The Decline of E-Empires (Paul Krugman)

The Decline of E-Empires

• By PAUL KRUGMAN

August 25, 2013

Steve Ballmer’s surprise announcement that he will be resigning as Microsoft’s C.E.O. has set off a huge flood of commentary. Being neither a tech geek nor a management guru, I can’t add much on those fronts. I do, however, think I know a bit about economics, and I also read a lot of history. So the Ballmer announcement has me thinking about network externalities and Ibn Khaldun. And thinking about these things, I’d argue, can help ensure that we draw the right lessons from this particular corporate upheaval.

 

First, about network externalities: Consider the state of the computer industry circa 2000, when Microsoft’s share price hit its peak and the company seemed utterly dominant. Remember the T-shirts depicting Bill Gates as a Borg (part of the hive mind from “Star Trek”), with the legend, “Resistance is futile. Prepare to be assimilated”? Remember when Microsoft was at the center of concerns about antitrust enforcement?

 

The odd thing was that nobody seemed to like Microsoft’s products. By all accounts, Apple computers were better than PCs using Windows as their operating system. Yet the vast majority of desktop and laptop computers ran Windows. Why?

 

The answer, basically, is that everyone used Windows because everyone used Windows. If you had a Windows PC and wanted help, you could ask the guy in the next cubicle, or the tech people downstairs, and have a very good chance of getting the answer you needed. Software was designed to run on PCs; peripheral devices were designed to work with PCs.

 

That’s network externalities in action, and it made Microsoft a monopolist.

 

The story of how that state of affairs arose is tangled, but I don’t think it’s too unfair to say that Apple mistakenly believed that ordinary buyers would value its superior quality as much as its own people did. So it charged premium prices, and by the time it realized how many people were choosing cheaper machines that weren’t insanely great but did the job, Microsoft’s dominance was locked in.

 

Now, any such discussion brings out the Apple faithful, who insist that anything Windows can do Apple can do better and that only idiots buy PCs. They may be right. But it doesn’t matter, because there are many such idiots, myself included. And Windows still dominates the personal computer market.

 

The trouble for Microsoft came with the rise of new devices whose importance it famously failed to grasp. “There’s no chance,” declared Mr. Ballmer in 2007, “that the iPhone is going to get any significant market share.”

 

How could Microsoft have been so blind? Here’s where Ibn Khaldun comes in. He was a 14th-century Islamic philosopher who basically invented what we would now call the social sciences. And one insight he had, based on the history of his native North Africa, was that there was a rhythm to the rise and fall of dynasties.

 

Desert tribesmen, he argued, always have more courage and social cohesion than settled, civilized folk, so every once in a while they will sweep in and conquer lands whose rulers have become corrupt and complacent. They create a new dynasty — and, over time, become corrupt and complacent themselves, ready to be overrun by a new set of barbarians.

 

I don’t think it’s much of a stretch to apply this story to Microsoft, a company that did so well with its operating-system monopoly that it lost focus, while Apple — still wandering in the wilderness after all those years — was alert to new opportunities. And so the barbarians swept in from the desert.

Sometimes, by the way, barbarians are invited in by a domestic faction seeking a shake-up. This may be what’s happening at Yahoo: Marissa Mayer doesn’t look much like a fierce Bedouin chieftain, but she’s arguably filling the same functional role.

 

Anyway, the funny thing is that Apple’s position in mobile devices now bears a strong resemblance to Microsoft’s former position in operating systems. True, Apple produces high-quality products. But they are, by most accounts, little if any better than those of rivals, while selling at premium prices.

So why do people buy them? Network externalities: lots of other people use iWhatevers, there are more apps for iOS than for other systems, so Apple becomes the safe and easy choice. Meet the new boss, same as the old boss.

 

Is there a policy moral here? Let me make at least a negative case: Even though Microsoft did not, in fact, end up taking over the world, those antitrust concerns weren’t misplaced. Microsoft was a monopolist, it did extract a lot of monopoly rents, and it did inhibit innovation. Creative destruction means that monopolies aren’t forever, but it doesn’t mean that they’re harmless while they last. This was true for Microsoft yesterday; it may be true for Apple, or Google, or someone not yet on our radar, tomorrow.

Party Friction : A House Divided

 

Everything is relative. This is not, in the words of the great Malcolm Tucker, “the break up of the Beatles, during the fall of the Roman Empire.” But political parties that don’t stick together, don’t tend to win together.

 

 

This is a much more complex statement than most political organizers give it credit for. 

 

How often do unelected senior staff see themselves as the embodiment of a given Party - and therefore, the only voices that matter?  This is not a stance that gets staked out maliciously.  A lot of high-level political staff work their way through the ranks, making personal sacrifices and putting in a lot of blood, sweat and tears in support of the vision their Party represents. 

 

This brand loyalty is commendable, but in the high-stakes, competitive game that is politics, there's a natural shift that happens between supporting the vision a Party represents and backing the tribe, no matter what.  It's this shift from cause to partisanship that leads people astray.  

