< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: Views From the Door to 11

Tuesday, March 22, 2005

Views From the Door to 11

Federalist X introduced this site to me (Global Guerillas) and I've been admiring the writing for long while now. The site is filled with serious thought and valuable insight. I recommend it to all readers here.

The latest post, however, by author John Robb contains some deficiencies, and I hope what follows is instructive.

Robb describes Chris Anderson's work on the "Long Tail". At its core, Anderson's work is a critique, and a rather good one I might add, on Pareto's 80/20 rule (a discussion of which is found here). Many a b-school student has learned this rule, and then like all of us, butchered its meaning later in life. As a reminder then, the 80/20 rule is return over sales. Or, consequences over causes if you want to be as general as possible. Most everyone thinks of it in retail terms, 80% of the revenue comes from 20% of the products. "Category Killers" as retailers know them, are this 20%.

Anderson's thesis is that information technology is rapidly moving markets to 50/50. Anyone watching the general trends caused by things like the iPod and satellite radio are forced to agree with Anderson. I too agree with him. But this is, in my opinion, only half the story.

The other half of the story is the demand itself. From where I sit, distressed companies are a predicate of this demand, and the decision to finance a rescue is more a gauge of demand than of supply. If Anderson's thesis described a lasting state of the market, money spent resurrecting failing entities would be money wasted. Should 50/50 markets exist for a period of time, VCs would deliver returns on average far higher than those investing in distressed, old, 80/20 markets.

Here then is the point precisely... Anderson's description of the retail business is behind the curve. What is happening in retail now is a result of fundamental market forces, the ends of which were bet on by VCs and debt financiers close to a decade or so ago. Now that capital has been used up, and folks like me are called in to clean up the waste. The 50/50 market occurred earlier (if ever), and would be evidenced by the private equity deals and their debt counterparts in the early and mid 90s. Now though retail, at least, is finding itself in a consolidation phase, the 50/50 markets (if they ever truly existed) are moving back towards 80/20.

Such is my contrarian view. You may be wondering though where Robb comes in? Well he applies the 50/50 analysis to global terror and warfare. He states that the near monopoly nation-states once had on warfare is being broken up by global terror networks. The technological forces causing this, in Robb's view, are democratization of warfare tools, amplification of damage, acceleration of word of mouth. Again, I think Robb is getting it backwards here. I'm no student of military history, but it seems to me what caused these three forces were one overriding force, demand. The demand by the third-world to compete with the first in terms of power projection. Third-world nation states were kept harmless by low economic worth and crushing debt. Only non-nation actors, or in other words, non-debtor actors, would provide a means to compete. Those means then are the three forces Robb speaks of (and possibly many more).

Of course, that is my admittedly unstudied opinion. In my business though, we look at the world from the bottom up quite a bit, and as such, we view things slightly differently than others. I hope its a view worth considering in connection with the excellent work of Robb and Anderson.