Corporations Weren’t Designed to Run on Code
Plants grow, people grow, even whole forests, jungles, and coral reefs grow — but eventually, they stop. This doesn’t mean they’re dead. They’ve simply reached a level of maturity where health is not about getting bigger, but about sustaining vitality. There may be a turnover of cells, organisms, and even entire species, but the whole system learns to maintain itself over time, without the obligation to grow.
Companies deserve to work this way as well. They should be allowed to get to an appropriate size and then stay there, or even get smaller if the marketplace changes for a while. But in the current business landscape, that’s just not permitted. Corporations in particular are duty bound to grow by any means necessary. There’s no such thing as “big enough.” Like a shark that must move in order to breathe, corporations must grow in order to survive. This requirement is in their very DNA or, better, the code we programmed into them when we invented them; seeing as how that was close to 1,000 years ago, corporations have had a pretty long and successful run as the dominant business entity.
The economy we’re operating in today may have been built to serve corporations, but not many corporations are doing well in the digital environment. Even the apparent winners are actually operating on borrowed time and, perhaps more to the point, borrowed money. Neither digital technology nor the corporation itself is necessarily to blame for the current predicament. What is to blame, rather, is the way the rules of corporatism, written hundreds of years ago, mesh with the rules of digital platforms we’re writing today.
The economy we’re operating in today may have been built to serve corporations, but not many corporations are doing well in the digital environment.
Since the mid 1960s and the explosion of electronics, telephony, and the computer chip, corporate profit over net worth has been declining. This doesn’t mean that corporations have stopped making money. Profits in many sectors are still going up. But the most apparently successful companies are also sitting on more cash — real and borrowed — than ever before. Corporations have been great at extracting money from all corners of the world, but they don’t really have great ways of spending or investing it. The cash does nothing but collect.
In 2009, a study initiated by economic futurists at Deloitte’s Center for the Edge dubbed this “the Big Shift.” They anticipated the conclusion to which macroeconomists are now reluctantly coming, that an economy dominated by large corporations must eventually undergo a system-wide stagnation. As the ongoing study has discovered, although some digital technology firms, such as Apple and Amazon, are doing well in the new business landscape, “they are still only a relatively small part of the overall economy,” which is losing steam over the long term. While per capita labor productivity is steadily improving, the core performance of the corporations themselves has been deteriorating for decades.
What we’re witnessing may be less the failure of corporations to thrive in a digital environment than the limits of the corporate model in any environment — and the acceleration of this decline with each new technological leap.
Incapable of raising the top line through organic growth, corporations turn to managerial and financial tricks to please shareholders. Boards incentivize CEOs to increase short-term profits by any means necessary, even if it means defunding research and development labs and personnel whose value creation may be a few years off. The strategy works, temporarily putting more cash on the positive side of the balance sheet. But it only makes the ROA problem worse: companies end up burdened with more unspent cash and a bigger block of dead, unproductive assets.
Technology may be involved with all this, but pointing to digital things as somehow causative is a mistake. Digital processes, applied to the same old tactics, simply exacerbate the same old problems. Outsourcing to robots is just another form of outsourcing.
The digital landscape does make the bankruptcy of the corporate model all the more apparent. The speed and scale on which this is occurring helps us recognize that we are not in a cyclical downturn as corporations attempt to compensate for the disruptive impact of digital technology. Rather, we are in a structural breakdown, as corporatism — enhanced by digital industrial mechanisms — runs out of places from which to extract value for growth. The corporate program has reached its limits. Its function is to grow companies by turning active economic activity into static bags of capital; in doing so, it has taken a liquid medium necessary for our economy’s circulation and frozen it in corporate accounts. And if corporations convert too many assets from the working and business economies into pure capital, then the whole system seizes up for lack of fuel.
Simply stated, it’s harder to make money by working or creating value when the scales tip too far in favor of investors and shareholders. Eventually, even investors who’ve ended up with piles of cash will have an increasingly difficult time finding places to invest.
