Some Chicago Boyz know each other from student days at the University of Chicago. Others are Chicago boys in spirit. The blog name is also intended as a good-humored gesture of admiration for distinguished Chicago School economists and fellow travelers.
The electric and gas utility industry is the “exact opposite” of the classic “disruption” thesis… although disruption and revolution have been promised many times over the years, they have failed to materialize. Let’s look at the characteristics of this industry and find the salient facts that either “enable” or “defeat” disruption.
I worked in the electric and gas utility industry throughout all of the 90’s. I traveled to over 100 public, private and municipally owned utilities (there aren’t that many left today because there have been many mergers in the industry space). Since then I have followed them through business publications and public sources of information.
The electric utility industry has 4 main components:
1. Generation – the generation of power through nuclear fuel, coal, natural gas, hydro or solar / renewable
2. Transmission – moving power via high voltage lines from where it is generated (remote) to the cities where people live
3. Distribution – the local city with overhead and underground wires and substations and physical trucks
4. Customer Service – who you call and how they dispatch crews and respond to incidents
The electric utility industry also is characterized by “real time” surges and the fact that power can’t be stored (yet) on a large scale; thus peaks occur on the hottest days or the coldest days and power is needed exactly at that moment at your particular location. These peaks can results in demand far higher than during a “typical” day.
The natural gas utility industry is conceptually similar to the electric energy industry with two main differences. Generation isn’t handled by them (exploration companies find natural gas and get it to their system through their own processes and methods) and natural gas is much less “peak sensitive” and can be stored near the point of demand and injected into the system.
Broadly speaking, there have been many attempts to “de-regulate” the electric and gas utility markets over the last THREE decades. Let’s start with natural gas.
The term “disruption” is everywhere in the popular press. You should “disrupt yourself” and new internet unicorns are going to “disrupt” all kinds of industries. Let’s think a bit about what really is disruptive and what isn’t. This post is going to start with the taxi industry. Later I will turn to other industries, where disruption was predicted but didn’t occur, and we can try to determine why.
I am very familiar with taxis, having traveled all around the country for business over decades and using taxis all the time in Chicago. Downtown Chicago is one of the few places where you could hail a street taxi at almost any hour of the day or night and assume that one could be found in a relatively short period of time (within 10-15 minutes at worst).
What were the elements of the traditional taxicab industry? They were as follows:
– Limited numbers of licenses were offered, and they were generally bought up and consolidated into a few taxicab companies
– The taxis operated mostly where they offered the highest returns; downtown, in wealthy areas, or near clubs and nightlife. While they theoretically served the entire city, in practical terms they ignored the poorer areas not only for the inherent danger but also due to the fact that it was hard to get a “return” trip once you dropped someone off, necessitating a drive back to a wealthier area and lost time with no earnings
– If you talked with a taxi driver, they typically worked very long hours and did not earn much money. Since driving a car an “entry level” skill, there were in practical terms an infinite number of possible drivers (a large supply) so the earnings of the drivers were as low as the market would bear (very low). The medallion owner then kept all the remaining profits
– The taxicab experience as a rider generally was lousy and perceived to be unsafe to single women. You didn’t have any information about the driver and they could be anyone; the low wages of being a taxicab driver also tended to attract drivers on the margins economically
– The taxicab used a consistent rate based on time or mileage plus a charge to start the meter and often specific additional charges such as tolls or airport fees. The costs could be high; for instance in Chicago if you left the city limits after the first city you were charged “meter and a half” – thus to travel out to a far suburb the fare could easily exceed $100. This was explained as the fact that the cab can’t get a local fare (they are licensed to pick up in Chicago, not the remote city such as Naperville) so they had to drive all the way back to the city to start working again. And on a big night like New Years’ Eve, it was a crapshoot to find a taxi since supplies were limited and not everyone was out driving
– The main role of the taxi associations was to limit new medallions (which increased competition) and manage the local regulators, who generally defined rates and other business conditions. After a while most cities had “regulatory capture” and didn’t issue new medallions and mainly kept the status quo
– If you were out of a major city, generally no one used cabs except maybe to go or be picked up at the airport. When I lived in Texas in the late 90’s I tried to get a cab and I was laughed at; cabs were terrible and no one took them. The alternative was drinking and driving or finding a designated driver
By now everyone knows what has happened to the taxicab industry. They have been disrupted practically out of existence by Uber (and to a lesser extent ride sharing apps like Lyft).
There’s actually a lot more going here than meets the eye. First, a structural model of the building is created. Buildings and bridges are overbuilt, such that the structure is capable of supporting considerably more load than it’s actually required to hold. This allows for minor failures to occur during the construction and life of the building without it collapsing. Once the model is built, they determine what support members may be removed without collapsing the structure, taking it from a safety factor of 1.5 (50% stronger than necessary) to 1 (just strong enough to stand). The analysis is carried out or overseen by structural engineers.
Next, charges are laid on some support members, like columns and beams, but not others. The idea is to leave parts of the building connected by steel girders to parts that will fall so they get pulled in that direction and fall on top of the pile. Gravity does the actual demolition, the charges just break the supports.
Finally, the charges are detonated in a careful sequence. First are a series of weakening charges that remove the 50% of support safety margin, then the building is collapsed from bottom to top and (usually) from the center outwards to the periphery, with the back and sides being pulled into the center debris pile.
