Stand beside a mountain stream and observe the water for a while and you’ll see that most of it moves in a continuous flow. Look a little closer, however, and you’ll see that the bed of the stream and objects in and along the stream — logs, boulders, the legs of a bear — all have an effect on the flow due to friction. Look closer still — say, at a rock near the edge of the stream — and you’ll find that the flow may slow to a halt if not actually move in the opposite direction, creating what is commonly called a whirlpool, but more accurately described as an eddy. Peer at the boundary between the flowing current and the eddy and you’ll see smaller eddies form and detach again and again, dissipating as they flow downstream because they are no longer powered by the object in the stream that created them.
Known as detached eddies in the science of fluid dynamics, these disconnected but still churning whorls can also be spawned in the atmosphere, as bodies of air move over the landscape or interact with each other. Heat water to the right temperature and move a low pressure area over that water and you may spawn a monstrous hurricane that lasts for days and travels thousands of miles. Move that same hurricane over dry land, however, detaching it from its power source, and it will slowly dissipate, even as it may still wipe entire communities off the face of the earth.
The key component of an eddy, and what distinguishes an eddy from a vortex, is that in the middle of an eddy there is a void — a place of calm that experiences none of the rotational effects of the moving fluid that defines the eddy itself. Drop a leaf in the center of an eddy caused by even the most ferocious mountain stream and it will float exactly where you dropped it. In a vortex there is no void, but vortices can also detach like eddies. This is known, sensibly enough, as vortex shedding — a phenomenon that has led to practical applications in the real world such as winglets on airplanes.
By analogy, it’s possible to see almost any aspect of existence or reality as a manifestation of these same forces. If the great sweep of humanity over time is represented by flowing water, social movements that spring up are like vortices, while the stillness at the heart on an eddy may allow a full-blown culture to take hold and grow. In relationships between two people any initial friction may lead to vortices of love or hate, but in some cases eddies may form leading to friendship, trust or respect.
In a commercial context this flow of water or air is consumer demand, and the obstacles that create eddies or vortices are businesses or business opportunities. In some instances this analogy might be quite literal, as with the oft-quoted maxim that the three most important things in business are location, location, location. If you can identify a spot where the fluid of consumer demand is flowing in abundance — a busy intersection, the confluence of two rivers, a pass through otherwise impenetrable mountains — then starting a business in that location would probably be a good idea.
When business people talk about market niches they’re talking about eddies. If you’re lucky you may be able to identify a market niche that is being overlooked or underserved — in effect an eddy of consumer demand that exists but isn’t being exploited. On the other hand, if you have a product (say, underarm deodorant) for which there is no consumer demand, you may be able to create an eddy by advertising heavily and implying that convincing consumers that they stink. In effect, underarm deodorant becomes relatively inexpensive social-embarrassment insurance for the masses.
Even if you open a mom-and-pop restaurant in a great location you’ll probably have to withstand a period of instability before that business takes hold. While that business’s appearance in the market may create a vortex, only by having sufficient financial staying power can that vortex transition into an eddy that produces self-sustaining revenue. For many businesses the most important part of a business plan is the line that shows how much money will be needed to survive the first year, because consumer demand changes more slowly than flowing air or water. If you can’t hang on long enough for people to find you and discover that you’re wonderful, you may end up failing for no other reason than that.
Which brings us to detached eddies. These are business that are still functioning, but which have become disconnected from the consumer demand that previously fed them. (Think about Kodak‘s long, lingering death.) What’s interesting about detached eddies in a business context is that it’s almost impossible to detect them early enough to do anything about the underlying change in consumer interest. Occasionally a company will notice that it’s wandered away from its core business, or that its core business is dying, but too often companies remain blind to the effects of changes in consumer demand until it’s too late, usually as a result of bloated bureaucracies that exist first and foremost to protect themselves. The more volatile consumer demand is in a particular market the more likely it is that companies in that sector will be fooled.
From an investment point of view the most important thing you can know in business is whether an eddy is detached or not. And that’s true for micro-eddies as well as macro-eddies. If a local pub has been in business for fifty years, it may be able to survive a new traffic pattern that sends people in another direction, but that may not be true for the fast-food restaurant down the block. Likewise, one giant electronics chain may be able to survive the evolution of technology by adapting to new markets like mobile, while another chain devoted to computer hardware may wither and die despite all efforts to the contrary. In retrospect these changes in consumer demand may make sense or even be blindingly obvious, but they can often be difficult to perceive and assess, let alone respond to, while they’re happening.
While there is general agreement that technology has changed everything over the past few decades, I think technology has in fact changed everything twice, as Yossarian might say. The first big change came with the adoption of the personal computer in everyday life. In our mountain stream analogy this event was like a bolder plummeting into the stream, affecting many of the already-established commercial eddies while also spawning new pools of consumer demand. The second big change came with the adoption of the internet in everyday life. In our mountain stream analogy this event was like a boulder-sized meteor hitting the stream with enough force to alter or destroy many of the eddies already in existence, including those established by the computer itself.
