Distributed Systems — Destruction of the Status Quo

One thing we can say for sure is that there will be a lot more start-ups. The monolithic, hierarchical companies of the mid-twentieth century are being replaced by networks of smaller companies. This process is not just something happening now in Silicon Valley. It started decades ago, and it’s happening as far afield as the car industry. It has a long way to run. —Paul Graham, Startup Investing Trends

This is one of my core beliefs, that the world is in the process of becoming much more distributed, that the traditional hierarchies (as articulated by Fred Wilson in his Le Web talk here) we’ve organized around are changing. It’s not just social or organizational hierarchies, though; enabled by technology, our infrastructure systems (energy, manufacturing, farming) are also becoming much more distributed. These newly formed distributed systems are having  profound consequences for large legacy institutions and creating opportunities for smaller start-up companies. What follows is a discussion of old versus new in myriad industries to illustrate this shift.

Mainframes vs. Data Centers

We’ve seen computation go from large mainframes in the 1960s (think of this as Big Computation) to personal computing in the 80s, with a desktop in every home and office, and now to data centers. We seem to have settled in on the right distributed size — distributed data centers with mostly laptops and mobile phones connected to them. And this pattern can be seen now in more traditional industries as well.

Power Plants vs. Distributed Generation

I think what happened to computers is a good analogy to understand what is happening in energy. In energy, we have Big Energy — giant nuclear, coal, and natural-gas plants that deliver our power over large transmission lines. These are the equivalent of the mainframe computers from the 1960s. Now we are seeing a large increase in demand for distributed generation, one form of which is rooftop solar — this is the personal computer of the 1980s. But it’s incredibly inefficient for each of us to build our own power plant. A similar thing happened to computers — rather than build your own data center, we are now moving to “the cloud.” The cloud is just a form of distributed computation — regional distributed data centers. My guess is that we’re going to end up with an integrated, multi-layered system of power generation that consists of regional distributed generation and small modules at the household level. This might mean that today’s rooftop solar companies will become the personal computer companies of tomorrow (whatever happened to Gateway?).

Factories vs. 3D Printing

Manufacturing is about to be disrupted by 3D printing and automation driven by increases in artificial intelligence (AI). To date, labor gains have offset transportation costs in manufacturing. This is why the world’s manufacturing routinely moves to the lowest-cost labor markets — to China and now to Southeast Asia — despite the fact that these locations are thousands of miles from where the product will ultimately be distributed. With 3D printing, the costs of both manufacturing and the necessary investments will collapse. In addition, much of the assembly is already being automated by robotics and AI. So Big Manufacturing (factories and assembly lines) is already being disrupted and is about to be displaced by distributed manufacturing (3D printers and robotics). We talk of local food, but we’re on the verge of local everything — why produce our goods halfway around the world? Local will be cheap. If your economy is driven by cheap labor, you’re in trouble. (This phenomenon could also collapse trade, leading to more insular economies, but this is a discussion for another day.)

Big Farming vs. Farmers’ Markets

Food is slowly following energy into a more distributed system as well. We’ve seen it with the abundance of farmers’ markets, the return of gardens, and the movement to grow food in cities. To this point, it’s been more small-scale hobby-sized projects. But like manufacturing and energy, there will come a time where the cost to produce is less than the labor and transportation costs. You’ll see distributed farming systems, not unlike data centers, that deliver local, fresh produce year round. This will become even more pronounced as protein-based alternatives chip away at traditional meat demand.

Universities vs. Online Education

Big Education is on the verge of a massive disruption. The value of a degree seems to be collapsing as all the information anyone might need is available free and online provided by sites like Kahn Academy, among others. Universities are struggling with new models — put classes online for free, extend online degree programs, or ignore it all and hope it goes away. If we follow the other trends and apply them to education, it probably means fewer big universities and more small schools. Or perhaps we move even more closely to virtual education: one can easily imagine students in groups of 25-50 in towns around the world gathering together to take online classes from the very best professors. In fact, this is exactly what the Acumen, a patient-capital fund, is doing. My prediction is that the best universities, by changing their business models, have a chance to take market share from the middle tier — the best and the boutiques will be okay — but the middle is in trouble. We’ll also see a surge in start-up colleges and universities as the barriers to entry are gone.

