The fundamental business challenge of our times

The fundamental business challenge of our times. Eli Noam of Columbia Business School has an important Financial Times column pointing out the fundamental business challenge facing the tech sector: commoditization.

“The market failure of the entire information sector is one of the fundamental trends of our time, with far-reaching long-term effects, and it is happening right in front of our eyes.”

Eli is by nature a cynic, so what he has to say is often not pleasant. But he has the unfortunate habit of being right much of the time, and ahead of the curve virtually all the time. I've disagreed with some of his conclusions, but I'm with him on the core insight: there is a basic structural disconnect in the economics of information industries, with painful consequences. We saw it first in telecom, where VOIP is now bringing the issue to a boil, but it's broader than that.

Jeff Jarvis and Ross Mayfield would like to think we can make it up on volume. I'm as excited as they are about new bottom-up markets and content forms like blogs. The problem is simply that you can't get there from here. A hundred Nick Dentons wouldn't pay for one floor of the Conde Nast headquarters building where Jeff works. (Jeff knows that, and is working both sides of the equation, but Gawker will never be Entertainment Weekly.) There's no scenario that doesn't take a substantial amount of money from the traditional media sector — and telecom, and IT — and replace with with a smaller amount of money in distributed alternatives.

One answer, which Noam thinks may be inevitable, is consolidation to the point of monopolization. Ma Bell held back the tide of commoditization in an industry characterized by high fixed and low variable costs, and Microsoft is doing the same thing in the PC business. That outcome isn't all bad… but it's far from good. And, I believe, far from assured.

Is there another answer? I think there is. I proposed it four years ago in the Harvard Business Review (and a year earlier in Release 1.0): syndication. At the time, the idea may have sounded like new economy hype. In reality, syndication is a roadmap for pulling out of the commoditization death spiral. It won't be simple and it won't be painless, but syndication will provide a foundation for new growth in the information sector. Just look at the performance of the two Web-based companies most heavily built on the syndication model: Google and Amazon. Another useful test case for syndication will be the development of the RSS/RDF/Atom ecosystem around Weblogs. [Werblog]

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