How do we deal with the ‘Facebook apocalypse’?

Over at Forbes, Eric Jackson argues quite convincingly that Google and Facebook – powerful though they are now – probably won’t be top dogs on the web for long.

“The organizational ecologists talked about the “liability of obsolescence” which is a growing mismatch between an organization’s inherent product strategy and its operating environment over time.  This probably is a good explanation for what we’re seeing in the tech world today.

“Are companies like Google, Amazon, and Yahoo! obsolete?  They’re still growing.  They still have enormous audiences.  They also have very talented managers. But with each new paradigm shift (first to social, now to mobile, and next to whatever else), the older generations get increasingly out of touch and likely closer to their significant decline.”

This prediction is consistent with history. You don’t see many Sony Walkmans, IBM PCs, or MySpace pages around these days.

But it also chimes with a lot of what we know about economics. Corporate organisations are “stupid” in that they don’t learn very effectively (pdf) and in most cases, improvements to productivity and new innovations tend to come from new firms entering the marketplace with new ideas, not incumbents making incremental improvements.

To what extent this is true will vary by sector: in the UK during the 1980s, 90% of all productivity improvements (pdf) in manufacturing came from firms exiting and entering the marketplace. One look at the cut-throat history of the tech market suggests it is probably in a similar ballpark.

There are big costs to workers from a firm going bust – unemployment, atrophied skills from inactivity, mental health damage, and loss of social support networks. And there are obviously financial loses to owners of capital. But in traditional industries like manufacturing or retail this transience of firms seems to cause relatively few many problems for consumers. It’s not too difficult to switch your supplier or visit a different shop.

Interestingly, the web seems to change this. Because of the more persistent relationship users have with web services than most businesses, there are real costs to consumers when they go bust.

If Twitter folded, journalists and other social media professionals who spent years building up followers would see the foundation of their business evaporate overnight; follows to do have a very real monetary value. If Google Apps for Business went down, migrating the IT system of an entire enterprise would be costly to many thousands of firms. If Facebook went down, billions could lose their only copy personal photos, a vast history of personal messages and their address book in one fell swoop. Megaupload goes down, and millions lose unique data. If any major email provider was out-competed and folded, millions would have to change their email addresses, with all the hassle that would cause.

Firms going bust is increasingly not a cost-free situation for consumers. But it looks necessary to improve productivity and create new services, so there’s a dilemma. What could we do to ameliorate the problem?

Cost and frequency of failure

We could hope that failing firms will have good will and cushion the costs of their own failure for consumers – that Facebook would let users download all their data before they turned the lights out. But this isn’t a strategy, it’s just wishful thinking. There’s also no incentive for a firm that’s about to disappear from existence to do anything, so don’t count on it.

Another strategy is to tackle the problem from the other end – reduce the need for firms to go bust in a market, and so in turn reducing the frequency of crashes. Achieving this would have the added benefit of reducing the other associated costs of a bust for involved labour and capital, as well as consumers.

We’re reliant on firms going bust to tell us about dramatic changes in consumer preferences – so why not start by trying to add more information flows to firms from consumers? In practice, this means getting consumers more involved in decision making at companies, rather than just relying on price signals to do the job.

Involving consumers in the decision-making and direction of a firm isn’t a new idea. Consumer cooperatives are a classic and tested model – like the UK’s Cooperative Group, where six million consumers elect the company’s entire board of directors. The Co-op is incredibly successful, widely considered to be innovative, and is one of the longest surviving large businesses in the world, founded in 1844.

If more firms were like this, they would be less ‘brittle’ and find it easier adapt to evolving preferences. But it’s impractical to expect this model to work for technology start-ups coming up with ideas. If a start up has a new idea, how do consumers know they want to be part of a consumer co-op before the product exists? And whether consumer-directors wouldn’t just get in the way in a start-up is also debateable. Finally, when a start-up fails, it doesn’t really matter. The big external costs to consumers and labour come when an entrenched firm fails, taking down part of the infrastructure of the web with it, so these are the kind of firms where changes should be directed.

