Disruptive Change

Smith & Caughey's Demise in Context

In the Herald for 2 June 2024 Liam Dann writes about the demise of the Auckland Department store Smith & Caughey against a greater contextual background of disruption in the retail trade. He says:

“It’s no secret that traditional retailing is struggling. There’s the recession and the grim post-pandemic malaise hanging over Auckland’s CBD.

And then there’s the relentless rise of online retailing. Actually, there’s been the relentless rise of online everything, reshaping society at a rapid pace and a deep structural level.”

Smith & Caughey’s isn’t the first victim and it won’t be the last.

There can be no doubt that there have been a number of challenges facing retailers – indeed a number of businesses – that are contributing to their demise.

My view is that online trading is probably posing the most consistent and lasting challenge to what we understand to be the “traditional” way of doing business. Dann himself recognises this when he refers to the

“relentless rise of online everything, reshaping society at a rapid pace and a deep structural level.”

Dann goes on to observe

“Online shopping has been around since the turn of the century of course, but in the past few years, it has become increasingly dominant. It was accelerated by the pandemic lockdowns. And it has been aided and abetted by the rise of AI (artificial intelligence) and ruthlessly clever social media marketing.”

Online shopping is only a part of the “online everything” to which Dann refers. There is a deeper message that underlies the “online everything” and it is that digital systems, exemplified by the Internet, have enabled a Paradigmatic Change in the way that we live our lives and will continue to do so. The result will be that we and certainly our children and grandchildren will live in a different society from that to which we have been accustomed. I do not suggest a form of technological determinism. Rather, digital systems are an agent of the changes that we have and will continue to experience.

Up until the late 1980s and early 1990’s before the advent of the Internet we lived in a largely kinetic society, relaying on models and variations of personal interaction. Our options for alternative means of communication were limited. We had mail, telephone, fax (remember that?) and that was it. Television and radio were in the hands of monolithic organisations that controlled the messaging that was available.

The Internet changed that. And it is important that we understand that the Internet is a distributed communications system that has a number of underlying qualities that have contributed to its rise and its ubiquity. Although the basic protocols that enable the Internet to operate are controlled by a small group of communications engineers, by and large the development of the various Internet platforms has taken place as a result of “permissionless innovation”.

This has enabled entrepreneurs to develop platforms such as Google, YouTube, Instagram, EBay, Trademe, Amazon and Facebook and bolt them on to the Internet backbone, thus making them available to users. In essence the model has been that of “If you build it they will come” and come they did.

Permissionless innovation is what has enabled most businesses to have an online presence in addition to or as an alternative to their High Street presence.

Permissionless innovation and the opportunity to test new business models coupled with ever-increasing developments in technology have resulted in continuous disruptive change or what futurist Jim Dator in an article entitled “Judicial Governance of the Long Blur” in Futures  Vols 21 No 1 January 2001 referred to as “The Long Blur”.

Dator, a futurist and political scientist, suggested that instead of a clear, distinct future emerging, there is often a prolonged and ambiguous transition period where trends, events, and changes blend together, making it difficult to discern clear patterns or outcomes.

In the "long blur," the future is characterized by complexity, uncertainty, and multiple overlapping factors influencing developments. This concept emphasizes the need for flexible thinking and adaptable strategies to navigate through uncertain times effectively.

Dator's idea suggests that rather than expecting clear-cut changes or transformations, we should be prepared for a continuous and often blurry process of evolution and adaptation.

Thus, what these elements have enabled goes beyond an expansion of a pre-digital communications system. The availability of video, audio, one to one or one to many video communications systems such as Zoom or Microsoft Teams without the costs of long-distance telecommunications fees have revolutionised the way that we communicate, do business, attend meetings or even go to Court.

This in turn has had significant flow on effects in the way that individuals manage their time and structure their working day, even to the extent of working from home which has had a dramatic impact upon office occupancy and commercial leasing of premises.

In New York for example 18% of the available office space is unoccupied and a significant reason for that is the utilisation of different means of communication. Face to face in person communication is no longer necessary nor the need it be the norm when other alternatives are available.

As Dann suggests, the Internet has enabled on-line shopping to challenge the High Street experience. The advantages of online shopping are clear. One need no longer spend time in a car or on public transport to travel to a physical location. The environmental impact, or lack of it becomes clear. The frustration of finding that stock is not available or that a particular size is not in stock is eliminated although to be fair there are occasions when these frustrations are present in the online milieu are still present.

