Software sends profits down the YouTube September 5, 2011
I have been showing my kids music film clips from YouTube on television. It's pretty easy. The iPad downloads the stuff over the home Wi-Fi network. Then you use a cable to hook the iPad into the back of the television. Then you listen to the music. And in the background, if you listen closely, you can hear the sounds of the business models coming crashing down. There goes the profit margin for the record industry. My kids are listening to this stuff for free. And as the music plays there is another small incursion into the ad-driven profit margins of commercial free-to-air television. We're watching television all right, but we're not watching commercial television. And, while I'm at it, all forms of traditional commercial media are suffering as my kids watch YouTube on television. We aren't sitting around listening to the radio, watching movies or reading newspapers. Our time is being diverted by free content downloaded from the internet. (We also aren't sitting around playing board games and enjoying more carefree pursuits, but I will leave the topic of poor parenting to another day.) In a recent article in the Wall Street Journal, the co-founder of pioneer internet browser Netscape, Marc Andreessen, went much further with this kind of analysis, boiling his argument down to the pithy one-liner: ''Software is eating the world.'' Andreessen spells out a collapse in the costs of providing services over the internet. Such radical reductions allow software challengers to emerge in all sorts of industries previously seen as the preserve of traditional ''real-world'' companies. In the challenger camp - and companies Andreessen discloses he has invested in through his venture capital firm Andreessen Horowitz - are online coupon business Groupon and online telco Skype. Andreessen's argument is familiar because we have seen it happen before our eyes. He cites the by now familiar examples of Blockbuster's video hire business knocked over by online order business Netflix, and bricks-and-mortar bookseller Borders knocked over by online bookseller Amazon. Andreessen also gives the almost obligatory nod to Joseph Schumpeter and his much-celebrated observation about entrepreneurs and their penchant for creative destruction - old businesses making way for aggressive young start-ups. (Funny how the entrepreneurs always focus on that remark of Schumpeter. They never seem to give much weight to some of Schumpeter's other observations, such as his prediction about the end of capitalism, because the society produced by capitalism fosters values that do not allow capitalism to be sustainable.) John Hempton, an indefatigable blogger, fund manager with Bronte Capital and fraud buster, agrees with Andreessen's argument, and raises the notion that the world is becoming ''appified''. I know, it's a terrible word, but it attempts to convey software doing jobs as an ''application'' that used to be done by something in the real world. For example, using the map function in an iPhone rather than leafing through the Gregory's. In a recent post, Hempton inspects the case of hardware firm Cisco talking about 50 billion devices in the world needing to be connected to the internet - but failing to convert that astonishing figure into sales of the hardware routers it manufactures. The reason? Because software is ''appifying'' Cisco's hardware business - software is doing the job that its routers used to do. ''If the output of your hardware is information or the manipulation of information then you are going to get eaten. If the output is something else then you are not,'' Hempton writes. And that's also Cisco's business model you can hear crashing down in the background of the YouTube music my kids and I are listening to. And just for the record, we were listening to Gotye's Heart's a Mess. I might buy the record from iTunes. Not all business models are collapsing.
TZL Price at posting:
36.4¢ Sentiment: Buy Disclosure: Held
