Authors: Jeremy Rifkin
Managing the acceleration and expansion of commerce and trade across national markets would have been impossible without an accompanying communications revolution. In 1814, Friedrich Koenig’s steam-powered printing machine began producing newspaper pages at
The Times
of London at lightning speed—the new presses could print a thousand copies of the paper per hour compared to a mere 250 copies with the older manual presses.
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By 1832, printing machines at the newspaper had more than doubled the run per hour.
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Fast, cheap, steam-powered print encouraged a drive for mass literacy across Europe and America. Public school systems were established and compulsory education was mandated in the newly industrialized cities to prepare the future workforce with the communication skills they would need to attend to the more complex business operations that accompanied the First Industrial Revolution.
In the ensuing decades, a succession of advances in steam-powered printing, including papermaking machines, stereotypes, and rotary printers, significantly reduced labor costs while increasing production, allowing
the steam-printing revolution to keep pace with the productivity gains in coal-powered rail transport.
When national postal services switched from stagecoaches to rail, cheap and fast print combined with cheap and fast transport to quicken commercial transactions. Time-sensitive contracts, bills, shipping orders, newspapers, advertising, instruction manuals, books, catalogs, and the like could be sped along by rail, connecting businesses across the supply chain as well as sellers and consumers in hours or days, rather than weeks or even months, greatly accelerating the pace of commerce.
The new print communications revolution didn’t come cheap. Like the railroads, the capital investment costs of bringing steam-powered printing to the market were significant. The first steam-powered presses were complex and could cost up to £500 or more per unit (equivalent to $26,500 in today’s economy).
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The cost of steam-powered printing continued to rise as new, more expensive presses came online. By 1846, the Hoe double-cylinder rotary press was churning out 12,000 sheets per hour, and by 1865, the roll-fed rotary press was producing 12,000 newspapers per hour. The startup cost of funding a newspaper had also increased dramatically to $100,000, or about $2.38 million in 2005 dollars.
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In America, giant printing companies sprung up in Chicago in the aftermath of the great fire of 1871. R. R. Donnelley & Sons, Rand McNally, and M. A. Donohue and Company were among the industry leaders. Their printing plants could take advantage of economies of scale by handling much of the print material for the entire country in a central location. These companies were surrounded by type foundries and printing press manufacturers, creating an integrated industrial complex near the Chicago rail yards—the central rail connection for the country—ensuring the quick postal delivery of textbooks, magazines, and catalogs across the country.
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The cost of building and running those enormous facilities was beyond the reach of most family-owned businesses. R. R. Donnelly, realizing early on that if it was to gain dominance in the industry it would need to raise large sums of finance capital, made the decision to incorporate as a public company in 1890.
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By 1900, these highly centralized print operations were churning out millions of catalogs for mass mail-order companies like Montgomery Ward and Sears, Roebuck and Company. Montgomery Ward’s 540-page catalog listed more than 24,000 items, including groceries, drugs, jewelry, handbags, shoes, men’s clothing, stoves, furniture, buggies, sporting goods, and musical instruments. Sears even sold prefabricated homes through the mail. The homes were shipped by train in pieces in crates and assembled on-site.
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Sears bungalows can still be seen in the Washington, D.C., area, where my wife and I live.
Millions of Americans in smaller towns and rural areas purchased virtually all their business equipment, home furnishings, and personal attire by catalogs printed in the great Chicago printing houses. The items were
then transported by rail and delivered, via the U.S. Postal Service, directly to their businesses and homes. Sears’s mail-order revenue in 1905 was a whopping $2,868,000, the equivalent of $75,473,680 in 2013 dollars.
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The convergence of coal-powered steam printing and coal-powered steam rail transport created an infrastructure for the First Industrial Revolution. The communications part of the infrastructure was augmented with the build-out of a nationwide telegraph network in the 1860s, allowing businesses instantaneous communication across their supply chains and distribution channels.
The coming together of steam-powered printing, the telegraph, and the steam-powered locomotive dramatically increased the speed and dependability with which economic resources could be marshaled, transported, processed, transformed into products, and distributed to customers. Chandler observes that “cheap power and heat and quick and reliable transportation and communication” were the key factors in the rapid spread of centralized factories in the 1840s and 1850s.
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The newfound speed and volume of economic activity made possible by the new communication/energy matrix required a complete rethinking of the business model across every other industry. Previously, production and distribution of manufactured goods were kept separate. Manufacturers relied on independent wholesalers, distributors, and retailers, scattered across the country, to move their goods to market. These antiquated distribution channels proved to be too slow and unreliable and far too provincial to handle the onslaught of mass-produced products flooding out of factories operating the first automated continuous-process machinery. In addition, many of the new manufactured products, like the Singer sewing machine and the McCormick reaper, required skilled personnel who could demonstrate them to customers. An increasing number of mass-produced goods also required specialized after-sale servicing, which necessitated maintaining an ongoing relationship with customers. The traditional distribution system was simply incapable of accommodating the new commercial practices.
The solution was to bring production and distribution all together, in house, under centralized management. The vertically integrated business enterprise took off in the last quarter of the nineteenth century and became the dominant business model during the whole of the twentieth century.
The great value of vertically integrated companies is that by eliminating many of the middle men across the value chain, these new mega-enterprises were able to significantly reduce their transaction costs while dramatically increasing productivity. In a nutshell, vertically integrated companies introduced vast new efficiencies whose economies of scale lowered their marginal costs, enabling them to sell ever larger volumes of cheap mass-produced goods to an eager public. Cheaper products stimulated mass consumer demand, which in turn spawned new business opportunities and the hiring of workers, improving the standard of living for millions of people in the industrializing economies.
