UPDATE//Feb 26: Jeff has done a great job of starting and consolidating conversations about commoditization and the recent piece by Eli Noam, which he had earlier posted. Eli Noam’s Financial Times article argued that we are in the midst of a market failure in the information and entertainment ecomies. The comments here had some great refutations from wiser economic minds than mine. I responded with this.
Here are some other points of view and reactions from the blogsphere.
* Ross Mayfield: The line between producer and consumer is being blurred. New combinations of goods are further decommoditized through the very act of consumers participating in production. But all products and industries trend towards commoditization, embrace it
* Kevin Werbach: Eli is by nature a cynic, so what he has to say is often not pleasant. But he has the unfortunate habit of being right much of the time, and ahead of the curve virtually all the time. I’ve disagreed with some of his conclusions, but I’m with him on the core insight: there is a basic structural disconnect in the economics of information industries, with painful consequences. We saw it first in telecom, where VOIP is now bringing the issue to a boil, but it’s broader than that.
* Steve MacLaughlin: Every time I talk to someone who gets a paycheck for producing content of one kind or another I always get the feeling they know the gravy train might come to an end.
* Jennifer Rice: Seems like we’re accelerating quickly on the technology front… nanotech and other innovations should help us combat some of the mega-shifts that we’re seeing.
* Fred Wilson: What is happening, as so brilliantly described by another economist, Carlota Perez, in her book “Technological Revolutions and Financial Capital” is that we are at the end of the “installation” period where building infrastructure was the recipe for making money and at the start of the “golden age of IT” where using it in innovative ways will be the key to making money.
* NEW: Nicki Scevak:The reason why his premise is flawed is that advertising pricing on the Internet is rebounding strongly (paid search is the best example of this).ððNoam misses the bigger picture. Advertising markets shadow consumer behavior. They do so slowly. Distribution costs are falling dramatically and with that consumer pricing, but donÌt be fooled because pricing of advertising inventory is rebounding
* NEW: Edward Hugh: 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. Personally I think heÌs out-to-lunch on this argument. Sure the new amateur-professional will not solve the problem he is presenting, but the Ïtragedy of the commonsÓ applies to fixed resource, diminishing returns phenomena, not network-driven increasing returns ones (and it is anyway a hotly contested issue, thank god I’m specialising in the new and not the old economy:)). I am afraid I have the impression Noam doesnÌt understand some basic network theory.
* David Isenberg: Sure, the Internet will destroy the telephone business — but let’s cheer, not wring our hands, as we email, blog, and call halfway around the world for free. And that’s not the only plausible positive outcome — there are more moderate ones. For example, the open-source software movement is maturing into an institution that could live co-dependently alongside commercial software much as the Red Cross coexists with commercial hospitals, big pharma and the HMO business.
* Russell Nelson: One thing that you must, must know, is that any economist who talks about “market failure” needs to put his feet on his shoulders and push. Markets do not fail any more than gravity fails. What would you think of a physicist who talked about “gravity failure”? Probably not much. You should think as little of an economist who talks about market failure.
* Lucas: 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.
I will keep you posted on the latest developments, and thanks Jeff for getting the whole conversation started.
6 thoughts on “Commoditization conversations continued”
“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.
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.