Saturday, May 10, 2014

Why zero margin cost will disrupt the internet of things in the same way it did broadcasting and print

Economic theorist and author Jeremy Rifkin explains his concept of The Internet of Things. Rifkin's latest book is The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (

Transcript -- We are just beginning to glimpse the bare outlines of an emerging new economic system, the collaborative commons. This is the first new economic paradigm to emerge on the world scene since the advent of capitalism and socialism in the early 19th century. So it's a remarkable historical event. It has long-term implications for society. But what's really interesting is the trigger that's giving birth to this new economic system. The trigger is something called zero marginal cost. Now, marginal costs are the costs of producing an additional unit of a good and service after your fixed costs are covered. Business people are all aware of marginal costs, most of the public isn't. But this idea of zero marginal cost is going to dramatically intimately affect every single person in the world in the coming years in every aspect of their life.

There's a paradox deeply embedded in the very heart of the capitalist market system previously really undisclosed. This paradox has been responsible for the tremendous success of capitalism over the last two centuries. But here's the irony, the very success of this paradox is now leading to an end game and a new paradigm emerging out of capitalism is collaborative commons. Let me explain. 

In a traditional market, sellers are always constantly probing for new technologies that can increase their productivity, reduce their marginal costs so they can put out cheaper products and win over consumers and market share and beat out their competitors and bring some profit back to investors. So business people are always looking for ways to increase productivity and reduce their marginal cost, they simply never expected in their wildest dreams that there would be a technology revolution so powerful in it's productivity that it might reduce those margins of cost to near zero making goods and services essentially free, priceless and beyond the market exchange economy. That's now beginning to happen in the real world.

The first inklings of this zero margin cost phenomenon was with the inception of the World Wide Web from 1990 until 2014. We saw this zero marginal cost phenomenon invade the newspaper industry, the magazine industry and book publishing. With the coming of the World Wide Web and the Internet all of a sudden millions of people, then hundreds of millions of people, and now 40 percent of the human race with very cheap cell phones and computers they're sending audio, video and texting each other at near zero marginal cost. 

So what's happened is millions of consumers became prosumers with the advent of the Internet. And so they're producing and sharing their own videos, their own news blogs, their own entertainment, their own knowledge with each other in these lateral networks at near zero marginal costs and essentially for free bypassing the capitalist market, in many instances altogether. This zero marginal cost phenomena, as it invaded the information industries, wreaked havoc on big, big industries. Newspapers went out of business; they couldn't compete with near zero marginal costs. Magazines went out of business. And my own industry publishing has been just wracked by free e-books and free knowledge and information.

But, you know, the strange thing about it is at first a lot of industry watchers said this is a good thing because if we give out more and more information goods free and people are producing and sharing it free, these freemiums will stimulate people's appetite to want premiums and then upgrade this free goods and information by getting more customized information. 

I'll give you an example. Musicians give away their music free when they started to see this happen hoping that they would get a big loyal fan repertoire and then their fans would be enticed to go to their concerts and pay premium in order to be there in person. And then, of course, we saw this with newspapers. The New York Times will give you ten free articles a month, freemiums, hoping that you'll then upload upgrade to premiums and by their subscription service. It didn't happen on any large scale. This was very naïve by industry watchers. Sure, some people have moved from freemiums to premiums but when more and more information goods are out there nearly free shared with each other, music, film, arts, information and knowledge, attention span is not there to then want to go to the premiums when you have so much available already in the freemiums.
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