Investing in the Second Great Wave of Technology
By Francis McInerney, Sean White
St. Martin's Press Copyright © 2000 North River Ventures, Inc.
All rights reserved.
A Brief History of Information
Throughout history, the falling cost of information has driven change by shifting the balance of market power from producers to consumers.
For most of written history, information costs have fallen imperceptibly. Long periods passed between major costs discontinuities. The evolution of information from the invention of writing to the printing press took many thousands of years. But once discontinuities such as movable type began, they occurred with increasing rapidity.
Knowing that a discontinuity is happening doesn't make picking winners easy. When large drops in the cost of information occurred, as with the development of the printing press, only certain types of organizations survived. The key, therefore, is having the right organization, something we will return to time and again.
Progress from the printing press to the Bill of Exchange and other commercial instruments took only hundreds of years. Moving from this Commercial Revolution to the Industrial Revolution took only a century; from the Industrial Revolution to the telegraph, only half a century; and from the commercial computer to the personal computer, only twenty-five years. Now, seemingly daily, new products are announced which double the power of previous generations of microprocessors and associated hardware and software. Information costs are in a complete free fall.
Thus, our experience since the dawn of civilization has been one of increasingly compressed cycles of change. Each of these, like the Reformation, has been dramatic, and has had profound effects on all aspects of our lives. What we are living through today is every bit as tumultuous. To understand it we need to understand the nature of information.
Information was once so precious that it was considered sacred, far more scarce and valuable than labor, land, or other natural resources. Information on how to grow crops, when to plant them, and when the seasons were expected to change was painstakingly collected. Commonly, this information was held intemples and controlled by the religious elite with the full authority of the state.
Scarce and very expensive to acquire, information had great value to those who controlled it. From the earliest Mesopotamian king to Lenin and the leaders of the world's industrial giants, rulers have recognized that information is power. Controlling it has meant keeping power.
At the same time, high-cost information made early civilizations vulnerable. Nothing devastated these societies more than the sacking of their temples: with the loss of that building went the loss of all knowledge, from when to plant crops to how to rebuild the temple itself. A crude predator could eliminate thousands of years of carefully collected information with a stroke, and often did. Such "lost" civilizations are still being unearthed.
For millennia, information costs didn't fall by much. Information was expensive to collect, expensive to store, and without machinery, it was even expensive to use. Empires and city-states rose and fell, and knowledge increased, but the costs of acquiring, managing, and disseminating information stayed pretty much the same.
Large empires in China, India, and Italy used bureaucracy and administrative skills to bring down information costs and widen information dissemination, but these efforts had little lasting impact. With its 53,000 miles of roads, Rome eliminated traditional dependence on water transportation and built an empire that lasted nearly two thousand years, spreading imperial administration from the North Sea to the Red Sea and beyond. Couriers of the Imperial Post could cover one hundred and fifty miles per day over the well-engineered (and safe) roads of the empire, reaching London from Rome in less than a week. This was a period of wealth creation on a scale that would not be seen again until railways were built across Europe and America, seventeen hundred years after the time of the Roman emperor Trajan.
Rome also divorced the management of knowledge from temples by creating large libraries for civil administration and learning. But information was still tied to geography. You had to go to the library; it didn't come to you. Information dissemination remained a problem until fairly recent times.
Christianity made important strides. The monastic system preserved information following the collapse of the western half of the Roman Empire. But it didn't do much to cut the costs of acquiring information or of increasing its dissemination. Indeed, for a time, monasticism may even have increased these costs. Illuminated texts were extremely laborious to reproduce.
The cost discontinuity in Christianity came with the invention of the portable temple. When a priest can say a Mass anywhere, the church goes to the people. Information, for the first time, was on the move, and Christianity became a portable, go-anywhere, cross-any-ocean phenomenon. This cut the cost of information dramatically. Islam benefited from the same process and quickly crossed the globe from the Atlantic to the Pacific through the Asian landmass.
