Digital’s easy scale has proven to be ruinously expensive
The digital unicorns have been enjoying the lucrative advantages of worldwide scale — without paying the price. But there are others costs, that might be even more expensive…
Cost is a funny word. In business, we tend to associate it with money - financial costs. But there are more costs than that - and the money-obsessed, VC-backed unicorn world has been proving that rather well.
One of the key differences between truly digital businesses and those that came before them is the costs they bear. In the pre-digital era, scale generally came with costs of servicing that scale. If you wanted to distribute your product worldwide, you needed to fund the costs of that growth: infrastructure, property, people and shipping. That’s been true even of the earlier wave of digital-based businesses. Amazon spent over a decade reinvesting it's refits into building out a phenomenal distribution chain. Tim Cook came to prominence at Apple by building one of the most ruthlessly effective supply chains in the world.
The newer wave of digital businesses have built incredible profits (in many cases) by dodging those costs. And the very nature of the internet is that allows that to happen. If your product can be distributed purely digitally, it can be sent anywhere in the world for as close to free as makes no difference.
The internet’s free distribution is a license to print money
Facebook is a truly global product, but the majority of it is still run from Menlo Park, California. The code that’s serving you Facebook via app or browser is fundamentally the same wherever you are in the world, and is written within a few hundred yards of Zuckerberg’s desk. While scale brings server costs — just as it does for Google — the core product is distributed worldwide for trivial amounts of money using the internet. No vast logistics operation here. Even more than that, the content sent around is generated at no cost to Facebook - the users do that - and is distributed for very little cost. The major overheads are the people building the system that facilitates that — and who run the ad systems that pay for it all.
This ability to scale without too great a burden in staff, property and logistics has allowed Facebook to become a truly global company in little over a decade (It’s only 12 years since Facebook expanded beyond universities). And its profits are eye-watering.
Businesses like Uber have scaled by simply refusing to employ staff directly, using their (scalable) app to connect drivers and passengers, and taking a cut of that transaction. And the lack of vetting arising from the indirect relationship involved has heightened the problems.
The hidden price of scale
However, the biggest social network is the poster child for digital scale, and Facebook’s sheer size and the open nature of viral spread on the service is what allows misinformation to spread so quickly across it. (Although closed groups can be just as damaging.)
That is actually the hidden cost of these vast scale digital businesses - but it is not financial. Through the avoidance of spending money, Facebook is suffering ever-increasing reputation damage. In the year since the Cambridge Analytica, the company has been hit by wave after wave of unforced errors. Some are technical, but many are born of its attempts to avoid the costs - monetarily - of scale. In particular, its avoidance of paying the costs of moderating what its the world’s biggest sharing platform has led to it being exposed for the appalling working conditions of those it hire to moderate content, the spread of conspiracies on Instagram - and the number of times footage from the Christchurch killed slipped through its net.
But when a gunman opened fire at a New Zealand mosque late last week, broadcasting video of the shooting live on Facebook for anyone to see, the platform’s enormous size became a complete and total liability. Suddenly that Super Bowl-size audience had access to something Facebook didn’t want them to see, and the company couldn’t take down fast enough the more than 1 million copies of the video uploaded by users in the next 24 hours.
Facebook is not unique in this. YouTube, for example, has a business that’s predicated on spending as little as possible to monitor and examine the content uploaded to it, and only gets really active when called out by the press - or advertisers concerned about the brand-safeness of the content its adverts are being put against.
The costs digital businesses need to start paying
So, in fact, perhaps my initial thesis was flawed. Digital businesses do have costs - but they are different from those whose operating environment is more physical. And up until now, those businesses have been able to avoid paying those costs. If they don’t willingly accept the costs of the scale they have built — well, arguably, that’s what legislation and regulation is for. As Martin suggested earlier, there’s a strong parallel with the industrial revolution, and the health and safety of workers.
Here, though, it’s less about individuals, but the health and safety of our society.
So, do you need to scale? Is there space in the digital world of lifestyle, small-scale businesses? Equally, if you want to scale, are you prepared to bear the costs of that scale - most notably in people? The digital world created an illusion that scale was free. We now know it isn’t free, and sometimes the cost it exacts on our society is far higher than any of us imagined.
The VC-backed, big scale unicorn world is no longer the unquestioned good it once was, and media attention is moving from fawning to hostile. But that, in of itself, brings another question to mind: what interesting, compelling businesses have we missed during our obsession with scale? What hidden worlds out there are homes to real innovation, that might solve the problems of scale?
Let's find out.