Bits Of Destruction

The news is full of stories this year end about the impending bankruptcies of retailers, newspapers, auto manufacturers, banks, and a host of other businesses that have been the mainstay of corporate america for the past 100 years or more.

Clearly the economic downturn is the direct cause of most of these failures but I believe it is the straw that broke the camel’s back in most cases.

The internet, now closing in on 15 years old in its mainstream incarnation as the world wide web, is in many cases the underlying cause of these business failures.

Bits of information flowing over a wire (or through the air) are just more efficient than physical infrastructure.

I’m typing this on my blackberry in a hotel lobby in berlin, I’ll hit send, and it will be published and read by roughly 5,000 people today. Compare that to what it takes to get the Tom Friedman column ‘Time To Reboot America‘ which is sitting in front of me in the International Herald Tribune newspaper printed and delivered to me. Printing and distribution infrastructure cannot compete with bits on a wire and we are going to see that infrastructure end up in in bankruptcy a lot in the next 12 months.

Let’s look at banking. Money is information too and is increasingly flowing as bits. I can’t think of the last time I walked into a bank branch. I use a debit card wherever I can and I can’t wait until I can tap my blackberry when checking out like many people in Japan and Korea already do. These bank failures have more to do with risky lending and owning securities that are toxic than anything else but we also know that a bank today is very different than a bank 20 years ago and I am positive that we’ll see entrepreneurs reinvent what banking is in the coming decade and it won’t look a thing like Bank Of America or JP Morgan Chase.

And what about retailing? I had breakfast last week with a person who has been in retailing for more than 30 years and has been operating at the highest levels of the industry. He said that he expects every category to be winnowed down to one dominant retailer with all the others going by the wayside. This too has the internet as an underlying cause. comScore says that online holiday shopping this year has been flat with the year before and I’ve seen reports that offline retail is down 6-10pcnt. The fact is that consumers have finally come to the realization that shopping online is easier, cheaper, and often a better experience. Physical retail will survive, but it will be a smaller industry in the next decade and those that do survive will need to give consumers a very strong rationale to get in the car and come to their store.

The internet has also made the auto dealer model of distribution a questionable approach in this day and age. Consumers can research a car, use auto lead gen services to work one dealer against another, and totally commoditize the dealer channel. I remember back in 1998, ten years ago, the Gotham Gal and I bought a car that way over the internet and had it delivered to our house. We never even went to the dealer. I’m not active in the auto market and barely drive a car these days, but I have to believe the dealer based distribution system is not the most efficient model for getting cars into consumers hands any more. I hope that any restructuring of the auto industry that happens takes advantage of a newer more efficient distribution model.

I could go on and on but will stop here. If you want to get a longer riff on these ideas, get Jeff Jarvis’ book, What Would Google Do?, where he imagines Google operating in many different industries and thinks about how they would approach them.

This downturn will be marked in history as the time where many of the business models built in the industrial era finally collapsed as a result of being undermined by the information age. Its creative destruction at work. It’s painful and many jobs will be lost permanently. But let’s also remember that its inevitable and we can’t fight it. Technology and information forces are unstoppable and they will reshape the world as we know it regardless of whether or not we want them to.

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Comments (Archived):

  1. mattmaroon

    The largest reason retailers will still exist is shipping efficiency. They have an incredibly efficient supply chain, especially the big box stores. In most small, cheap products shipping expenditures are simply too high a percentage of the overall price tag, and shipping individually to customers is just far less efficient via USPS than through a supply chain like Wal-Mart’s. The same goes with large or heavy objects.Online shopping works best for things that are small, light, relatively expensive, and have a high enough markup that the prices can be slashed to save the customer more than they pay in shipping. Books are great for that, and that’s a large part of why Amazon was so successful from the get go.

  2. aarondelcohen

    Fred, I’ll share this with my parents who own the largest independent bookstore in Washington Politics and Prose. I have long said that the only way an independent bookstore can survive is to not be a bookstore. I think retail will always have a place in society if it offers the tactile experience and formation of physical community that the Internet cannot really recreate. Good retailers will be places that embrace meetups. Meetups have to be held somewhere.

    1. fredwilson

      Totally. I’m not suggesting at all that physical spaces and infrastructure is worthless. On the contrary, it becomes even more important but we need to use it in ways that maximizes its value

    2. kortina

      Totally agree that physical bookstores need to be something beyond bookstores in order to succeed. Huge opportunity for innovation in physical spaces like bookstores and coffeeshops and such. I’m interested to see how digital will intersect with physical here.

    3. anonymous

      convert all bookstores to a coffee shop which has lots of kindles, so that you can read any book there and you can network with people also.

