thirty years. Today’s PC costs 16 percent of what it did in 1981, but is nearly five hundred times more powerful. More than a billion have been sold.
As chips have become cheaper and more prevalent, their impact has moved from the world of computers and high technology to every aspect of modern life. Computers are the central driver of productivity gains across industries. Software has become a key source of new consumer products and services. The average automobile now has more than one hundred microprocessors and its own operating system. Even product packaging is becoming intelligent. Soon, more than a trillion items will be able to send and receive data about their price, whereabouts, and expiration dates.
The ubiquity of computers in business, however, has been eclipsed by their takeover of our personal lives. As e-mail and Web browsing have given way to virtual reality games, intelligent cell phones, and social networking, we are each developing a second, parallel, existence. Human beings thrive on interaction, and computers have given us remarkable new tools to connect, collaborate, and communicate with one another. In 2008, consumer Internet usage surpassed business use for the first time, opening a gap that is expected to widen over the next decade. We have our real lives, and now we also have digital lives.
In our digital lives, we can simultaneously chat with friends in different time zones or explore alternative identities in role-playing games. We can let our computers scour the Internet looking for things that interest us—auctions for obscure collectibles, music by artists liked by people who like the same books as you do, or just random content (blogs, photo images, YouTube videos) fed into our personal home pages. And we are no longer tethered by wired connections. All of our information is now available wherever we go on a variety of devices. Nearly 20 percent of American homes had dropped landline service by 2009, relying entirely on cell phones. “Computing,” as Nicholas Negroponte wrote in his 1995 classic, Being Digital, “is not about computers anymore. It is about living.”
Digital life is the unintended side effect of cheap computing power and the ubiquitous network standards known as the Internet. Initially invented in the 1970s, the Internet had the modest goal of connecting the mainframe computers of U.S. government agencies and defense contractors. As more computers joined the network, however, the Internet mutated into something far different and much more interesting. Today, it connects billions of devices and billions of people. It moves information at ever-increasing speeds along a nearly infinite set of pathways, shortening distances and eliminating borders.
Three related principles—Moore’s Law, Metcalfe’s Law, and the Law of Disruption—explain the power and promise of digital life. Taken together, they provide its natural laws—its physics—overseeing its unique forms of time, space, and gravity.
Moore’s Law: Faster, Cheaper, Smaller
In 1965, Gordon Moore, the founder of Intel, made an astonishing prediction. In a brief article titled “Cramming More Components onto Integrated Circuits,” he claimed that the number of transistors on his chips would double every year or two without increasing their cost to users. His promise is now known as Moore’s Law: every twelve to eighteen months, the processing power of computers doubles while price holds constant.
Moore’s Law is the result of technological breakthroughs that reduce the size of transistors, coupled with manufacturing improvements that greatly reduce the frequency of defects. With each new generation, producers yield slightly larger chips made with slightly smaller transistors. Neither Moore nor his competitors have yet to break Moore’s Law, and there is every reason to believe they will continue to deliver on it for the rest of our working lives.
The application of Moore’s Law boils down to one remarkable fact: computers continue to get faster, cheaper, and smaller. As a result, they become more powerful by a factor of two with every succeeding generation. Computer memory, data storage, and data communications have their own rough approximations of Moore’s Law. Improvements in fiber-optic cables (which transmit data at the speed of light) and the development of optical switches translate to data communication costs that are rapidly approaching zero for most uses. One fiber-optic cable can carry millions of simultaneous telephone calls.
Total data storage has also expanded exponentially. In 1980, IBM sold refrigerator-sized disks for its mainframe computers that stored about 1.2 gigabytes of data at a cost of $200,000. Today, Wal-Mart sells 4-gigabyte drives—enough to store about 3,000 books—that are the size of a paper clip and cost only $5.00. GE announced in early 2009 a breakthrough that will increase the storage capacity of CDs by 100,000 percent. IBM is working on technology that will store data in individual atoms and build circuits out of a single molecule.
Because chips are the raw material in the construction of digital life, the implications of the faster-cheaper-smaller principle are profound. Consider a few examples:
1. Deflation. Basic commodities like oil, electricity, or cotton tend to become more expensive over time, with cost increases working their way through the rest of the system. Computer prices, on the other hand, have stayed the same, or gone down. Miniaturization leads to computers in more and more products, increasing economies of scale and pushing costs down even faster.
