[I'm republishing some of my favorite posts of 2009 - just in case you missed them the first time around. Happy Holidays!]
Ever since I first heard about the Internet and then saw its incredible development and application across industries, I’ve been on the look out for the economic effects of this powerful platform technology. The specific economic influence I’ve been looking for is a strong deflationary trend. That’s when we will know when the Internet has truly begun to reach its potential.
Let me explain why.
The Internet is a communications technology that also carries its own computer processing technology. We can deliver computing power to any connected computer platform, pocket or desktop based or otherwise, wired or wireless. We can see this quite clearly today in the Internet based technologies of AJAX and beyond, which offer browser and non-browser based applications delivered over the Internet.
Distributed computing power that is communicated in a two-way medium across the Internet. Take a look at the cloud computing based technologies where applications can be dynamically provisioned across scalable information architectures. While a lot of these technologies still have to go through an adoption process, which is partly cultural, we aren’t too far off from a world where powerful applications can be delivered anywhere, anytime, for little more than the cost of electricity.
Internet based applications represent a class of very powerful technologies. Powerful, not in the sense of processing millions or billions of instructions per second, but powerful in the sense of dramatically reducing the costs of doing business . Yes, processing power is important but its the delivery of highly effective disruptive business technologies that is the game-changing and ultimately, deflationary trend that this essay seeks to discuss.
And Silicon Valley is at the heart of the development of what could be called Internet-based disruptive business technologies (IBDTs). We are investing tens of billions of dollars in developing IBDTs. Not all of them succeed but there are plenty that do succeed. Software as a service (SAAS) is a good example of an IBDT.
The chief characteristic of an IBDT is that it is at least 10 times more effective at one-tenth the cost.
That’s what defines the disruptive nature of an IBDT: it is so much better and so much cheaper that its success cannot be resisted by continuing to use older means of production. This is also my definition of innovation — it’s not innovation unless it is disruptive. (”Incremental innovation” is not innovation it is an incremental improvement in a production process.)
Looking at the continuing development of IBDTs and their relative low cost of development and nearly free distribution, it is easy to see that once they become widely used and implemented, we will see a massive reduction in the costs of doing business.
We will know when this scenario has occurred, or is occurring because we will see the signs: a strong and continuing deflationary trend. We will see a continual erosion in the value of products and services.
In simple terms, the Internet devalues everything it touches. Anything that can be digitized. I’m using the term “devalues” in a strictly materialistic definition and not in a cultural “values” sense. And I’m using the term “Internet” to denote a class of distributed technologies and applications.
I believe this scenario is already occurring and we already see the deflationary effect of the Internet in many sectors of the economy and this will continue — and it will accelerate.
Here are a few examples: - The Internet enables the outsourcing of knowledge workers. High salaried workers in many professions are losing their jobs to workers in foreign countries where the costs of doing business are far lower. Vivek Ranadive, CEO of Tibco Software, likes to say that India is broadband’s killer application. It’s a graphic example of how the Internet allows the export of jobs.
Here we have call center jobs, and also IT jobs being performed at a lower cost. In this example, we can see how the Internet has made it possible to devalue the salaries of call center employees, and also IT employees in many different categories. Yes, there are still high paying jobs in IT, for example, but anything that can be shifted will be shifted to lower cost centers where ever their location.
- The value of music has dramatically fallen. I used to pay nearly $20 for a CD with about 10 songs or about $2 per song. Now I use Lala.com and pay just 10 cents per song for lifetime streaming rights. And there are many, many examples of free or almost free music available. Thanks to the Internet and Internet based technologies such as streaming data and browser based MP3 players — music is so much less expensive than it once was. It’s an incredibly deflationary trend made possible by the Internet.
- Movies and TV shows cost less to watch. I used to pay Comcast about $60 per month for basic cable service. I ditched the service more than a year ago and watch TV programs through a variety of Internet based services such as Hulu.
Instead of renting movies from my local video store at $4 each, I switched to Netflix, which lowered my DVD rental costs. Even better: Netflix Direct — I watch tons of movies — as many as I want for just $8.99 a month. My per movie costs have fallen dramatically.
- Newspaper and magazines are available online for free. I used to subscribe to daily newspapers and many magazines. I don’t anymore yet I get nearly the same access to those products for nearly free - just the cost of my ISP. I save several hundred dollars a year - that’s a lot of value taken out of the publishing industry. Take a look at books and the disruptive power of Kindle and vanity publishing web sites.
- Graphics and design work. There are plenty of sites where you can post a project and have designers and artists compete for the work. This drives down the income of designers and artists. Their work is devalued.
