Creation and Destruction of Value in Technology

Media Companies made $18 Billion revenue in 2005 on classified ads, plummeting to $9 Bill. in 2008, loosing half of their business, because Craig Newmark and his Craigslist arrived on the scene providing free classified ads. Business Analysts estimate craigslist revenue in 2008 at $81 Mio. If you put this together, and see that $9 Bill. in economic activity have been replaced with $81 Bill., this would mean that productivity in classified ads as increased by ELEVENTHOUSAND PERCENT in three years. When I read that macroeconomists in major magazines, such as businessweek, expect the economy to rebound, because labor productivity increases at an unsustainable long term rate, I have my doubts, I’m deeply concerned that they have it wrong this time.

I’m not a doomsayer, I really like technology, but somehow it hit me last week when I saw Motorola’s ads about the new Droid phone. I have been a fan of great technology my entire life, nice Audio Systems and Video Systems were mandatory in my house well before computers became usable and affordable. As Computer technology and the Internet developed, it created new fields of work, new products we never imagined before while eating traditional companies that were not able to adapt to the new environment. Search Engines replaced largely yellow pages, Skype is assaulting traditional communication companies, and the traditional photography on 35mm is all but dead.

Since last month, I have been enjoying a Network-Blue-Ray Player at my house. Not that the industry really gets me to shell out 30% to watch a movie on blue ray now instead of regular DVD, no. I use it to stream live video from the media store of Netflix, right to my TV. That is technology that is not even widely adapted in the US. They provide now 1000s of viewing choices I can watch every day for the same monthly fee I pay for them mailing me movies. Here are the economics of watching a season of your favorite TV show:
- in 2003 you rented a 5-disk season for about $3.50 a disk at your local videostore. Total $17.50
- in 2006, you rented the same 5-disks on a ‘one-disk-at-home’ plan for $9.95. Lets assume you your finish the season in a month, you saved about 7.50 or about 35%
- In 2009, you watch that season entirely live IN ADDITION on getting your movies by mail, for the same price. You can do this easy in two weeks, so even if you do not have any movies mailed to you, and just watch online streaming from Netflix, value increase again is tremendously though only of theoretical nature, at least 50% less costs again though.

I wonder why Netflix is doing this? It has won the war against Blockbuster and now drops a nuclear bomb on the competition? It cannibalizes its own sales, by offering streaming instead of selling ‘more-videos-at-home’? No, if they don’t do it, somebody else will, and it would kill Netflix as fast as it has grown.
Last week the Droid phone arrived. It provides a build in free navigation system based on google. I have no doubt that the navigation piece is really good and will create a huge problem for the existing vendors in the navigation field, such as TomTom and Garmin. Companies whose prosperity evolved with widely available GPS signals and cheap receivers will now compete with ‘free’ as Media companies did with Netflix. The productivity increase is not anymore hitting the older and established companies that are not able to adapt to the changed environment, it starts hitting those that are fairly new and became fairly recently large organizations. Consumers are not able to consume all technologies as fast as they are coming at them, which will eventually throttle some of the growth we see.

I think we are in trouble as long as we destroy that much economic activity at such an amazing pace, that today’s numbers of productivity gains may be misleading and not trustworthy anymore. At least not as an indicator for future hiring.

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