This is Part 2/chapter 6 in The Blockchain Economy serialised book. For the index please go here.
Part 1 was all about the Infrastructure layer. Part 2 is where this meets the real world and impacts big established markets.
If you are in a market that is going through wild, disruptive change where nobody knows how it will play out, you might be thinking:
“We have seen this movie before.”
Markets go through fundamental disruptive change in fairly predictable phases.
Here are the 7 acts in the Creative Destruction play. These stories have played to packed audiences in markets such a recorded music, newspapers, books, telecom, magazines, software (again and again and again) and are now playing out in markets that used to be boringly stable such as finance/banking, accounting, legal services, government and healthcare. This is what happens when software eats the world.
This chapter/post describes:
- The Creative Destruction 7 Act Play ie the stages of creative destruction.
- 23 established markets that are undergoing creative destruction from Blockchain.
- What makes this Decentralised wave fundamentally different.
- How you should think about where your market is in the Creative Destruction 7 Act Play, as an entrepreneur, worker and investor.
The Creative Destruction 7 Act Play
Act 1. The Old Guard Dominate
This is when a few big companies dominate a market that has not fundamentally changed for decades (or hundreds of years in many cases such as banking). Mergers, debt leveraged acquisitions and “roll-ups” have locked the old guard into behemoth structures. No entrepreneur would think of competing against these companies and, if they did, no investor would back them.
Act 2. Straws In The Wind
This is when a few visionary/crazy entrepreneurs see opportunity. Occasionally VCs get active at this stage, but all too often VCs are part of the established order and do not see enough reason to believe that the times are changing. It takes guts to see a few straws blowing about and bet that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”. This is where ICOs, a Blockchain innovation, is changing early stage capital and that is further accelerating change. VCs would have run a mile from the mix of technical and market risk represented by Ethereum but thanks to those “dumb” retail ICO investors (who became very rich), Ethereum is now powering the next wave of innovation.
Act 3. Denial
The changes are now real and the old guard management can see it. But they don’t know how to react, so they reach for high pressure management to make the numbers work. In some cases, management also reach for creative accounting tricks to smooth out earnings and make it look as if nothing has changed (known as fraud in most circles). This only surfaces when we get to Act 5; during Act 3 everything looks normal on the surface.
Act 4. The weird turn pro
The crazy entrepreneurs who started at Act 2 are now gaining real traction and major amounts of capital. They are experimenting frenetically to find what is really sustainable/scalable. This is the time “when the going gets weird, the weird turn pro” (quote from Hunter S Thompson, who was certainly weird but also professional enough to write best-selling books). During this Act there are lots of stories in the media about these strange entrepreneurs but, as the old guard numbers still appear to be OK, the accepted wisdom is still that nothing will fundamentally change.
Act 5. Blow up
This is when reality can no longer be glossed over. This is when we see scandals such as Wells Fargo fake accounts and News Corp phone hacking. This can lead to investors taking a cold hard look at the numbers and when the new numbers do finally appear, it can trigger a stock crisis, often with a restatement of earnings and a change of CEO.
During Act 5, the reality can no longer be denied and we see real crises in big companies. These crises may lead to radical transformation, or they may lead to Chapter 11 restructuring and fire sales. Before that happens we see the kind of behavior we saw with Wells Fargo (which went on a long time during Act 3, Denial, when hardly anybody was paying attention). This is new for banking, which has not had a major headwind like this in hundreds of years. However, bankers can study other markets that got hit by the digitization truck – for example Media.
News Corp – when pressure hits reality
News media was one of the first markets to get hit by the digitization truck.
The day the News Corp phone hacking scandal hit I happened to be meeting with an esteemed Wealth Management firm that had put up a list of their highest conviction stocks. Right at the top of the charts was News Corp. Oops. When questioned they responded:
“Stuff like that happens, it’s impossible to predict that kind of thing where rogue employees run amok”.
Yes, that is true and the financial metrics rationale for putting that stock at the top of the charts was impeccable. Yes, the problem that crashed the stock that day was a Black Swan event and they are by definition impossible to predict. The rogues were fired. Story over? No.
Nobody could predict who would go rogue and when and in what form, but it was reasonably predictable that somebody would go rogue fairly soon in some way. It was an inevitable event even if it was not an imminent event.
The reason that the employees went rogue was that their business was slap bang in the path of digital disruption. The same was true in the Wells Fargo fake accounts scandal. Valiant efforts by sales people (Wells Fargo) or Journalists (News Corp) cannot save companies from digital disruption. Top management attempts to make that happen usually end in scandal.
When pressure hits reality, we get Act 5 BlowUp.
Act 6. Reconstruction
This is when a new power structure starts to emerges. This is when we see IPOs from the visionary entrepreneurs who started in Act 2. Sometimes they stumble post IPO and never recover. Sometimes they stumble post IPO, recover and grow to strength – that was the famous story of Priceline after the Dot Com Nuclear Winter.
Act 7.The new old guard dominates
Many entrepreneurs make the mistake of seeing how quickly the new guard arose and think that they can also be deposed quickly. The entrepreneurs who made it to this stage will be tenacious, paranoid and really hard to beat – until the next wave comes along. For example, in the Centralized Internet era we have GAFA (Google, Apple Facebook, Amazon) and BAT (Baidu Alibaba TenCent) who deposed analog their competitors nd will dominate until the Decentralized Internet gets to prime time. Until that happens, don’t bet against GAFA and BAT.
The markets dominated by the new old guard are in Act 2 in the Blockchain wave of disruption.
23 established markets that are undergoing disruption
Each of these will be covered in a separate chapter/post:
- Supply chain
- Creative Economy
- Sharing/Gig Economy
- Venture Capital
- Financial Trading & Asset Management
- Energy markets
- Middle Class On Ramp
- Back Office Outsourcing
- Real Estate/Property
The first wave of change – from dot com to social media – did something rather strange. It took something that was fundamentally decentralised (the Internet, which was designed to withstand nuclear attack by enabling communication between decentralised resources) and made it centralised. That is why most of our searches are in Google’s data centre and most of our social chit chat is in Facebook’s data centre. The Centralised Internet era enabled us to exchange information online. In the blockchain-based Decentralised Internet era we can exchange value online and that puts many more industries into software’s feeding trough.
How you should think about where your market is in the Creative Destruction 7 Act Play, as an entrepreneur, worker and investor.
Part 3 will look at how to make money in the Blockchain Economy as an Entrepreneur, as an Investor and as an Employee/Contractor. In this simple summary we look at the fundamental action of the Entrepreneur – the lead actor in this play based on the current Act in the Creative Destruction 7 Act Play (as the Entrepreneur creates wealth for investors and employees/contractors)