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Uncovering Horizontal Prophets and Vertically Integrated Innovators

Below you’ll find an excerpt from the September Issue of The George Gilder Report

In the infancy of the internet, prophets proclaimed a new economy which ― powered by nearly instantaneous transmission of nearly infinite information ― would follow rules fundamentally different from those governing the industrial age.

Especially vulnerable was the great industrial paradigm of “vertical integration.” In its heyday, Ford Motor not only built cars, but it built the parts for cars and parts for the parts, it painted the parts and made the paint, it shaped metal for the parts and pulled the metal out of the earth from its mines. And when the cars were finished it sold them through a network of dealers it created and effectively controlled.

It did all this because Ford ― like many other great industrial enterprises ― faced an information challenge: How could it know for sure that the parts and materials it needed to keep its assembly lines running at speed would always be available at the time, price, and quality required? If a problem arose in an external supply chain, how quickly could Ford shop its way to a solution? How many phone calls to potential replacement vendors, how many negotiations on price, site visits to verify quality would have to be made? How often would Ford be gouged by a supplier or a middleman who knew Ford was racing the clock? When Ford introduced a new model, how could it guarantee it would be enthusiastically presented to the public, if it didn’t control the dealers?

Vertical integration was the great defense against uncertainty for producers of all sorts of complex products.

The internet would change all that, proclaimed the prophets. Comparing price, quality, and availability across the supply chain would become almost miraculously easier.

Vertical integration, imposed by scarce information, would be overthrown. In its place would emerge horizontal integration. Companies that used to do everything necessary to produce and sell a product would instead specialize in the one thing at which they excelled. They would outsource the rest. Growth would come from horizontal expansion.

Amazon was good at making it easy to find books, buy books, and get books shipped overnight. Why not do the same for CDs and DVDs? And then why not everything else?

The most successful internet pioneers appeared to be horizontal integrators, growing to stupendous size doing one thing well. Who needs the second-largest online retailer, or the second most capacious search engine, or the second most popular social media platform? In all this, the prophets were vindicated. They clearly saw the opportunities of nearly infinite information flowing nearly instantaneously.

What they missed was what the internet would demand in return: a new generation of “vertical innovators” to cope with the three fundamental challenges to the internet economy, each challenge created by the internet itself.

The Paradigm the Prophets Missed

The internet turned information scarcity into abundance and supercharged sluggish communication to the speed of light. Yet these very abundances created corresponding scarcities.

Before the internet, information security was a relatively minor issue. Today the demand for security is massive, imperative, and still largely unfulfilled by the reigning technologies.

Hacking is the ultimate in asymmetric warfare: Hundreds of billions are spent on complex centralized security solutions quickly overcome by hackers without any visible means of support.

One key solution is blockchain. But blockchain technology is barely a decade old and its applications are only beginning to be realized.

The second great challenge was first denoted as “storage.” Where would we put the massive amounts of information being evoked by the internet? Information that’s grown from gigabytes, then terabytes, then petabytes, and now — with the internet of things (IoT) — possible zettabytes.

Our ability to tuck exabytes of data cozily into massive data centers exceeded our ability to get the data back out again in useful forms.

More than 20 years ago, I renamed the storage challenge as “storewidth,” analogous to the “bandwidth” that enabled all those bytes to be assembled in the first place. Today, despite fantastic progress in store-width technology — including “the cloud” — the challenge looms even larger as the amount of data increases.

Finally, there is the great question of how to extract maximum value from all those zettabytes. Though often misrepresented as a rival of human brains, AI’s real utility is to aid human beings with tasks for which our brains are mostly irrelevant.

AI is the master of iterative processing across millions of data points to reach statistically likely conclusions. AI beats humans at the game Go not because it is “smart,” but because it can evaluate millions of moves in less time than it takes a human to flip a token from white to black. Humans can’t do gigahertz iterations. AI is a complement to human judgment and creativity, including the creation of AI.

Now, there are three great scarcities of the internet economy:

  1. Security
  2. Data storage and retrieval without crippling delays
  3. Data interpretation on a vast inhuman scale.

In each case, infant solutions such as blockchain, the cloud, and AI are available. But each of these still strains to meet the needs of the most demanding users. Each still falls short.

This shortfall will persist as the flood of data rises. It will define the structure of the most important, groundbreaking, next generation of internet companies. And that structure will be vertical.

The new internet giants will be vertically integrated innovators. To an extent that would have abashed the prophets of the horizontal, an ascending spiral of vertically integrated innovation will be powered not so much across companies… but rather within them.

The core advances will come from the same consumer-facing companies offering new internet-based services that push the internet to its limits.

Look for a more in-depth discussion of this in the September monthly issue of The George Gilder Report.

I revealed a company that ecompasses all of these things and more. And there’s still time to invest…

Regards,

George Gilder
Editor, Gilder’s Daily Prophecy

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George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology — and its impact on our lives.

He’s an established investor, writer, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

And he’s certainly no stranger to the financial newsletter...

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