One of the most famous passages in economic thought is Schumpeter’s description of markets as an arena for “creative destruction.” This conjures images of the rust belt with its abandoned factories and warehouses. In the Internet age, I think the story is a bit different. Sure, we have Pets.com and other collateral damage of innovation, but it seems that the Internet allows some firms and brands a bit more flexibility. You have creative reconstruction.
For example, people laugh at MySpace and Friendster for losing their early advantage in social networking to Facebook. It sounds as if these firms became the 21st century equivalent of horse and buggy firms (which is also a myth – these firms didn’t just go bankrupt but slowly morphed and merged with auto makers). But if you actually look, you see that MySpace is attracting a million visitors per month and ranks in the top 500 web sites in the United States. Similarly, Friendster is now a gaming web site with a few million users, mainly from Asia.
Make no mistake, these firms will likely never regain their position of dominance. They are quite close to failure (see here for recent MySpace pessimism). But they still seem to have quite a bit of value, nearly a decade after their collapse. If I told you about a company with a few million visitors, but didn’t tell you the origin, you’d probably be impressed. The lesson I take is that the market can allow opportunities for reconstruction.