This was also a major change in "software." Making temples portable and information mobile was a shift in thought, not technology. Today, software changes like this one are essential to firms trying to create innovative organizations that apply knowledge to production and customer service instead of money to natural resources, machinery, and labor.
The next major software change, the translation of the Bible into the vernacular, allowed people to have the temple to themselves. This too brought down costs. However, information still had to be collected manually and recorded by hand, a slow and expensive process. But the first hesitant steps in the secularization of information had been taken: information no longer had to reside in temples. It was losing its sacred character.
The effects of secularization were explosive. Gutenberg's fifteenth-century invention of movable type caused the most dramatic drop in the cost of information since the development of handwriting. It made books commonplace and universally available.
In the sixteenth century, information, and with it the immense power that resided in the church and state, moved suddenly into the hands of individuals. Everywhere that literacy moved, established institutions collapsed, often with frightening speed. Inexpensive books literally made the library at Alexandria available to anyone. Common people gained access not just to religious ideas, but to scientific knowledge and political ideas as well. Individuals for the first time appropriated the power to interpret information and to create it. They could print books. The power shift that followed was cataclysmic.
Just like the Information Revolution today, the Reformation spread across growth markets like wildfire. It especially flourished along major trade routes, following the business paper trail across northern Europe and into North America. Incumbent rulers naturally resisted this shift in control over information, and dueling books were soon followed by dueling nations.
But it was in combination with the discovery of the New World, perhaps the most important event in history, that the printing press had its most profound consequences. The existence of portable secular information in the hands of the newly empowered and "reformed" colonists created a force that tore into the Northern Hemisphere of the New World, consuming native lands and almost overwhelming the "unreformed" colonists to the south—though not, notably, their fellow reformed colonists to the north.
The reformed colonists saw their rights as "self-evident" and not bestowed on them by a church or state. Low-cost information enabled them to create a political process of their own and to assume, for the first time, an educated electorate. The secularization of information was complete. Low-cost information, in effect, created America.
Low-cost information also created the modern corporation. Unencumbered by churches or kings, the reformed had ideas of their own on how best to exploit their environment profitably. They found themselves for the first time in a position to organize, and they did, creating one of the most enduring and adaptable organizations on earth: the publicly traded company.
By substituting information for craftsmanship, the Industrial Revolution made literacy a mass phenomenon. In the nineteenth century, improvements in printing technology were made that, among other things, lowered the cost of newspapers and made mass circulation available on a daily basis. The upheavals of 1848 ripped through Europe, bringing down much of the reconstruction of the post-Napoleonic world.
With the invention of the telegraph, information became available everywhere instantly, rapidly "democratizing" stock markets, for example, and increasing their access to savings. Unprecedented social upheaval followed. While revolutions swept Europe and new nations like Germany emerged there, the United States was engulfed in a civil war whose gruesomeness exceeded that of even the Napoleonic Wars. With the telegraph, the golden age of the great Rothschild banking house, with its secure private courier system, passed into history.
By the mid-twentieth century, the burgeoning volume of information needed management. The computer age began. Computers cut information costs further than ever. Soon we had microprocessors, and the opening shots of the personal-computer revolution were fired.
What makes PCs different from any other information tool is that people aren't only on the receiving end anymore. They can buy information, sell information, and most important, create information. Personal computers are the ultimate information-generation machine. The PC completes the shift in power from producers to consumers. The personal computer is a social force of unprecedented magnitude.
In many businesses over the last two decades, restructuring around the falling cost of information meant moving knowledge out of headquarters and into the field. Cheap and plentiful information has displaced labor, land, natural resources, and capital. Personal computers have empowered line workers. Post-PC devices are doing the same for families and children.
From the holy to the banal, the falling cost of information has driven the growing empowerment of consumers at the expense of producers. Cheap information makes it easier for customers to voice—indeed to force—their preferences on producers.
The Internet has given consumers with PCs the power to exercise market control as never before, unleashing the centrifugal forces of disintermediation on just about anything that moves, from stock markets to retail stores and even our democratic institutions. On electronic networks of every kind, from television to the Internet, consumers exercise the new power they hold. Consumer reaction is instant be it through the Internet, at the polling booth, or most important, at the cash register.
