Private equity ownership is devastating retail — just as it has destroyed newspapers

The Washington Post reports some startling figures about the role of private equity firms in the retail business. According to the Post’s Abha Bhattarai:

More than 1.3 million Americans have lost their jobs in the past decade as a result of private equity ownership in retail, according to a report released Wednesday. That includes 600,000 retail workers, as well as 728,000 employees in related industries. Overall, the sector added more than 1 million jobs during that period. [my emphasis]

This is exactly what has happened to the newspaper business over the past several decades. Yes, the internet has devastated the economic model, with advertisers fleeing to Craigslist, Google and Facebook. But that’s only part of the story. The other part is that corporate chains have hollowed out newsrooms in order to maximize profits at a time when what was really needed was investment and patience.

The most notorious of the corporate raiders is MediaNews Group, formerly Digital First Media, which is owned by Alden Global Capital. MNG has all but destroyed once-great papers like The Denver Post and The Mercury News of San Jose, as U.S. Sen. Elizabeth Warren notes in her proposal to re-regulate Wall Street. Cuts continue at MNG’s Massachusetts holdings, the Boston Herald, The Sun of Lowell and the Sentinel & Enterprise of Fitchburg. Meanwhile, The Berkshire Eagle is rebuilding after a group of local business people bought the paper back from MNG.

Consider, too, that independent regional papers such as The Boston Globe and the Star Tribune of Minneapolis are doing reasonably well, and others are taking innovative steps such as giving iPads to their readers to ease the transition to all-digital (the Arkansas Democrat-Gazette), operating under hybrid for-profit/nonprofit ownership (The Philadelphia Inquirer) or are pursuing pure nonprofit ownership (The Salt Lake Tribune).

For years we’ve been hearing that Amazon is destroying retail — yet, as the Post observes, that part of the sector not being strangled by private equity has continued to grow. Newspapers’ business problems are very real. But surely they would be shrinking a lot more slowly, and perhaps groping their way toward sustainability, if they weren’t being destroyed by our financial overlords.

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Disruptive innovation and the future of news

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Photo via ElationPress.com.

Previously published at Medium.

Toward the end of The Innovator’s Dilemma, Clayton Christensen’s influential 1997 book about why good companies sometimes fail, he writes, “I have found that many of life’s most useful insights are often quite simple.”

Indeed, the fundamental ideas at the heart of his book are so blindingly self-evident that, in retrospect, it is hard to imagine it took a Harvard Business School professor to describe them for the first time. And that poses a problem for Jill Lepore, a Harvard historian who recently wrote a scathingly critical essay about Christensen’s theories for the New Yorker titled “The Disruption Machine.” Call it the Skeptic’s Dilemma.

Christensen offers reams of data and graphs to support his claims, but his argument is easy to understand. Companies generally succeed by improving their products, upgrading their technology, and listening to their customers — processes that are at the heart of what Christensen calls “sustaining innovations.” What destroys some of those companies are “disruptive innovations” — crude, cheap at first, attacking from below, and gradually (or not) moving up the food chain. The “innovator’s dilemma” is that companies sometimes fail not in spite of doing everything right, but because they did everything right.

Some examples of this phenomenon make it easy to understand. Kodak, focusing its efforts on improving photographic film and paper, paid no attention to digital technology (invented by one of its own engineers), which at first could not compete on quality but which later swallowed the entire industry. Manufacturers of mainframe computers like IBM could not be bothered with the minicomputer market developed by companies like Digital Equipment Corporation; and DEC, in turn, failed to adapt to the personal computer revolution led by the likes of Apple and, yes, IBM. (Christensen shows how the success of the IBM PC actually validates his ideas: the company set up a separate, autonomous division, far from the mothership, to develop its once-ubiquitous personal computer.)

Clay Christensen in 2011. Photo (cc) by Betsy Weber. Some rights reserved.
Clay Christensen in 2011. Photo (cc) by Betsy Weber. Some rights reserved.

