Tuesday, April 25, 2006

Falling Rate of Profit

I don't seem to be able to go anywhere on the blogosphere without tripping over a blog called something-or-other 2.0. (The emergence and propagation of 2.0 makes it an interesting example of what Richard Dawkins calls a meme.)

Following a link from Umair Haque's post on Edge Competencies and Media 2.0 Profit Pools, I reach something called Publishing 2.0, written by Scott Karp, who asks What If Media 2.0 Is Less Profitable Than Media 1.0? Scott Johnson agrees: Of Course Media 2.0 is Less Profitable, and a comment on ScottK's blog by Bob Aman suggests that Everything 2.0 is less profitable than Anything 1.0.

There are two different issues here - one micro and one macro. Umair focuses on the microeconomic - which media strategies will be (relatively) more profitable. ScottK makes a more sweeping prediction: "total spending on marketing and advertising will shrink as marketing 2.0 proves to be far more cost efficient than marketing 1.0".

But what of the wider implications of Bob Aman's comment for the software industry? Companies typically invest in information technology in the hope of greater efficiency and effectiveness. SAP recently claimed that "companies that run SAP are 32% more profitable than those that don't" - but even if this is true (which Nucleus Research challenges), it is not easy to prove cause-effect. Andy Hayler (of IT vendor Kalido) calls this A Bit Rich, A Bit Poor.

One of the things that puzzled Marx was not why profits fell (the falling rate of profit had been identified by earlier economists including Smith and Ricardo) but why they didn't fall even faster (see SPGB pamphlet). The same question now applies to IT - why has productivity risen so little, despite massive IT expenditure.

Part of the problem here is the relationship between macro and micro. One firm's cost saving is another firm's lost revenue. Doesn't this mean that if everybody suddenly became more massively more efficient, for example if IT suddenly started delivering real ROI across the board, the economy would collapse? If so, it's probably just as well that IT has never delivered quite as much efficiency as the salesmen promised. There have always been well-informed observers expressing doubts about the benefits of IT, from Paul Strassman to Nicholas Carr.

On this argument, we shouldn't be surprised if Industry version n+1 is less profitable in total than Industry version n. In a 2002 study, McKinsey identified only six industries in which productivity has increased : retail, wholesale, securities, telecommunications, semiconductor and computer manufacturing. But these industries are characterized either by massive ongoing centralization (retail productivity statistics are one-sided because they only show the big chains and not the struggling mom-and-pop stores) or by unlimited growth in product demand (Moore's Law assumes an exponential demand for chips).

Let's come back to Media 2.0. What exactly is the choice facing the media industry? Perhaps the internet erodes the profitability of Media 1.0 even if no media companies are willing to try Media 2.0. In which case, Media 2.0 starts to look a bit more attractive.

1 comment:

Bob Aman said...

Well, my thoughts were mostly along the lines of:

Everything 2.0 tends to up productivity through simplicity, good design, and convenience. But there are few exceptions to the rule that people aren't willing to pay more if they think they are getting less. Sadly people don't use productivity as the metric, they think about number of features.