No. 349: In Defense of Jack Dorsey

On the heels of Elliott Management’s plan to remove Jack Dorsey from his chief executive role at Twitter, this report looks at: dynamism, corporate conglomeration, and a model for outside-of-the-box thinking that new entrepreneurs can learn from. Twitter isn’t behind the curve, it may be ahead of its time.

A defense of Jack Dorsey’s leadership is a defense of polymathic thinkers in business. The public markets have rewarded the type of deep-specialization that Dorsey shuns. However, those same markets are beginning to reflect the American economy’s falling rates of dynamism. In a 2012 article by Harvard Business Review, entrepreneur Kyle Wiens wrote:

We live in an age where deep-specialization is highly encouraged — the era of what tech analyst Vinnie Mirchandani calls the “monomath.” Doctors specialize, lawyers specialize, academics specialize, mechanics specialize … just about everyone professionally specializes. The more deeply you specialize, the more money you’re likely to make. And that’s fine. Except when it’s not. [4]

One can infer from a number of employment data sources that the United States is approaching a new period of job market revision, though deep specialization will always remain common in professions such as medicine and academia. Being able to view a problem from a number of angles, avoiding narrow analysis, is re-emerging as a high professional value. Polymathory is a personality trait that Dorsey identifies with. But more importantly,  his helming of Twitter and Square is one of the few remaining pillars that addresses diminishing paths to middle-class entrepreneurship.

Audience and Commerce. In a unscientific 2PM poll (n=632, take home income: $42,000 – $98,000), the following tools were selected out of nearly thirty options. Each was noted for their value to middle-class, early-stage entrepreneurs: Twitter (27.1%), Reddit 17.8%) Gumroad (11.1%), Patreon (22.9%), Substack (7.3%), Shopify (31.1%), and Square (29.4%).

The more focused the company, the more aligned with early-stage entrepreneurship they appear to be. This comes at a cost, however. Critics question Twitter’s eschewed advertising potential, a growth that comes by conglomerating the business. Academia and public markets generally conclude that corporations that are polymathic in nature (companies that operate seamlessly in three or more distinguished industries) are valued at a premium. There are a number of companies that come to mind:  AT&T, Facebook, Amazon, Comcast, and Google. For decades, these corporations have been allowed to operate new verticals with minimal government oversight. The polymathic corporation is relatively new to the American imagination but the polymathic individual has been long discouraged.

The age of conglomeration can be directly tied to the diminishing number of startups launched in the United States. After Reagan’s Antitrust Explosion of 1982, elements of the law began to shift from structuralism and toward consumer welfare. That year, AT&T and IBM faced antitrust litigation that forced changes in each company by 1984. [1] This period would eventually manifest in ways that are just now becoming scrutinized; it’s led to a new form of anti-competitive behavior. This meant that new companies would launch, only to be snuffed out by the faster-moving, well-capitalized companies like Facebook, Google, or Amazon.

The market rewards these companies and rightfully so; they are nearly immovable. The media landscape would have readers believe that entrepreneurship is at an all-time high. However, this couldn’t be farther from the truth. The American economy is ossifying. In The Complacent Class, Tyler Cowen writes:

These days Americans are less likely to switch jobs, less likely to move around the country, and, on a given day, less likely to go outside the house at all […] the economy is more ossified, more controlled, and growing at lower rates.

A defense of Jack Dorsey is a reminder that Twitter is one of the few major media platforms with little risk of antitrust action. A pivot towards a Facebook or Google-like model of conglomeration is a reward with a proverbial expiration date. A chief argument by activist investor Elliott Management is that, unlike Facebook or Google’s expansive catalogue of audience and advertising products, Twitter has hesitated to innovate. I believe that this has been by design.

Investors have complained that Twitter has failed to come up with innovative new products. Though its core social network remains prominent — it is one of President Trump’s primary bullhorns — upstart rivals including, most recently, TikTok, have seized the public’s imagination and eyeballs. [6]

Consider the campaign trail where candidates on both sides of the line of demarcation are comfortable critiquing anti-competitive behavior. It’s common to see Twitter’s contemporaries to be mentioned. From Senator Warren’s platform [2]:

America’s big tech companies provide valuable products but also wield enormous power over our digital lives. Nearly half of all e-commerce goes through Amazon. More than 70% of all Internet referral traffic goes through sites owned or operated by Google or Facebook.

