I am beginning to really believe that this Internet thing is destroying more value that it is creating. By the way, I'm talking about economic value here, not any other type of value. There is no denying that it is creating a great deal social value. And it's creating a great deal of entertainment value as well. But I really think it is destroying economic value.
My suspicion was further supported yesterday at the O’Reilly Tools of Change for Publishing conference in NYC. During his keynote address, Tim O'Reilly spoke about his publishing company’s experience in the world of eBooks. He gave an example of a book he released through the traditional retail channel (Barnes & Noble, etc) as well as as through an app on the iTunes app store (using a service called Stanza which is an eBook application for the iPhone/iTouch). Through the retail channel, the book was priced at $24.99 and on the app store it was priced at $4.99. Hmmm...
Also, when asked, Tim said that once he paid Apple, Stanza (and maybe author royalties), he made just about the same margin (%) on the eBook as he did on the printed book. So, let’s look at this:
First of all, let’s assume that publishers earn a 20% margin on a book. This means that O’Reilly made around $5 on the traditional retail book and $1 on the eBook. Hmmm....
Doesn’t this mean that the internet destroyed 80% of the economic value of that product for O’Reilly? Sure, the consumer made out very well in the eBook deal, but O’Reilly didn’t. And you know who else didn’t? Every piece of the value chain that created the $24.99 price. This includes the:
- Owner of the book store
- Employees of the bookstore
- Utility companies that light and heat the bookstore
- Construction crew, architects & millwork vendors that built the bookstore
- Real estate broker that picked out the location
- Town that earns property tax off the building
- Warehouse workers that packaged and shipped that book
- Printing company that printed the book
- Author that wrote the book
- Etc, etc...
Am I going crazy, or is the virtually free distribution channel known as the internet working to destroy economic value. Sure there’s money to be made there, just 80% less of it. From the music business to newspapers to media (trading off-line dollars for online pennies) to retail to traditional publishing. It's not looking good...
Makes me think -- what would the US look like if its GDP diminished by 80%?!? Pretty scary. My feeling right now is that we all just have to get used to the fact that the internet is going to destroy a lot more economic value than it creates over the next decade or more. It’s not going to be pretty. Unemployment will stay high, salaries for those employed will be lower and everyone is going to learn to live their lives with less money.
The ironic part of this all is the title of Tim’s presentation yesterday was “Reasons to be Excited.” Hmmm...
If I’m crazy, please let me know. I hope I am...
DS