    4. liza

      amen to that.i rarely buy anything in large stores anymore unless they’re things like a gaming console. Dinosaur Hill is a toy store here in NYC where we do most of our toy shopping because Toys ‘R Us, in a stroke of genius, closed down the largest toy store in downtown were the majority of kids are way over toddler this little independent toy store became overnight the sensation among parents like me who resented the big box stores’ big “F You” to us with their refusal to provide us service.they’ve closed for a while because they’re actually expanding. i can’t wait for them to be back on business bigger and better but, alas, that’s where i see the future of business in this country. because, i heard a labor lawyer say once, you can’t compete with slave labor –which is what China and India offer and is, by extension, what Walmart and such companies want so desperately want to import back into the small businesses with good service, good products and an endless font of expertise is the wave of our future here in the US. there’s really no other way to go.

  3. fredwilson

    Excellent points ari

  4. fredwilson

    Yup. This kind of thing is going to happen. The only issue is the existing auto companies have a lot invested in the existing system

    1. Darryl Siry

      Fred, I think automakers would love to sell direct to customers, but are bound by state franchise laws as some of your other commenters have suggested. To this end, I agree with your comment, and have blogged about this specifically: that congress and the automakers should take advantage of the current crisis to address one of the major structural problems that prevents the car business from being competitive – the state franchise laws.If an optional federal charter were put into place to allow manufacturers to sell cars direct under a federal charter, you would see a massive shift in the distribution of automobiles and while it would be very disruptive and ugly for a period of time, it would ultimately result in better value for customers and better profit for automakers. Not all dealers would disappear either – the ones that would remain are the ones that provide real value to the end customer and the manufacturer.

      1. markslater

        surely a chapter is the only realistic way to get this started? No one is going to address this while loans and bailouts are made. Such a dramatic shift requires a direct threat to the solvency of the industry. (yes, yes i know its already insolvent). Laws wont get changed otherwise.

    2. leigh

      Saw a great documentary on Hermes – the Saddle company that was going to be destroyed by the automobile – Did they hang on to the horse and buggy for dear life? Nope. Reinvented themselves into one of the most successful hand made leather bag companies. Reinvent or die. That should be most retailers (and auto companies) mottos.

  5. aripap

    Economic downturns apply pressure to the weak companies whether they have been weakened by the challenge of digitization or by poor management. The Circuit City bankruptcy, for example, was nominally caused by the recession, but in fact was the result of poor decisions and intense competition from Best Buy. We might expect Blockbuster to emerge from this recession severely weakened after years of bruising competition from Netflix.For newspapers the real coffin nail is going to be classifieds. While ad spending is down across the board, classifieds are getting destroyed. I suspect that while local display ads will come back with the economy, jobs listings, real estate and for sale listings are gone to Craigslist forever.

  6. fredwilson

    It my quill pen

  7. Jamie

    If I was an Auto executive, I would give incentive to ordering in advance over the internet delivered to the home. The auto manufacturer is fighting a game of asymmetric information, and just-in-time delivery to a consumer probably wouldn’t work well for logistical reasons, but if they can have the consumer choose what model they would like over the internet, with all the bells and whistles, and instead of selling the consumer the vehicle three months in advance the manufacturer writes a call option for a specific discounted price. The longer in the future, the bigger the discount. So let’s say the consumer buys a call option at three months to deliver (or 6 or whatever) and they change their mind mid way through the process. The consumer can either A.) sell their option on the same online sight, or B.) let their option expire, at which point the vehicle would fall into the traditional distribution model. The consumer losses the premium they paid for the option, but isn’t locked into a vehicle that they decided they no longer want, and the car producer wins because they get the premium from the option they wrote.Of course, there would need to be some lock in period at the end to allow for physical delivery, standard underwriting / credit checking, etc, and an added cost for the actual delivery, but this isn’t out of the ordinary anyway.Just think of all the parking lots we could turn into something more productive.

    1. MikeInAZ

      Great idea, but the dealerships have laws passed in most states that make it hard for the auto manufacturers to sell direct.

  8. Tom Hughes

    The Christmas edition of The Economist has a relevant piece, “The Beauty of Bubbles,” which very sensibly reminds us that when you build too much housing, housing gets… cheaper! Same as optical-fiber bandwidth, memory chips, 19th-century railways. Bad for the investors and banks that bankroll the boom, but not necessarily bad for society at large.That said, the big question about these moments of Schumpeterian creative destruction is whether they dislodge the entrenched incumbents, “rent seekers” in economic parlance, who may have strengthened their positions during the boom. For the destruction to lead to real renewal, those incumbents must be turfed out. It’s easy to imagine this (finally) happening to the auto-industry chiefs, and maybe to the union leaders who helped dig the hole. Tom Friedman’s piece, though, is more about social infrastructure — airports, trains, cell towers, hospitals, schools, teachers. Markets for those services are also dominated by rent-seeking, entrenched incumbents with a vested interest in the status quo, however crappy. Can this turn of the wheel displace them as well and let in new competitors and new approaches? That’s a lot chancier.

