The perils of early adoption - and of moving too slowly

Humanity has a tough time keeping pace with technological advancement. We run into trouble when we embrace our inventions too soon, but also when we adapt to them too slowly. History is littered with examples, and a couple have emerged quite recently.

The competitive nature of business drives many to become early adopters, tempting those who hope to gain some advantage over their slower moving rivals. But early adoption is a risk - many have suffered for embracing technology without caution.

Such risk can become widespread, and threaten entire economies, as the threat of being left behind drives everyone else to adopt - without due consideration of consequences.

The April hacking of the Associated Press’s (AP) Twitter account, and subsequent US stock market plunge, provides a recent example.

The story revolves around the use of automated trading: computers trading autonomously on the stock market, without human intervention, based on investment instructions in the form of preprogrammed algorithms.

Hackers - reportedly the Syrian Electronic Army - obtained access to the AP’s official Twitter account and posted a hoax tweet stating the White House had been bombed.

“Breaking: Two Explosions in the White House and Barack Obama is injured”, the hackers’ tweet read.

Both the White House and the AP informed the public minutes later that the report was not true. But within three minutes of the hoax tweet’s posting, virtually all US markets plunged, according to Reuters.

The news agency said the S&P 500 index’s value fell US$136.5 billion following the tweet, while the Dow Jones Industrial Average dropped 143.5 points, or 0.98%.

Both the Dow and the S&P regained their previous levels after it was revealed minutes later that the AP had been hacked, according to the UK’s Daily Mail.

Jonathan Corpina, a senior managing partner with Meridian Equity Partners, told Bloomberg that algorithmic trading programs that read news headlines may have started the selling.

“And then other [algorithms] jump in to play the snowball effect, and little by little you have the computer trading systems that have cancelled all their orders on the buy side and the sell [algorithms] hit all these bids, and that’s the big dip we saw,” he said.

This is not the first time algorithmic trading has been blamed for market wipes. The May 2010 ‘Flash Crash’ saw the Dow Jones Industrial Average drop about 1000 points, only to recover within minutes. A joint US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) investigation found that high-frequency trading (HFT) - a form of automated trading - contributed to the sharp price declines in the Flash Crash.

(It is worth noting that, despite the SEC/CFTC report, some actually theorise that HFT may have helped minimise and reverse the 2010 Flash Crash.)

In either case, both these stories - in 2013 and 2010 - illustrate what can happen when an industry gets ahead of the tech curve, without implementing necessary safeguards.

But we also run into trouble when we fall behind the tech curve. For example: I argue that recent happenings in the US’s case against file sharing website Megaupload and its founder Kim Dotcom are symptomatic of one industry’s struggle to keep pace with technology.

Look at how the entertainment industry has struggled to cope with the rise of the internet. Consumers are turning away from traditional media channels and instead turning to piracy or cheap/free internet-based alternatives for their music, film and television desires.

This upsets the business models of the companies that produce this content, which largely rely on revenue direct from consumers or ad revenue based on audience numbers.

Some companies are adapting to the new landscape formed by these pressures - changing their services or releasing new types of products to sway consumers away from piracy and other free content - but the industry’s attempts to stay afloat are often litigious. Rather than rolling with the technological punches, they’re on the defensive, unleashing their lawyers in an attempt to dissuade consumers from pirating content or service providers from facilitating such piracy.

Now, there’s nothing wrong with a company protecting its interests to the extent allowed by law. But in their zeal, those pursuing Dotcom and his company in the Megaupload case have broken the law several times.

For one, a New Zealand judge ruled that search warrants used to gather evidence related to the case were, in fact, illegal.

On top of that, it was later revealed that the New Zealand intelligence agency, the Government Communications Security Bureau (GSCB), unlawfully spied on Dotcom in the years leading up to his arrest. The spying was illegal because the GSCB is forbidden from spying on New Zealanders, and Dotcom gained New Zealand residency in 2010.

The Prime Minister of New Zealand, John Key, apologised to Dotcom for the illegal spying, saying he was “personally disappointed” and that the GSCB had “failed on the most basic of levels”.

The case is still underway - more investigative blunders may yet come to light.

With a couple of exceptions, the film, music and television industries have so far failed to adapt their business models to the internet age. They turn to litigation in an attempt to stall the use of technology, instead of trying to innovate their businesses in order to keep pace with an evolving market.

We stumble when we try to move too fast - but also when we move too slowly.

Image credit ©iStockphoto.com/Berc