Specialization vs. Deep Generalism

To land one of America’s most coveted and secure jobs, it would be best to mask one’s multi-disciplinary interests. If Jack Dorsey didn’t start a company, it’s unlikely that his varied interests would appeal to the typical executive recruiter. And this is despite a superior track record as a software engineer.

This wave of career-specialization was a response to a trend of industry conglomeration that’s influenced public markets for decades. Executive recruiters cited certain benefits to building resumes of this sort: increased value proposition, shortened learning curve, “perception of authority”, higher conversion, and superior networking.

The rise of the corporate conglomerate coincided with an emphasis on post-collegiate specialization, a trend that was influenced by hiring practices and job security of coastal technology companies.  Rufus Franck, founder of Consultants 500 explained [3]:

When you take a look at the Fortune 1000 over the last 40 years, starting from 1973 you see that major changes have taken place. By 1983, one-third of these companies have fallen off the list. By 2013, only 30% of the original companies are still on the list. This pace of change will continue to increase as only a third of today’s major companies are expected to survive the next 25 years.

Twitter and Square seem to operate differently than many of its aforementioned contemporaries. Created in 2006, Twitter.com ($27.32b) has revolutionized two-way communication with public persons, news, and business. For power-users, it has become what LinkedIn was designed for and what Facebook can never be. It is the platform that is closest to a globally-available forum for ideas, creativity, research, and culture.

Likewise, Square has revolutionized credit and cash transactions. Founded in 2009, Square ($34.77b) has accomplished a great deal in the commerce and peer-to-peer payments space. It’s Cash App product is a billion dollar property, according to analysts. The two companies haven’t taken on the form of today’s polymathic (conglomerate) corporation. Perhaps, because it has one at its helm.

The argument to consider is whether or not the platforms are better as focused vs. positioned along a path to conglomeration.

…Except When It’s Not

The more deeply you specialize, the more money you’re likely to make. And that’s fine. Except when it’s not. Before the announcement of Elliott Management’s acquisition of $1 billion worth of Twitter stock, Dorsey’s most prominent critic was entrenched in academia. When New York University’s esteemed Professor Scott Galloway wrote to Twitter’s Executive Chairman in December 2019, it would become a call to action for a number of restless public market investors and institutional holdings. Galloway began his letter with clear intent:

To be clear, my primary objective is the replacement of CEO Jack Dorsey. However, your firm’s weapons of mass entrenchment include a staggered board that may force shareholders to seek to replace other directors, including yourself, first. [….]

It is difficult to ask people to work evenings and weekends when the CEO works mornings (is part-time). The exodus has resulted in anemic product development that has stunted growth and monetization. [5]

Admittedly, Dorsey has few executive comparisons. Though, when critics and advocates do attempt to provide an analog to his personality: Steve Jobs is occasionally cited. Critics will compare Dorsey’s worst characteristics to Jobs’ antics: lack of focus, imbalance, knack for stoicism, and pursuit of spirituality. Advocates will compare Dorsey’s best characteristics to Jobs’. Most often, this comparison ends at both executives’ ability to run two large companies at once.

In the fourth quarter of last year, Twitter generated more than $1 billion in revenue, a first for the company. Advertising sales of $885 million during the quarter were up 12 percent from the same time in 2018. And the number of users who see ads on its platform on a daily basis grew 26 million in 2019, up 21 percent from the prior year. [9]

This is fair, there will only ever be one Steve Jobs, a leader with the talent to run Pixar and Apple in tandem. Jobs founded Pixar when he was fired from Apple. He returned to Apple once it acquired NeXT, yet another company that Jobs founded and led. He remained in a leadership role at Pixar until it was acquired by Disney in 2006. The iPhone debuted within a year of Pixar’s acquisition, an inspired device that found new ways to combine media, technology, and commerce. But to be fair to Dorsey, he’s successfully running two companies with a combined market cap of nearly $70 billion and he’s doing so with an eye on the future of two evolving industries: media and commerce.

The Call For Dynamism

Screen Shot 2020-03-02 at 4.50.30 PM
Decreasing dynamism [9]
An argument for Jack Dorsey is a call for improved dynamism, a long-celebrated trait of American business that has fallen over the previous four decades. The more that conglomerates exist, the more we’ll see dynamism collapse. As a number of those companies begin to succumb to antitrust scrutiny, dynamism will be called upon to close the gap between the age of conglomeration and the need for new, high-growth businesses. Twitter and Square are proponents of dynamism, not just in platform capabilities but in the characters of each company’s mission.

