The Death of the Middle
The emergence of department stores opened up a vast array of choices for the everyday consumer. No longer did they have to go to the corner store and hope their store clerk was selling what they desired — these massive stores offered a larger selection of products at cheaper prices. Sears, Macy’s, JCPenney — these were all great businesses.
Until the internet and Amazon came along and reshaped the industry to fit a barbell distribution. We saw an explosion of higher quality products at lower prices (from better economies of scale) on one side, and the rise of the boutique, or the rise of specialists (Gucci, Apple, Lululemon, etc) on the other. So department stores got destroyed. Malls got destroyed. Anything that was in the middle got destroyed.
In this piece we’ll discuss why the internet reshapes industries to fit a barbell distribution curve, and why this results in “the death of the middle.”
This barbell bifurcation is happening across many other sectors, including media, music, and even VC — and the bifurcation is only getting bigger. In media, as we discussed in a previous post, local newspapers got obliterated once the internet went mainstream. General interest magazines too. People today either want the mass market stuff, or the highly niche bloggers (as we see with the prominence of Substack).
We see a similar thing in music. While we all used to listen to the same ~100 bands, now global hits are bigger than ever, and the long tail is bigger too. The middle has been hollowed out.
So why’s this happening?
One reason is the classic innovator’s dilemma. Executives at companies “stuck in the middle” are making so much money they don’t want to take risks, which keeps them optimizing for local maxima at the expense of something truly disruptive.
Another idea is that the internet is changing our preferences — we’re getting more interested in either exactly what we want, or whatever’s most frictionless. Aggregate or specialize. In other words, give people everything they want or the one thing they need. Everything in the middle gets slaughtered.
Consider McDonald’s as an example. Before McDonald’s there was tons of variance in hamburgers — you never knew what you were going to get, as there was no “one size fits all” burger. But then McDonald’s decided to standardize their product; you knew exactly what you’d get no matter which Mickey D’s you entered. The same thing happened with Starbucks, Gap, and most other big brands that promise consistency as their main value proposition.
Our main decision as internet consumers has become a flat out no, unless we’re getting exactly what we want, in which case that no becomes a yes. We only want the very specific thing, or the good thing that’s most convenient and consistent.
So the choice is now: “I’m going to find this niche obscure thing, or I’ll get the mass market thing.” It’s either Paul Skallas or Malcolm Gladwell. Aesop Rock or ASAP Rocky. Boutique brand or Amazon. You get the idea.
And you’d think removing friction creates a more level playing field — if it’s easier to find & purchase someone’s products, you’d think consumers would pick the easiest option. But that’s not always the case. Instead we see the familiar barbell with global mega hits on one side and a long tail of niche creators on the other.
Alex Danco’s series on understanding abundance captures it best (Note: I quote him verbatim liberally throughout this piece — read his whole series to get a much better understanding):
When you remove friction, more people default to either hyper-targeted “if” options, or default “else” options. When this happens, you get winner-take-all effects, or at least winner-take-most, in the “else” category. This is why on a street with three coffee shops, Starbucks will be crowded, and on a street with ten coffee shops, Starbucks will be even more crowded.
That said, the other quirky, independent espresso shops are probably doing okay too. They may also have their own little dedicated customer base that chooses them preferentially.
The decision function looks something like this:
If [I am on a street] and [find an espresso shop that’s exactly what I want]
then [Go there]
else [Go to Starbucks]
Software exacerbates this in any sector it touches, where friction is removed and there should be some level playing field (which, of course, ends up uneven). Lower switching costs, masked complexity, and cheaper options remove the friction from consumer deliberation, which leads to single-variable consumption decisions, thus creating bifurcated, compounding power law outcomes.
Nassim Taleb talks about this in The Black Swan, using the examples of Mediocristan & Extremistan. Mediocristan represents thin tailed events, or moderate outcomes — events in which small changes only affect the individual without affecting the broader collective much at all. This is the case in a world of scarcity.
Extremistan, on the other hand, represents fat tailed events, or power law outcomes, in which small changes can have large effects on not just the individual, but the collective as well. Changes in Extremistan have systemic effects that don’t occur as much in Mediocristan, or, quoting Taleb, “In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate, or the total.”
The key lesson is that the magnitude of outliers in Extremistan is much larger than that of those in Mediocristan. So in a world wired for scarcity, no wonder the outcomes are so moderate — it’s the system running as designed! However, when we add technology & startups to the equation (along with other things dictated by the power law) we move to a world of abundance where the middle no longer satiates our demands. Companies and their products must be so differentiated that no one else can copy them (the boutique coffee shop), or they must be “full stack” and 100% exactly what we want (Starbucks), as discussed above.
Another way to think about this is using the Internet Rainforest analogy described by Ben Thompson and James Allworth on Exponent: in a rainforest, with its abundantly available water, sunlight, and nutrients, two types of plants thrive: the tiny, highly differentiated plants on the forest floor, and the giant trees that form the canopy. It’s hard to be in the middle.
As a startup, if you’re in the middle, it’s possible you’ll find customers, but nothing will give you pricing power over the giants, nor the agility to outrun a thousand different little plants (competitors). Your ROIC won’t exceed your cost of capital, a predicament from which growth cannot save you.
So what’s one to do? There are two options:
Go as differentiated as possible and serve the customer exactly what they want.
Power law everything — don’t pick the winners; have the winners all pick you.
Build a “pointy business” that’s purely differentiated, or “no stack”. Or build a “utility business” that does all of the underlying work as a truly “full stack” company/product.
Don’t get stuck in the middle.
Read of the week: Interview with Ben Horowitz
Listen of the week: A16z Live with Marc & Ben — In response to a question, Marc makes a compelling theoretical argument as to why Harvard might out live The United States.
Cosign of the week: Sotonye
Until next week,