2. Abundant resources. Oil, natural gas, coal, and many of the sources of electricity are nonrenewable—as they are used, they are also used up, raising prices and limiting further increases in productivity. But the major ingredient of semiconductors is silicon, the second-most abundant element on earth.
3. Zero marginal cost. For most manufactured goods, such as automobiles, price is based on the sum of the cost of developing the goods (research and development as well as marketing), the marginal cost of producing each item (including materials, distribution, and customer service), and a profit margin. Software—the programming that tells computers what to do—can be marketed, manufactured, and distributed electronically, giving it a marginal cost that is close to zero.
Perhaps the most compelling example of Moore’s Law in action is not in business at all, but in the world of toys. From the moment in early 1999 when Sony announced its second-generation home video game console, the Play Station 2, it was clear this would be no mere plaything. PS2 games provide three-dimensional animations that are convincing enough to give many adults motion sickness. Because the games are networked, PS2 users around the world can play them against each other, building powerful communities of users who, in many cases, are coauthors of new game modules or other new uses for the software. Sony sold more than 1 million PS2s in Japan on the first day they were available. To date, Sony has sold more than 150 million PS2s.
Built fifty years after the Univac, the custom processor in the PS2 can execute more than six billion instructions per second. Roughly speaking, that makes the PS2 the equivalent of 22 million Univacs. That many Univacs would fill an area larger than the city of Seattle, and in 1952 would have cost more than $16 trillion, considerably more than the current gross domestic product of the United States. The PS2, on the other hand, is the size of a small laptop computer. It sells for $99.
Seven years later, in 2006, Sony launched the PlayStation 3. The PS3 features even more lifelike graphics, full networking capability, and the ability to download and play high-definition movies. Thanks to Moore’s Law, PS3 is thirty times more powerful than PS2. That translates to about 660 million Univacs, enough to fill the entire state of Washington. And their cost, in 1952 dollars, would exceed the total money supply of the world.
Metcalfe’s Law: Value Expands Exponentially
While those numbers are settling in, consider the second defining principle of digital life. Metcalfe’s Law, formulated by networking pioneer Robert Metcalfe, explains a phenomenon anyone with a telephone already understands. The more people you can reach, the more reasons you find to reach them. One telephone is useless. A few phones have limited value. A billion phones create a vast network. As the number of connected devices in any network increases, the number of possible connections between them grows exponentially. Each new connection, therefore, adds far more value than the one that preceded it. To paraphrase Metcalfe’s findings, the usefulness of a network is the square of the number of users connected to it.
The key to Metcalfe’s Law is the knee in its curve, the point at which there are enough users so that each new node adds not a few but a few million new connections. Here’s how it works. If you have a network of two telephones, the total number of possible connections is two (I call you, you call me). Add a third phone and we add not two but four additional links, still not very exciting. The millionth new phone, however, adds not two or even two hundred but two million new potential calls, making the network even more attractive for the next million users, and the millions after that. Add three-way and conference-calling features, and the number of possible connections explodes.
Networks—railroads, computers, or individuals speaking a particular language—exert a kind of magnetic pull. The more users, the stronger the pull. Reaching the inflection point gives the network increasing momentum, or what is sometimes called “the tipping point.” Eventually, absent any economic or technical constraints, networks grow to the point where every possible connection is made. At that point they become so much a part of our lives that they are almost invisible. To reach the tipping point, however, networks must attract as many users as quickly as possible, drawing in the next, bigger, wave. The best way to do that is to keep the cost of entry low, perhaps by subsidizing or giving away equipment the user needs to connect and then charging little for access and use.
For information technology, Moore’s Law makes it relatively easy to keep the costs of connection low. Digital networks are built on hardware that gets cheaper all the time, allowing new applications to take full advantage of Metcalfe’s Law. That’s one important reason digital networks have de veloped so much faster than earlier networks like, say, the railroad or the telephone, where giving away free service wasn’t an option. These early technologies also didn’t benefit from the additive value of standardization. Railroads in the United States did not settle on a uniform gauge until the 1880s, making interconnections between lines in the North and South complicated, slow, and expensive. Telephones added dials only in 1931, though the need for human operators had constrained growth for some time. Without self-dialing, today’s phone system would require more operators than there are human beings to work it.
- On Sale
- Oct 13, 2009
- Page Count
- 304 pages
- Basic Books