Markets Disrupted

The weaknesses we discovered in classical economic theory and the intriguing insights about predictable irrationality are a bit apart from our concerns over whether there are jobs for journalists and other communication professionals. To see how economic theory affects our lives, we need to look at what is called the “media ecosystem,” and the forces that are disrupting the markets and the traditional news and media businesses.

Beyond the theories of behavioral economists, there is hard evidence that the marketplace for news isn’t working the way it used to. Media corporations, which are suppliers as well as employers, find their market relations to workers, advertisers, and consumers are disrupted. The typical of news organizations profit margins from pre-Internet and broadband days of 20-25%, have declined along with reader and viewership, as well as with advertising and other revenue. And now survey research indicates that 30% of people who consume various news and entertainment content online would not pay for it, even if it wasn’t available anywhere for free online. So much for the belated plans of some media entities to begin charging for online content.

Media consolidation, an issue since the 1980s, when many media and entertainment companies engaged in mergers and buyouts, has left the mainstream media dominated by oligopolies or monopolies. These corporate entities have grown and profited by simply buying up more and more properties. They have done this through leveraging their assets — borrowing to buy them, borrowing against them. These corporate behemoths are not dragged down by debt.

The concentration of ownership of media outlets threatens a democratic society as it sharply reduces the diversity of issues and perspectives covered by the media. Ownership concentration also gives undue political influence to powerful media cartels. However, we are going to set aside issues of the public interest for a moment, and look at how media concentration introduces economic threats to media businesses.

To follow the market disruptions, we need to consider not only the size of media corporations, but also how the organization of a business can affect its viability. Organizations are similar to living things, in that they exhibit patterns of growth and development. In the beginning, they spend their energy getting up and running, but once an organization is established, there are a couple of characteristic watershed moments that signal problems. There is the moment when an organization expends as much energy sustaining itself as delivering a service. There is the time when the organization spends more energy sustaining itself than delivering a service, and there is the time when an organization is profitable, but no longer fits with a corporate plan.

When a business is acquired by a corporation or holding company, its revenues and assets can be diverted away from its core business to more profitable parts of the corporation. For newspapers this meant having their profits be plowed into the larger conglomerate organization to pay down heavy debt. A company owned by one of these giants can be pulled in bankruptcy even if it’s profitable on its own. For news organizations, profits were siphoned away, instead of being invested in improving or modernizing news operations. It is important here to distinguish between products and organizations. News as a product, is not the same as a particular news organization.

WikiWorld comic based on article about Disrupt...

Image via Wikipedia

Marshall McLuhan said technology is disruptive.  It is useful to notice that both disruptive technology and disruptive innovation are important to considering the future of the news business and journalism. Disruptive technology usually refers to a specific device, like the CD-ROM which overturned the cassette tape in the market, and was in turn, overturned by the digital audio player. For communications professions like journalism, public relations, and advertising, the Internet has been a disruptive technology, as it upset the production and distribution of content. With the creation of craigslist on the Internet, it was only a matter of time before advertising revenues fell, as the monopoly hold of print on classified advertising was broken.

Disruptive innovation, on the other hand, refers to the process that occurs when a technological development or device enters, alters, and eventually overturns an established market. You can observe disruptive innovation in action as the MP3 has displaced the music CD as our primary way of engaging with recorded music, or as “cloud computing” begins to take market share from the established market for software applications.

The impact of both disruptive technology and innovation is that what was valuable, becomes less important and less valuable.  What is valuable is often what is scarce and or expensive. Either kind of disruption can render scarce items, freely available, cheap or even worse, superfluous, by the disruption. No matter what the inventor or innovator introducing a new technology means to do, new technology breaks up the trajectory of the status quo market conditions and is disruptive through its unintended consequences.

This isn’t to say that disruption is a negative force. Often, new technology that disrupts, transforms an industry that is complicated and expensive market into an accessible, simple, convenient and affordable market, benefitting consumers and the producers who can increase the size of the marketplace.

Gordon Gekko Wall Street wizard with his cordless phone.

Gordon Gekko Wall Street wizard with his cordless phone.

In 1987, corporate raider, Gordon Gekko, (played by Michael Douglas in the film, Wall Street, directed by Oliver Stone,) demonstrated his prestige with his cordless telephone. That expensive, complicated, and rare device in 1987, is now cheap, accessible, simple and affordable to own, in fact more than 20% of households and 41% of all adults in the U.S. depend on cordless, mobile phones today.

From computers to iPods, the market cycle begins with sophisticated, expensive, specialized products produced for a customer base that needs and can afford the product. When a cheaper version of the product with fewer features (e.g. original iPod and iPod shuffle) is introduced into the market, it doesn’t cannibalize the market for the expensive product. Instead, it creates its own smaller market of new customers — non-consumers — of the expensive product. However, over time, if the cheaper product improves and the makers of the expensive product fail to recognize the new product as a competitor, they lose market share and business to the disruptive technology.

Now it is time to consider how we produce products, especially public goods, like the news, and how the markets for these goods work. We will look at how new products affect markets, and consider whether all pirates deserve to walk the plank.

Continue reading Open and Closed Systems

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Clayton Christensen Disruptive Technology and Innovation