The Internet Destroys Profits

The Internet is a force that levels communication, distribution, information, and access. Controlling these four things has been the foundation of business.  In the past if you could control one of these things better than your competitors, you had an advantage. The Internet removes this advantage, and thus, levels money out of practically every industry it touches.

It is my opinion that both the individual and humanity as a whole benefits from the Internet. I also think that particular businesses have capitalized on the unique opportunities the Internet presents.  From a macroeconomic standpoint I worry that the net result of the Internet has not been positive for business.  As the Internet increases efficiency, the efficiency creates unmanageable data overload. While it drives down costs, it also drives down profits.  It increases communication but it demands instantaneous, around the clock responses.  It allows for quick and cheap distribution, but the distribution channel can no longer be controlled. Digital files can be infinitely replicated at zero cost, but it drives down the value of the contents to near zero.  It provides businesses with vital information, but that information is also available to competitors and consumers.  It gives us access to the world, but it prevents anyone from restricting access to anything.

It’s clear that this has happened with music, movies, television, print, cable, auto, telecom and real estate.  I’m sure there are dozens of industries that have not had their profits ground out by the Internet.  I would theorize that this is only because the Internet has yet to set it’s sites on that industry.  Where the Internet touches, profits shrink.  You can think that your industry will be exempt, and you might be right. Chances are it will be swept under; it’s only a matter of time.

This may seem like an odd thing to say coming from someone who is a proponent of the Internet.  The Internet has reshaped the business landscape and redefined the profits that can be expected.  It doesn’t seem like the business world has fully adjusted their expectations.  I keep hearing the question asked, “How can X industry return to its former level of profits?”  In response the industry inevitably tries to generate more revenue with the same business model and it doesn’t work.  It’s possible that once the Internet touches an industry, pre-Internet revenue levels will never return.  The only solution is to change the size of company so it is in line with the profit potential.  For example, you don’t need a massive building with hundreds of employees to sell music.   It is very likely that this is the dawn of the small business age.

Of course, there is the chance that for every industry with destroyed profits, there is an entirely new business model that the Internet has enabled.  At the moment, the Internet may be a net negative for business because those new possibilities have yet to be realized.  What’s more likely is that some industries will discover a new model, but most will have to reorganize around adjusted expectations.

Posted on August 24th, 2009 at 12:25 by Jason Schwartz in Business Model, Internet, Macroeconomics

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  • It’s possible that once the Internet touches an industry, pre-Internet revenue levels will never return.
  • AlysonAmber
    You are right when you say digital files can be replicated at zore cost, I guess this is the problem because we didn't find any methods to stop this.Internet can be very useful when it comes about marketing,affiliate these are the things you can actually do on the internet and keep your self in top.Music,videos will always represent a bad profit business because they can be replicated and it is sufficient that one copies and shares something that can only be found on your web site.


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    hughesnet satellite internet

  • What about books? Why don't we have cheap or free books on demand? The answer is execution. Amazon figured out how to make lots of profit from ebooks with the Kindle by investing in and embracing new technology, executing fantastically on new products and working with publishers.

    Music and newspapers didn't do this. What if the record labels had gotten together and built the iPod before Apple did? What if newspapers built the big Kindle, and make their operations a lot more efficient? *Old* models that refuse to chance get their profits eaten into on the web... but Craigslist is immensely profitable compared to newspapers b/c they embrace new models.
  • Craigslist is immensely profitable, but not when compared with the former size of the entire classifieds market. One site took out an entire market and in the process captured some of the revenue for themselves. It seems unlikely that the classifieds market as a whole will ever get back to its former levels of profitability.
  • The global profits of classifieds will probably actually go up.

    Think about it this way... margin is def up... what's the margin at c/l
    vs the margin of print classifieds as a whole when you take into
    consideration the amount of print distribution and manufacturing
    overhead it has to eat plus the markets that online classifieds can open
    up. Not only do people post more classifieds than they ever did before
    b/c it's so much easier, but they can do it for much smaller things now.
  • It's true that Craigslist increased the number of people who post
    classifieds and the types of things they post them for. In that sense they
    increased the market for classifieds.

    If Craigslist managed to charge the same as print for those postings, then
    margins would be up. Instead they dropped the price to zero for most and
    are charging less for the categories they do charge for. Costs are lower,
    but so is revenue.

    They are projected to hit $100 Million this year. They effectively shrunk
    the entire classifieds market to $100 Million, unless you think that the
    print classifieds market was smaller than that to begin with.
  • Most of that was profit... and since people are selling cars and other
    items formally sold through newspaper classifieds, you have to add those
    in. The online classifieds market is way more than 100m in profit.
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