Not All Change is Innovation

Photo by Vipgrafx
Photo by Vipgrafx

When a solid, honest business loses relevance due to changes in technology, then it can fairly be said to be a casualty of progress.  Such is the case for my dear friend Tony Tamberelli, who very recently shut the doors at Tamberelli Digital, a camera and lighting rental service in Manhattan.  Tony was just about the first professional with whom I did business in the New York market more than twenty years ago.  At that time, Tony was still managing a rental services business in New Jersey and hadn’t started his own shop yet, but his career included work for several of the major houses in NY and LA, and he was one of the most experienced guys in rentals.  He is also one of the nicest, which was no small thing back in the late 80s and early 90s.  Back then, when the available cameras on the market were packages with a retail value of well over $250,000, the guys (and I do mean guys) at the rental shops were not exactly receptive to calls from anyone who sounded like he might not know what he was doing.  It was not uncommon to hear an impatient voice at the other end of the line that suggested, “Prove to me you’re not a schmuck, and I’ll consider renting to you.”  But not Tony.  The first time I ever called him, I had plenty of dumb questions, and he couldn’t have been friendlier.  And over the subsequent two decades, I never rented from anyone else in the NY market.

The truth is that the writing was on the wall for sometime for Tamberelli Digital, and it is a textbook case of a business failing due to inevitable, technological progress.  Without going into the complexities of operating a rental shop, suffice to say that the core products for rent, cameras, have changed in two dramatic ways.  First, the quality of the image one can capture with a $5,000 camera in 2013 is hundreds of times better than what we could capture with a quarter-million dollar camera in 1993.  Second, there are about eight major manufacturers at any given moment producing a new product that has anywhere from several months to a year before a competitor produces something the market wants more.  So, it is very tough to know what inventory to keep on the shelves, and at the same time, many of us who use these cameras own at least one or two, and therefore rent less frequently or not at all. Meanwhile, the overhead required to maintain a rental business, particularly in Manhattan, is extremely high.  And finally, thanks in part to the illusion that digital production costs less, which it does not, macro forces in the market have driven rates downward while costs of operation (or living) have continued to rise.  So, that’s the snapshot version of why Tamberelli Digital closed its doors. Nobody is to blame for the contemporary irrelevance of this business; it is simply an economic reality stemming from actual innovation.

I don’t bring all this up in order to eulogize, but to illustrate the difference between real loss of value through innovation and dilution of value through practices that are not in fact innovative at all.  Innovation happens when Panasonic or Canon produces a camera that competes with a Sony product, and then Sony responds in kind, and so on. The beneficiaries of these innovations (usually) are consumers, who get a diverse array of affordable tools to produce motion pictures.  The victims of these changes are intermediaries like the rental house, not because the rental house didn’t provide a very valuable set of services, but because the core service, holding leases on expensive gear,  is no longer required in the new market. Conversely, however, not every disruptive digital-age business can be said to represent the same kind of innovation, even though presumptive defenders of all things Web, like to use this word to deflect criticism of what might be very damaging practices.

Take the music industry response to the Internet Radio Fairness Act (IRFA), in which Pandora claimed a rationale for lowering the already low licensing fees paid to artists.  This was, I believe, the first time we saw so many brand-name musicians speak out against a web-industry initiative since Lars Ulrich was pilloried over Napster. Regardless, Pandora cannot be said to be an innovation that obviates the need for the music in the same way low-price digital cameras obviate the need for my friend’s rental company.  To the contrary, it should be obvious to anyone that Pandora could not exist without the music and that if it cannot function while paying fairly-negotiated rates for its primary resource, then market rules says tough noogies, and some other entrepreneurs can try to get the formula right.  Of course, as is so often the case in our ever-bifurcating economy, the principals at Pandora can only fail upward if the business model doesn’t turn out to work. This post from Digital Music News discusses Pandora executives cashing out $87.6 million in shares, which may signal a lack of confidence in the business and also would not bode well for a Spotify IPO.  With payouts in the tens of millions from a company that has yet to make a profit, it is hard to know whether building a solid business is really the goal, or if Pandora is just a lesson how to become a dotcom bubble millionaire 2.0.  If the company were to fail, Web industry wonks would blame the musical artists, many of whom will never see $10 million in their lives, but few will question the extraordinary wealth going into the pockets of about three to four executives.

The web industry has a bit of a track record for doing at lightning speed what the corporate raiders of the 1980s were doing in a pre-digital context — namely generating fast wealth for a small group of people while building nothing and often destroying something of real value in the process.  It is, therefore, dangerous as a general practice to apply the word innovation as broad praise for every enterprise, initiative, or claim made by any company simply because it is web-based.  Pandora and Spotify may change the way consumers enjoy music, but they do not redefine the fundamental desire for the music in the first place, and they have nothing whatsoever to do with the manner in which it is produced.  We could look at Vimeo or YouTube in a similar way with regard to filmed entertainment or Amazon and e-books with regard to literature. All of these technologies change distribution and marketing, but they do not change the production of the products in any economic sense, and they do not change the desire among consumers to acquire the products.  Therefore, if the makers of products like music, books, motion pictures are in any way harmed by technologies that change distribution and marketing, it is not reasonable to paper over that harm in the name of so-called innovation. 

We already have a cultural problem distinguishing value from vapor, continuing a vicious cycle of leaping from bubble to bubble, and scores of economists seem to agree that we haven’t learned a thing since the near total collapse of the economy in the wake of the housing bubble implosion less than four years ago.  I know next to nothing about economics other than the self-evident observation that building a business that generates returns on investment and creates middle-class jobs is sound, and that a scheme that turns vapor into million-dollar transactions for five individuals is dysfunctional.  What I lack in knowledge about economics, though, I counter with a pretty solid understanding of language; and one expression I’ve known is utter bullshit since working for my first corporate client is the term “adding value.”  This is a purposely vague concept, often used by professional services companies to justify high fees; and even this may have some truth to it from time to time.

But “adding value” is also a popular term used by webonomics proponents like Mike Masnick to tell authors of creative works how to “adapt” to a market in which their products no longer have intrinsic value.  “Add value by selling tee shirts or creating special limited editions, etc.” the proposition goes, despite the fact that there are no grounds to argue that technological change has in truth diluted the intrinsic value of the media products themselves.  To the contrary, it is clear that the market still wants music, films, books, etc., which means the products retain their intrinsic value because nothing about technology has supplanted the demand.  Worse yet, the insistence that industries built on intrinsic value must adapt to the whims of an industry built almost entirely on advertising value is a very dangerous prospect in a world already on shaky economic grounds.  Advertising, which yields about 90% of Google’s extraordinary wealth, has no independent, intrinsic value; it must be pegged to products and services that do have intrinsic value in the consumer market. We literally cannot all be in sales and marketing; some of us have to make things. Hence, any business practice that dilutes intrinsic value for the sake of advertising value is not only not innovative, but is a form of cannibal economics over the long term.

It seems to me that we might think of value as we think of matter — that it can neither be created nor destroyed (hence cannot be added), but that it is always shifting from inhabiting one entity to another.  The value of cameras, for instance, shifted away from my friend’s rental business to retailers, who sell the cameras to a market wanting to own them.  But the value of creative works, like the ones produced with those cameras, has not in truth shifted away from the works themselves to entities seeking to exploit those works for the purpose of advertising.  The value remains embodied in the media products themselves. It is, therefore, not only preposterous to suggest that the Internet mandates a new economic model to which certain producers must adapt, it is potentially the logical foundation of one of the biggest bubbles destined to explode.

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