  9. kidmercury

    “we’ll see entrepreneurs reinvent what banking is in the coming decade and it won’t look a thing like Bank Of America or JP Morgan Chase.”if we lived in a free market society where government served as an impartial referee rather than a biased planning tool that steals from 99% to give to 1% of its corporate owners, i’d agree.too bad we don’t live in a free market society.also interesting you mentioned bank of america and jp morgan chase, the two banks whose owners are very much responsible for designing and implementing the central banking system that governs our world, which is responsible for virtually all of the world’s problems including our current financial crisis. jp morgan engineered the bank run of 1907 which served as the pretext to introduce the federal reserve act so that bank runs wouldn’t happen again and the business cycle would be stabilized. the truth, of course, is that the business cycle is naturally stable as the market regulates itself, unless government comes in and messes things up and robs people via a messed up tax code and distortion of the money supply. which is what government always does.bear market 4 life,kid mercury

    1. terra210

      Interesting thoughts. Do you have a good reference for the JP Morgan engineering of the 1907 Bank run? I would like to learn more about this.I think the dramatic spikes before the drops are an interesting phenomenon, and do seem to infer some larger event occurring. @gregormacdonald on Twitter, wrote that: ” When ability to deliver a physical good reaches hard constraint, price amplitude soars (both up and down). 2006 forward”. By this he said for example: “The inability to increase production of oil. The fact that non-OPEC production has been flat, for example, for 6 years.” lead to the huge spikes and now drop in the price of oil.But we have to remember that _human relationships_ are involved in the “ability to deliver a physical good”, as mentioned by a previous poster. In the case of oil, a recent OPEC member’s willingness to curb production last week, created a spike (up), in oil-related stocks. Take a look at the interesting formation in this stock’s intraday chart because of this event. See the big cavern, around 1:30, and then the spike up.:…This stock’s chart, is a diagrammatic slice of all our free markets, our trade, our businesses. The fact that the information age has produced new innovations which eclipse the industrial age is only a small step in a normal cycle.The relationships between people, in governments, in families, in schools, in businesses, and how they impact profit,(as with wars, OPEC, or Banking), or loss, (as with Madoff), have much more impact on the tipping of the economic cycles, in a stock, a company, or a country.

      1. kidmercury

        hey terra,below are some links. basically jp morgan engineered a run on knickerbock trust, started pulling money out of it so it could not operate. this is the same thing that happened to bear stearns in 2008, all the money was taken out of it and its shares were sold so that it would collapse. then an argument is made that a systemic collapse could happen and the only way to prevent that is greater centralized government control. those who engineered the collapse then draft legislation that benefits them.the best resource IMO for all this stuff is the book “the creature from jekyll island” by g. edward griffin. that book is awesome, clearly explains things and very well documented. below are some links that you may find useful:… (fast forward to about 2 min)http://www.undergroundpolit… (scroll down to panic of 1907 part; explains how panic was engineered by morgan)http://www.jekyllislandhist… (shows how morgan then used engineered panic as oppty to create fed reserve system)

        1. terra210


      2. terra210

        Here is a link to the intraday chart, as the content in the one above has changed:http://martalyall.typepad.c

  10. Dan Blank

    I have to say, I am rather impressed that you wrote all of that on your Blackberry.

  11. howardlindzon

    damn…from a blackberry….NOT BAD.whats sad is tha all these businesses COULD have adopted. It’s not an overnight thing.Same with Blockbuster as I was talking about with the kids yesterday.Thew whole corporate structure from the top needs to get younger faster and it wont and thats why the pain is so great and wont end fast enough.great post.

    1. leigh

      Did a bunch of strategic marketing work with a major Canadian video retailer years ago – when we started talking about threats to their business that they need to do future scenario planning about – we went into depth about Netflix. What were the responses of most of the Sr. executives (except our client who was a genius) – Hey, whose side are you on anyhow? It’s strange how pple just don’t want to see it and they prefer to shoot the messenger. After all, if they see it, they have to do something about it and besides, most companies focus on the short term. And why not? Their bonus structure and pay outs aren’t about long term health and viability of the business. When the CEO/CMO’s tenure is 2 years and focused on short term shareholder value then the strategic non-thinking tends to be on that same 2 year horizon….

  12. dfriedman

    Regarding the distribution of cars: car dealers are protected by state franchise laws, which makes it pretty much impossible, or at least very expensive, for car makers to disintermediate them. As I understand it, most, if not all, states, guarantee their car distributors’ businesses via laws that prohibit manufacturers from selling directly to consumers. Car dealers therefore have little incentive to develop e-retailing capabilities, despite the obvious logic behind same. Until such laws are gutted I don’t see how your argument holds. (For other forms of retailing your arguments appear plausible.)

    1. firebones

      I wonder if it will be the rural states that tip this? Fifty years ago every small town had several car dealerships, then at the same time these communities lost their dime stores and main streets to big box stores seventy miles away, the dealerships disappeared and moved to mega-dealerships in those same larger and more distant communities, leaving behind meth and dropping property values. Although the dealership lobby may still have the same amount of financial influence as it did then, its base of support has to be shrinking. The challenge will be for the general public to learn there’s a better way and apply the pressure. Amazon Automotive?