 

When you see yourself as a grizzled Party veteran, you develop a certain sense of entitlement - you've been through the trenches, you know what's best for the Party.  Newbies, be they staff or even Members, don't have your skin in the Party game nor your institutional experience, so it's their job to serve you, in support of the Party, rather than your job to empower them.  Strict control of the team and a go-for-the-throat approach to the opposition is the only way ahead.  

 

The result is an increasingly tightening fist that ignores, threatens or eliminates opposing perspectives.  Of course, the public has differing perspectives; when you cease to include them in internal conversations, that approach bleeds out to public communications, too, with a shift of focus from informed conversation to message control.  It happens all the time, to all Parties - it's a chief reason why governments (and for that matter, nations) fail.

 

As is happening now to the Federal Conservatives (and as some of us predicted was coming); internal dissent to this increasingly top-down process and growing frustration with the firewalls that have grown up around government are eating away at the CPC from within and chipping away at those walls from without.

 

There's another side to this story, though - in a tightly controlled system, many of the staff that work their way up the ladder are able to do so because they affiliate themselves with (or are taken under the wing by) senior staff who groom them to carry on their particular legacy. 

 

Those who might have differing perspectives or loyalties more to an employer (elected official) or the vision over the brand can be seen as not being team players and be marginalized or even fired, creating disaffection among natural Party advocates.  Yes, actual ability and creativity play a role in this process, but not as much as everyone likes to tell themselves.  If disenfranchised staff manage to stick around - or even if they don't - they can harbour grudges against those senior folk that, from a non-insider perspective, are seen to have hijacked the Party from its roots and its beliefs. 

 

Leaders come and go; when one leaders goes, the Senior Centre will naturally gravitate towards one who is most reflecting of their way of doing things and under whom they can carry on in the general roles with which they've become comfortable. 

 

They may legitimately see differing voices within their own Party as threatening to the establishment they feel they've built and, therefore, the Party itself.  At the same time, those who have been marginalized over the years (and also those who simply want to build something of their own) are going to see the Establishment as the problem and themselves as the solution.

 

In this way, leadership votes can be less about a particular leader than about the teams that back them and the strategies/communications gambits they have played.  It's not how politics should work, but it often is.  This being the case, backroom operatives that fight tooth-and-nail for a particular candidate/method of operation in which they play a key part may see the Party's choice of a differing candidate as a slap in their own face. 

 

If they aren't shown the door by the new team, they may just walk off themselves in resentment.

 

More than a few political operatives should pay heed to the advice of Colin Powell: "Never let your ego get so close to your position that when your position goes, your ego goes with it."

 

This is the scenario unfolding right now in Harper's Conservative Party; if he's serious about keeping his coalition of Reformists and Conservatives together, he's going to have to switch up the methodology that got him into power and with which he's governed so far. 

 

A good model for him (and his potential successors) to look at would be Ontario Premier Kathleen Wynne.  Wynne faced a similarly polarizing battle with Sandra Pupatello that demonstrated a rift between the establishment and many of the junior staff/Party members.  The Leadership Convention itself was a bit messy, but Wynne and her core team did an amazing job of reaching out to and including the organizers of other candidates, especially Pupatello's. 

 

Worth noting - what allowed Wynne to pull this off was a steadfast focus not on the Party as a brand, with wagons circled and pistols drawn, but of the vision and virtues the Party is meant to represent.  In her internal actions, her dealings with Opposition Parties, the press and stakeholders, Wynne has kept at it, walking the talk and leading by example. 

 

This inspires trust, faith and loyalty, which are the fibres that hold a Party together.  Carrots and sticks simply don't have the lasting power to accomplish this.

 

Yes, there are differing viewpoints both within the Party and across the province, but Wynne is applying her mediation skills and active listening ability to keep people engaged, making them feel respected.  This allows her the space and time to drill down to points of commonality and build back up from there.

 

If Team Harper put their vision (though I'm not sure exactly what that is, as their actions are pretty contradictory to their supposed intent) first, they would be able to engage the growing discontent in their own Caucus and across the country the same way.  Take abortion as an example; at the end of the day, pro-life advocates don't want to see young lives penalized for the sins of their fathers/mothers.  Fair enough; what about looking to empower those fathers and mothers to make better choices at the outset? 

 

Contraception is part of that mix, yes, but not exclusively; education, as for all things, is key.  Sex education, social-emotional learning, respect for difference and self-discipline through initiatives like Positive Psychology and Roots of Empathy.

 

You can take the focus on abortion and judo-flip it into a mandate to directly tackle stigma, poverty and education challenges.  Why bait and switch when you can convert?

There is always a solution to every problem, but as every problem is complex and interwoven with the very structure of our society, it's important to scale down to the core basics that everyone - even those whose opinions you detest - can agree upon.  From there, you build up and move forward.

 

Which brings me to my key point - yes, the party that doesn't stick together doesn't win together, but you don't achieve cohesion through strict top-down control; that's invariably a recipe for friction. 

 

The best leaders don't act like tyrants - they tend to be more like teachers.