John Robb: The New Economy
Wednesday, May 29, 2002 by Dave Winer.
John Robb is the president of the company that I am chairman of, UserLand Software. Before joining UserLand, he was the president of Gomez, and before that an Internet analyst at Forrester. We talk about little things, the details of running a small company struggling to stay afloat in a recession, and bigger things -- how did we get here, and what comes next.
A couple of weeks ago we were talking about the "New Economy" that drove the stock market boom of the late nineties. It didn't turn out the way the people hyping it said it would. John observed that there actually was a new economy, evidenced by the dramatic decline in profits for corporations, and went on to explain why it was happening. I said "Write me an essay!" and he did.
Did the Internet enable a new economy? I think the latest evidence says that it has. But it isn't the new economy corporate America expected.
Since 1993, the economic statistics for the US economy have been wonderful. Productivity is way up and accelerating, wages are up and increasing, and inflation is down and declining. We are getting more competitive, more leveraged, and wealthier -- while the cost of goods has remained static. The only "bad news" is in corporate profits.
During this entire time, corporate profits have remained stagnant. There is even reason to believe, given the current accounting scandals and strident calls for accounting reform, that corporations actually experienced a massive decline in profitability over the last 8 years. Standard and Poor's estimates that corporate profits would be 25 percent lower if currently popular accounting gimmicks where negated.
So, what happened? All previous booms handsomely compensated corporate America's managers and investors. In fact, the expectation was that corporations would be able to leverage the Internet to make more money than ever before through a combination of lower costs and larger scale. The rapid gains in the markets during the late nineties reflected this logic. The dotcom mania reflected this logic. It was all horribly wrong.
The reason is that the Internet isn't an extension of the past. It is a new thing. It leverages individuals in ways that go beyond old models. It creates a new order of things where individuals, and not companies, can expect to control all the benefits of economic gains.
Pretty impressive stuff. But, how did individuals pull this off? Control of the information flow. Individuals within and outside of corporations have used their control of the information flow to make the markets for products, services, and labor increasingly competitive. People have more providers to buy from, on a global scale, and more organizations to work for (the monster.com effect) than ever before. Corporations are caught in a vice between competitive pricing and higher labor costs.
In cruel turn of events (not from my perspective of course ;->, but from a corporate one), individuals are also starting to wake up to the excesses of corporate America. They know too much. Adam Curry says that there are no secrets, and this is what he means. Companies that have been able to hide behind copyrights (excessive in length) and patents (excessive in breadth) in order to charge excessive prices, are being challenged. Their justifications for high prices aren't making headway either. In music, people now know that artists aren't paid under the current system. Why should people pay an oligopolist that distributes an artist's creative works without adequate compensation a premium price? Napster, Morpheus, and Kazaa are just the start of the opposition to this. There will be more, and they will be more aggressive.
Additionally, corporations are also starting to lie with abandon. In the new world enabled by the Internet, people find out about it fast. Public trust in corporations is at an all time low. Andersen, Enron, Schering-Plow, Adelphia, Stanley Tools, Global Crossing, Microsoft, WorldCom, and many more have crossed over the line. All of them have been under intense profit pressure. All have opted to break or bend the law for a short buck. It won't help. If the guys at the top of American corporations think that this is a recourse, they are sadly mistaken. Information travels much too quickly. There is no damage control.
Corporations aren't people, despite what the law says. They are a means to an end. If they end up barely producing a profit, but employee salaries rise and consumers get low prices, does that hurt us? No. Sure, the stock market will be a dog, but who cares? The market is merely an abstraction of the wealth creation process and a playground of the wealthy that is often perveted to fleece gullible individual investors.
Will companies continue to compete and invest in new technology? Yes. They can't stop. Barriers to entry are dropping daily enabled by a plethora of new technologies. Any weakness is immediately seen, globally via the Internet, by entrepreneurial individuals who will take action to provide competition. If corporations stay static or look to the government for salvation they will die.
What most of us care about is the ability to think, create, and enjoy. The new economy makes that better, easier, and smoother for more people than ever. Say goodbye to the tarriffs from the tolltakers of corporate America. We won't miss them.