Open source

The open source movement is in a way a type of consumer cooperative operating in the realm of software. Anyone can contribute to the code base of an open source project (provided they know how to code) so users can contribute changes they think should be made.

Whether these changes are incorporated into the main project will vary, but there’s always the option of starting your own codebase (“fork”). In a way the barrier between coders and non-coders makes these projects more akin to workers’ cooperatives, but often most coders will be enthused users, so it’s not a stretch to see them as having some consumer participation in the shaping of the direction of what’s being produced.

An auxiliary of the open source movement – the open standards movement – is also relevant. Where open source can reduce the frequency of failure by involving users in the production process, open standards can reduce the costs of failure. This is because they ensure interoperability between services and so can allow users to export their data in an open format if something were to go awry.

But there’s a problem with open source and open standards as they are currently composed. In principle, they could go some way to solving our problems. But unless they’re used by the services that most people use, their effect will be minimal.

And because firms have an incentive to keep their code and data locked down – to increase barriers to entry to competitors, to increase value to advertisers, so they don’t have to rewrite their databases in different standards – it’s unlikely you’re going to see say, Facebook, introduce an export facility, or open its platform up to consumers.

People might learn to appreciate open standards after Facebook goes down and they lose their information, and they might pick an open service next time. But that doesn’t solve our problem either, as it happens after what we’re trying to avoid.

The lifeboat and the bridge

The principles of open software and consumer cooperatives have the potential to solve our problem, but market failures mean they’re unlikely to be applied where they’re actually needed.

So it seems to me there are two simple things states can do to help solve the problem.

The first is draw up an Open Data Bill and pass it into law. This would (where applicable) mandate the use of open standards by firms, and also mandate that all data held about a user is downloadable by that user, in an open standard. Open standards and access to our own data are massive public goods with huge positive externalities, but because they’re not always in individual firms’ self interest they don’t get done. This would fix that problem, and reduce the impact of the failure of services by giving users a ‘life boat’.

The second is to reform the corporate structure of larger companies to include some directors elected by consumers, rather than just shareholders. Not all the directors, like in the Cooperative Group, and not even a majority, but just a small portion of the board – say one third.

This kind of split between board members is similar to the German, Swedish and Finnish systems of electing company boards, called Co-determination – where employees elect half the directors* and shareholders the other half. Giving consumers one third would give them some input on the strategic direction of large businesses, a place on the bridge of the ship, so to speak. The benefits would reach far beyond web services – consumer appointed directors would be far more likely to put a stop to unethical business practices; think Apple and Foxconn.

You’d avoid the problems of consumer cooperatives not being very agile start-ups, since the new structure would only apply to large businesses. But like the Cooperative Group, these services would be less likely to run aground in the first place.

*I think there’s a good case for worker involvement on boards as well, but that’s for another post

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Comments

  • mattwardman2000  On May 7, 2012 at 21:13

    >To what extent this is true will vary by sector: in the UK during the 1980s, 90% of all productivity improvements (pdf) in manufacturing came from firms exiting and entering the marketplace.

    It doesn’t actually say that. It says (point b):

    “We find that (a) ‘external restructuring’ accounts for 50% of labour productivity growth and 90% of TFP growth over the period; (b) much of the external restructuring effect comes from multi-establishment firms closing down poorly-performing plants and opening high-performing new ones, and (c) external
    competition is an important determinant of internal restructuring.”

    ie Perhaps half of that 90% came from eg British Steel closing down the bad plants and building up the good ones.

  • Jon  On May 7, 2012 at 21:23

    Good spot. I suppose that means the percentage is probably significantly lower, though still very substantial.

  • Topias Uotila  On May 8, 2012 at 05:23

    Hi,

    The Finnish system doesn’t really give the employees half of the seats on the board. The primary mechanism is that the employer and the employees agree upon the participation methods and if they fail to do so, the employees have a right to a quarter of the seats on the board – however, at least one and at maximum four seats.

    Anyway, the issue, if this is a good governance model or not, is debatable. Especially I do not believe that it makes sense to deny the majority of the seats from the owners of the company. Mainly due to the fact that this would create very strong incentives for the companies not to grow beyond your limit of when the seats need to be given up and might even make investing in very growth oriented start-ups less attractive. Thus slowing down the creative destruction, which you started out as describing as the main source of productivity increases in the economy. (Leading to slower growth and ultimately a worse situation for everyone.)

