Anticipate the Cheap

“In every industrial revolution, some key factor of production is drastically reduced in cost. Relative to the previous cost to achieve that function, the new factor is virtually free. [Thanks to steam,] physical force in the Industrial Revolution became virtually free compared to getting it from animal muscle power or human muscle power. Suddenly you could do things you could not afford to do before. You could make a factory work 24 hours a day churning out products in a way that was incomprehensible before.” – Microcosm, George Gilder.

The story Gilder paints isn’t new. Much of the change in the twentieth century has been driven by newfound abundance. The automobile became ubiquitous by unlocking the ability to tap vast stores of oil, replacing the formerly used energy source, whale blubber, which was scarce. The 80 foot container made shipping cheap enough to tap abundant labor far away. Computers made information abundant.

Information is Cheap

Moore’s Law dictates that a unit of computer processing power halves in price every two years. The price of bandwidth and storage is dropping even faster. What the internet does is combine all three, compounding the price decline with a triple play of technology: processors, bandwidth, and storage. As a result, the net annual deflation rate of the online world is nearly 50%, which is to say that whatever it costs YouTube to stream a video today will cost half as much in a year. The trend line that determines the cost of doing business online all point the same way: to zero.

Just as water will always flow downhill, economies must always flow toward abundance. In other words – what can get cheap eventually WILL get cheap.

Price the Scarcity

However does this mean that there is no money to be made online anymore? Clayton M. Christensen explains the law of conservation of attractive profits: When attractive profits disappear at one stage in the value chain because a product becomes commoditized, the opportunity to earn attractive profits with proprietary products usually emerges at an adjacent stage. As commodities become cheaper, value moves elsewhere.

Chris Anderson’s book “Free,” points out an interesting example of this – “at some point in your life you may wake up and realize that you have more money than time. You will then realize that you should start doing things differently, which means not walking four blocks to find an ATM that doesn’t charge a fee, driving forever to find cheaper gas, or painting your own house. If you are a kid, you probably have more time than money. That’s the force behind MP3 file sharing, which is kind of a hassle but is free. As Steve Jobs famously pointed out, if you download music from P2P services, you’re likely to deal with problematic file formats, missing album information, and the chance that it’s the wrong song or a poor quality version. The time it takes to avoid paying means you’re working for under minimum wage… But as you get older the equation reverses and 0.99 here and there no longer seems like a big deal. You migrate into a paying customer.”

Abundantly available music wants to be free. Scarce quality-controlled music wants to be expensive. If you’re running an online business and want a market advantage, consider anticipating the cheap and giving away what is too cheap to meter. Price for the new scarcity.