It is no coincidence, therefore, that the companies that have managed to profit most from the information revolution are the ones that devote the most energy to maximizing customer responsiveness.
It is also no coincidence that, just as the Reformation unleashed powerful new organizations such as modern corporations, the Information Revolution is driving completely new concepts in organization and management. As corporations allowed us to successfully exploit the North American continent, perhaps the biggest wealth-generating phenomenon of all time, the new organizational models described in this book will allow us to exploit the Information Universe, possibly an even bigger wealth-generating phenomenon.
Having understood the nature of information, we next have to understand what it does for us.
Every time the cost of information falls, it can more easily be substituted for something else, be it labor, capital, or natural resources, than before. As we saw earlier, information and grasses combined to make agriculture, and agriculture creates a sustainable consumer surplus. When this is done on a wide enough scale we get profound changes in our society. Agriculture gave us early civilizations and a whole new way of living. But, though it wasn't clear at the time, these early drops in the cost of information began the slow, inexorable shift of market power away from producers and into the hands of those with the consumer surpluses.
Today we would say of this process; the customer is always right. Why? Because the customer has the money! But we all know that the customer didn't always have the money and that the consumer economy is a new phenomenon in history.
And the fact is that this slow, ever quickening movement of market power into the hands of consumers has been accompanied by large shifts in political power as well. If the customers are always right, they are as right in their legislatures as they are in their stores.
By shifting power from producers to consumers, the falling cost of information destabilizes any political regime that stands in its way. No government can propagandize and control a people that has ready access to cheap satellite dishes.
Moreover, since these shifts in market power are directly proportionate to the speed at which the cost of information falls, in a time like ours when the cost of information is in a complete free fall, we should expect political shifts the world over that will be spectacular, and profoundly disruptive. The collapse of the Soviet Union is only one case.
Thus, the falling cost of information has huge foreign-policy implications. China is at the brink. It cannot take advantage of the falling cost of information without letting so much power flow into the hands of its people that the regime dissolves.
Moreover, China is trying to compete with low-cost labor. This drives its political, military, and economic policies alike. A military built on low-cost manpower can never compete with one built on the low cost of information, as the war in Kosovo so conclusively proved. China's massed military might, even its nuclear arsenal, will be no match for a nation farther down the information-cost curve than China. Kosovo showed that a mass military like Serbia's may be forced to leave the field without ever having engaged an enemy, with consequences that can be enormously destabilizing at home. Kosovo also demonstrated to China that the straits of Taiwan might as well be six thousand miles wide.
We can predict with some certainty that by 2010 China will have been transformed into a fully functioning and powerful democracy, or into a mess. Either outcome will make China's relations with other countries highly complex. However complex, though, the process is easy to understand: China can adapt to falling information costs or drop behind. Either way, the events that happen there will dominate world events for years to come.
Next, the Iron Laws of Information. These are the patterns that information follows in its never ending empowerment of consumers and creation of wealth.
Iron Laws of Information
In advising the Canadian government during the late eighties, we developed the Iron Laws of Information to explain the consequences of the falling cost of information. Fail to observe them, we told the Canadians, and you are toast. Respect them, and you will create enormous wealth-generating opportunities for your country where there were none.
The Iron Laws are as follows:
1. Cheap information always chases out expensive information.
2. Disorder always increases.
3. Profit always flows to the least regulated company or market.
4. The first three laws always operate simultaneously on any organization.
The First Iron Law says that Gresham's Law—cheap money always chases out expensive money—applies as well to information as it does to economics. With a phone and a cheap computer, for example, anyone can get around high-cost phone calls in one country by getting someone with a phone in a country with cheaper phone rates to call them back, thereby draining money from one market into another and killing investors who backed the wrong horse. (Continues...)
Excerpted from Future Wealth by Francis McInerney, Sean White. Copyright © 2000 North River Ventures, Inc.. Excerpted by permission of St. Martin's Press.
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