    2. markslater

      A chapter will fix that.

  13. kenberger

    Netvibes killed the printing press star.

    1. kenberger

      In my mind and in my car, we can’t rewind we’ve gone too far.It’s now so clear we can assess, put the blame on RSS.

      1. fredwilson

        You’re a poet ken?

  14. rodmaz

    The problem is retail has suffered from a severe lack of innovation. It’s easier and faster to innovate on the web and to offer new, compelling services than in brick-and-mortar stores.Just take a look at one of the major examples of retail innovation: Apple Stores. Apple would not be as successful as today without the success of their Apple Stores. That’s a fact!

  15. Sven

    Good points,Regarding the newspapers, check out James Surowiecki in the year-end New Yorker: don’t think it’s just the trading dead trees for electrons angle, it’s also how people find and consume information. My local paper gives me a view of sports, events and business in the area. Everything else I care about I found elsewhere on the web at least 18 hours earlier.And digital can be, as I think Jeff Zucker recently said, trading analog dollars for digital pennies. Most online businesses need to find some subscriber (member) or product mix, as I think ads alone won’t work. And 2009 will probably weed out a lot of the free-user/sell-ads companies that lack a vowel somewhere in their name.auf Wiedersehen…

  16. GlennKelman

    What amazes me about this essay is that you could write something so thoughtful and persuasive on a BlackBerry in a hotel lobby. You are amazing Fred. (I like the title too)

    1. fredwilson

      Glenn – your comment and a few others like it inspired my post this morning called My Quill Pen

      1. GlennKelman

        Very gratifying Fred! Loved that post too!Have you ever read Anna Karenina? I read it in high school just before email became popular, and was amazed at how many notes — 5 – 10 per day! each delivered by a smirking servant! — Anna fired off to Vronsky. And I thought to myself that the 19th century was filled with these literate, compulsively expressive freaks — a way we’ll never be.Enter email. Enter twitter.When I was tutoring high school kids many years later — they could hardly write — except on their MySpace page. The number of words the average person writes each day, often in semi-artistic and certainly emotional ways — has probably increased by an order of magnitude in the past three years, and not just by the Russian aristocrats, but by their servants too! I never thought it could happen again.

        1. fredwilson

          Great comment and I love the connection to anna karenina

  17. liza

    i’ve been saying for years now that we’re in the middle of a transitional period very similar to the turn of the last century but very different for one reason : the writing of History has been wrenched from the hands of the elites and democratized in this thing we call blogging.power to create and disseminate information and in this case History is what’s destroying these industries very much in the way the rise of the industrial age destroyed the last vestiges of feudalism known as the imperial and mercantile’s really going to be an interesting 20-30 years which is how long i imagine this restructuring of capitalism and liberal democracy will take place.

  18. jeremystein

    youre definitely right about physical retailing vs online. many of the dominant players in the physical industries are trying to compete against their online counterparts. the best example i can think of is big lots vs woot:

  19. liza

    btw : which Blackberry are you using?

    1. fredwilson

      Curve. I like it better than bold and storm. Really looking forward to next gen curve

  20. shareme

    One issue that we face that has been overlooked thus far.Mobile device users worldwide is 2 to 1 in billions when compared to desktop computer users. That is set to grow to 3 o 1 in billions within the next 18 months.Thus, its more of mobile web application efficiency that will drive the future of information bit flow. And not the DOA w3c mobile widget proposals or Opera web widgets, or Nokia WRT, or Motorola web widgets.Real mobile web applications that integrate vi javascript with device functions such as GPS and etc. Its no longer a desktop web any more where Enterprise Java had a fighting chance but a brand new wave of change.Fred, you going to see a brand new industry take shape in a very short time period at a very rapid pace that might be even faster than the time to get a world wide web.This new growth i snot only tied to mobile internet growth but also tied to both direct cloud computing such as Amazon’s Web services but also social cloud computing services such as Gnip, FF, Twitter, Google, Brightkite, and etc.Okay back to code, I want my read GPs coords vai javascript in Android working this weekend..

    1. fredwilson

      Awesome comment and vision. You might like my ‘quill pen’ post I wrote this morning

  21. maurycy

    This is what is called creative destruction. 🙂

  22. example

    Actually I would say that banks did a pretty good job of using, or “leveraging”. Those bankers are pretty smart, and a lot of them come from pretty geeky fields like physics, engineering, computer science, etc. Plus they had web-like technology long before the general public (like bloomberg terminals). And hell, you could the use of networking by investment banks goes back to the 1920s, when people would get up-to-date stock market information by telegraph.These days, all banks have online banking. When you use your ATM card, your bank probably makes a lot more money via ATM fee then they ever did with you going in and seeing a teller.In fact, I would argue that it wasn’t a failure to embrace the internet that caused the banks problems. Rather it was an *over-enthusastic* embrace of information technology in general that caused their problems. A lot of the exotics that banks sold, like mezzanine CDOs, netted CDSes, blackbox statistical arbitrage would have been impossible without some pretty hard-core computational resources and the ability to make trades by computer.

