Commoditization conversations continued

6 thoughts on “Commoditization conversations continued”

  1. Hi Om,

    “sitting in the ivory tower of academia”

    Firstly be careful with this, there is some science and art involved here. I mean would you call a pipework specialist or a nuclear physicist in if you had a nuclear reactor going AWOL on you?

    Now I think Noam has hold of a problem here, and it is a big one. Again I think there is nothing exceptional in what he says for an economist specialising in new economy phenomena. Hal Varian says the same thing, and probably a lot better. Brad Delong has this very interesting and neglected piece here:

    “A market failure exists when market prices cannot reach a self-sustaining equilibrium”

    This statement itself is not helpful in the present context, since one thing we won’t be talking about here with the accelerating pace of technical change is equilibrium of any kind, let alone a self-sustaining one. So we need to look for new metaphors. We need Kurzweil and Schumpeter more than we need Samuelson here.

    “All these are symptoms of a chronic price deflation that shows no sign of abating. It is a good deal for consumers, including those of developing countries, but it spells disaster for providers. The price for their information or distribution is dropping towards marginal cost, which is close to zero and typically does not cover full cost.”

    This is his key point, a conclusion Kurzweil has also reached (me too). I think you can live with rapid price deflation provided the market demand accelerates fast enough to compensate volume for price. In some segments, of course, this is entirely possible (and this is why you can always say look at X, he is making money, but this is not addressing the argument at the level at which it is being put. It is a global macro argument. I would even say that you need to look at the OECD demographics here). The big markets (in terms of numbers of people) for the information products are those relatively young fast developing societies like India and China. But here PPP’s get in the way. This is the connundrum we have.

    “Volunteerist activities such as open-source software, shared information or public hotspots will not solve the problem, because they, too, are subject to the instability known as the “tragedy of the commons”, in which individuals’ free-loading and over-utilisation destroys the communal effort.”

    I think he’s out to lunch on this argument. Sure the new amateur-professional will not solve the problem he is presenting, but the “tragedy of the commons” applies to fixed resource, diminishing returns phenomena, not network-driven increasing returns ones. I am afraid the guy doesn’t understand basic network theory.

    “Perhaps the most effective thing that government can do instead of interfering in the information sector is to help diversify the economy to a more balanced portfolio.”

    I think the best that can be said of individual nation-state governments, if we look at ideas-driven information products globally, is that they are most decidedly ‘out’. This goes way beyond them. You let a US government try to stop fat-pipe driven outsourcing, and then watch what happens.

    As they say, we will see.

  2. The failure has been in creating new markets, not in halting the inevitable advance of commoditization. In a disintermediated environment like the internet where collusion can be routed around commoditization of existing markets must take place, and rapidly.

    The upside is that the ready access to markets of the historically more innovative smaller players enables the potential for the creation of new markets, and value-adds to existing ones.

    The reason why this potential has not been tapped is this: lack of a public identity infrastructure for consumers. A commodity market implies goods standardization and price competition. Why is this taking place on the internet? Well, first of all in a text-based environment it is technically much easier to compare on price. Secondly, and most importantly, personalized, value-added services and marketing can only readily take place amongst the less innovative larger players where it is possible to invest in expensive personalization and data mining services, and then only to a limited extent since the data is not cross-domain (if you are selling pet-food you can only guess what type of pet they have).

    If people woke up to the enormous market creating potential of a public identity infrastructure that utilized cross-domain, consumer-driven agent technology I have no doubt that price competition to a large extent would give way to product differentiation.

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