Structural Unemployment is Here: Blame the Software Engineers

Here in the U.S. we just concluded our Labor Day holiday, and I spent it thinking about labor. 

More specifically, I was intrigued by the difference between the labor required to design something versus actually building that thing.

For example, in almost every engineering discipline, an engineer cannot his or herself physically build the entirety of their design. One person alone usually cannot build a house or an automobile or a bridge. I’m obviously not including outliers like small rural shacks which can be envisioned and built by the same person. I’m talking about things that bring lasting value to a significant number of people.

In contrast, software engineering stands out as one of the only, if not the only engineering discipline where one person could conceivably build out their entire vision, no matter how large.

In fact, it’s no secret that Facebook founder Mark Zuckerberg coded almost the entire site himself. [1] Bear in mind that Facebook is web software that’s roughly equivalent to a large urban agglomeration in the physical world. To think that one man could singlehandedly build a city of that size would be absurd. But in the realm of software, one individual could build a proverbial palace of software with nothing more than their own intellect and rapid-fire typing.

This amazes me, but it also leads to deep questions about the long-term sustainability of our labor market.

The evidence has been mounting lately about the structural nature of post-recession U.S. unemployment. [2] As the Federal Reserve contemplates QE3 (“Operation Twist”) and Treasury officials scratch their heads over possible fiscal or monetary fixes, it’s become clear that deeper underlying conditions are keeping more and more Americans jobless.

[3]

The labor efficiency of software engineers and related high-technology workers is likely a culprit in the structural unemployment problem. As more highly utilized products and services are digitized, more things are built by fewer people. This isn’t even about robots and automation, but the changing nature of what we’re building and how it’s built.

This could be the end of the theory: software is less labor-intensive than previous economic output and therefore labor demand will continue to drop as software demand rises.

But stopping here would be naive. The digital revolution has just begun. We are only now beginning to build out the “application layer” of the technology stack upon all the infrastructure that was built out in the 90s and 00s. [4] This means that while overall demand for labor may not increase, demand for software engineering and related fields will continue to skyrocket as a larger chunk of economic output is dominated by software.

This makes our economics problem an education problem: making sure enough of the labor force is trained in software engineering, computer science and related fields. There should be a twofold focus on both technical retraining for adult workers and strong reform of K-12 programs that emphasize these disciplines. The former received a creative proposal by Jason Calacanis a month ago entitled “A New New Deal” that’s worth taking a little seriously in times like these. [5]

Hopefully by Labor Day 2012, policymakers have realized this and allow me to enjoy the holiday without such intellectual exercises. We can only hope (or learn to code).

[1] – Most of the early product, at least, was coded solely by Zuckerberg. Shortly after launching, other top programmers like Adam D’Angelo joined the effort and it scaled up from there.

[2] – A recent report on investing blog Seeking Alpha contemplates “Quantitive Easing 3″ in light of structural unemployment concerns. It quotes an FOMC member as stating that, “the current high level of long-term unemployment, which as of July accounts for about 44% of all the unemployed, might signal a mismatch between the skills of the unemployed and the jobs currently available.”

[3] – Structural unemployment chart from Felix Salmon’s warning in June.

[4] – See Carlota Perez’s book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages

Music Service Overload

I’ve waited well over two years to experience the previously Europe-only online music service Spotify here in the U.S. Ironically, now that I finally have an account, I don’t really care for it anymore.

The reason is simple: I’m overwhelmed with music services! Even if we take the narrower market of “music recommendation” or “music discovery” services, there’s still heavy overcrowding.

So word to Billy Chasen, Seth Goldstein, Joey Flores, and Daniel Ek (CEOs/founders of some of these services): is the pie simply getting bigger in the world of digital music or will there be some toe-stepping in the near-future?

What’s the extent of market crowding and what are the major services vying for my attention at the moment?