    1. fredwilson

      Totally agree. But I also think we’ll see consumer banking redefined in the coming years by technology based entrepreneurs

  23. anon

    Hmm, Apple is said to be ahead of Dell now because Apple has retail stores, while Dell is on-line only (well that’s one of the many reasons). There are just too many simplifications in this piece. Not about newspapers though, that model is done — not because of the cost to produce issues Fred cites, but because of the breakdown in local ad monopolies that the Internet fostered (Craigslist).

  24. srini

    Argh, I have been selling REBOOT AMERICA stickers since 1996.I wonder what other UNAMERICAN.COM stickers are going to be re-“applied” by the punditocracy. hey, “leggo my ego” 🙂

  25. jpb

    How can you take a writer seriously who doesn’t know the difference between its (possessive) and it’s (it is). Ugg…

    1. carla cohen

      Fred, I am the aforementioned Aaron Cohen’s mother, founder of Politics and Prose Bookstore in Washington, D.C. For years our only competition for book sales has been Amazon and not the chains which are not really cheap and not merchandised in a manner to help customers fine interesting new books. We lavish customer service on people who frequent our store. If a customer wants to choose books for his daughter, his brother-in-law, we will walk around the store describing books. I know that I crave personal attention in a store and I am quite sure that stores that offer such a service will be reinvented. It’s not cheap, but I earn a comfortable living and my staff is the best paid in the field.We offer intelligence in selection and in service. We also offer a place to connect with other people who are interested in ideas and reading. We have author talks every day. Authors respect the store and audience and never talk down. The discussion is almost always on a high level.Can this be replicated? Yes, in the right community . It needs consistent attention from loving owners and a customer base which values the store.Will it survive in a decade or two? I am not sure. Young people find it difficult to do sustained reading because of the distractions of the digital age. A solitary activity like reading may not appeal to enough people over time to support a large publishing industry and bookstores of any kind.

      1. fredwilson

        Great comment and thanks for stopping by to share it with everyoneI’d say three things in response1) Machines can’t replace humans doing what your staff does. If every retailer did that, I’d think differently about the future of retail2) My kids are voracious readers and also play video games, watch tv, and use facebook compulsively. Reading isn’t going away entirely in the next generation. I’m sure of that3) We have a company in our portfolio called which attempts to create an online experience that approximates what goes on in your store. They aren’t even close, yet, but that’s where they want to take the online shopping experience and I am confident they can get it a lot closer than it is todayThanks againFred

    2. fredwilson

      Then don’t take me seriously. However, I don’t work too hard on perfect spelling, grammar, and fixing typos. And on a blackberry I am even more lax.

  26. David Fishman

    I agree with most everything…..however shopping online is not a better experience…….and it’s quite the opposite…..a big pain in the ass. It’s also a solitary experience. Etailers have not embraced the social sphere the same way bloggers and social networks have. Until they open up their silos and embrace the social web… will be difficult to transform the online experience quite like the offline brick and mortar experience.

    1. Eric Sornoso

      It’s very interesting what becomes of the blogger in the next 10-15 years, and the advancement of social marketing, internet, and society as a whole.

  27. heather gold

    One thing to consider is the social and emotional function shopping has had for many Americans. This country needs more public space in which people can connect with each other and experience meaning.Malls were as much a “place to go together” and “something to do” not to mention a place to cruise. Dating and “hanging out” happen online now of course, but where else do they happen?Consumerism has functioned for many Americans as an opiate for real political choice (“which model do you want to buy?”) and self-empowerment (“I’m doing something!”).I am happy to see this change. Social functions stil need fulfilling and that means opportunities.

    1. fredwilson

      So true. That’s one of the many reasons we invested in

    2. slowblogger

      A truly insightful comment. Made me think about the offline in a new perspective. Thank you.

    3. markslater

      this is a great comment. I struggle with the gulf between what …say…English find social meaning in and what Americans do. As an English person living in America i sometimes feel surrounded by social and emotional Zombies here. everything from the sense of humor, to ability to conduct and hold meaningful conversations, to expressions of emotion seem lost or distinctly absent when i compare with my country. It could just be me, and its not leveled as criticism, i just wonder if my life would be so much more socially and emotionally fulfilling were i to move home. Sometimes i feel that consumerism has bankrupted this country socially, emotionally, and financially.Ofcourse there are pluses, like marrying a beautiful american woman and experiencing what i believe to be unparalleled opportunities in my work life.

  28. Frederic Guarino

    Fred, first off, kudos for linking Facebook Connect to your blog !Impressive indeed that you wrote this on a Blackberry -)Your points are dead-on on how 20th century industries have been hit hard by the web and digitization.I worked in news photography after college in the late 1990s and witnessed first hand the integral shift of that entire industry from analog to 100% digital ie getting undeveloped film rolls from photographers to getting scanned images via email or sat phones and ftp’ed to magazine clients.We’re overdue for a re-engineering of retail, banking and other industries so the current economic upheaval will let bolder stances be taken.@aripap @sven re newspapers, some traditional media companies have invested in internet classifieds – look at and – the NYT sells print+web classified efficiently, we’re not yet living in a Craigslist world.@shareme, I agree with you that mobile will change the web experience in yet unforeseen ways, see my post at and give me your comments !

