The internet, the great business facilitator.

I’ve just read a fascinating article by Tom Foremski  called “ The internet devalues everything it touches”. It raises some great thought provoking points, it’s also slightly off base.

Let me explain. The internet is what it is, a massive and cheap to use platform that connects together many millions or billions of users.  The value destruction component isn’t a function of the internet, it’s a function of how people are using it to disrupt entrenched business models.

If you look at the examples mentioned by Tom, they all relate to some form of distribution efficiency. The simple fact of the matter is that for digital assets, the internet is more efficient at moving stuff around than roads, rail, shipping or retail stores.  The take away is, that if you are involved in traditional distribution and the asset you move can be digitised, you are in trouble. You will be disrupted.

I think it is important to note that it doesn’t have to be value destroying, check out what Amazon has done to the book value chain. Sure they’ve brought down the price, but more importantly they’ve removed stages in the value chain and absorbed their contribution while eliminating their cost.  In effect they’ve made book retail more profitable, and because they did it, they took a larger piece of that profit…nice work if you can pull it off.

Amazon knows what its business is about

“The Business of Delivering Stuff

Amazon is a master of the supply chain”

That’s why they got into Kindle. The digitisation of print, combined with the (nearly) free distribution of the internet is in fact the perfect business model. It so grossly simplifies the distribution of the asset, that the profit pool expands even though the revenue might contract.

There are other examples of this in action. Many look like companies buying up companies to create vertically integrated solutions, but I think it is more about optimising distribution COSTS.

Level 3 bought the Content Distribution business of Savvis, which on the face of it looks like a vertical play. But when you look at who Level 3 already service (Youtube in particular), this looks less and less like a growth play and more like a play to optimise (content) distribution and its associated cost. I suspect that Level 3’s business case would have stacked up on the cost out alone and discounted any upsell!

Google today announced its intent to buy On2. Why? Well in the Youtube value chain Adobe flash became a cost liability (both in terms of licensing and processor). Google already has the massive distribution of the internet going on, so what do they do? They vertically integrate by acquiring an asset to streamline out some cost. The internet didn’t destroy that value, all it did was facilitate distribution.  Google can choose to absorb the cost as profit or pass it through.

The media companies will probably disagree with the above example, but then their historical value was in distribution wasn’t it?

To me this is just disruption in action, in this case the internet is the facilitator of the low cost business model.