Let’s start with just the newer, hybridized services that are about music information, discovery, recommendation, personalized streaming, social interaction, etc…:

Let’s not forget that there are non-business entities that also compete for my attention when it comes to music recommendation, chiefly:

  • People posting on social networks (Facebook, Twitter, Google+, etc.)
  • My own friends telling me in person / listening to their music in their homes, cars, etc.
Then of course there’s the mobile discovery sub-market as well, which I also rely on, composed mainly of:
We can additionally include online music retailers as part of music recommendation, since they have email newsletters and front-page “bazaars” that peddle the latest tracks. These include:

Many of these retailers are now branching into the cloud storage and playback market as well, and there we have:

Last but not least, we have the music streaming market, but they’ve since been forced to compete with the newer onslaught of recommendation/discovery services, so they’ve built those components in as well. Including those into our tally we have:

Shallow Analysis:

As you can see, there’s simply way too many sources of music to reasonably divide my attention amongst. I don’t have the exact metrics but I’m not sure if many of these companies can coexist in the same market for very long. Are there really enough music listeners/fans to support all these services? If there aren’t, we’re going to see a few emerge that leverage either cost, an innovative experience (like Turntable) or some other unique element. It’s just too much right now.

Personal Experience:

At the moment, I use a combination of a handful of these services. Some are used consistently on a daily basis. All my owned music is in my iTunes library. I occasionally, maybe once every two months, visit Pandora on a lark. I log into Turntable. fm maybe once a week and mess around for 30 minutes. I use Shazam about once or twice a week, and if it fails to identify anything, I keep SoundHound around just in case. I have no specific loyalty to the iTunes Music Store, so I’ll buy an album or two a month between it and the Amazon MP3 store. I’ll buy a Beatport track maybe once every 3 to 4 months. So where else can I fit in these other services? It’s fatiguing. 

Experience meets Analysis:

In order to be viable enterprises, these services must manage to command my attention (when appropriate) as often as possible. Therefore, Turntable.fm can’t be the little toy I experiment with once a week. It must either become my consistent, go-to place for music, or hope that enough users make it their “30 minute toy” to be profitable (that number would likely be prohibitively enormous).

Relevant Expertise:

I’ve used most of these services at some point in my life. I live and breathe music on a daily basis. I was a DJ for over five years. As a child, I was an early adopter of Napster in its heyday, experimenting with other file sharing mediums past that. I was an early adopter of Beatport and other niche stores and tools when they later emerged. I’ve spent tens of thousands on compact discs and later, digital downloads. I own over 337 gigabytes of music, encompassing 46,000+ songs across 380 hand-crafted playlists. This collection will expand, but not through this many services simultaneously.

Fighting Rudeness with Rudeness

Anthony De Rosa of Reuters featured in this NYT article about how people checking their phones during social interaction has become the norm:

“I’m fine with people stepping aside to check something, but when I’m standing in front of someone and in the middle of my conversation they whip out their phone, I’ll just stop talking to them and walk away. If they’re going to be rude, I’ll be rude right back.”

Let it be known: I will be adopting this as a personal policy from now on.

Ethan Kaplan on the Death of the Compact Disc

Ethan Kaplan on the death of the compact disc and the future of music:

Consider for a moment the amount of supply chain management, staffing and processes in place just to produce a CD and get it out to third party retail. And consider the CD itself: a 74 minute bit conveyance mechanism that is pretty much disposable. They are often used just once: to rip the bits.

So in the end, the CD is this:

A once major source of high margin revenue which is now taking disproportionate back line expense to prop up, in order to justify the size of an industry which does not exist anymore. And even if that expense is not significant in hard numbers, the inertia it creates at the resultant diverted and stifled innovation sure is.

It’s time to kill it. Bring it out back and shoot it. And then really take a look at what is left.

When I look at what is left, I see a positive: the ability to transcend media with music products, no longer limited by the 74 minute disk. The ability to add value through art, through sound quality (vinyl or USB/digital distribution) and through multi-modal experiences. The ability to change the notion of what an album is. I also see a time when success is not judged on how many units were shipped by an artist (and resultant sell through), but rather how much money the artist made in net revenue across media. A world focused on ARPU and CAC rather than third party retail supply chain maintenance. A business in other words, and hopefully one that treats artists fairly through accountable representation.

Couldn’t have said it better myself.

*Ethan Kaplan was SVP of Emerging Technologies at Warner Music Group

SolarCity: Distribution Done Right

SolarCity’s CEO on their business model:

We design, finance and install [solar] photovoltaics systems at residential and commercial sites. We don’t sell the systems to our customers. We own them. So, we are responsible for making sure that they can continue to produce power reliably and affordably for the next twenty-five years.

This is a winning business model. SolarCity’s not innovating in the photovoltaics engineering space. They’re mostly innovating on the distribution and supply channel side of things. To be sure, there are pros and cons to this approach.