  29. Jeffrey J Davis

    Fred -Very thought-provoking post. It’s curious how everyone is hungry to definitively determine “who’s fault” the current crisis is. I must admit that this is the first slant at this idea that I’ve heard, that the internet may be somewhat to blame.Your logic appears sound. A crisis always serves to weed out the weakest competitors. The most efficient competitors have the best chance to survive. Many inefficient competitors have had their business models Friedman Flattened right out from under them without even realizing.Web enabled business = less bricks, less mortar. Less bricks, less mortar = less capital requiredLess capital = less debt incurredLess debt = lower interest coupons to service, greater liquidityLiquidity = oxygen = survival .Obviously your points and mine are huge generalizations which will not apply to every industry, but Web enabled business models certainly helped the effects of this downturn to be more swiftly and broadly,Jeffrey J Davis@JeffreyJDavis

  30. edward lyman

    There’s no arguing with the fact that “bits on a wire” have outmoded things like physical branch locations for retail banks. But I think maybe you paint with too broad a brush here. After all “banking” includes (formerly) investment banks like bear stearns, goldmann, etc, and indirectly includes other monstrosities like AIG and hedge funds. These folks lack branch locations and are not behind the curve when it comes to bits on a wire—in fact, the automation of trading might well exacerbate volatility.Good point about the dealer distribution system…what an ossified pile of crap. A big part of US automakers troubles come from te inability to respond in a timely way to a rapidly changing marketplace. Partly the union’s fault, and partly the management’s fault. Maybe now they will find it in their best interest to work together.

  31. Darren Herman

    Great post as always, Fred. I’m fascinated with this area as well. Roger had a post back in November that talked about predicting the winners of tomorrow and many of your examples here showcased much of what Roger stated in a totally different way. Go back and check it out – pretty interesting. http://www.informationarbit

    1. fredwilson

      Thanks going to read it now

  32. SifuMoraga

    Another New Yorker in Berlin! You should visit the CCC 25c3 convention in the BCC to see some creative destruction in action. Look me up if you do.

    1. fredwilson

      I am headed there today with my son josh. Where would we find you?

  33. geo geller

    we are in the midst of a social revolution that is just coming to a boil metaphorically speaking we live in a parallel universe where the so called real world and the social environment are in a tug of war, but the real war is more social and psychological – its within ourselves and with our broken system of old tired top down management… which is challenging us and its-self – by that i mean the economic melt down we are experiencing around the world has deeper roots and more systemic in that we are having to reinvent ourselves and to rethink the unthinkable and develop new strategies – when the web was a baby in 1995 when i first became involved when it was just text i realized that to understand the potential of what we were exploring we had to suspend our minds and challenge our bricks and mortar concepts and that what we did before will not work for the future – and here we are 14 years later we are confronting our comfort zone and learning that we have to embrace our mistakes as our teachers and can’t afford to be risk averse – we have to be risk reverse – we need to pool our resources and stop playing follow the leader and as the butterfly and bee’s flapping their wings can change the course of a storm and even create a storm “we the people” have the ability to swarm like bees and move our worlds and start all over – we have to challenge ourselves and pool our resources and challenge our leaders to stop trading in war and violence and fear and their media propaganda machines need to stop being co-conspirators in this charade too – we need to break down the big biz as king, government as queen and media and religion as the mistress equals IdiotCracy -we have to stop this IdiotCracy and take back our future and reinvent ourselves and stop going along to get along even though we know its wrong -we will know we are ok when we the people stand up and nobody shows up when our leaders and the media say we need to do something that we know is wrong like going to war – we the people are the ones who go to war and also the ones who bleed on the battle and home fields – we lose in war even when we think we win but only a few who are at the top gain those who trade in war – when will we ever learn that we the people stand up and take back our future and keep our leaders responsible and accountable and not drive and herd us by fear and their propaganda – the economic meltdown is also part intended consequences to tighten the noose around the internet too so we need to pay attention – because the job of our leaders is not to protect us we actually need to question who protects us from those who say they are protecting and when their job is to stay in power at all costs – food for thought – geo

    1. kidmercury

      “the economic meltdown is also part intended consequences to tighten the noose around the internet too so we need to pay attention”no doubt. the web will increasingly be under attack. if we lose it it will be humanity’s biggest loss, bigger than losing the constitution (which we’ve already lost).