    If the problem you are describing really is as economically huge as you imply, why wouldn’t that company or another be able to monetize on it? If the billion Facebook users value their data for even 1$ each, wouldn’t it be possible to purchase the bancrupted FB’s data for a minimal sum and make it available for download for 1$ per user? Surely such a business would not need to run costs up to a billion $.

  • Raj  On May 10, 2012 at 03:28

    The analysis is scintillating and very refreshing.

    However, the solution offered is not pleasant. USA today suffers from a surfeit of laws and rules and is becoming dysfunctional in many areas not for the lack of it, but because there are too many. While mandating a open data bill may look great for regulating Facebook, what about Google. Would this mandate that users should be able to get a copy of all searches they have made? Would this mandate online newspapers that allow users to post comments to allow a way for users to download them? Would it mandate this blog site to let me download my comments before they close?

    Rambling apart, all laws have unintended consequences and in a rapidly changing world, it will not take long for the law to become out of context.

    Instead, would it not be better for solutions from the market. What if somebody offers a Facebook downloader that can archive your content to your local disk? Perhaps for a small fee :)

  • Jon  On May 10, 2012 at 12:20

    Topias: Thanks for the comment.

    Regarding giving up a majority of seats restricting incentives for firms to invest – I think there are three things I’d say about this.

    Firstly, yes I think there will probably be some incentive not to expand past that point. But I’m not sure whether it would be strong to the point of being overriding. The owners of the company, after all, are out to make a profit. Consider their position when they reach the point at which the majority loss was triggered.

    They might expect to make a smaller profit than they otherwise would have done without the new corporate structure and growth, but if they want to make more profit, they have to expand. They might be worried that not having full control would reduce their potential profit, but the growth would still arguably be necessary to increase it.

    You could argue that they could game the system – that they’d keep the company small but try to increase the rate of profit within the confines of a smaller firm. This doesn’t actually seem like such a bad thing: it sees like it would quite dramatically ensure firms concentrated on productivity improvements, which is actually great in the long run.

    And thirdly, and I think quite importantly, I’d say that such an incentive towards smaller companies might not be such a bad thing for the competitiveness of a market as a whole. A lot of negative effect in markets – monopolies, inordinate strong market power, concentrates of wealth, political influence, big barriers to entry to new firms etc, happen because firms grow too large. If capital was a little bit more often invested in other smaller firms rather than piled on existing firms, you might see some of these problems reduce.

    I think your point is something you’d have to bare in mind though – perhaps you’d want the worker and consumer representation on the board to taper in slowly, rather than happen at a sort of ‘big bang’ when a company reaches a certain level. That might be less distorting. It also means that it’s not just the owners of the company who are in control of its actions at the point a majority loss would be triggered, so the inventive would be less relevant.

    RE the market solution to open data access that Raj and Topias raise: Firstly, I think it’s still wishful thinking. It might happen, sure, but there are situations where it might not. What if Facebook, say, went into administration? Administrators selling off assets might not make that call. I think you also need a degree of co-ordination, it’s not just about access to data, it’s about everyone using the same framework so you can modularly slot it into other services when it is exported/imported. Also I think having it in law actually comes closer to existing EU law and wouldn’t require that many changes – EU law already requires that you have access to your data from any public company on request, (people have pointed out that you can do this with Facebook and Google) so asking for them to do it in a format that works with other services seems like a logical step

    I think I’m going to do a follow-up post to look at various criticisms from the Slashdot comments in detail as well. Also again guys, thanks for taking the time to comment.

    • Raj  On May 11, 2012 at 03:35

      Awesome, Jon. Thanks for the detailed follow up.

  • susan  On December 3, 2012 at 07:59

    Thanks for finally talking about >How do we deal with the ‘Facebook
    apocalypse’? jon stone <Loved it!

  • Hildegard  On July 27, 2013 at 21:48

    Amazing! Its genuinely awesome article, I have got much clear idea on the
    topic of from this post.

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