Friday, October 03, 2008

The Three Economies

A serious one for a change. Chris Anderson of "Long Tail" fame has a post on his blog about how the world is diverging into two economies, which he succinctly labels Atoms (physical goods) and Bits (digital goods). This is an interesting idea but I think it misses a fundamental point. There are not TWO economies, but THREE: bits, atoms, and people.

Chris is, as ever, spot on about bits: the marginal costs of (re)production approach zero, and traditional economics no longer apply.

He is IMHO slightly wrong about atoms when he says that material goods tend to increase in price over time: in most material businesses, efficiencies go up with scale, marginal costs go down over time, and so do prices. Cars, air travel, you name it: mass production and process efficiencies push costs down. A TV costs the same in dollars that it did 40 years ago despite being vastly superior and despite (monetary) inflation. This is the lesson of 19th century industrialization and 20th century mass production.

HOWEVER the cost of atoms doesn't go down nearly as fast as the cost of bits, so by comparison atoms look increasingly expensive.

Thirdly, there is the economics of people: Business models where people are inherent to the value proposition (at least, for the immediate future). Musical performance, for example. The "care" part of healthcare. Education, especially higher education. Research. Skilled people scale even less well than material products. The costs of employing people for these jobs tends to stay the same over time (or rise), even as the Atoms and Bits that complement their tasks get cheaper, making the People costs an ever larger fraction of the total. Observers often complain that healthcare and college education costs consistently outpace inflation. Of course: it is because they are People businesses, so naturally their costs are going to rise relative to either Atoms or Bits.

This "Three Economies" model helps to understand the dislocations going on in some industries. Music is a great example. Before the 20th C it was essentially a People business: you paid to see people perform. Recording turned it into a People Plus Atoms business, and by the 1980s it was overwhelmingly Atoms: top bands often lost money touring, but did it to promote the sale of recordings. Then along comes the digital era, and now we are in the midst of a transition to a People Plus Bits business, where Pay For Performance once again dominates and recordings promote the performance rather than vice versa -- while backward-looking execs desperately cling to the People Plus Atoms model.

No comments: