Ruthless Efficiencies

As read­ers of this site know, I strongly believe that we are now in the mid­dle of a major over­all shift in eco­nomic trend that hasn’t been seen since the intro­duc­tion of the paper bill in late 1700s eng­land. Seen under this lens, I’m start­ing to think that there may be some truths to the claims that some of the tra­di­tional indus­tries are mak­ing that their busi­ness is get­ting hurt by new tech­nol­ogy. Their busi­ness is get­ting hurt but it’s not because of any par­tic­u­lar evil on the part of Inter­net com­pa­nies. The truth is that the rea­son those indus­tries are start­ing to suf­fer from the prop­a­ga­tion of Inter­net tech­nol­ogy is that their tra­di­tional busi­ness mod­els were based on inn­e­fi­cien­cies in the market.

The Music Industry

Take, for exam­ple, the music indus­try. Tra­di­tion­ally, the music indus­try has been based on aggre­gat­ing mul­ti­ple songs on a piece of media. Every few decades, they would ben­e­fit from the intro­duc­tion of a new tech­nol­ogy (for exam­ple, shif­ing from LPs to 8-tracks, then to cas­sette tapes, then to CDs) as peo­ple had to basi­cally pur­chase the same good over and over again when they upgraded their equip­ment. Then came the con­cept of a dig­i­tal track avail­able via down­load. The music indus­try is try­ing to resist that change because the shift from sell­ing pieces of plas­tic at a pre­mium to buy­ing indi­vid­ual tracks hurts them in two ways:

• first, they now have to ensure that every track they sell has the poten­tial of get­ting some buy­ers. Gone are the days of pack­ag­ing some sub-standard prod­uct with some bet­ter prod­ucts in order to aver­age out the dif­fer­ence. Now, every track has to fend for itself.
• Sec­ondly, they can no longer rely on tech­nol­ogy as a way to get sell the same track again and again to the same people.

So, of course, they are resist­ing the change. The issue they have with MP3s and down­load­able music does not have to do with peo­ple shar­ing things ille­gally (as peo­ple have been shar­ing music ille­gally since the first days of record­able media) but rather because dig­i­tal music has the poten­tial of mak­ing their mar­ket a lot more effi­cient. Now that goods (in this case, songs) are parceled out in their most atomic way, there is no room for them to repack­age them into some­thing big­ger that may be 10 per­cent good and 90 per­cent use­less. Their approach to fight­ing things, of course, is to sue and attempt to cre­ate a new closed sys­tem through the use of dig­i­tal rights man­age­ment (DRM) in order to pro­tect their advantage.

The adver­tis­ing industry

Another indus­try get­ting hurt by the Inter­net is the adver­tis­ing busi­ness. Tra­di­tional adver­tis­ing busi­ness have been based on sell­ing a gen­eral audi­ences to adver­tis­ers. The model, how­ever, was based on the con­cept that some per­cent­age of the audi­ence would buy the prod­uct. What was always in ques­tion, though, was how much that num­ber was. Then came the Inter­net with its easy to mea­sure model. Ad ban­ners were mea­sur­able but response rates were low. Then came google, with its rich con­tex­tual adver­tis­ing model and its offer to charge adver­tis­ers only for the clicks they received. This started to change expec­ta­tions as to what is now expected of adver­tis­ing. As a result, adver­tis­ers are becom­ing more demand­ing of tra­di­tional media, requir­ing more infor­ma­tion about the effec­tive­ness of their pur­chase. Tele­vi­sion, news­pa­pers, radio are now con­sid­ered less effec­tive, because they can’t pro­vide the rich track­ing data that the inter­net does. The net result of this is that adver­tis­ing is becom­ing more effi­cient. Along with that effi­ciency comes the fact that less dol­lars will be wasted and there­fore less dol­lars will be spent. Because expec­ta­tions have changed, adver­tis­ing is suf­fer­ing. Their model is evolv­ing and they’re hav­ing dif­fi­cul­ties adjusting.

The phone industry

The Inter­net is also start­ing to hurt the phone indus­try. The recent announce­ment by Gizmo that they would offer free calls is just another thing high­light­ing how the phone com­pany model is bro­ken: tra­di­tion­ally, phone calls have been very cheap to deliver (in an order of mag­ni­tude much lower than 1 cent) and phone com­pa­nies have been charg­ing a very large amount for those offer­ings. Voice over IP is under­min­ing that, show­ing peo­ple that phone ser­vice can be very cheap. In the US, the tel­cos are try­ing to fight this by attempt­ing to cre­ate a multi-tiered inter­net where such ser­vices would not go through. That model is doomed as mesh net­works could under­mine their abil­ity to do so. Once again, effi­ciency is mak­ing a prod­uct much cheaper. At that point con­sumers win and the remain­ing play­ers are mak­ing good money but are play­ing in a mar­ket­place that is much smaller than it used to because inn­e­fi­cien­cies have been worked out of the system.

Ser­vices

Ser­vice providers who do not need to have a foot in meat­space (accoun­tants, lawyers, etc…) have the poten­tial of being affected too. In “The World is Flat”, Fried­man argues that this type of work is shift­ing over­seas. He’s right and the long term trend has the poten­tial of shak­ing up many ser­vices indus­try by pro­vid­ing those ser­vices at a much cheaper rate. Once again, the intro­duc­tion of the inter­net and glob­al­iza­tion is mak­ing a mar­ket more effi­cient (hence cheaper costs) but leav­ing behind a much smaller marketplace.

What to do?

When this stuff hap­pens, the only thing you can do is fig­ure out how to move upstream or change your busi­ness model. Large cor­po­ra­tions are gen­er­ally slow at mak­ing those types of evo­lu­tions but it’s a make or break sce­nario: adapt or die. The process can be painful: One of the first thing to do is fig­ure out where your fat is and reduce it. This means get­ting rid of peo­ple who do not pro­vide real value. The sec­ond part is fig­ur­ing out which part of your busi­ness are highly effi­cient and invest in inno­vat­ing with those com­pa­nies. Ulti­mately, costs will con­tinue drop­ping and sur­vival will con­tinue to be about increas­ing efficiency.

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