But at least an inordinate amount of time and effort has not been expended in physically travelling to the kinetic outlet. And if the product is not available from one outlet, it may well be available from another. Delivery of the product is generally effected by courier and many online retailers have a more than reasonable return, refund or exchange policy. Zara immediately comes to mind.

For those of my generation there may be something lost in the socialisation experience that accompanies kinetic shopping but for younger generations the online acquisition of goods and many services has become the norm. Even professions are offering online consultations which have significant ramifications for requirements for office or surgery space which in turn has implications for the commercial property market.

One of the common cries from those who are suffering from the effects of the Digital Paradigm – news media are example of which more later – is the effect that online services are having upon their existing business models. The response of the movie and music industries is instructive.

In the late 1990’s the development of the mp3 protocol and the “shrinkage” that this brought to music files in particular meant that music could be distributed over an Internet that did not have the speed of fibre and for which high speed ADSL was only just appearing. File sharing of music files and later movie files became rampant, much to the concern of music and movie companies. Those who shared without permission or without paying a royalty were termed “pirates” (an old term adopted by Defoe among others who in pre-copyright days was highly critical of printers who published his material without compensating him) although what they were doing was infringing copyright.

Permissionless innovation allowed the entry of the file sharing utility Napster which was followed by a number of other file sharing platforms as continuing disruptive change took place.

Copyright owners commenced Court proceedings but at the same time – at least in New Zealand – pushed for legislative change in the form of amendments to the Copyright Act to enable those involved in file sharing to be held accountable.

But as these changes were taking place, permissionless innovation and continuing disruptive change were working their magic. Fibre, high speed internet, technological changes and major alterations to business models in the music and movie industries mean that streaming became a viable alternative.

Thus we have a plethora of streaming services such as Spotify, Netflix, Apple+, TVNZ On Demand and many others which allow users, for the payment of a small fee to access content lawfully. The moral and legal challenge associated with copyright infringement has pretty much been removed although there are some die-hard file sharers even so.  But because of these business model changes the file sharing provisions of the Copyright Act have fallen into disuse and are pretty much obsolete.

Ironically the alleged file sharer Kin Dotcom still awaits extradition to the US but the world has moved on in the twelve years since he was apprehended.

The software industry provides another example. Over 20 years ago computer software was purchased over the counter. This created problems if the program needed to be installed on another machine or the medium (disc, CD or DVD) had become damaged.

Nowadays most software delivery is done directly and online. Some software for gaming consoles is still sold over the counter or through an online retailer but an account with Microsoft or Sony will mean that games software can be purchased online. In addition online software will generally include an update facility whereby the latest version will almost always be available. The old “over the counter” purchase model is pretty much obsolete.

These examples demonstrate how the qualities of permissionless innovation and continuing disruptive change have made inroads into old business models. This does not mean that all digital suppliers are successful. Many brands have fallen by the wayside. Many platforms are significantly different from how they started. This demonstrates the need for continued adaptability.

A High Street retailer like Smith & Caughey has suffered a number of hits – a perfect storm. It is not just a matter of online shopping that has dealt them a blow. But in a sense the demise of Smith & Caughey is something of a canary moment but rather than sounding a warning it is a signal that continuing disruptive change is with us and is impacting on many of our well-loved icons. This change will continue to take place.

Other businesses – generally in the kinetic space – will no longer be with us in the future. We have already seen the demise of the big bookstores like Dymocks and Borders although Barnes and Noble still maintains a kinetic presence in many US locations. But books provide another interesting example of the way in which digital innovation and digital delivery have impacted upon our consumption of the printed word. Amazon’s Kindle and Barnes and Noble’s Nook provide a digital means of delivery and reading of the printed word that no longer requires paper and the print infrastructure that lies behind books. Some of us prefer the kinetic experience of holding a book, but that will become, if it isn’t one already, a niche market. The comforting ambience of a wall of books in a home library will become an unusual oddity.

But one industry that doesn’t seem to “get it” and that is crying out for and indeed relying on a possible Government handout is Mainstream Media (MSM). This is not a problem that is simply a local one.

In the New York Times for 1 June 2024 the following appeared:

“In May, Google announced that the A.I.-generated summaries, which compile content from news sites and blogs on the topic being searched, would be made available to everyone in the United States. And that change has ….. many …publishing executives worried that the paragraphs pose a big danger to their brittle business model, by sharply reducing the amount of traffic to their sites from Google.”

