The Internet devalues everything it touches . . .

The Internet devalues everything it touches . . .

Summary: 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.

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TOPICS: Software, Browser
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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.

Topics: Software, Browser

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104 comments
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  • Cloud Computing: The low cost arrived to IT business?

    Hi Tom,

    Great analysis, and of course I agree.

    And dare to say that Cloud Computing is also the IT business ?low cost?:

    http://www.cloudviews.org/2009/05/cloud-computing-the-low-cost-arrived-to-it-business/

    MariaSpinola
    • Yes...

      Thanks Maria. Yes, cloud computing is definitely a disruptive technology
      that reduces the costs of running business IT. That's why it is
      succeeding...
      foremski
    • Devalues, or free-marketizes?

      Or, in other words, un-artificially inflates?

      The Internet brings us the opportunity of genuine free markets on a global scale.

      That's why nothing is being done about a certain monopoly - embedded interests and all that.
      fr0thy2
      • Commoditizes

        The Internet takes classes of goods and services that were at one point highly differentiated and tends to remove meaningful qualitative differences.
        RationalGuy
    • No wonder Nasdaq collapsed

      nt
      LBiege
  • RE: The Internet devalues everything it touches . . .

    i don't think it can devalue intellect.(like yours,for instance).great article,lots to ponder.
    snakecharmernyc@...
  • Bang On

    Great blog. I would add education to your list. My children attend internet based distance education. The internet is an amazing educational resource at almost zero cost.

    The industrial revolution (perfected) is the foundation of our current wealth. We have been talking about the electronics revolution for about 50 years, but mostly in the context of circuit miniaturization, power and cost. Maybe when historians look back, the real electronics revolution will be what you just outlined. It may end up having a similar impact to the industrial revolution. It is fascinating to watch all the status quo vested interests fight this revolution. Ultimately they will lose.

    Interesting times.
    Economister
    • Yes, it is fascinating to watch...

      The Telcos and Cable TV companies have put up a good fight so far and
      seem to be OK. That's despite there being lots of technology out there
      that would have made them obsolete years ago. Plus, they have the
      government on their side...
      foremski
    • lose

      Don't wanna sound pedantic, but 'loose' can be
      screws and women. Sorry--it's just not the first
      time I notice you spell it this way.
      emk
      • Don't mind - thanks (nt)

        nt
        Economister
  • Devalue - completely wrong word.

    I agree strongly with all you say bar the use of the word 'devalue' and the merits of 'devaluation', where I disagree completely.

    The logic of your own definition cannot be faulted but I think your choice gives completely the wrong impression. It would have been far more accurate and helpful to characterise the Internet as a technology for increased efficiency and cost reduction. Why define a term with the wrong connotation ?

    "Like gravity - neither good or bad". Completely wrong on all counts. It is not a basic force and like any technology may be modified or superceded. [On the other hand I would be very interested in a demonstration where you proposed to turn gravity off or perhaps travel back to a time when gravity hadn't been 'invented' and so didn't exist;-)]

    More importantly like any invention it has the potential to be good or bad (think atomic power). Your neutral classification should be replaced with a desire for exploitation of efficiency, not least to preserve the environment and free man's creativity from those physical constraints which cannot be overcome [er, like time and gravity ;-]

    Otherwise you stand like King Canute and major corporations on the seashore watching the tide. Unfortunately a massive volcano has erupted mid ocean and not only will you get wet feet but the tsunami, approaching at 100mph, will engulf you.

    No, the Internet heralded The Information Age, the 5th industrial revolution. Period of reforms following revolutions? 60 years. On past form the industries you point out will either disappear completely or have been massively transformed in the next 30 years.

    My guess? Some will be swept away and Governments will finally act to remove the remaining monopolistic incumbents once the dark net reaches critical mass.
    jacksonjohn
    • agreed, competition doesn't devalue

      it makes it harder to charge big bucks for trash. Rather than holding back anything, which the article's general tone suggests, this drives things forward much much faster.
      stevey_d
      • That explains a lot of

        toothpaste, drywall, pet food, toys, etc...
        HypnoToad72
    • Thanks...

      ...for writing the reply post for me. Horrible use of the word value.

      I do NOT agree with everything either. There is an insane 'race to the bottom' of cost savings. It's asinine. A good example is the airlines retrieving, recovering, returning and remediating all their call centers from South Asia. They got burned badly. Same for a lot of other software makers, hardware companies, and so forth and so on.

      In fact, the Internet INCREASES the VALUE of things it touches, if done correctly.

      Great article and responses. Thanks to all.

      -j
      jheuristic
    • Exactly

      The devaluation of old businesses becomes
      increased value of the businesses that use the
      Internet to their advantage. Money isn't lost
      because of the Internet, it just shifts who's
      hands its in (or stays in).

