Criticizing Clay Shirky's Collapse of Complex Business Models

Summary for TLDR types:
  1. Tainter's complexity and Diamond's failure to diversify = wrong
  2. Increased competition from abundant free content = the problem
  3. Solution = competitive response; cartel, locking up distribution, specializing into niches are alternatives to lowering prices.


Well, some societies don't diversify their resource consumption, so when it goes away (whether they killed it or not), they have to rebase to a different resource mix; and as Diamond says, some don't make it.

One could say video/content corporations failed to diversify enough, that their advertising, product sponsorship, and licensing (domestic and international) revenues weren't broad enough.

I'd argue that it was fairly broad and well-diversified, to get more diversified they would have had to find a new species capable of paying for content. However, content providers only have humans to sell to.

So, yeah, you could say it's a diversification issue, but that seems like saying our universe is a single point of failure.

A more helpful framework is that of competition. Content used to be difficult to make and provide, now it's simple and abundant.

Since us humans can be entertained for hours by user-generated youtube craziness or wikipedia, the advent of these free sites means that content corporations have had the ultimate Wal-Mart of low cost production move in and start undercutting them.

Shirky points out that providers need to lower costs in order to compete. This isn't true.

1) This assumes some reasonably classical down-ward sloping demand function for prices near zero. We don't have working micro-payments yet, so we don't really know what near-zero looks like. It could be one massive step function.

2) Alternatively, the iTunes store has shown music companies the way forward by controlling distribution (back to the early days of movie theatres). The iPad presumably promises the same, but for more content.

3) There are lots of high-profit content niches, e.g. financial news and analysis that people pay lots of money for.

Given the increased competition, providers need to organize some kind of competitive response; lowering prices is only one. They can also form cartels, lock up distribution, specialize into niches, etc.

I think you are reading Shirky wrong. Yes, "providers need to organize some kind of competitive response". And yet, they are not. More generally, why does creative destruction happen at all - why do small companies out perform larger ones? Tainter's thesis is one theory as to why this happens: that corporations are frozen into inaction through the deleterious effects of ever increasing internal complexity.

If that's the read, then why does Shirky go back to the 80's? The currently fashionable econ story = Recalculation, wherein we previously knew what worked, and now we don't, so last year's winners have to simultaneously run their old businesses into the ground while searching for the next way to do things. And as Barbie says "Search is hard, let's go shopping!" -- Patrick

I'm sorry if I'm spotty in leaving my name on posts. Now, down to business: "why does Shirky go back to the 80's?" The book was written in the 80's, but all the examples seem to be from the 90's. I can't imagine why the decade of the example would matter, though. As for recalculation - this is the first time I've heard of the term, although it sounds a lot like technology driven creative destruction, i.e. what worked last year still must work, so the only reason it doesn't work now is that something else has come along that works better. That is certainly interesting, but doesn't explain thing like the fall of Rome/the Incas/various Chinese dynasties where large complex societies fell to more agile, more vigorous and less technologically advanced societies. For more modern examples - why is it that large cities like Detroit and Cleveland are crumbling? There is no technological innovation driven creative destruction similar to the hard drive market there. At least to me, it is clear that some other force is at work. Even when technology is a key element in the downfall of organizations as in the many examples that populate "the Innovator's dilemma", it seems clear that the downfall came, not because one company with super advanced technology sprung it on an industry and cleaned everyone's clock, but because the larger companies, which often possessed the disruptive technology first, were culturally unable to pursue opportunities in front of them. If my assumption (recalculation = tech drive creative destruction) is false, could you expand a bit, particularly with links? Theo Recalculation doesn't explain how societies/companies fall apart, rather it explains why switching from one source of cash/oil/resourceX to an unknown other causes so much pain. Some organizations make it across this (e.g. IBM through the late 80's early 90's), and some don't (Rome's losses of the provinces). A good example of Recalculation's costs lie in the labor market: when one section of the economy is booming, it's obvious where to look for a job, when no section is booming, you don't know where to look for a job. Search costs go up.... -- Patrick

I don't but it as an explanation of collapse. More precisely, it isn't detailed enough. According to the article you linked, "recalculation" is the re-allocation of capital phase of the Austrian business cycle although it certainly could result from rapid and profound technological change; the media industry is going through recalculation right now. The re-allocation of capital is a costly phase, but mostly because it is difficult to come up with profitable businesses quickly; there are generally lots of people with lots of ideas, but most of the end up failing. The thing is, the subject of recalculation is always one level of complexity higher than what Tainter/Shirky talks about. The media industry is recalcuating but that doesn't say anything about why individual firms lack the plasticity to make the transition from old media to new media. -- Theo

Exactly, since firms don't know how make money in a new way, Recalculation indicates the problem doesn't lie with the plasticity to reform into a "new way" firm, rather it lies in reforming into a massively entrepreneurial firm trying to find a way to make money. Additionally, making money may require skills that your staff do not have. So, you may be asking an impossible question of them. And the killer is that you have no idea whether it's impossible or not until you start making money again.... -- Patrick