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Monday, February 02, 2009

More on deflation and unemployment

Back in April 2006 I wrote about how Web 2.0 would contribute to deflation and unemployment. Those things are happening now (not just because of Web 2.0, of course!). Here are a couple of things that I find interesting:

Fred Wilson’s post When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs examines some companies that can generate huge revenues with few employees, thanks to modern technology. Craigslist does that, while Facebook and Digg probably could – but don’t. Why not? Because they’ve been growing their businesses to make them more attractive to buyers. Now that buyers have largely dried up, the old “bigger is better” is increasingly being challenged by “small is beautiful”. Maybe Digg and Facebook will make the switch to smaller, and operate with relatively few staff, i.e. lay off lots of people. “Lean and mean” is already so much easier to do than in the past, but a sinking economy will dramatically accelerate the shift to it. I find the transition to 21st-century organizations exciting – and frightening. I don’t think that many people are psychologically prepared for how efficient companies can now become if they make that their priority. In the late 1970s, I.P. Sharp Associates, a pioneering online-services company I worked for, ran on tools such as email, instant messaging, and a flat organizational hierarchy – and was reputed to have the highest revenue per employee of any computer services company in Canada. Since then, easy credit and a zooming stock market has put the emphasis on growth rather than profitability – but that era is now over. Many traditional companies won’t move effectively because they’re not willing to accept the gravity of the situation, e.g. instead of targeted layoffs, many offer voluntary buyout packages which are most likely to be taken by those who can easily get new jobs elsewhere, i.e. the employees they should hang on to, not lose. And CEOs hired for growth are usually not the best at lean-and-mean.

The other interesting piece is that The Times (London) reports that India set to follow cheap car with £7 laptop. Even if the price ends up not being quite that low, it will be low. Part of what makes it possible is the use of domestic Indian technology: no reliance on the likes of Intel and their high cost structures. I presume there will eventually be export versions to the West, though by then I suppose the Western nations will have protectionist trade barriers in place.

We are shifting from a long period of growth to a period of retrenchment. And the Internet is there to assist in that retrenchment. I wonder whether it will eventually suffer backlash from the public at large, as things like free trade and unregulated markets do now.

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