Deven R. Desai
Volume 65, Issue 6, 1469-1482
Digitization is the new steam. Steam allowed us to leverage like never before and spawned a series of new offerings and new needs. The steam era started with many competitors and inventors and ended with only a few concentrated winners. The winners contributed vast amounts to society and spawned a need for new laws, from antitrust to product liability to intellectual property to securities, and more. Just as steam disrupted old industries and fostered new ones, digitization is providing the same changes today. Digitization opens the door to decentralized production, lower costs, and disruption of incumbents, but digitization does not mean perpetual disruption is at hand.
In this essay, I begin to set out why new, centralized winners will emerge. Digitization spawns an abundance of person-to-person transactions but with the problems of impersonal transactions. Copyright industries were some of the first to experience the change from few to many producers. Technologies such as 3D printing, synthetic biology, and nanotechnology further the shift from centralized to small and local production. Although some champion disruption and new businesses, a paradox of centralized production and markets with fewer players is that such sectors are easier to regulate. The ability of almost anyone to make guns, sell harmful software, or produce other sophisticated offerings removes that easy pressure point. Put differently, even though digitization enables decentralized, lower-cost production, economic questions will remain. We must understand what they are and why they persist to see what the future may be.
In simplest terms, transactions costs related to safety, quality, property rights, contracting, and knowledge may be more acute in a digitized, decentralized world. I offer that companies such as Uber, Lyft, Airbnb, Google, Apple, Amazon, and eBay, have thrived, in part because they have enabled decentralized production to operate at scale. In addition, as established players understand digitization and network technology better, they have adapted to the new marketplace. For example, rather than giving consumers a music or video file, part of the copyright industry has shifted to streaming music and video. Consumers have access to the content with no fear of malware but lose the ability to manipulate that content. This strategy could be used to limit 3D printing and other creative technologies. Instead of having design files that can be altered, consumers will stream a file for the specific design. Many may welcome this shift, because they are not tinkerers but instead are simply consumers who want a safe, stable product or service. But that stability flows from centralized players. In short, this era of disruption and decentralization will likely pass and new winners, who will look much like firms of old, will emerge, if they have not already.