A critical factor in accounting for the decline in business dynamics is a lower rate of business startups and the related decreasing role of dynamic young businesses in the economy. For example, the share of US employment accounted for by young firms has declined by almost 30 percent over the last 30 years. [7]

Multidisciplinary thinking is a shared trait of early-stage business leaders. To solve new, difficult problems, it takes more than abundant funding. It requires the type of outside-of-the-box thinking that Dorsey has prescribed and conglomeration has discouraged.

The markets may not reward Twitter for its market discipline until conglomerates like Facebook and Google begin to adjust as the headwinds of government scrutiny and new data privacy legislation continue to mount. Data-privacy bills are being authored across the United States at an incredible pace. Today, New Jersey’s legislature joined this conversation:

The bill would require companies to obtain permission from New Jersey consumers before they can collect and sell personal data to third parties. The legislation, which would apply to internet companies like Alphabet Inc.’s Google and Facebook Inc., would have implications for any company that collects consumer data. [8]

As data privacy becomes more of a concern, a pivot towards commerce is the intuitive path. We’re beginning to see this with Facebook’s emphasis on Instagram’s cart capabilities or Google’s acquisition of Pointy and its emphasis on marketplace development. Imagine if Twitter had a CEO with practical knowledge of both of these disciplines. Would its board dismiss that chief executive?

Conclusion

Twitter has avoided a number of the headwinds facing today’s top corporate conglomerates: (1) media’s pivot from advertising data to transactional data (2) antitrust scrutiny of conglomerates (3) a growing chorus of data policy concerns. It’s precisely Dorsey’s outside-of-the-box thinking that may serve his companies well as the shift towards linear commerce continues.

Square and Twitter represent two fixtures of industry (media and commerce) that have grown without infringing on other verticals. But more importantly, both companies represent a sort of democratization of entrepreneurship that is required for dynamism to mark its return. In short, they are two of the last remaining tools of early-stage entrepreneurs.

On a technical front, it’s possible that Square may be of service to Twitter’s appeal to brand partnership as platforms reimagine advertising in the privacy-driven data economy. Together, Twitter’s best chance at pioneering a path forward is with Dorsey. But Dorsey’s appeal to dynamism’s reemergence isn’t solely based on the two companies that he helms. He’s the rare founder-CEO that isn’t protected by classes of voting shares, another emblem of today’s risk-less nature of conglomeration. Rather, his style of leadership translates well to aspiring entrepreneurs looking to establish careers outside of career specialization. This, I believe, is a precursor to dynamism’s reemergence.

Dorsey’s leadership style a needed in today’s public markets. And it may take the public market’s tolerance of his style of multi-disciplinary thinking and leadership. Surely, the incredible team at Elliott Management may come to a similar conclusion once wider data points are considered. But admittedly, Dorsey may finally need his own Jobsian moment to silence critics and pacify supporters, alike.

Report by Web Smith | About 2PM

Additional reading: 
Entrepreneurs are widely considered the backbone of the US economy. However, an increasing number of studies document a significant decline in the pace of formation of new businesses and other measures of entrepreneurship starting in the early 1980s. This decrease in entrepreneurship is at the center of the decline in dynamism experienced by the US economy in recent decades (Davis and Haltiwanger, 2014). This has raised concern among scholars and policymakers because of the importance of entrepreneurs for productivity and economic growth. [10]

Member Brief: On Neo-Traditional Development

1kHCvlJw

Think back to your youth. When you visited your local malls in in the 1990s or early 2000s, they resembled marketplaces of vendors and major retailers. It was a living and breathing brochure of SKUs. Back then, storefronts didn’t require special features, personality, or experiential qualities. Consumers were there to discover, to shop, and to transact. Today, the malls that are still ascendant are something different than what we remember. The malls that failed to evolve are crumbling beneath the weight of changing consumer preferences, personal technologies, and faltering specialty retailers.

This member brief is designed exclusively for Executive Members, to make membership easy, you can click below and gain access to hundreds of reports, our DTC Power List, and other tools to help you make high level decisions.