      For example: the Craigslist $100M industry vs.
      the prior established $10B classified industry.
      Yes, the newspapers and other media are losing
      $9.9B of what they used to make, but that $9.9B
      now stays in the hands of the advertisers --
      increasing their profits. They now have more
      money to spend in other ways. In the end, no
      aggregate value was lost to this new economy.

      The Internet is a disruptive technology, not a
      devaluing one.
      Spats30
      • Sorry no I don't agree...

        To say that 9.9 Billion all of the sudden stays
        in the hands of the advertisers is actually
        quite wrong.

        The 9.9 Billion I contend actually disappears,
        and is not available because the advertisers
        themselves have to lower their costs.

        Saying that the 9.9 billion stays in the
        economy assumes a neutral or inflationary
        economy. We are not in an inflationary economy
        we are in deflation, thus money is destroyed
        never to see the light of day again.

        Thus the Internet does indeed devalue
        everything it touches. And like the article
        said it is neither good nor bad. It is what it
        is just like gravity.
        serpentmage
    • Fair points..

      Value does have a semantic problem but it is still the better choice,
      imho. Economists try to define it further with "exchange value" and
      "use value" but that muddies the waters...

      Basically, Internet based technologies, in a similar ay to all prior
      successful technologies, enable work to be done for a lot less. If you
      can trap that value creation, as the Telco and Cable TV and proprietary
      companies such as Apple and MSFT do, then you can make a lot of
      money and employ a lot of people.

      And yes, I agree, a massive Tsunami is on its way -- but it's on;y a
      Tsunami if you live on land (legacy bedrock) if you float on the ocean
      you won't be hurt :-)
      foremski
      • Sailors drowned

        "It's only a Tsunami if you live on land (legacy bedrock) if you float on the ocean you won't be hurt."

        Perhaps not - if you can withstand currents of 100mph and 100 feet high tidal waves.

        Various people have talked about the newspaper industry and journalism. It is a dying industry. I do not wish to walk to the newsagent on Sunday morning to buy the Times, to wash my hands of print after reading it, to dispose of the waste paper. It is not effective to chop down trees, print 1 million copies and ferry them to all corners of the country and world ... when we have the Internet.

        I look at The Times, The Telegraph, The Guardian, ... Le Monde, Das Welt ... even the NY Times ;-) on my 30" monitor.

        The supporting revenue model through advertising is collapsing and with it the financial viability of the industry. OK blame Google, but its happening.

        Also happening are iPhones, Kindles and touch PC's. They are the 'natural' replacement for hard copy.

        In another column you lament that the industry has not found a new business model. It is a futile cause. It is as futile as campaigning for canals after the invention of the railway, railways after the invention of the motor car and aeroplane. The Internet to digital media is like the invention of matter transfer to physical media, so great is its transportation value. [The most damming question following the last tsunami disaster? How come there was no Internet warning system for low lying coastal villages - it took 3 hours for the shock waves to traverse the ocean and it should have taken 3 microseconds to deliver a warning.] To see what must be destroyed think about what would happen to cars and aeroplanes if someone invented a 'transporter' a la Star Trek.

        The new business model for newspapers is very simple: shut them down in a controlled manner before they crash. Good writers and photographers can work for Google, Yahoo, ... BBC, Sky TV, ... the printing presses can go to The British Museum.

        Get it done so that nobody gets hurt. 30 years left.
        jacksonjohn
        • Work and Workers Devalued

          [i]"I look at The Times, The Telegraph, The Guardian, ... Le Monde, Das Welt ... even the NY Times on my 30" monitor."[/i]

          You will only be able to continue to do so until the above-mentioned companies go bankrupt and the work of journalists is so devalued that they can make more money doing something else (or doing nothing) other than finding and reporting the news ... unless you think they can be forced to turn out good content for free at the point of a gun by some government agency.

          You will then only have the narcissistic ramblings of various bloggers.
          Too Old For IT
      • Global Digital Emporium

        The new business model that consumers would like I call the Global Digital Emporium - beta version available from an infamous site in Sweden.

        Instead of trying to preserve each digital industry separately (news story, TV, photograph, book, musical work, art print, ...) it is time for them all to be combined. In the same way that a collapsing star accretes all matter around it ... so TGE would be a distillation of all that has been.

        I would also include the transportation mechanism itself - the ISP's and Telecommunications companies - and the financial mechanism for distributing money ... in this collective: the whole model cannot work without a combined plan. [Good example would be the gambling industry in the UK pre and post Government-led reformation.]

        Using your terminology this 'devaluation' is a natural occurrence following disruption. There are only a few obstacles in the way: Microsoft, Adobe, ... the big four media giants ... all digital rights holders ... the money collectors (who seem to think they should get a big cut for moving a few bits around) ... ISP's (who are not at all worried by piracy since it has fuelled their broadband sales).

        That's why I think Government action will be required - to knock heads together: I don't think the global corporates will ever relent.
        jacksonjohn