This is a significant step ahead of the difficulties suffered by MSM as a result of declining advertising revenue that has motivated a drive towards a form of indirect subsidy by means of the Fair Digital News Bargaining Bill.

When the Select Committee reported back on the Bill it recommended that the Bill not progress. However, as a back up position it suggested a number of changes to the Bill including a significant addition that dealt with AI.

My view – and it is one that is shared by no less a media doyen than Gavin Ellis - is that the Bill should not proceed and that there are other mechanisms available to MSM to monetise their content.

One remedy lies in the field of copyright law and in the same article in the NY Times it was reported:

The New York Times sued OpenAI and its partner, Microsoft, in December, claiming copyright infringement of news content related to the training and servicing of A.I. systems. Seven newspapers owned by Media News Group and Tribune Publishing, including The Chicago Tribune, brought a similar suit against the same tech companies. OpenAI and Microsoft have denied any wrongdoing.

There are other possible remedies that are available that may assist MSM as it fails to deal with or adapt to the Digital Paradigm. One lies in a Digital Services Tax which was proposed by the previous Government and which the present coalition has allowed to proceed in the meantime. Perhaps some of the revenue from such a tax could be directed towards MSM, although there would have to be complete transparency surrounding such an arrangement, lest the perception of media “bought and sold”, as was the case with the Public Interest Journalism Fund, once again contaminate any arrangement.

But subsidies such as this – indeed State support for the Fourth Estate – merely encourages MSM to perpetuate its previous business model. Although MSM has migrated content to online platforms what is presented is not innovative but imitative of the earlier model. It is the same product wrapped in a different medium with some video and audio thrown in for good measure.

What MSM must do to survive, lest it following the footsteps of Smith & Caughey, is to recognise the realities of the new Paradigm, to understand that consumer behaviour is changed and modified by new technologies, and to adapt to it. One of the challenges facing MSM is articulated in this comment from the NY Times, emphasising that the answer may lie in copyright law:

“Then there’s the dispute over copyright. It took an unexpected turn when OpenAI, which scraped news sites to build ChatGPT, started cutting deals with publishers. It said it would pay companies, including The Associated Press, The Atlantic and News Corp., which owns The Wall Street Journal, to access their content. But Google, whose ad technology helps publishers make money, has not yet signed similar deals. The internet giant has long resisted calls to compensate media companies for their content, arguing that such payments would undermine the nature of the open web.

“You can’t opt out of the future, and this is the future,” said Roger Lynch, the chief executive of Condé Nast, whose magazines include The New Yorker and Vogue. “I’m not disputing whether it will happen or whether it should happen, only that it should happen on terms that will protect creators.”

He said search remained “the lifeblood and majority of traffic” for publishers and suggested that the solution to their woes could come from Congress. He has asked lawmakers in Washington to clarify that the use of content for training A.I. is not “fair use” under existing copyright law and requires a licensing fee.”

There is no doubt that the complexities of modern society demand that a reliable information system – a news media if you will – should be available so that we can make informed decisions about our daily activities as well as have reliable information about the activities of those to whom we have delegated our governing power.

There is a concern that has developed over the years that MSM has become a mouthpiece for the Government line, uncritically using press releases and reworking them into a story. That may be a somewhat cynical view and ignores the work of investigative journalists who expose questionable practices within government, business and the wider community. But there can be no doubt that as well as a revenue problem, MSM is facing a trust and confidence problem as well.

As far as trust and confidence are concerned the media needs to abandon any suggestion of partisanship and establish itself as a balanced, impartial, reliable source of information. The op-ed pieces or regular columnists are not news, nor are they interpretations of facts. Often they are polemics for a particular point of view.

Fortunately, permissionless innovation and continuing disruptive change have provided a means by which op-ed writers can de-couple from MSM mastheads and set up their own publication outlets. It may not be as rewarding as the weekly paycheck from the MSM company but a separation of fact from opinion is essential for MSM integrity and public confidence. In addition the savings in payments for op-ed writers can be redirected to impartial fact gathering and fact based journalism.

It may seem that I have strayed a distance from the demise of a shopping icon to some suggestions about what MSM can do to remain viable and trustworthy and reassert its position as the Fourth Estate.

But the underlying themes remain the same. The Digital Paradigm and continuing disruptive change will continue to exercise their magic, aided and abetted by permissionless innovation. One thing is clear. Rarely are we able to predict with any clarity what is coming down the track. Generally once we recognise the shape of things to come – such as climate change or artificial intelligence – it is too late to do anything about it.