Or put another way – is it inevitable that markets as we understand them will shrink in their “dollar” value as we go through the digital industrial revolution (although the “actual” value market as seen from consumer may not shrink and even grow).
This , of course, would have major consequences for things like stock markets – suggesting a continued future of volatility – as markets continuously correct themselves to accommodate this shrinkage.
Digitalization of the newspaper & music industries have decimated these markets and related markets such as Tv and film are under massive pressures and could go the same way.
Is this also our futures in the Industry segments so eager to embrace Industry 4.0?
When newspapers first faced the digitalisation of their markets -the assumption was this was a zero sum game and the market tommorow was the same as today -the cake stayed the same – the digital disruption would just reshuffle the deck of winners & losers .
This seemed an eminently reasonable logic. The first wave of digital transformation was a step change in productivity – elimination of the whole layer of print production -journalists could type & then digitally send to automated print anywhere in the world – more content, cheaper production . Lets do more.
In hindsight , we could not have been more wrong – the cake has shrunk radically – maybe by a factor of 10 – and it was a bit more than a reshuffle of players sharing the pie – more like the pie shrunk , the smaller pie was shared among the players and then a whole new group of gangs moved into the neighborhood and demanded protection money (google , adblock + and the like).
It is easy to explain this as a market specific event – but what if this is an inevitable consequence of digitalization , the only question is how long it will take?
Music again seems a similar dynamic -maybe the pie is reduced by a factor of 3, not 10, as we figure out how to shore up the hemourage that is pirate copying and replace it with streaming – since music does not have the double wammy of newspapers, that is both customer & advertising revenue collapse – but otherwise a lot of parallels. TV & film as a total market seems a little more stable, but many cracks are appearing, like un-bundling of channels and streaming platforms , also wide spread pirating these media, and social media alternatives.
We can make a long list of reasons why what happened to newspapers is unique to them and digitalization of the whole market just exposed a flawed market. But we are, perhaps, just kidding ourselves and digitization of an entire market – once it has reached a certain critical mass – is fundamentally tied to the way markets work and the result is that the total market size will shrink.
Maybe the only difference between the newspaper industry and other markets is the speed it happened – they are the equivalent to the fruit fly – the fast moving consumer goods of the industrial world, in terms of seeing the effect of digitalization. Its entire market segment was one of the first where digitalization could occur across all elements of the value chain, from the product being 100% digital, consumers being able to consume digitally and customize their product , to advertisers being able to advertise digitally, to content able to be un-bundled, re-bundled & distributed digitally and to parts of the market changing to a sharing or free economy (eg news blogs).
We should treat the newspaper market like a time-lapsed video of what will happen in other markets in the future, a fruit fly experiment of Industry 4.0. Something that works at a speed that alIows us to observe the entire life cycle. We can then look at our own industries to see if we can find markers that point in the same direction.
Given this is business mangement & not a scientific discipline it will be more like a Greek philosopher extrapolating how the world works from an armchair rather than data – but today I’m sure someone will figure out a way to verify it if so inclined.
Lets build our simple newpaper thought experiment: We have 1m customers who buy newspapers at $1 each. We also have 1000 advertisers willing to pay $2000 each . So our newspaper has an income of $3m.
Along comes digitalization and explodes the access to the newspaper content. Now we have 10m people who can access and want to read some or all content, and 10,000 advertisers attracted to this crowd.
BUT – now our customers are willing to spend only $0.01 on content (maybe premium subscribers – rest will skim for free). Our advertisers are also now using targeted adverts via likes google and via adblock+ and in effect only willing to pay $20 each on average. Suddenly our newspaper is looking at $0.3m.
Whats happened? – our customers can start choosing to pay only if they want the content, and only that sliver of content that is of interest. Maybe they buy an app. that helps them find what they want – or get it for free – with a few paying for premium service (our neighbourhood gang effect). Maybe they get part of the news via social media and blogs. Maybe they pay a little bit in several places to get their favorite stuff directly (I subscribe to 3 online speciality publications – rest is “free” podcasts and news articles online – CNN & BBC for me).
On the other side, the newspapers have to cut down drastically in content & staff – gone are the too expensive investigations and the idiosyncratic articles – and they find out what people really like from them. To make this pay, the more limited content is then packaged and distributed out into as many forms as possible (online, hard copy, apps., tweets, resold to other channels …) and supplemented by cheap 3rd party content.
Finally our friendly gangs move in from out of town (no prior interest in news needed – but rule access from anything to anything in the digital space) – making it so easy for customers to find what they want, advertisers to get to who they want and offering newspapers access to a much wider world. Everything with a tiny cut to them along the way.