In no other industry can you clearly see the historical and ongoing impact of this second, extinction-level event than in the interactive entertainment industry. Not surprisingly, this sequencing of two powerful, demand-changing technologies also illustrates how hard it can be to determine whether any businesses in that sector have or will become detached eddies.
I was about twenty-five years old when I got my first computer, and, not so coincidentally, my first computer game. While coin-op arcades and consoles like Atari had been around a while, computers opened up a whole new realm of gameplay. Into that empty arena strode a number of individuals who became known not simply for the games they created, but for the unique way in which they approached the potentials of that new medium. One of those people was a man named Ron Gilbert, whose personal take on entertainment was as unique and engaging as anything you’ll see in any other medium. And Ron had the additional overhead of having to figure out how to be uniquely himself in a medium that had yet to fully mature.
As the interactive industry rapidly evolved it inevitably changed, responding to and creating new vortices and eddies in the consumer marketplace, while also fueling larger and larger companies, corporations and mindless bureaucracies to deal with all that growth. While technology continued to evolve, providing ever more available memory and processing power, the interactive entertainment industry began to coalesce around business models that were deemed more reliable than the individual creators that had pioneered the industry. Along the way whole genres died out, including ones favored by designers like Ron, and in their place rose great brand-driven empires founded on sports and shooting.
Then the internet came screaming in over the horizon and blew everything to smithereens. Retail channels that were strangled by brand-driven corporations suddenly became financial sinkholes compared with online distribution. Dedicated online games sprouted everywhere like bamboo, and in social games the largest of the social networks discovered a revenue stream they could actually bank on. Retail gaming stagnated, the blockbuster mentality took hold with predictable results, and the stand-alone software market (including console gaming) suddenly looked little different than the publishing and music industries.
In fact, anyone who paid close attention to the interactive industry in even the late 1990’s would recognize almost nothing about that same industry today. All of the markets and eddies that were created with the advent of the personal computer have either evolved or detached completely in the intervening years. Yet even now there’s no clear sense of where all this is going, or what bets anyone should be making. Companies like Zynga exploded onto the scene as a result of exploiting Facebook’s captive audience, but will that last? Will there be a vital, stable, Zynga ten years from now — or even a vital, stable Facebook? In the world of interactive entertainment, can anything be said to have truly taken hold, or are many of the eddies being exploited today already detached from the forces that created them?
Last week I ran across mention of Ron Gilbert and a new game he’s making. And I started thinking that maybe Ron Gilbert was an eddy himself, and that all of the business plans and focus-group research in the world would never be able to reproduce what he seems to be able to routinely produce. That, in turn, made me think about the explosion of Kickstarter-funded titles being put forward by many of the same people who were driven out of the interactive business when it consolidated around first-person shooters and sports.
Once again, as with the music industry and the publishing industry, the internet is allowing creators and loyal audiences to avoid the gatekeeping dweebs and find each other. Over the past twenty years no company has been more aggressive about buying up companies, consolidating talent and managing brands than Electronic Arts, yet the sum total of that industry-dominating effort is that EA is now the most hated company in America. And not in a good way.
I’m still dubious about Kickstarter’s long-term viability, because Kickstarter has yet to withstand the kind of development boondoggle that has long been a part of the interactive industry. One only has to look at the idiotic (if not criminally negligent) deal that star-struck Rhode Island made with interactive genius Curt Schilling to see how such inevitable disasters play out in real time. And I don’t think there’s any question that the same will happen on a smaller scale at some point through Kickstarter. Still, underserved consumer markets and individual developers are clearly being well-served by the ability to avoid doing business with bloated behemoths like Electronic Arts.
Creative industries are always mercurial, in large part because they rely on creative and artistic people to keep them profitable. If you’ve ever tried herding cats you know how hard it is to keep creative types focused on something as abstract as, say, making money. When there was no way for individuals to fund small projects and connect with consumer demand I think behemoths like EA were probably safe, but that period has only lasted a decade or two. Which makes me wonder whether corporate eddies like EA — whether you think of them as aggregators or originators themselves — aren’t already detached from the market forces that helped create them. (Some analysis on the interactive industry’s current health as a whole here.)
In a week that saw the botched IPO of Facebook and the botched launch of Diablo III it’s clear that the internet itself is no guarantee of success. The internet as a distribution pipeline, however, really has changed everything, including the ability of creators and markets to find each other, and that’s one thing I don’t see changing any time soon. Again, as a long-time observer of the interactive industry, it’s amazing to me that the eddies with the greatest staying power may turn out to be the people who make games rather than the people who fund them and sell them.
It’s an outcome I don’t think anyone foresaw, except maybe Greg Costikyan, who might read this post and rip me a new one if I don’t mention his contribution to the cause. In any case, I can’t think of a healthier development in the interactive industry over its short life, or one that bodes better for the future.
— Mark Barrett