I do not see hardware companies with exclusive consumer offerings doing very well in the long term. End user computers will be so stripped down of any horse power or might as most of its computing power shift to the Internet, as I have discussed in my earlier post. Look at some of the strategic actions of the following companies:
- IBM divested from all things consumer hardware.
- HP have boosted its data centre management with the purchase of EDS.
- Dell is struggling to regain market share.
So my conclusion here is to stay away from computer makers who are making heavy investment in distribution channels and goods geared to consumers and look for those with good distribution network with utility businesses.
The Internet has introduced free labour to many industries like media and software. Think of the contribution of bloggers and content on YouTube. Also, think the volume of applications being used thanks to open source code and other free software used on the Internet like Google Docs...etc. Many have created profitable businesses using this model whether by supplying the infrastructure like YouTube and Blogger applications or by providing the content like blog posts. Participants are benefiting mainly by attracting advertising revenue. I am arguing that this model is unsustainable.
The Internet and computing power over the years have lead to two hard trends:
- globalization: the shifting of manufacturing jobs to low cost producing countries, and
- automation: the replacement of routine task by machines
- loss of advertising dollars as advertisers do not want to advertise to unemployed people who can't purchase their goods, and
- the labourer will be so occupied about their livelihood that will consume most of their time to prevent them from being a participant in the Internet free labour force.
Today it is a new phenomena that it will take time to play out but the economics of the Internet will impact us and soon it will force us to change our social behaviour yet again.
The idea that you can give things away online, and hope that advertising revenue will somehow materialise later on, undoubtedly appeals to users, who enjoy free services as a result. There is business logic to it, too. The nature of the internet means that the barrier to entry for new companies is very low—indeed, thanks to technological improvements, it is even lower in the Web 2.0 era than it was in the dotcom era. The internet also allows companies to exploit network effects to attract and retain users very quickly and cheaply. So it is not surprising that rival search engines, social networks or video-sharing sites give their services away in order to attract users, and put the difficult question of how to make money to one side. If you worry too much about a revenue model early on, you risk being left behind.Ultimately, though, every business needs revenues—and advertising, it transpires, is not going to provide enough.
Free content and services were a beguiling idea. But the lesson of two internet bubbles is that somebody somewhere is going to have to pick up the tab for lunch.
Source: Economist 2009