- The cost of distribution is a lot less in many industries thanks to better management of inventories and improvements in the management of supply chains. Again, it is thanks to Internet based applications that enable greater efficiencies and thus lower costs of doing business resulting in lower prices for products and services.
- We don’t have to buy much software anymore because there are free or nearly free applications available online. And this trend will continue. For example Google buys up software companies and then offers those product online for free — this instantly devalues competing software applications.
- The open source software movement has created tremendous amounts of value by devaluing software that you used to have to pay a lot of money for. Operating systems and many other software components are available for free and supported by a large community of developers distributed around the world. Again, the Internet has enabled this type of distributed development to occur.
- Journalism jobs are fewer and pay less because there is more competition, there are more people willing to do the work for less money. Reuters, for example, is dramatically expanding its Indian based editorial teams. The same trend is seen in many other media professions. For example, my colleagues in video production are not able to get the rates they once could, and you see this again, and again. The amount of work that needs to be done hasn’t changed, it has gone up, but the rates have gone down. Also, each single job is far more productive. For example, to produce a video would require a large crew of specialists and hefty costs in studio time and the use of expensive equipment. Video cameras, and editing equipment is a fraction of what it used to cost and the work can be done wherever, and whenever, thanks to the Internet. Again, the value of video production has fallen dramatically.
- There is devaluation in public relations. Fewer people can do the work of more people. Smaller teams can do the work of larger teams thanks to Internet technologies.
- Magazines staffed by just one or just a few people can pull in the readership of what used to be a 30 plus person magazine editing and production team. I’m an editor-publisher-reporter-photographer-videographer-webmaster-and-a-dozen-more-hats single worker producing, publishing and distributing Silicon Valley Watcher and I get a larger readership than the magazine I worked for when I first started in this business, and that had a 25 person editorial team. I also have the equivalent of what used to be a large data center out in the cloud for less than $100 a year — not to mention all the free open source software I use.
- Telephone communications are dramatically less expensive today thanks to services such as Skype and other VOIP based products. It used to cost me nearly $2 a minute to make a transatlantic telephone call — now it’s about 5 cents a minute or even less. The value of a transatlantic telephone call has been devalued.
- Advertising is dramatically less expensive today. You have to pay about ten to 20 times more for a print advert in a newspaper compared to a newspaper’s online advert. That is true across the board — todays advertisement costs measured by any metric — are much less today. And this is disrupting the entire media industry from print, TV, radio, and online.
Take a look at the classified ads business. The Pew Center reports that in 2000 this was a $19.6 billion a year business. In 2008 it had fallen to $9.9 billion because of online classified ads — mostly Craigslist.
And Craigslist doesn’t charge for the vast majority of its classified ads. Craigslist has managed to pull the majority of nearly $10 billion out the classified ads industry in a single year using an operation staffed by just 30 people. There are estimates that Craigslist could take in $100 million this year.
Again, we see the power of the Internet and how it devalues everything it touches. In this case, Craigslist’s use of Internet technologies has managed to transmute $10 billion in value into $100 million. It’s the opposite of the dreams of alchemists - Craigslist has managed to transmute gold into lead. That’s what the Internet provides — the means to dramatically devalue an existing industry.
- There are many more examples. I’m sure you know of many examples in your line of work — where the use of Internet technologies has enabled a massive devaluation in the work being done and the products and services produced.
With so many examples to be found, the cumulative effect will be shown as a deflationary trend. Do we see it today? Yes, we do see a large deflationary trend. Is it caused by the use of Internet technologies? Yes, a large part of it is being caused by Internet technologies but it is not clear how much because we are in the midst of an economic crisis.
However, it could be argued that the economic crisis was caused by the use of Internet based technologies, which enabled loans to be made more quickly, which enabled the transfer of risk to third-parties thousands of miles away, and which enabled massive amounts of speculation in a diversity of markets from oil to real-estate. The whole process was made more efficient through the use of IDBTs.
Yes, Internet technologies do enable the creation of new markets and services that didn’t exist before. Take virtual worlds as an example. But by and large, if something can be digitized it is vulnerable to being devalued by IDBTs.
Is this a bad thing? No, it just is what it is, just as gravity just is - neither good or bad.
Where it will leads us as a society is interesting. If we have the means to produce just about anything, product or service, for a tenth of the cost and make it 10 times better — we have the means to build a tremendous amount of value that we can all share in.
However, our society is not set up for sharing — even though the Web 2.0 world is all about sharing every online photo, text, video, song, etc.