Why Retail Will Face the Same Fate as the Media Industry

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ticking time bombsTaylor Swift might be optimistic about the evolution of the music industry, but the Internet has only spelled troubled for media of all kinds. Over the past two decades, executives have watched revenues plummet as a sprawling Internet turned their product into easily replicable bits. The cost of producing and distributing just one more song or article or video neared zero, and with it a lot of the traditional value of big information businesses has crumbled.

The corrosive effects of connectivity have largely remained relegated to information businesses in the virtual world. But Jeremy Rifkin, the prolific author who has served as an advisor to the German Chancellor Angela Merkel and the European Union, believes that the astronomical investments in Uber and Airbnb, as well as a series of relatively smaller double digit rounds raised by Handybook, Homejoy, and Thumbtack, signal the breaking of a long-held “firewall” that kept the transformative effects of the Internet contained to information businesses like music, news, and television.

In his new book “The Zero Marginal Cost Society,” Rifkin argues that capitalism’s two-century march towards efficiency has reached an unexpected terminus. He believes that the introduction of low-cost renewable energy such as solar, an emerging automated logistics network that operate on its own (read: self-driving cars), as well as an internet of things in which objects share information seamlessly, has introduced a new economic framework which will reduce marginal cost — the cost of producing a unit of a good or service — across a range of physical industries to near zero.

In a wide ranging interview with Street Fight, Rifkin recently discussed the emergence of the collaborative commons, why a small reduction in margins could kill traditional retail, and what a new economic system means for the existing marketing-technology complex that has powered the internet for the past 20 years.

Set the stage for us a bit. Where does “collaborative commons” fit into the wider economic narrative and what’s driving this transformation?
What we’re beginning to see is a new economic system entering the world stage: the collaborative commons. It’s the first new economics paradigm since the advent of capitalism and socialism in the 19th century so it’s a remarkable and transformative event. Over the past few years, the collaborative commons has flourished alongside a capitalist market — at times benefiting each other, and at time adversarial. But the defining struggle over the next 50 years is the relationship between these two economics systems in our daily life.

What’s triggering this economic the transformation is zero marginal cost — or the cost of producing an additional unit of goods or services after the fixed cost of producing. As capitalists, we are always interested in reducing marginal costs, but none of us ever expected a technology revolution so powerful in its productivity that it might reduce those marginal costs to zero, making those goods and services essentially free, abundant, and beyond the market force.

What’s ironic is that the introduction of zero marginal cost dynamic in the information businesses led to the destruction of many of the companies that have sought it for years. But the assumption always was that the zero marginal cost phenomenon would not cross the firewall from the virtual world of bits to the physical world of atoms. That firewall has now been breached.

One of the physical industries which connectivity has hurt the most has been retail. What’s your prognosis for legacy brick-and-mortar retailers, many of which have struggled to compete with the growth of ecommerce?
In retail, and in other industries where there’s relatively small profit margins, it only takes a small dip in profits to render the model unsustainable. In retail, as a growing percentage of sales moving to the virtual world in retail, you will see the big retail going out of business. While we’ve always believed these giant vertically integrated companies are the first and second industrial revolution are in invincible, they’re really dinosaurs, and because their profit margins are very low, they’re extremely vulnerable. What you’re going to begin to see is this ten percent effect hitting industry after industry. It hit the book industry. It hit Circuit City. It hit the recording industry. It hit newspapers and magazines early on. It’s even hitting advertising, too.

This is what surprised us with renewable energy in Germany. We didn’t see that when the country reached 20 percent renewable energy, the big power companies couldn’t pay to build key systems like back up gas plants, which they needed to have in order to sustain a degree reliability. They couldn’t finance them anymore. That meant that these companies had to reach out to one another, and essentially become aggregators of power, rather than siloed, and independent producers.

If the vertically integrated corporation is on the outs, do the traditional benefits of “scale” remain relevant?
In the first and second industrial revolutions, the nature of the energy and communication systems that existed (coal, oil, the telegraph etc.) meant that corporations had to create vertically integrated shareholding companies to get the efficient economies of scale to return the investment to stockholders. Vertical integration allowed companies to produce cheaper products and reduce marginal cost by getting rid of a lot of the inefficiencies, but resulted in five or six main players in each industry, which you still have today.

What’s interesting about the Internet of Things as a platform is that the architecture is designed to be laterally scaled. In other words, if you look at the Internet of Things, it is designed architecturally to be distributed, collaborative, transparent, and naturally, it leads to fragmentation — not consolidation. Its actual value is in sequestering millions of small players in a lateral economy to scale.

For the past two decades or so, a marketing industrial complex has fueled the growth of the technology industry. What does a participatory economy mean for the advertising industry as a whole?
[The advertising industry] is still in denial, and some of the internet companies are in denial as well. When millions of people are up on the web, they’re producing their own content, and sharing with each other, so they’re not getting anything out of some third party producing content. They’re provisioning each other, and what they look to are product endorsements within their own reputation networks. They don’t really give a crap if GM says, “We’ve got a great car here.” They trust each other’s peer-to-peer judgments. We’re not paying much attention to advertising.

The advertising industry has got to really hollow out — and it already is. If you look at Google, as advertising they’re going to the mobile, the users are using mobile and not desktop. Advertising is less effective, and they know that they’re less likely to look at it, less likely to click, and less likely to do something about it.

Over the past few weeks, experts have weighed in on Uber’s massive valuation. The company found early sucesss as a taxi app, but its leadership has often pitched it as a logistics firm. Talk a bit about the future of logistics and how the way we move goods in the physical world is changing.
The transport logistics is the most inefficient part of our economy. You’ve got 20% of all trucks deadheading all over the country. It’s a mess. The reason is that if you’re a big company like Wal-Mart, you might have a small number of warehouses across your national market. You either own them or you are outsourcing fulfillment to a private warehouse. But the vertically integrated company simply cannot put enough warehouses out there to create an efficient way of routing the traffic and the local market.

What happens if all of those warehouses were in one logistical system? Even though they are privately owned, at any given time with GPS guidance you know where all of the freight is, in each of those warehouses, and which ones have surplus, which ones have open shelves, and you can watch the traffic, the GPS guidance to exactly the warehouse you needed that’s close to your destination. It would change the entire efficiencies — you would never have empty cargo, or going a thousand miles, and deadheading back to the headquarters. So this is a new idea, and you would have to have everything standardized so that you can move across the whole system just like you can with communication.

Given the role of logistics as an critical component of the infrastructure for this new model, can one company like Uber — or for that matter Google — own it through and through?
What this means is there isn’t a single global company in the world that can have five hundred warehouse and distribution centers. As big and powerful as vertically integrated companies are, we can’t do it. It requires cooperation. That’s a huge job.

However, a collection of private corporations could do it by engaging in cooperatives, and pooling their warehouses into a cooperative network. I think that’s going to happen because the technology benefits of putting all of those warehouse and distribution centers as nodes into a logistics network is extraordinarily valuable.

Steven Jacobs is Street Fight’s deputy editor.