Forbes, 2 May 2014
We live in an exceptional moment in history. Gigantic changes are under way in society. Everything we do is being re-invented—how we live, how we work, how we play, how we communicate, even how we think and how we feel.
The first thing the Internet did was to begin eliminating the middle men, the markups and the margins of the traditional vertical value chain. Suddenly you could buy stuff online—first books and music, and then almost anything—cheaper, and often quicker, than in a physical store.
This was horrible news for middlemen and physical stores. But it was just the beginning.
Horizontal value chains
The second thing that the Internet did was create a vast new set of horizontal value chains, in which millions of people began skipping the traditional vertical channels of commerce and creating their own virtual meeting places and marketplaces with their own lateral economies of scale. It began with sharing computer code, then ideas, then music, photos and videos and finally physical things.
“How does a huge hotel chain, with its high fixed costs,” asks Jeremy Rifkin in his illuminating new book, The Zero Marginal Cost Society, “compete with literally millions of privately owned spaces that can be shared at lowand even near zero marginal costs [made accessible by a firm like AirBnB]? Retailers of all kinds, already on the ropes with disappearing profit margins, are going to be equally disadvantaged by a sharable economy where clothes, appliances, toys, tools, and thousands of other items are continually in use through rental and redistribution networks. Extending the life-cycle of stuff by passing it on from user to user significantly cuts into new sales.”
Note that Rifkin is not suggesting that products become free. He is talking about the marginal costs of generating a new unit of production approaching zero or near to zero. Thus once the cost of building apartments, or producing music, or installing solar energy is met, the additional cost of producing another unit of use is very low or close to zero. Mainstream economists like Larry Summers and Bradford DeLong worried about declining marginal costs in an article in 2001, given that the “the most basic condition for economic efficiency is that price equal marginal cost.” They concluded then that “the right way to think about this complex set of issues is not clear… we do not yet know what the right replacement paradigm will be.” Now, thirteen years later, the picture is becoming clearer: horizontal value chains can wreak havoc on existing business models.
The advent of these horizontal value chains is further terrible news for all kinds of suppliers of goods and services. But it didn’t stop there.
The economy of access
The third thing that the Internet did was social. It created a generation of people who began doing something that cut to the heart of the way society has been organized for several hundred years. These people—mainly young—began preferring access to ownership. Instead of planning their lives on the premise of acquiring and owning more private property, this new generation began finding meaning and satisfaction in having access to things and interacting with other people in the process.