PRO: SolarCity doesn’t get forced betting on long-term engineering gambles that may or may not prove rewarding in several years. Photovoltaics is not a walk-through-the-park science. Most advancements take time to get to market. Why should SolarCity wait around? They want to jump in and make money with systems that are available now.

PRO: Staying clear of engineering innovations means staying clear of patents and patent trolls. That means they don’t have to pay a cent to lawyers for protecting any key intellectual property they’ve developed. They’re just buying other people’s IP and not worrying about protection. It also means they don’t have to pay lawyers to defend against infringement suits either. Big win.

CON: Once a successful distribution model is found, it’s not too hard for other companies to reverse-engineer it and replicate it. SolarCity may quickly find itself in a race to heavily market or hype their product or brand. However, since they’re involved in ownership/leasing of solar PV systems, there’s a lot of skill they could employ on the finance and accounting end to out-compete would-be combatants. It’s still a con nevertheless.

I’m glad companies like SolarCity are out there pushing renewable energy now using what’s already out there. When it comes to big-picture plays like this, it’s all about occupying mind-share early, both philosophically as more and more of humanity develops awareness of global environmental issues, and entrepreneurially, to win customers before late players join in.

Another company that’s pursuing a similar business model in the green-tech space is Better Place, whose own tagline states “accelerating the transition to sustainable transportation.” [emphasis mine] By making any of the perceived annoyances of electric vehicles disappear, innovating in the infrastructure/distribution/business models, they’re by-passing the heavy engineering of battery technology, whose “super-battery” promises have always been “just five years away!” for the past hundred years (seriously). They understand that there is a monumental task in front of humanity, to transition to another energy regime, off of fossil fuels, and they’re working with the battery technology that’s out there right now to put those wheels in motion (no pun intended).

Investing in People, not Ideas: Greplin, Y Combinator, and the Right Model for Venture

Daniel Gross is a 19-year old Israeli who skipped Army duty to start an ambitious social/cloud search startup called Greplin. As this interview with Inc Magazine demonstrates, Gross and his company barely graduated from the Y Combinator seed program (an incubator that helps founders start companies). He went through several failed ideas in the few months he was there before he put together Greplin in the last forty-eight hours. It wasn’t his final search idea, however, that Y Combinator was initially attracted to; he had talent and ingenuity the incubator knew could lead to success down the line. His story makes clear that the best venture investment deals are ones that are made into people, not ideas. Let me explain.

Entrepreneurship is about exploiting economic opportunities. It’s about building a business around a particular pain-point. The best companies are often those that are proverbially described as “selling pain-killers, not vitamins.”

The question then arises, “What are the pain-points currently experienced now?” These are usually short-term considerations. Capitalism is not terribly good at incentivizing the creation of “pain-killers” for long-term and large-scale problems. You’ll see this come up in a variety of examples, like future forms of nuclear energy, rapid and convenient space travel, etc… That’s one of the strongest reasons for government funding of innovation. For all other cases, the private sector is generally good at solving short-term problems.

Back to the point, when it comes time to creating the “pain-killer” for a relatively near-term problem, entrepreneurs (usually engineers), sit down and brainstorm about the best solution. In fact, there’s a whole class of entrepreneur known as EIR‘s (entrepreneurs-in-residence) that are kept in-house by venture firms purely to brainstorm about new opportunities and help evaluate incoming pitches/ideas. This is essentially what our ambitious Daniel Gross did in his time at Y Combinator. He cycled through a couple short-term problems but none of his pain-killers were really effective, until Greplin.

His story, like most other stories in Silicon Valley, is one of ingenuity, skill, and raw talent. These are what produce the best solutions, the best pain-killers. At any given moment, there are a number of problems that need solving through a new enterprise. Not all are easily solvable. Some are, like Greplin and many other consumer web startups. Typically, the harder a problem is to solve, the greater the reward for the solver (but this is not true in every case).

At the moment, mobile notifications are a certain pain-point in the market of consumer mobile computing (smartphones, tablets, etc…), and it’s hotly discussed in tech and venture circles. If you’ve used an iPhone or iPad, you know how annoying those popups can be. If you’ve used Android, you know how cluttered the top bar gets with incoming alerts. There’s enough room for improvement here that entrepreneurs around the world have started tackling this one area aggressively.

Yet the idea itself is not something truly unique or proprietary. The problem and its solutions are not a hidden gem waiting for years of research and development to produce a breakthrough. It’s a simple race, and the company to win it is the one staffed and run by the craftiest programmers, the most efficient managers, the most creative designers, etc… In other words, it’s the people. And since so much entrepreneurship is happening in this shorter-term race, we can say that entrepreneurship is mostly about the people.