Join Here

No. 348: An Open Letter on Sustainability

Sustainability

Seated in a lodge in the Selkirk mountains of British Columbia amongst 44 new and old friends across a number of professions, photographer and environmental activist Meg Haywood Sullivan shared her thoughts on circular fashion and sustainability with me. It wasn’t the first time that I considered this era of retail’s negative impact on our ecosystem but it was certainly the most impactful consideration.

I was there for the tying of the bow and I was there to capture the customer removing it after it arrived at her home. I photographed the entire chain, from beginning to end.

The award-winning photojournalist told the story of prAna, a well-known activewear brand that predates many of the brand identities adopted by DTC retailers today. Started in 1992, the brand maintains many of the sustainability initiatives that are just now becoming popular. She detailed one of her trips to prAna‘s factory, documenting the day-in-the-life of a worker. She was there at the home of the prAna contractor when the factory worker awoke. The two rode a scooter together to work, where she documented the day’s duties down to the yarn tied around the package for delivery. Once Sullivan was back to the United States, she then photographed a prAna customer receiving the package in question, untying the yarn to see the new piece of clothing.

On prAna‘s site, the retailer lists a number of initiatives. There is a code of conduct and policies on fair labor, traceability, recycled polyester, polybag reduction, and supply chain. You can find the brand’s suppliers on the site.

It is rare for American consumers to see this intense of a commitment from a brand. For prAna, it is more than marketing speak, that is certain. But its impact on the greater machine is nearly non-existent. Their efforts are meaningful, but it will take an industrial shift to stymie the rising problems that the fashion market faces.

Consider that in 1995, a consumer’s poly-based fabrics were worn in gyms or on runs. Today, the majority of clothing resembles organic-appearing variations of those same technical fabrics. These fabrics have taken over our closets, our drawers, our long runs, and our boardroom meetings. But there are consequences to fast-fashion and athleisure; plastics weren’t intended to be worn and discarded with impunity.

Because it’s cheap and easy to manufacture, polyester has become today’s dominant textile. But polyester, which is essentially made of oil, causes a host of problems. While the material does provide a use for all those recycled plastic water bottles, washing any synthetic fabric — whether it’s made of raw petroleum or recycled plastics — sloughs off microscopic fibers. Those microfibers end up in water supplies and never biodegrade. [1]

To understand the current state of industry, you must consider the last shift of this magnitude in fashion retail. The boom of plastics in fashion retail closely resembles the turn-of-the-century availability of cotton-based goods in urban areas. Between 1840 and 1920, a number of developments accelerated fashion consumerism to unforeseen heights.

The continued rise of cotton bolstered a global trade with America as its newly fueled war supply, the wares of America’s burgeoning industries, Wall Street, and – for the first time in American history – casual fashion, a format that was uniquely European before retail distribution improved.

One reason it is hard to see cotton’s importance is because it has often been overshadowed in our collective memory by images of coal mines, railroads, and giant steelworks — industrial capitalism’s more tangible, more massive manifestations. [2]

The department store brought selection and ease of transaction to urbanizing areas of the United States. Cities like New York, Los Angeles, Chicago, and Pittsburgh led the way in a retail economy that surpassed $42.5 billion in sales before losing nearly half of its value in 1929.

During its ascendancy from about 1880 to 1920, American society shifted from rural to urban centers and absorbed more than 23 million immigrants. By 1910, over one-fifth of the population lived in a city of at least one hundred thousand, big enough to support several good-size department stores. City people had seemingly inexhaustible needs — for clothing, bedding, household goods. Sales of consumer goods rocketed upward, roughly tripling in just the 20 years between 1909 and 1929. As department stores’ sales spiraled ever higher, stores expanded and rebuilt, and then expanded and rebuilt again. [3]

And the Gilded Age introduced trickle-down economics to major cities, albeit slowly and in limited fashion. The majority of residents of urbanizing cities worked for low wages in unsavory conditions. Between 1881 and 1900, nearly 35,000 workers lost their lives annually to work-related incidents. This tragic period would result in reforms to include the growth of unions that bolstered the earning potential of the working class. Though known for an era of robber barons and hardened industrialists, the turn-of-the-century also brought a growing class of “white collar” workers, staffed to manage the operations of many industries. 