The Paper vs. Twitter

I grew up in a house where my parents got the paper in the morning. They physically walked to the end of the driveway, which seems so odd, so archaic, now. My paper today is Twitter and RSS feeds. The decline of the newspaper industry has been well documented — print journalism is being replaced with a global distributed network of millions of bloggers and tweeters around the world. If I’m interested in a news event, I simply find and “turn on” the hashtag on Twitter.

Federal- and State-Level Governments vs. Cities

There has been a lot written about cities and their rise on the global stage. In a sense, government has become more distributed. Here in the US, it seems that cities are more important than ever and are increasingly the only governable unit — state and federal government seems to matter less and to be less effective. As Richard Florida has observed, we will have a “spikey” world with concentrations of people, wealth, and ideas in the best cities. The effective unit size to govern — just like a data center — has become a city.

We’re moving from a large, hierarchical, centralized world to one that is small, networked, and distributed. It’s as if each industry is homing in on their own Dunbar number — the perfectly sized data center, solar installation, or global classroom. The amazing thing to me is the breadth of this phenomenon, from education to utilities to manufacturing. Over the next 10-20 years, many of the institutions that have been in place for the last 100 years will be fundamentally altered. These systems will be smarter, stronger, and faster than the previous ones.

Fat vs. Lean Markets—Hint: We’re Fat.

I’ve always struggled with what word to use when describing poor markets. There’s the developed and the developing world. There’s the bottom or, a little better, base of the pyramid. There’s the emerging or frontier market, which evokes an image of covered wagons heading west—Manifest Destiny and all that. The UN classifies them as LDC, or Least Developed Countries. The problem with all these is that they define people by how much money they make and set the Western way of life as the ultimate goal—if you develop, climb the pyramid, and emerge, you’ll be like us, which is obviously what you want to do. It grades people based on purchasing power, which has always felt dehumanizing to me.

In manufacturing there’s a concept called Lean Manufacturing, which at a high level represents a philosophy of “maximizing value while minimizing waste.” Eric Reis has taken these ideas and applied them to startups, something he calls the Lean Startup. As I met one amazing entrepreneur after another last week in Kenya with Acumen Fund, I thought, what better word to describe the environment they operate in than “lean.” These guys are all about maximizing value and minimizing waste—they have to be. They’re capital-constrained, they face a shortage of skilled labor, their customers have little disposable income, and they are often at odds with state-backed incumbents or even the government itself. They operate in a lean market, and yet they are succeeding. I think back to a scene I saw earlier this year in China: two women were fighting over a discarded plastic bottle for the recycling refund. Now that’s a lean market.

The constraints of these markets breed innovation—it’s the reason startups beat incumbents. It’s why the Nokia 1100 cell phone with it’s monochrome screen and $20 price tag is the world’s best selling cell phone. It’s why Tata can build a car for $2,200 and why Visa’s mobile banking platform was developed in Africa and imported to the US and Europe. It’s why 37signals is so successful and why the Lean Startup methodology is being ever more widely adopted.

So if these markets are lean, I guess that makes us fat, and, really, is this so far off the mark? We have the highest obesity rate of any country in the world—about 30%. We consume more energy per capita than almost anyone else (the exception being a handful of very hot Middle Eastern countries). We have the shortest school year. We drive the largest cars and build the biggest houses. It’s hard to be innovative when you have everything you could possibly need, and thus we’ve become fat. On top of that, we’ve taken on a mountain of debt to pay for it all. From the World Economic Forum’s Global Risks 2010 Report:

According to IMF, by 2014, the average debt-to-GDP ratio of advanced economies that are members of the G20 is expected to climb from 2007 pre-crisis levels of 78% to 118% [various academic work has shown that a ratio above 90% becomes a serious head-wind to growth]. In sharp contrast, emerging economies, with smaller governments and lower exposure to the baning crisis, kept their fiscal houses in order. According to the same IMF analysis, between 2007 and 2014 the average debt-to-gdp ratio fo emerging countries that are members of the G20 will never exceed 40%. For once, and in contrast to the 1980s and 1990s, emerging economies are not the causal to global fiscal crisis.

So who emerges as the winner here? In a world of debt, who out performs? And what market do you want to emulate—the one that excels when faced with every constraint imaginable or the one that has everything? Which one figures out the environmental problems first—the one where waste is valuable or the one that can afford to ship and dump it? The one with the longer school day and year or the one with the shortest of both? The lean startup or the incumbent? Which one is your money on?

What you call a market matters—it frames the discussion—and in this case, we may want to reevaluate who is aspiring to what.