The Platform Monopoly
The corporation has always depended on people in order to execute its functions. It needed our arms, legs, mouths, and brains to function. Digital technology, though, might finally give corporations the autonomy they need to make decisions without us, and even without the bodies they need to execute their choices in the real world. They can be software running software.
No question, digital technology has created tremendous new avenues for growth. Apple, Google, Facebook, Amazon, Microsoft, and many other corporations have created new opportunities and new millionaires. But as a result of their extractive, monopolistic practices, the landscape is left with less total activity and potential for growth. The pie is smaller, or at best staying the same, but these digital businesses have managed to get bigger pieces of it, making it harder for every other corporation around — including themselves, in the long term.
In large part, this is because they’re still operating as if they were twentieth-century industrial corporations, only the original corporate code is now being executed by entirely more powerful and rapidly acting digital business plans. What algorithms do to the trading floor, digital business does to the economy. In the purely rational light of the computer program, a digital corporation is optimized to convert cash into share price, money and value into pure capital. Most of the people enabling this have no reason to believe it is harmful to the business landscape, much less to human beings.
At worst, argue today’s generation of technopreneurs, we are undergoing a whole lot of “creative destruction.” That’s the process, first coined by Marx but popularized by Austrian-American economic philosopher Joseph Schumpeter, through which the economy achieves a natural churn. Simply put, it’s a description of the way young companies with superior technologies or processes invariably unseat established ones. Old ways of doing things are replaced by better ones. There’s pain as companies go out of business and people lose jobs, but ultimately there’s gain as the new market establishes itself.
This rationale has been enough to keep most thoughtful Silicon Valley entrepreneurs from worrying too hard about the repercussions of their actions. After all, digital corporations will necessarily carry out corporate code better than their predecessors. For example, last century’s retailers mailed out catalogues and then used sales feedback to adjust the offerings for the next quarter. A digital company will A/B test its web page, display ad, or online catalogue in real time. Every interaction is a test of a bigger/smaller font, a higher/lower price, friendly/formal language, and so on. The thousandth time a page is rendered, it has evolved into a much better selling mechanism.
Each and every choice and process can be made more efficient, more responsive to market conditions, and more persuasive to users. And why shouldn’t companies optimize for victory? It’s only creative destruction. Either get with the program or get run over by it.
Creative destruction accelerates whenever there’s a major new technology capable of fostering entrepreneurial activity, so the fact that we’re seeing so much churn right now shouldn’t surprise us.
That’s the sanguine interpretation of creative destruction, held by the winners since industrialism began. If you’re the unhappy victim of a plant closing, the resident of an abandoned community, or the owner of an undercut small business, you are an unfortunate but necessary sacrifice to business innovation and free-market competition. Free-market advocates celebrate create destruction as the way that scrappy young upstarts come and unseat the most powerful companies on the block. But Schumpeter also suggested that each new winner takes over its sector in a much more complete way than its predecessors, potentially destroying more businesses and opportunities than it creates — certainly in the short term. It’s like big fish swallowing up smaller ones until only a few really big fish remain. And with enough influence, those big fish can change the rules and further disadvantage those who would rise up to eat them.
Creative destruction accelerates whenever there’s a major new technology capable of fostering entrepreneurial activity, so the fact that we’re seeing so much churn right now shouldn’t surprise us. Nor should it upset us, not if we take Schumpeter to heart and accept that without pain in the form of lost employment and social destruction, we won’t get gain in the form of new markets for capital. But the entrepreneurs fomenting today’s upheavals appear more aware than their predecessors of how to create monopolies, leverage networks, and exploit their technological advantages. The digital difference is that monopoly-favoring regulation needn’t occur at the political level when it can be embedded in the operating systems themselves.
