Over on O'Reilly Radar, Jim Stogdill has a fabulous piece on the economic theory of rents as they apply to technology businesses, open source, cloud computing, spectrum auctions, and other chewy, boingy subjects. This is exactly the kind of economist talk I love: the stuff that makes you slap your forehead and say of course, that's how it works
Obviously digital distribution has also damaged the traditional channel model of the music, film, and photography markets. The impact of this is that the tail-end of the curve can probably shift business models and still make the same money (by touring, selling FLAC files, whatever). But the head -- where the record companies are -- will struggle to extract rents like they used to. As they realize this, they do what rent holders who are losing always do: dispense patronage from their existing franchise and try to influence the law to make their rents more permanent.
Points of control = Rents
Apple has historically lived on rents derived from superior design, which is a very hard thing to do consistently. So they've earned their rents so far. Recently, they've gotten even smarter. The App Store is an MBA's dream because it combines network effects with classic distribution channel control and slotting fees. It also has strong barriers to exit. Interestingly, Foxconn (and its employees) mostly continue to work at opportunity cost levels of renumeration. Rents stay with the leverage and are not evenly distributed through the supply chain.
Apple also finds itself in the odd position of Karmic enforcer. The software developers that once helped destroy content owners' iron-clad grip on distribution now find themselves selling their creations for 30 percent of $.99. Karma is a bitch.
Google extracts amazing rents through a combination of innovation and network effects, although they have really struggled to duplicate their core search / AdSense monopoly. Innovation is keeping Google ahead of Schumpeter for now, but hasn't yet created a second vortex of network effect monopoly. So Bing is an important threat if its share continues to grow. Emerging and effective competition in the area where you are extracting rents will have a non-linear impact on your bottom line. If all goes well (in a Schumpeterian sense), both Bing and Google's search franchises will be rent free in an economic sense. Good for people buying ads, bad for people that hope Google will keep taking the cash thrown off to innovate in other areas (like creating an Office rent-neutralizing alternative in the cloud). It's like watching a pair of Ultra Kaiju trying to choke each other out over Tokyo.
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