Christensen has applied his theories to journalism as well. In 2012 he wrote a long essay for Nieman Reports in collaboration with David Skok, a Canadian journalist who was then a Nieman Fellow and is now the digital adviser to Boston Globe editor Brian McGrory, and James Allworth, a regular contributor to the Harvard Business Review. In the essay, titled “Breaking News,” they describe how Time magazine began in the 1920s as a cheaply produced aggregator, full of “rip-and-read copy from the day’s major publications,” and gradually moved up the journalistic chain by hiring reporters and producing original reportage. Today, they note, websites like the Huffington Post and BuzzFeed, which began as little more than aggregators, have begun “their march up the value network” in much the same way as Time some 90 years ago.

And though Christensen, Skok, and Allworth don’t say it explicitly, Time magazine, once a disruptive innovator and long since ensconced as a crown jewel of the quality press, is now on the ropes — cast out of the Time Warner empire, as David Carr describes it in the New York Times, with little hope of long-term survival.

***

INTO THIS SEA of obviousness sails Lepore, an award-winning historian and an accomplished journalist. I am an admirer of her 1998 book The Name of War: King Philip’s War and American Identity. Her 2010 New Yorker article on the Tea Party stands as a particularly astute, historically aware examination of a movement that waxes and wanes but that will not (as Eric Cantor recently learned) go away.

Lepore pursues two approaches in her attempted takedown of Christensen. The first is to look at The Innovator’s Dilemma as a cultural critic would, arguing that Christensen popularized a concept — “disruption” — that resonates in an era when we are all fearful of our place in an uncertain, rapidly changing economy. In the face of that uncertainty, notions such as disruption offer a possible way out, provided you can find a way to be the disruptor. She writes:

The idea of innovation is the idea of progress stripped of the aspirations of the Enlightenment, scrubbed clean of the horrors of the twentieth century, and relieved of its critics. Disruptive innovation goes further, holding out the hope of salvation against the very damnation it describes: disrupt, and you will be saved.

The second approach Lepore pursues is more daring, as she takes the fight from her turf — history and culture — to Christensen’s. According to Lepore, Christensen made some key mistakes. The disk-drive companies that were supposedly done in by disruptive innovators eating away at their businesses from below actually did quite well, she writes. And she claims that his analysis of the steel industry is flawed by his failure to take into account the effects of labor strife. “Christensen’s sources are often dubious and his logic questionable,” Lepore argues.

Jill Lepore. Publicity photo from her Harvard bio.
Jill Lepore. Publicity photo from her Harvard bio.

But Lepore saves her real venom for the dubious effects she says the cult of disruption has had on society, from financial services (“it led to a global financial crisis”) to higher education (she partly blames a book Christensen co-authored, The Innovative University, for the rise of massive open online courses, or MOOCs, of which she takes a dim view) to journalism (one of several fields, she writes, with “obligations that lie outside the realm of earnings”).

Christensen has not yet written a response; perhaps he will, perhaps he won’t. But in an interview with Drake Bennett of Bloomberg Businessweek, he asserts that it was hardly his fault if the term “disruption” has become overused and misunderstood:

I was delighted that somebody with her standing would join me in trying to bring discipline and understanding around a very useful theory. I’ve been trying to do it for 20 years. And then in a stunning reversal, she starts instead to try to discredit Clay Christensen, in a really mean way. And mean is fine, but in order to discredit me, Jill had to break all of the rules of scholarship that she accused me of breaking — in just egregious ways, truly egregious ways.

As for the “egregious” behavior of which he accuses Lepore, Christensen is especially worked up that she read The Innovator’s Dilemma, published 17 years ago, yet seems not to have read any of his subsequent books — books in which he says he continued to develop and refine his theories about disruptive innovation. He defends his data. And he explains his prediction that Apple’s iPhone would fail (a prediction mocked by Lepore) by saying that he initially thought it was a sustaining innovation that built on less expensive smartphones. Only later, he says, did he realize that it was a disruptive innovation aimed at laptops — less capable than laptops, but also cheaper and easier to carry.

“I just missed that,” he tells Bennett. “And it really helped me with the theory, because I had to figure out: Who are you disrupting?”

Christensen also refers to Lepore as “Jill” so many times that Bennett finally asks him if he knows her. His response: “I’ve never met her in my life.”

***

CHRISTENSEN’S DESCRIPTION of how his understanding of the iPhone evolved demonstrates a weakness of disruption theory: It’s far easier to explain the rise and fall of companies in terms of sustaining and disruptive innovations after the fact, when you can pick them apart and make them the subject of case studies.

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