    2. fredwilson

      I think that comment may be as long as the declaration of independance and possibly as revolutionary as wellThanks for sharing it

    3. Guest

      geo geller:As provocative your thoughts are, I have already read much of what you wrote in an article by Pulitzer Prize winner Chris Hedges:…Friedman is a wanker. He was wrong on Iraq and his writing is mostly generic. Krugman is a much better seer, however, Hedges is the true visionary. Here’s what he said in 2003 re: the War in Iraq.“we are embarking on an occupation that, if history is any guide, will be as damaging to our souls as it will be to our prestige, power and security.”When I read “The Idiots Who Rule America”, my initial thought was: “this guy has gone off the reservation”, but then I remembered that I would had probably thought so about his 2003 views, too. Now I see people communicating a similar vision on a weblog and am thinking, “damn, this is going to be a massive tectonic shift in the coming years!” And just to think of it, in 1991 when I moved to America I was buying the Fukuyama “end of history” meme and believing that the fall of communism was gonna be it for my lifetime in terms of “history”…

      1. fredwilson

        Damn guys, this is great conversation. I am so proud to see this level of discourse on avc!

      2. leigh

        Truthdig is a great site … thanks for the share

  34. tywhite

    Great post.I yearn for a disrupted auto industry. Unfortunately they are so in bed with the lawmakers it is going to be difficult — bailouts are less an issue than the protection dealers receive (as Dave noted above). The only way to break their system, in my mind, is to break the companies they do business with (specifically the big American manufacturers and their web of inefficiencies).Not to rant, but America disgusts me sometimes — we want the pill fixes, we look to solve the symptoms of problems instead of the causes. This is why I work in the internet industry — the internet provides the opportunity to start anew, to completely disrupt the corrupt and inefficient establishment. Unfortunately, the laws and structure essentially require us to wait for industries to hit rock bottom before we can rebuild them properly. I thought the auto industry might have hit bottom, but apparently not yet. Keep an eye on it, though, and let’s hope more companies like Tesla are started and wait in the wings for their opportunities.

  35. davidjwbailey

    12 years ago, I made myself very unpopular when working in a large accountancy firm by suggesting to a large client that the internet would turn the high street (US: main street) we know into grassy areas for recreation before my kids had kids of their own. This is only the beginning of the shift away from retail. The limitation on internet shopping now is more about how we use the screen to interact with inventory (it is still quicker to flick your eyes down a row of CD’s in an HMV / Virgin than it is to browse through Amazon). There are also real sensory limits in terms of buying foods, drinks and ‘luxury’ goods without holding / smelling / rotating them in front of our own eyes. The internet will solve nearly all of those problems within a decade, and will take ever shorter times to roll out the technology. When that happens, more and more stores will close and / or become simply catalog space for their online back-end. My kids still have 10 years or so to go, and are looking forward to having picnics where retailers once stood. We don’t need them, we never really did. When they go, the real consumer power unleashed by tools such as the Android G1 barcode reader will begin to drive value back to consumers and out of the hands of the distribution chain. Taking one simple example, computer games: There is no reasonable justification for retailers of stuff like computer games to take 53% margins on a ‘zero risk’ (sale or return basis) and for the distribution chain to take another 35% or so, leaving only about 7% for the developer who creates the IPR and makes the game fun to play. Roll on the internet shopping revolution. Roll on consumer power. Let’s connect consumers to creators and really unleash the power!

  36. fredwilson

    CarlI¹ve written on that topic a lot. I don¹t tag my posts well enough tosurface them in one easy search, but it¹s a topic that I¹ve probably writtenas much about as anything.The biggest problem with the VC business is that only about 20% of the firmsare really worth investing in. they are the ones that have the bestreputations, understand the technology and markets they invest in the best,and thus generate the best returns. For them, nothing is really broken.But if the other 80% went out of business, it would be terrible forentrepreneurs. So it¹s not entirely clear what is the best outcome ­ lessVCs or the current status quo

    1. phoneranger

      Entrepreneurs depend on wealth-destroying VCs! And good 3nd-tier suppliers depend on GM and Cerberus. And great Soho restaurants depend on Wall Street CDO originations. And talented actors depend on Viacom and CBS. Lots of worthy people have been helped by too much capital going to the wrong places. They’ll all suffer as the capital surplus turns into a deficit. Bad for entrepreneurs and auto parts suppliers.

  37. Carl Wimmer

    Physician, heal thyself.It is all well and good musing about the trouble other industries have but I just read that the VC industry has had a negative return to its investors over the last 7 years.Why not muse about the broken VC business.The trouble may not seem to surface because, by definition, you still have money and so … the intellectual bankruptcy of the VC world may not reflect into a financial one for some time.But the rot seems to be in the structure.Good luck to you if you seek a solution and the “best of luck” to you, if you don’t.

  38. slowblogger

    Yes! Give freedom to entrepreneurs and we will make the world better!Remove required capital (which is huge) to start a new bank. The worst regulation of all is “barrier entry regulation”. Allow a guy with an idea and little money to start a new “different” bank. The government officials (at least in Korea) did not grant a license even if you do have the initial capital, saying they need to protect the financial stability. This is non-sense. Small banks won’t create the dilemma of “too big to fail”.And, add “Art” to your list. I am working on it.

