The coming information collapse?
: Eli Noam, a Columbia professor, writes a most depressing piece for the Financial Times arguing that we’re headed to a market failure in the information economy — and, he says, that holds ominous implications for the economies of countries dependent upon the information economy (like Finland, with 35 percent of exports and 15 percent of GDP coming from one company, Nokia … or like America, eh?).
I’m not sure he’s right about this — I think, instead, that we are headed for a fundamental restructuring from hyperbig to hypersmall. But then I’m no economist, so let’s listen to him [via EditorsWeblog]:
…we need to recognise that the entire information sector – from music to newspapers to telecoms to internet to semiconductors and anything in-between – has become subject to a gigantic market failure in slow motion. A market failure exists when market prices cannot reach a self-sustaining equilibrium. The market failure of the entire information sector is one of the fundamental trends of our time, with far-reaching long-term effects, and it is happening right in front of our eyes.
The basic structural reason for this problem is that information products are characterised by high fixed costs and low marginal costs. They are expensive to produce but cheap to reproduce and distribute, and therefore exhibit strong economies of scale with incentives to an over-supply. Second, more information products are continuously being offered to users. And information products and services are becoming more “commodified”, open, and competitive.
The main result of these factors is that prices for content, network distribution and equipment are collapsing across a broad front. It seems to have become difficult to charge anything for information products and services. The music industry is unable to maintain prices. Online publishers cannot charge their readers, except for a few premium providers such as the FT. International phone call prices have dropped, and with internet telephony will move to near-zero. Web advertising prices have collapsed. Much of world and national news is provided for free. A lot of software is distributed or acquired gratis. Academic articles are being distributed online for free. TV and radio have always been free unless taxed. Even cable TV, at 20,000 programme hours a week, is available to viewers at a cost of a 1/10 of 1 cent per hour. Newspaper prices barely cover the physical cost of paper and delivery; the content is thrown in for free…
The reaction of information sector companies to the price declines is to cut costs, outsource, hedge, diversify and use new processes such as micropayments. They will try to innovate to differentiate their products. But there is a limit to the ability of individuals and organisations to absorb rapid change over a sustained period. Therefore, the main strategy will be to consolidate and cartelise in order to maintain pricing power. As a result, prices and profits rise (as well as media concentration), which will lead again to expansion, entry, and by the same economic logic, to a new price collapse, with a general downward trend in prices.
He’s right that consolidation is a market reaction to this trend (and that’s why government regulation of such consolidation fundamentally mucks with the market). We will see the big get bigger, like supernovas exploding.
But underneath them, we are seeing little guys grow on an entirely different scale.
And that’s where I think the professor is wrong: There is more demand for information and media than ever. The market is not collapsing. Yes, prices are. But so are costs. And so, some of this growing demand will be served in new ways. And the big guys will not be out of the picture.
: So, up from the bottom, there’s Nick Denton creating new media properties at next-to-no cost; he’s profitable already.
There are local, even mom-and-pop retailers who are now serving the world at eBay.
There’s Vonage piggybacking on the high-bandwidth Internet to kill the gigantic telcos with VOIP.
There will be little guys selling bits of bandwith.
There will be creative people using new, easy, and cheap tools to create very credible TV products.
But this is not mutually exclusive to the big guys. On the one hand, those big guys will find marketshare — not huge amounts, just irritating amounts at first — taken by these little gnats flying around their heads.
But the big guys will still control broadcast, cable access, theaters, retail, and other ways to get the benefits of volume. If they’re smart — and they are — they will benefit by finding new and far less expensive sources of content from all these new, little guys; they will take some of the successes of the little world and bring them to the big time. The big guys will also benefit from learning new, cheaper ways to produce what they produce (look at how FoxNews saves a fortune vs. the other news operations by just eliminating produced pieces).
No question that the information economy is undergoing fundamental change. It’s too soon to predict exactly what that change will bring. But it’s not too soon to try to figure it out and join in.