Uber, as we’ve seen, means to be the creative destroyer of the current taxi industry. It bills itself as a way of connecting drivers and passengers. According to this way of thinking, it is primarily a platform and payment system, not a taxi or limousine service. By calling itself a platform rather than a taxi dispatcher, Uber has been able to work in a regulatory gray area that slashes overhead while inflating revenue. This is how Uber can be valued at over $18 billion while many of its drivers make below minimum wage after expenses. Meanwhile, the company’s path to success involves destroying the dozens or hundreds of independent taxi companies in the markets it serves. On the surface, it’s the creative destruction of centralized taxi commissions and bureaucracy. The result, however, is the elimination of independently operating businesses, replacing them with a single platform. Former business owners become Uber’s unprotected contractors. Market pricing and competition are replaced by a monopoly’s algorithmic price-fixing.
Creative destruction? Perhaps, but with a twist: the new businesses of the digital era aren’t stand-alone companies like stores or manufacturers, but, like they say, entire platforms — which makes them capable of reconfiguring their whole sectors almost overnight. They aren’t just the operators; they are the environment.
To become an entire environment, however, a platform must win a complete monopoly of its sector. Uber can’t leverage anything if it’s just one of several competing ride-sharing apps. That’s why we see Uber behaving so aggressively toward its competitors (being accused, for example, of making and canceling calls to drivers of other companies, wasting their time and energy and then advising them to change platforms). It’s not that there’s too little market share to go around; it’s that Uber doesn’t mean to remain a taxi-hailing application. In order to become our delivery service, errand runner, and default app for every other transportation-related function, Uber first has to own ride-sharing completely. Only then can it exercise the same sort of command as the chartered monopolies on whose code these modern digital corporations are still running.
The fact that digital companies can build platform monopolies brings creative destruction to a whole new level.
Union Square Ventures founder Fred Wilson worries aloud on his company blog that digital entrepreneurs are more focused on creating monopolies and extracting value than they are in realizing the internet’s potential to promote value creation by many players. Wilson is excited about the possibility of new platforms that allow new sorts of exchange, “but,” he says, “there is another aspect to the internet that is not so comforting. And that is that the internet is a network, and the dominant platforms enjoy network effects that, over time, lead to dominant monopolies.” The fact that digital companies can build platform monopolies brings creative destruction to a whole new level.
None of this is ever about bringing more value to people or — heaven forbid — helping people create and exchange value on their own. Digitizing the corporation simply affords it ever more efficient and compelling ways to extract what remaining value people and places have to offer. It’s simply running the original and unchallenged corporate program as efficiently as possible, carrying out a thirteenth-century template for converting value into capital — but doing it faster and better every day, learning and improving with every action. This is why we’re seeing the extremes we’re now witnessing: we took a program that used to require human actors to execute and put it on a digital platform.
Ironically but irrefutably, this is not good for business. As more value is sucked out of the economy and frozen in corporate storage, companies’ return on assets erodes even further. As corporate algorithms battle one another for platform monopolies, the extraction of value and opportunity from the real economy worsens. An app swallows an industry and has nothing to show for it but shares of stock with no earnings. On a digital landscape running only corporate code, corporations themselves end up in the same predicament as musicians and everyone else: a couple of winners take it all while everyone else gets nothing. Making matters worse, in a successful corporate environment, total economic activity decreases, remember, as money is sucked up into share value.
It’s as if the business world is morphing into a video game. We can only wonder who the eventual winner will be. Sergey Brin, Mark Zuckerberg, Jeff Bezos…? They’re playing a winner-take-all competition. Google is trying to leverage its platform monopoly to become a shopping platform, Facebook is leveraging its monopoly in social media to become an advertising service, and Amazon is leveraging its store to become a cloud service.
In the corporate program, there’s only room for one.
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Douglas Rushkoff is author of 15 bestselling books on media, technology and culture, including most recently “Throwing Rocks at the Google Bus”. This article was originally published in The Harvard Business Review and was adapted from Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (Portfolio, 2016).