These are markets where customers’ preferences tend to settle into a polarized equilibrium. In other words, they want to go high-end some of the time and low-end some of the time. It depends.

But the critically important corollary to this is they hardly ever want to go middle-market. The middle seems unappealing, even at the extremes irrational.

Now, I submit—and back in the days when I was wandering the corridors of the economics department at my college it seemed to be amply confirmed—that the Hollow Middle industry structure has two particularly salient characteristics:

  • It’s extremely widespread throughout the economy; and
  • Once an industry arrives at this model, it tends to stay there. It’s what’s called “an equilibrium solution.”

The easiest way to understand what a Hollow Middle structure looks like, and for you to confirm through your own intuition and experience that it can be a very appealing and durable model, is to give you some examples.

  • Apparel: We want fitted suits, shirts, and dresses from name-brand designers or we want a generic polo shirt and jeans and a semi-disposable frock from the Gap, H&M, or Zara.
  • Beer, wine, and liquor: The craft brew or a Budweiser; a waiting-list-only Napa Screaming Predator Cab or the house Chardonnay; a 12-year-old single malt or the well vodka.
  • Cameras: The “free” one built into our smartphones or a Nikon or Canon digital SLR with half a dozen lenses each worth more than that smartphone.
  • Home entertainment: Our iPod/iPhone/iPad plugged into a pair of sub-$100 speakers or the concert hall-emulating home theater system.
  • Cars: An Audi, BMW, Mercedes, or Porsche for the experience; or the Accord or Camry, Civic or Corolla, to get us back and forth when we turn the key.
  • Hotels: A Four Seasons or Ritz-Carlton; or a Courtyard by Marriott. By now you get the idea but one more example, for a reason.
  • And lastly, financial services: Private banking from US Trust or a Morgan Stanley financial adviser and your own CPA; or the $200 minimum balance checking account from TD bank, H&R Block, and an e-Trade account.

I left financial services for last because isn’t that the closest approximate analog to legal services?

My own working hypothesis is that law firms are going to find themselves increasingly isolated if they don’t have a distinctive, credible, and meaningful value proposition.

Firms that do a little bit of everything—”full service”—but which also don’t stand for anything in particular are, in our ecological/biological analogy where we began all this, an endangered species.

Understand I would take no satisfaction in being proven right about this category of firms.

But the arguments from economics and, yes, industrial structure, show that history looks most unfavorably on this category. And once clients begin self-selecting their migration paths either up or down the value chain (or both at the same time, more realistically, because “it depends”), there will be less and less oxygen in the room.

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