This opens up for some interesting potential trends:The “insurance” model of diverse businesses is undermined – its no longer possible to have many products (different types of own content by wide range of journalists) where popular content cross-subsidizes minority “products”. Only popular content can survive.
Content also starts to survive by becoming highly specialized so the few with interest pay the price (handcraft prices).
Or the newpaper focuses on producing a narrow but mass market appeal content and distributing it in many other outlets – eg weather news.
Platforms also emerge controlling large parts of the consumer space (winner takes all) but rarely from incumbents and always a radically simplified cost model often building on high repetition globally of (cheap) successful own formats and / or heavy use of social content or advertiser friendly. Newspapers try and survive also building platforms mixing own and 3rd party content. In other industries (eg Netflix for film/ tv) we see a potential for a few winners to take all with this – but newspapers seem stubbornly fragmented and regional, so never getting the scale.
And customers ? yes choice explodes – but many special interest areas suddenly require separate payments , apps for access, online subscriptions, direct payment for single content streaming. Choice of quality products may even be going down (fewer content widely repeated) and cost to the consumer may not reduce as much as thought once all the small payments are added up (our “protection gangs” are not for free at the end of the day).
Does this mean consumers live in a poorer world? not necessarily – as the third element emerges (besides professional content and platforms ) – that of a social media and sharing economy alternative. Blogs and hobbyists – maybe not all be for free, but willing to work and share closer to “at cost” , also building quality and credibility, valueing reputation and widespread visibility (lots of followerers) i.e. other currencies emerge other than just the “dollar” currency.
The effect is the “dollar” market shrinks – but the actual accessible “value” market may indeed grow. It is this conclusion that is at the heart of our thought experiment – and these trends and conclusions have a potential to be true across all markets that begin to digitalize at scale across their value chains – ultimately also industrial markets – causing all “dollar” markets to shrink but not necessarily the “value” market.
To give an example – lets run a thought experiment of the future in discrete manufacturing. We see a significant scale up in 3D printing and simulation tools. As we get closer to 3D printing for manufacturing (additive manufacturing-AM), Roland Berger (the consultant company) suggests that mechanical engineering will start to look like software engineering. Designs will be done virtually, and straight to 3D printed products. I don’t see this as universal but even if not by AM, manufacturing will be flexible and able to mass customize more readily. Factories will be able to produce a much wider range of goods from digital inputs (designs and all associated info to produce them). More simple areas will automate the design process completely based on inputs from consumers (Customers simulate what they want in easy ways & all design elements and info is created automatically thats needed to produce them – then “generic” factories produce the design from the data). Once this occurs – the deep technical knowledge driving cost advantage will erode, as we have seen in our newspaper thought experiment. Factories don’t have to be tied to any one company – they can be platforms to produce many things at need. Designs are now all digital. Piracy means even the best can be copied. Social / hobbyists will create their own digital solutions and share them via social / sharing economies that will be as good as company offerings and consumers can also choose these and get them made anywhere. I can go on . Conclusion of this version of the thought experiment will be similar to the newspaper industry. Variation and availability from the “dollar” market will have to reduce – less money – focus on only what sells best – replication across platforms (“global template products”?) , consumers get less choice in core templates/types of products, but can mass customize these template products to their hearts content . The sharing economy will take up some of the slack and the overall effect may be the market itself does not shrink so much (or grow – who knows) in eyes of the consumer , but the “dollar” size goes Down.
Can we reverse this – no. The old truth is you can’t stop progress. I would even argue companies will pour money into being more digital and accelerate the trend even though they start to see there will be an overall reduced market. This is because, in the digital world , a new type of winner is possible – the one that takes it all. We see the mega platforms of Google, Facebook, Amazon and Apple seemingly being able to continue to leverage their power. So any sane CEO will push hard to make sure its their company that tries to take it all. Its like we have a digital lottery where the illusion is we can all walk away multi-millionaires – even when all logic and math show that statistically you are wasting your money. As long as we can point out now and again one winner – we forget the many who lost.
Will we see this soon? – unlikely – as it starts to hit – it will also enable under-developed markets like Africa to accelerate as prices drop and accessibility goes up – and this will maintain markets for a while, if nothing else. Also many markets have very long life cycles (eg. we don’t replace housing stock that fast – and renovation and retro-fit also is not always that fast).
Thoughts & comments welcome
Njal
(NOTE: the views expressed here are my own and do not represent the views of the company I work for)