two industries badly in need of some creative destruction

Austrian economist Joseph Schumpeter coined the term “creative destruction” to describe the positive impact of business failure on free market economies. It’s a simple concept. As better ideas for products or services emerge, old ones dies out. The classic example is the automobile coming on the scene and displacing horses and buggies. More recently, the internet has been a very creative destroyer. From retailers to travel agents to media companies of all types, it’s been steadily remaking just about every industry out there.

But often the companies and industries ripe for creative destruction aren’t as obvious as video rental shops or horse-drawn carriages–and they use their social and political connections to hold out far longer than they have any right to. That’s definitely the case in two sectors right now: real estate and higher education.

A recent study found that 90 percent of prospective homebuyers, and a full 96 percent of homebuyers under 40, use the internet in their house searches now, and yet old fashioned brokers and agents still reap massive commissions by shutting out online competition like Seattle’s Redfin. In other words, real estate consumers want Netflix, but the industry’s insiders are still managing to give them Blockbuster. And like Blockbuster was able to do for decades, those insiders are getting fat on outrageously bloated fees.

Think about it. Homebuyers still have to pay 5-6 percent of the purchase price to the listing and selling agents. What services are those parties providing that should earn them tens and even hundreds of thousands of dollars per transaction? They are little more than glorified clerks making sure that the proper forms get signed and filed. In case you haven’t heard, there is a somewhat handy machine known as a computer nowadays that can perform these functions perfectly well in less time and for no money.

Higher education is an even worse example. If it were a stock, we’d all be shorting it. People wonder why the economy has been so slow to recover from the Great Recession. But it’s not terribly complicated. Recent college graduates are about $1 trillion in debt now, and unemployment among them is pushing 9 percent. We can thank our wonderful higher education system for both of these problems.

Most universities routinely waste millions on non-educational initiatives like athletics programs, overpaid tenured professors, and unnecessary administrators. Unsurprisingly, the cost of tuition has outpaced inflation by 400 percent since the 1970s. These increased costs have been paid for through a backdoor government subsidy–student loans, which students have to carry with them like leaden pianos on their backs for years after they graduate.

Luckily, the free market has come up with a disruptive innovation that could help our young people–online, distance learning. EdX and Coursera, founded by professors at Harvard, MIT, and Stanford, already offer a combined 370 online courses serving over three million students. These “MOOCs,” or massive open online courses, are much cheaper per student. As for quality, it’s impossible to believe that an intro to poly-sci or sociology course with hundreds of students crammed into a giant lecture hall is any worse than one delivered online, especially when the online professor is a renowned expert in his or her field.

Of course, MOOCs make traditional educators very nervous. They’re going to do all they can to hold them off. So far, they’ve managed to keep the great money flow of government-backed loans flowing into their coffers. But, like real estate agents, they can’t fight these innovations for much longer. The benefits are simply too great.


6 thoughts on “two industries badly in need of some creative destruction

  1. Glen Austin

    The problem with the education example is that a degree from Amberton University is not equal, in an employer’s mind, to a degree from the University of Texas or Harvard. Unless a “top tier” University decides to start mass marketing their degress (which I doubt they will do), they can give away courses and “seminars” and “education” all day long. It doesn’t make a degree. I recently took a very good “Starting a Business” course from SMU in an 8 week format, but honestly, it’s not an MBA. Even reading the textbook, “The Portable MBA” will not make it an MBA. Academic rigor will. We already have way too many students going to what I would classify as “weak colleges” in the 3rd and 4th tier of academia, where professors exist to collect a paycheck, and students do half their work and still pass the course. The colleges which succeed will 1) get current with teaching (teaching on recent and relevant topics) and 2) provide strong academic rigor by giving failing grades to students who do not complete the work and pass the test. I think, because of the political environment, true academic rigor may not be possible in Tier 3 and 4 schools without angering a lot of students and parents. (What do you mean I have to study to get my degree?)

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  2. Glen Austin

    On another topic, you need to be looking at the “big tech services companies” as The Walking Dead. HP, Tata Computer Services (TCS), InfoSys, even IBM have seen massive project failures in their services and I think the era of “Big Tech” may be coming to an end. Several things are precipitating this. 1) There are not enough software innovations in the marketplace to absorb the doubling of computer power every 18 months. Even things like “big data” and “analytics” aren’t absorbing all the computing power currently being manufactured. 2) Big purchasers of systems are now expecting software and services innovations to drive down the cost of “computing” the way hardware. They argue that the power of the network should speed up the delivery of services. 3) The big services firms have long been “spoiled” to exclusive contracts with large dollars and long terms, and these are rapidly drying up in favor of small, more tactical engagements with focused expertise. 4) The advent of the “Cloud” has brought new entrants into the market with Google and Amazon, who are happy to sell computing power, upgrades and “SaaS” at their cost (which is very low), and that disrupts the business models of the big hardware, high margin guys, IBM, Oracle (Sun), and HP. Most of the new hardware is delivered on Intel/AMD chip architectures, running a FREE operating system (CentOS, the free version of Red Hat Enterprise Linux). 5) Companies selling Enterprise Resource Planning systems like SAP are getting into the “cloud” and “Integration” business. 6) Customer Relationship Management (CRM) systems run better on the cloud (like Salesforce.com) than the traditional CRM systems (like Siebel) run in data centers. 7) Everyone has been buying “way more than they need” and many companies are now “simplifying” their business models and software to reduce costs and make their company more agile.
    8) The “low cost” mentality of customers has made it difficult for large systems integrators to shine, as the more talented integration specialists and experts move to boutique services firms specializing in specific technologies at better pay and leave customers with dissapointing results in the major firms.

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  3. Pingback: the real march madness: our terrible system of higher education | the confessions of a contrarian investor

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