Sometimes, a particular problem will have no easy solution. Entrepreneurs will brainstorm, and realize that either a solution is infeasible (returns are weak or economic opportunity is low due to technological infeasability or other societal/political constraints) and back out of an enterprise (usually before it’s even off the ground). In this case, the problem/solution/idea matrix is what’s at fault. But that entrepreneur still has what it takes to tackle some other pain point, and they’ll go on, brainstorm about that next area, and come up with an enterprise to provide a solution. For a great example of this, see Quora co-founder Charlie Cheever‘s answer to how he got recruited to Facebook, specifically where he talks about his premature experience with RFID mobile payments. That never worked out for him but he still had the “right stuff” to succeed eventually with Quora.

Investing in people is thus the best strategy for those in the world of venture. This is, to my knowledge, a well-known fact among venture capitalists, angels, incubators and accelerators. If it’s not, it should be.

There should be investors lined up outside every major university, especially those of technical leanings (MIT, CalTech, Carnegie Mellon, Berkeley, etc…), scooping up young kids who can’t stop thinking about ways to tackle hard problems with ingenious solutions. And young kids in general should be encouraged to follow this track if they’re to lead our nation to a productive and prosperous future.. When President Obama met with leaders of the tech industry recently, a major topic was how to encourage America’s next generation to take up the reigns of innovation, to pursue math, science and engineering degrees, and to lead industry with technical prowess. As I’ve shown, there’s definitely a strong reason for that.

Entourage’s Ari Gold on Starting a Business

From Season 6, Episode 3 of HBO’s Entourage:

Ari: [This man] is paying his dues, when have you paid yours?

Turtle: I’m willing to pay them now, and I have a great idea.

Ari: So do all these idiots, can you execute it?

Turtle: I think I can.

Ari: In this life, no one is going to invest because you think you can. Do you have a business plan?

Turtle: No I haven’t sat down and–

Ari: What do you need? Office space, insurance? How many employees? What do you project to earn? What do you need to break even? At what point can your investors see some profit?

Turtle: I don’t know! I don’t know.

Great scene, great advice.

The Top-Down Career Planning Methodology

I have realized that a top-down methodology to examining one’s career planning processes brings to focus a rather interesting point. Whatever career path you choose is one that you ultimately plan to embark upon for the rest of your life. For example, if I choose to become a lawyer, I am basically asserting that I will be in the law profession for all or at least the majority of my life. However, what if I chose to step out of that profession? What if I chose to embark upon something else? Well, that wouldn’t be very efficient. Let’s look at it “top-down.” Let’s not examine it from a young person’s perspective, but rather, from a perspective of someone who’s already been in the profession for decades. If I’ve been a lawyer for twenty years, then I have amassed a great amount of experience that nothing could duplicate. My skills have been honed to a fine point and there is nothing I am better at doing than practicing law. To step out of the profession would mean abandoning all those years of experience and skill-building to start anew. But why would anyone want to do that?

You embark upon something because you know you will commit 100% of your life to it. Or else why would you do it? With every fiber of your body, you will commit to that career plan. You will devote not just mere years, but several decades to that career so that you will become the best and you can make the biggest impact in your world. Why do something where you don’t make an impact? You make an impact by working for decades and gaining experience. To step out of the field would mean letting go of all that experience and your life’s culmination would be half of what it could and should ultimately be. That’s a shame. The next time you’re sitting down, contemplating what career path to embark upon, think this over. There’s no turning back. There’s no reason you should. Whatever you pick is something you will be 100% committed to. That’s why you should participate in internships and whatever job opportunities present themselves so you get a feel for what’s in store before it’s too late.

Spending decades in the law profession will teach me exactly how to argue points and build cases. There’s no better way to learn how to do that than to practice law for decades. A doctor who’s practiced medicine for decades shouldn’t just leave the profession. He’d know exactly what to do in a surgery or exactly what ailment his/her patients suffer from. There’s nothing that can replace the experience he’s had. Nothing. He’d abandon all the skills he’s learned in the field. Those invaluable skills will be forever wasted and he’d be half the person he would have and should have been. Doing something for ten, twenty, even thirty years and then deciding to back out will make your life worth half of what it should be worth. Think it over, top-down!