But the new era of industry and innovation didn’t only produce misery. As factories and commercial enterprises expanded, they required an army of bookkeepers, managers, and secretaries to keep business running smoothly. These new clerical jobs, which were open to women as well as men, fostered the growth of a middle class of educated office workers who spent their surplus income on a growing variety of consumer goods and leisure activities. [4]

These three macroeconomic shifts – the continued cotton empire, the golden era of the department store, and the birth of the white-collar employee – ushered in a time of cotton trousers, oxford dress shirts, and suiting en masse. The retail industry is a lagging indicator, not a leading one. In today’s market, athleisure and technical fabric-based casual wear signifies shifts of their own.

Workplaces are more casual than ever before. And that’s if you even report into an office. Distributed workforces are prevalent in today’s economy, the types of clothing investments that consumers make are second order effects of their lifestyles. And no longer is cotton king, technical-based fabrics (polyester, spandex, nylon) are the cheapest to produce as long as crude oil is in ample supply. These fabrics deliver a host of benefits: they wick moisture from one’s skin, they stretch, they contour the body, and they deliver compression performance in some cases. The endure a day’s commute without the wear and tear of traditional fabrics.

According to Grand View Research, the market for technical fabrics are only going to grow, doubling between 2015 and 2023. To the untrained consumer, these products are all benefit and with little downside.

Screen Shot 2020-02-24 at 10.04.33 AM
United States | Athleisure Market Growth

But there are unseen side effects. When consumers wash clothing made with plastics, microfibers enter the water system – a pesky form of pollution that does irreparable harm to the ecosystems affected. The durability of a number of these fabrics, often cheaply manufactured, is a fraction of the durability of organic-based fabrics that preceded today’s technical era. Today’s customer is cycling from purchase to discard at a faster pace. Additionally, few if any retailers have instituted circular logistics – a policy that would promote upcycling old fabrics into new garments.

Screen Shot 2020-02-24 at 11.39.56 AM
Source: Circular.Fashion

There are a number of trends that are aiming to stymie this problem. Nike and Adidas are the two largest manufacturers of technical performance wear; they’ve both committed to upcycling plastics and other discarded fabrics and materials. In turn, consumers will see more products designed with repurposed goods rather than the mining and processing of additional, raw material. Additionally, services like ThredUp have partnered with flailing retailers like Gap, J.C.Penney, and Macy’s to institute resale programs. And organizations like Circular Fashion are technologically equipping materials suppliers to track products in through to the consumer and back to the supplier for upcycling.

The circularity.ID Open Data Standard allows fashion brands to publish their product data in a format that can be utilised by a variety of software applications along the product life cycle. [5]

It’s my position that there will always be a place for technical fabrics in the marketplace. For those retailers, circular fashion strategies must be instituted to minimize waste where possible. On the consumer side, CPG companies like Filtrol are working to widen the appeal of solutions like their own – a microfiber filter for washing machines that prevents plastic fibers from entering the water supply.

Even if the majority of companies operated like prAna, it wouldn’t be enough to reverse the effects of this era of fashion, and I speak from experience [6]. The athleisure industry is one that I’ve been involved with in some way or another for the majority of my adult life. It will take another generational shift back to organic fabrics designed to be worn for 10 years rather than 10 months or even 10 weeks. Specialty retailers will have to end their practices of overproduction and superfluous promotion, reducing the prices of clothing to the point that consumers view them as temporary goods versus potential heirlooms – the types of pants, coats, dresses, and oxfords that could be passed to younger siblings, sons, or daughters.

Changes in retail are often a result of larger societal changes. Fashion insiders also have a responsibility to mitigate a growing problem. But until those larger changes occur, circular fashion (and sustainability as a whole) is just window dressing. As organic fabrics begin to adopt many of the technical capabilities of their new-aged counterparts, we’re likely to see a shift away from the athleisure-like appearance that has overtaken this era of fashion. It may take the dawn of a new industry, a period of strengthening of the middle-class, or a new period of growth for traditional retailers. Something beyond the industry will have to force its hand. Until then, brands like prAna will stand in virtuous opposition to today’s common practices. And it won’t be nearly enough to stop the flow.

Report by Web Smith | Edited by Hilary Milnes | About 2PM

[6] Disclaimer: I am a proud cofounder of Mizzen + Main, a label that is derived from technical fabrics along with fellow upstarts like Ministry of Supply, Theory, and a host of copycats. Although I believe that companies like Mizzen + Main are in the minority of good actors, my concerns remain for the industry as a whole.