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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