As I watched the movie “the Big Short” (which I highly recommend) one item I noted was the ubiquitous nature of the Blackberry. Everyone on Wall Street lived on their Blackberry, and much of the action took place via a Blackberry (phone conversations, updates via email, watching stock prices remotely, etc…). A book was written called “Losing the Signal” that covers the rise and fall of Blackberry.
While I haven’t read the book I am intimately familiar with Blackberry, having owned one for many years and waking every morning to see the blinking red light which indicated that I had new emails outstanding. I had an early version with the combined numeric / letter keyboard, which meant you had to hit the button multiple times (with delays) to type a “C” for instance. Like everyone else I was soon able to type at a rapid clip in this insane method and it seemed like an enormous relief when this was replaced by a “full” keyboard.
Blackberry also was a pioneer in instant messaging, another technology whose power I underestimated when I initially encountered it. A co-worker tried to connect to me by messenger and I just didn’t see the use – why not just send an email? Of course nowadays it is completely obvious why messages are useful and email is mainly “just for work” and overtaken by reams of spam. And initially when texts were expensive (remember when your phone plan limited the number of texts?) this enabled text messaging that was essentially “free” (if you owned a phone already). But when you watch the complete and utter fall of Blackberry it must be remembered that not only did they invent and perfect the phone / email hybrid but they also had a head start on messaging, another multi-billion dollar technology.
My Blackberry was more reliable than my iPhone – I received email quickly and with more certainty, especially when compared with the wonky iPhone connections to outlook. However, with the lack of an “App Store” and no touch screen, the Blackberry was doomed by both iOS and Android. Reliability and a keyboard lost to an open system, a touch screen, and a seemingly infinite number of apps from third party programmers. You could look to a Blackberry as a lesson for Apple and their iPhone dominance, but Apple does a lot of things well that Blackberry never did, such as let vast numbers of third parties program for their platform, and continually evolve their platform with new tactile features (touch, GPS, etc…).
Fifty years ago, if you were a company building automobiles or telecommunications equipment, you would have employed an assembly line full of workers. There also would have been people kitting parts, making inspections, doing tests, even running errands. If you operated a catalog company, you might have warehouse full of people loading and unloading goods, taking inventory, generating reports and packing and shipping goods. If you manufactured metal goods, you might employ several grades of craftsmen, from apprentice to master machinist, as well as cutters and welders, finish workers, inspectors, packers and shippers.
Much less so today. Automobiles and electronics and every other sort of manufactured good are increasingly made on robotic lines. From painting to welding to complex assembly, robots are replacing people. Warehouses can run almost autonomously, with goods stored in a 3D grid that is accessed, inventoried and replenished by increasingly intelligent networks of machines and computers. Jeff Bezos would like to robotize even the delivery of those goods via autonomous drones. That seems entirely doable, though the thought of computer controlled helicopters moving through the skies upsets some people.
Sixty six years ago, almost to the day, Isaac Asimov’s novel I, Robot was published. It was followed by four more novels over 30 years as well as 38 short stories in what became known as The Robot Series. In these books, Asimov explored all sorts of aspects of a robot populated world, including the dangers they might pose to people, problems with machines that think with digital logic, their inevitable evolution from simple mechanisms to organo-machines that were difficult to differentiate from human beings, except for their vastly superior intellectual capacity and increased lifespan, and some of the implications of that.
In a society relieved of all sorts of menial labor and drudgery, Asimov envisioned something of a Golden Age of Man. Material goods would be so cheaply and easily made that no one would lack for any basic goods, and most people would enjoy a standard of living and a degree of leisure time available now to only the extremely wealthy. That’s a view with some precedent in how other technologies have improved our lot, so it’s one possible future.
I find myself wondering, though. Suppose something like that were to come to pass. After all, we’re seeing signs of its development now. How does this future society actually work? How are people employed? What does one do to earn a living in a society where work is done by machines? We see this problem already, which tells us we’re farther along this road than maybe we realize. All the people that are not employed in Jeff Bezos’ warehouses or building electronics assemblies or automobiles, what do they do? In the past, when people were displaced from agriculture by machinery, they went to cities and were employed in large scale industrial and retail businesses. That is no longer the case. Not only have the manufacturing base dispersed across the globe chasing cheaper labor and fewer rules and regulations, even the human staffed retail store is increasingly in question as a viable model.
This is all creative destruction in action, I know. And we can wave our hands and say, Well, people will adapt, they always have! Yes they will. But to what? Everyone can’t be – and doesn’t want to be – a robotics designer or research chemist or test technician in a robotics factory. Will there simply be more people to do fewer jobs? Will the work week get reduced to 3 days on, 4 days off? I’m trying to imagine a world where the same or more people are available but less work needs to be done by them. And if the answer is more leisure time, is that necessarily a good thing? Do we get a Golden Age, or an Age of Sloth, where everyone gets crazier and more destructive in an attempt to amuse themselves. Who cares, eh? The robots will clean up the mess.
And is a robotic recursion process possible, where robots set about designing and building better robots? If we assume cookbook engineering can be encoded into a machine brain, millions of possible combinations may be scanned and modeled and simulated for each mechanism and each circuit, always searching for an optimal solution. And as everyone from Asimov to Clarke have asked, when is sentience reached and will we recognize it when it occurs? And then what? Our society is the early stages of major, ground shifting changes. There’s a lot on the horizon we haven’t even begun to think about to the level necessary. And how do we stay up with these changes if our political class is intent on bankrupting us and destroying our civilization?
” that covers the rise and fall of Blackberry.