  39. alexander alaric

    These are great points to think about…especially taking tactics and ideas which are working smashingly well in 1 industry and asking “How can I apply these to my industry?”Anything which makes things better, more efficient, and reduces marketplace friction is better for humanity despite the temporary pain CHANGE almost always causes.

  40. Brian Paul


    1. fredwilson

      Maybe, but I think the lack of distractions and being able to ³lean back² ismore important

  41. josh guttman

    Great post Fred. This sounds inspired by perspective that can only be gained from traveling abroad.Clearly, we’re moving from the industrial to the information age and many businesses that were once titans of their industry will become smaller or irrelevant. As some of the comments above indicate, this is sometimes systemic, but I think often management-inflicted through failures to adapt and/or poor decision-making. Toyota, a beacon of operational efficiency, just announced their first unprofitable quarter in ages, so clearly its an industry-wide event, but Toyota will emerge from this a strong company, while I don’t believe GM, Chrysler or Ford will, largely because their management has failed to adapt. As it relates to distribution strategy (the one area where they’re affected by the information age), they still manage 9,000 dealerships, despite plans dating as far back as 1995 to reduce this figure. Their distribution network needed to be cut in half for competitive reasons alone, irrespective of the internet effect. They’ve failed to adapt.As for retail, I grew up in a retail family so have closely watched the ups and downs of the industry. I think great retailers that offer unique merchandise and/or a unique shopping experience will survive. Average retailers that do not and/or have failed to adapt to market conditions – ie Circuit City – will fail. Still, I think it’s as much to do with management failures as it is with systemic changes. It reminds me of my friend Mickey Charles at The Sports Network, which began as a wire service for sports scores and today, is one of the largest syndicators of sports content online. They’re original business certainly is obsolete, but they adapted. This upside, in my mind, is that this economic downturn will accelerate the process separating the wheat from the chaf and have a Darwinian effect on the market that will reward the strongest businesses and managers.

  42. Axemedia

    I wrote a piece a couple weeks ago about the auto industry and what will likely happen to the dealership business model.Link is here…Yes, creative destruction at work.Reading some of the other commentators I see some mentioning dealerships are protected by laws that prevent the manufacturers from selling direct. It does not need to be direct from manufacturer, dealerships just need to par down to a small office with a computer and a few models on hand for test drives. No need for millions of dollars in inventories sitting on their lots. People can order online from home or have their hand held by a rep in front of the computer terminal at the “new kind of dealership” office. Vehicles are made to order then delivered. Still need a local service department for repairs and warranty work too.

  43. Dan Auito

    You got that right. Stand by to be eliminated if you can’t get with the times and fast!

  44. liza

    you can’t call the US’ economy “agrarian” on account of slavery. actually, quite a few Latin American economists and sociologists consider slave economies as late stage feudalism –Celso Furtado comes to mind.if you think about it, the 1898 US invasion of Puerto Rico and Cuba, marked the end of Europe’s style of post-feudal imperialism and the rise of the US through the engineering of “open markets”. and technology played a significant role in the transformation of the US into an imperial Puerto Rico, for example, the US came in and destroyed the local mercantile and small business economy by importing laborers from other islands (thus markedly lowering wages and busting nascent unions), taking over lands and property through eminent domain (especially from freed slave who almost always didn’t have the title to their property) and imposing technological “standards” that were too expensive and/or too advanced for the island’s economy to adapt to them. more people ended up poor and destitute under US colonial rule than ever during Spanish rule –not accounting for slavery, of course.the point is that the US could go in and destroy the Spaniards rule because as a declining Empire, Spain had invested little infrastructurally to begin with —they were still operating as a feudal society and mercantile economy just as, by the way, the US south.they also learned that keeping colonies can be incredibly expensive and that it was really better for the elites to literally “free the markets” for total US control while not having to deal with issues of citizenship, welfare and constitutional rights in the same way they had with their possessions –especially Puerto Rico.the US didn’t have to be efficient with their use of technology for “freedom marketing” either. it only had to be first, the only one and if not then the biggest. walmart, the big 3, wall street are just instances in that philosophy of “empire” (which has been euphemistically referred to in business as “dominance”).now we have China biting the US’ ass with exactly that : they have not only a larger pool of labor, they have a larger pool of SLAVE-like labor. they’re so big they can claim rights to technological innovation even if they didn’t produce it (i read somewhere they were asking for all trade secrets involving hardware components manufactured in China, allegedly, for security reasons) and they have the money to impose their will if not by bribery (as in oil producing countries in Africa), then by force (wasn’t it the minister of finance from China who said the US had to bail out the banks or else?)am a former Latin American Studies professor (never fully tenured) and no, i don’t have a business background. but i know a thing or two of history that is usually NEVER taught in the US (unless, of course, you go out of your way to learn about Southern US and Latin American history and economies in the 19th and early 20th centuries).so yeah, i stand by what i said 🙂