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I've been online since 1971 and I like to smoothe the way for everyone else. Among other things I co-founded Sympatico, the world's first easy-to-use Internet service (and Canada's largest).

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Monday, April 17, 2006

Web 2.0 and deflation, unemployment, etc.

In the preceding post I argued that the key characteristic defining Web 2.0 is the 2-way use of the Web, where the “consumers” of the Web become producers themselves.

This has massive implications for the economy.

If the supply of something goes up dramatically while the demand for it doesn’t, its price decreases. Let’s look at some examples.

Media

A lot of people have stopped reading newspapers. You can get the news on the Web for free from sources like Reuters (full disclosure: I once worked there tongue sticking out ) and any number of sites that redistribute that material. Some newspapers are fighting back by emphasizing their columns, which aren’t available elsewhere and are a major source of reader loyalty.

Well, the supply of newspaper columns has gone up dramatically, with the new entrants called blogs. And some of the bloggers write at newspaper quality. They just haven’t been writing in newspapers because newspapers are few in number and have limited space. As blogs emerge that satisfy the same needs filled by newspaper columns, the situation for newspapers will get worse.

For the media in general, the appearance on the Internet of large amounts of amateur material of good quality will reduce the amount of time that consumers have for professionally produced material.

Programming

There are now sites like RentACoder.com where you can post a programming job you need done and programmers around the world can bid on it. Now your pool of available programming talent has expanded dramatically — including programmers in places like Eastern Europe who will work at much lower rates than those in North America and Western Europe. Supply up much more than demand -> price drop. Availability of cheaper suppliers -> price drop.

I should also mention the “open source” movement. More and more software applications are being created by the collaboration over the Internet of interested programmers, Linux being the best-known example. A lot of that work is done for free, or funded by taxpayers (the Internet itself was developed by people working for governments or universities). When people start switching in large numbers from Microsoft Office to free or cheap alternatives, I’ll be really glad that I don’t work for Microsoft.

Secondhand goods

My wife has been selling secondhand goods on Ebay (which in my view has been a Web 2.0 site since its birth) for a while. The profit margins used to be quite good for certain things. Not any more. As more and more people have heard that anyone can sell on Ebay, and have started doing so, new sellers have appeared who are willing to sell at tiny margins. No doubt some of this is from newcomers who haven’t yet realized that it’s not really a good idea to set the starting bid at only 99 cents (many of them think that a low starting bid will encourage bidders and that the result will be a bidding war, but the usual result is actually that the item sells for 99 cents, or doesn't attract any bids even at that price). But my impression is that this is only part of the story, and that the flood of new entrants has reduced margins for everyone. Sure, more people are buying on Ebay too, but I’d bet that in percentage terms the increase has been much higher on the selling side.

Ebay’s been lowering the prices of many things for years, by making it much easier for buyers to shop around and to access unfamiliar vendors. And Amazon, and all those other sites. But what I’m focusing on in this post is the advent of new vendors, including those who aren’t so easily thought of as vendors because they provide things at no charge. (Ten years ago I thought that the lack of decent infrastructure for “micropayments” — tiny payments for things of low perceived value — was holding back a lot of potential near-amateur vendors. But those vendors have found other ways, such as donations and, thanks largely to Google's pioneering AdSense program, advertising.)

When prices go lower, this is called “deflation”. It hasn’t occurred in a significant way in North America since the 1930s, though it’s been a problem in Japan since the 1990s. While those who have experienced high inflation may think that deflation sounds like a good thing, the fact is that inflation is actually good for those who owe money (if your income is rising because of inflation, you can pay back your debts more easily) and deflation is bad.

During deflation, those on salary may not experience wage cuts. They may instead lose their jobs entirely. For example, during the 1930s the national unemployment rate rose to approximately 30% in Canada, the USA and Australia. When you combine the people having zero income loss with those having 100% income loss, the average “price” has dropped by some percentage in between.

So that’s Web 2.0 and deflation and unemployment. The “etc.” in this post’s title refers to all the other bad consequences. For instance, I mentioned above that deflation is bad for people who owe money. A lot of people won’t be able to meet their mortgage payments and will lose their homes. Web 2.0 isn’t the only reason for that — many countries are in a credit bubble that will burst — but it’s one of the contributing factors.

UPDATE: For some historical perspective on this see The Growing Specter of Deflation by Nicholas G. Carr.

2 Comments:

Blogger Carolyn Burke said...

Hi Rohan -
I'm not sure I follow how Web 2.0 will specifically create deflation. Are you suggesting that 2-way web content creation is sufficient to wipe out whole sectors of employment (i.e publishing, printing,...)? Is your emphasis more on how eBay-like open markets will replace retail sales? Could you elaborate on this a bit?

Thanks,

Carolyn
(Sorry I missed the presentation at the unconference.)

Thursday, May 18, 2006 at 4:55:00 PM EDT  
Blogger Rohan Jayasekera said...

Well, as I mention at the end of the post, this is just one factor toward deflation. It’s all a matter of degree: publishing and printing won’t be wiped out, but they will be reduced. And eBay doesn’t have to replace a traditional retail sale to affect it: if something is available on eBay much cheaper than in a store, the store will want to keep its price down, to minimize the chance of losing the sale to eBay.

I do think that these forces are big. As someone said at the BarCampTdot session I led on this topic, her parents had dropped their newspaper subscription, and they’re hardly geeks: they just see no reason to pay for stuff they can now get for free on the Internet. This doesn’t necessarily kill off the newspaper, but does push it to change, e.g. have content online that generates revenue from either advertising or user-pay. That means competing in a bigger space, however, with smaller margins (i.e. deflation).

Tuesday, May 23, 2006 at 12:41:00 AM EDT  

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