The new business model spread quickly as firms saw the great advantage of bringing together production and distribution under one roof and extending their business operations across an entire continent. Diamond Match Company, W. Duke and Sons Tobacco, Pillsbury, H. J. Heinz, Procter & Gamble, Eastman Kodak, and I. M. Singer and Company were among the hundreds of companies to adopt the vertically integrated business model to achieve efficient economies of scale.
Virtually all the entrepreneurs who prospered during the takeoff stage of the First Industrial Revolution in the second half of the nineteenth century succeeded in large part because they were able to raise sufficient financial capital by incorporating and becoming a publicly traded shareholding company. The capital allowed them to capture vertically scaled market opportunities and become the standard bearers of their respective industries.
The Second Industrial Revolution
At the very time the First Industrial Revolution was peaking in the last two decades of the nineteenth century, a Second Industrial Revolution was being born in America and Europe. The discovery of oil, the invention of the internal combustion engine, and the introduction of the telephone gave rise to a new communication/energy complex that would dominate the twentieth century.
The most important thing to understand about oil is that it requires more finance capital to marshal than any other single resource in the global economy. Moreover, recouping the investment across the many steps involved in getting the oil and the products derived from it to end users can only be obtained by organizing the entire process—discovery, drilling, transporting, refining, and marketing—under the aegis of vertically integrated companies operated by highly centralized management.
Discovering and bringing online new oil fields today is time consuming and costly, and, more often than not, unsuccessful. The activation index, which measures the total investment needed to access new oil discoveries, is enough to leave the faint-hearted out of the game. It is not unusual for the leading energy companies to invest several billion dollars in new oil projects. When Iraq decided it wanted to triple its oil production in the first decade of the twenty-first century, the cost of financing the investment was calculated at nearly $30 billion.
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The total cost of capital investment in worldwide exploration and production of oil and natural gas was nearly $2.4 trillion between 2000 and 2011.
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Oil exploration requires sophisticated satellite data analyses and a knowledge of geology, geophysics, and geochemistry. The most advanced computers and software are needed to collect and interpret three-dimensional reflection seismic data and create three-dimensional images of the Earth’s interior. Drilling wells to depths of 20,000 feet or more requires
expensive and complex high-tech oil equipment. Erecting massive oil-
drilling platforms on the ocean floor is a major engineering feat. Laying out pipelines, often across hundreds and even thousands of miles of difficult and inaccessible terrain, is equally challenging.
The refining process is also difficult. The geologist Robert Anderson describes the complex set of operations. Organic chemists have to break down the crude oil hydrocarbon complex and reconstruct it into a slew of products that range from gasoline to polyurethane. The particular properties of crude oil vary considerably from one oil region to another, which requires building customized refineries to process particular feedstocks.
The marketing of oil is no less complicated. Petroleum product sales vary considerably from season to season. Gasoline prices are higher in the summer months; heating oil is more expensive in the winter months. Energy companies must therefore rely on meteorological forecasts and economic growth projections and scenarios, and even factor in potential political events that could be either disruptive or opportunistic, in determining future oil needs—at least six months in advance—to ensure that the correct crudes are channeled to the appropriate refineries to be ready for the coming seasons.
Further complicating the process, Anderson explains, is that the marketing departments of energy companies are subdivided into industrial, wholesale, and retail units, and further divided by specialty products including asphalt, aviation fuel, natural gas, liquids for chemicals, agricultural fertilizers and pesticides, and coke for the metal and rubber industries. Fifty percent of the petroleum sold in the United States is refined into gasoline for transport.
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Even at the very beginning of the oil age, some entrepreneurs understood that the complex, multilayered process required to bring oil to end users could only be made financially lucrative by consolidating control over the entire operation. Only then could companies employ the rationalizing practices of centralized management and reap the optimum profit.
John D. Rockefeller founded the Standard Oil Company in 1868 with just that end in mind. Rockefeller bought up oil wells and refineries around the country and secured special arrangements with the railroads to ensure that his oil shipments had favored status. At the dawn of the automobile era in the opening decade of the twentieth century, Standard Oil became the first company to set up gasoline stations across the United States, creating a complex, vertically integrated business operation that combined production and distribution from the wellhead to the end user. By 1910 Rockefeller controlled most of the oil business in the United States. Competitors and the public cried foul, and the federal government brought suit against his company under the Sherman Antitrust Act. In 1911, the Supreme Court ordered the breakup of the Standard Oil Company. The government effort to curtail big oil was short-lived. By the 1930s, 26 oil
companies, including Standard Oil of New Jersey, Standard Oil of Indiana, Texaco, Gulf Oil, Sinclair, Phillips 66, Union 76, and Sunoco, owned two-thirds of the capital structure of the industry, 60 percent of the drilling, 90 percent of the pipelines, 70 percent of the refining stations, and 80 percent of the marketing.
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The concentration of the oil industry today, while less pronounced, is still formidable. In the United States, five companies—Chevron, BP, Royal Dutch Shell, ExxonMobil, and Conoco Philips—control 34 percent of domestic oil exploration and production.
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Around the same time Rockefeller was busy consolidating control over the new energy source of the Second Industrial Revolution, Alexander Graham Bell was experimenting with electricity. In 1876 Bell invented the telephone, a device that would become a critical factor in managing the new and more expansive oil, auto, and suburban economy and the mass consumer culture of the twentieth century.