日知录（179）Andy Xie: Creative Destruction, From Taiwan to Twitter

An always-on world is emerging, challenging computer business models and rocking the information industry as never before.

By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.

Another information revolution is unfolding. Possibly in two to three years, how we access and use information will change fundamentally, dramatically affecting the IT industry as well as the broad economy.

Today, PCs still dominate information storage and processing. The new world is likely to shift data processing and storage to the Internet. All knowledge will become available instantly. There will be no distinctions for voice, video and text data processing. Mobile phone technological advances are creating this always-on world, allowing users to remain online anytime, anywhere.

Speculation about the arrival of this new world has been around for a long time. It's one of the competing visions of the future and, during a recent visit to Taiwan, I found reason to support the argument. I visited several major IT companies and realized how quickly this world is coming, affecting Taiwanese IT businesses and much more.

A major implication of the always-on world is that the PC will lose importance. This prospect has far-reaching consequences for East Asian economies that have invested heavily in PC-related manufacturing activities, including China.

Taiwan's economy has benefited heavily from three factors in the past two decades: China's opening, which made cheap labor available to its manufacturers; the outsourcing trend tied to the rise of big-box retailers in the United States, which created a market for its manufacturers; and the rapid growth of the PC industry, which gave its technology companies room for fast growth.

Taiwan's strength in taking advantage of these three factors stemmed from its factory management expertise and extensive connections in China and the United States. In particular, Taiwan assumed an important role in the PC supply chain. In areas from components to assembly, and even to branding, Taiwan's PC industry rose to global prominence. Now, this industry faces a setting sun.

In the new paradigm, the most important function for a consumer device is connectivity and interactivity. It makes a PC just one of many devices, but one with distinct disadvantages in competing against other products. First, Microsoft and Intel charge high prices for proprietary products that are essential for PCs. Their so-called WinTel standard served to increase competition in downstream industries, thus lowering prices and increasing sales of PCs. However, WinTel's monopoly charges limit how low PC prices can go. Also, although PCs are designed as self-contained devices, they are loaded with expensive functions with no value in a Web-based world. Overall, a PC is no longer the best value for the money in a Web-based world.

The PC industry is already suffering from this market evolution. The DRAM industry is experiencing terrible hemorrhaging. When DRAM demand was strong, many DRAM factories opened, especially in East Asia. It appears most won't survive. One industry veteran in Taiwan told me only three of these companies would survive in Taiwan. The notebook industry that saw rapid growth over the past decade seems destined for stagnation or even decline. In a stagnant industry, profits narrow to the thinnest possible margins.

Taiwan is suffering a terrible recession now. Its first quarter GDP shrank more than 10 percent from the same period last year, mainly due to collapsing trade in the global economic crisis. And structural changes in the PC industry could hold back Taiwan's economy even after the global economy recovers.

Meanwhile, the OEM trend has reached saturation, pressuring profit margins for most Taiwanese factories on the mainland. As far as I can tell, only a few Taiwanese businesses in the smartphone industry are prospering. Even in this sector, a lack of key intellectual property related to 3G and 4G mobile phone standards could limit their prospects.

Taiwan's economy is likely to stagnate for a long time. Structural problems will hold back exports. Profitability will shrink for its export factories on the mainland. Even though some Taiwanese businesses are succeeding in the Chinese domestic market, they are too small to lift Taiwan's economy on their own.

Taiwan's household wealth level is still high, which could support its consumption level for the foreseeable future. But this is a stagnation story. Its living standards are stuck at around US$ 15,000 per capita. Taiwan hasn't really grown much in the past decade, and its living standards are likely to remain unchanged for another decade to come.

The same forces will limit the rebound for China's exports, nearly half of which are IT-related products. Numerous mainland businesses either supply Taiwanese companies or compete against them for export markets. And most Taiwanese factories are on the mainland. What's at stake for China -- factory to the world -- is the relative value of hardware vs. software or IT services.

It seems the importance of hardware is declining. Many products considered high-tech have been commoditized and are losing growth. I am deeply concerned that China's policies are still geared toward promoting industries in this sector. Some local governments are throwing billions of dollars at attracting such commodity makers. All that money may be attracting sunset industries offering little in terms of economic development.

On the other hand, network contractors such as China's Huawai and ZTE are winners in this revolution. Mobile connectivity is the most important factor in contributing to the always-on world. Demand for network equipment will be strong over the next few years. Network operators have to spend heavily to upgrade networks in the race for consumers.

Even software companies may not be winners. As connectivity is anytime, anywhere through a network, consumers can rent software on the Internet for temporary use; they don't have to buy it or install on a PC. This will increase competition among software providers by decreasing their market power through a lock-in effect. Software production currently has a high profit margin. But when software is no longer a fixed cost, users have more incentive to switch. In the new world, software providers may see profit margins decline to the global manufacturing average.

Microsoft and Oracle, for example, command massive market capitalization. But they are hardly the most innovative companies. Nor are their products of the highest quality; customers often complain about their products. Still, they enjoy high profit margins because their clients accept huge, fixed costs for their products and, thus, have little incentive to switch. The always-on world raises doubts about their business model. I suspect their market capitalization will decline dramatically over the next five years.

In theory, the biggest winners are network providers such as mobile phone operators. They have the best chance to control users, although it will not be easy. For example, although Chinese mobile phone operators have vast numbers of customers, a relatively small number -- mainly those using services for business – are the largest contributors to profits. The merging of voice, video and text will make such money-making discrimination impossible. Mobile phone operators and other service providers will merely collect simple rental fees from businesses and consumers alike.

Content providers ought to emerge as big winners in the Internet world, grabbing a larger market with fewer marketing costs. But that's not going to happen. Content businesses are already losing big and could lose even more in the always-on world. The problem is that existing content providers don't know how to sell their products. Companies such as Google have taken advantage of that and collect advertising dollars by locating content for users through a search service. In the end, as content providers are starved of money, they will exit. The destruction is already unfolding; newspaper companies are struggling around the world, and the current form of newspaper production will probably vanish.

Paper versions of magazines and books also could disappear in the foreseeable future. Electronic paper technologies are sufficiently developed and work as well as print. Changing to electronic publishing is not easy. Books and magazines roll off presses after publishers paying high fixed costs for printing, generating economies of scale in disseminating information. But information in electronic form can be transmitted at zero cost. The justification for information aggregation with large fixed costs isn't there. So people won't get their information from fixed cost operators such as newspapers, magazines and book publishers in the future.

This scenario implies that paper demand will collapse in the future. It would be hard to justify any new investment in paper and pulp production, which require massive fixed investment. Existing capacity is probably more than enough for the foreseeable future.

A big positive of the always-on world is that it would make all of the world's knowledge available to everyone, at anytime. Not everyone will know how to use this advantage. But enough will, and the world will change for that. For example, schools will not be needed for education, the biggest government monopoly around the world, which works thanks to economies of scale created because governments impose uniform standards that offset the inherent inefficiencies of government control.

Healthcare is another big business bound to be affected by the revolution. Healthcare accounts for more than one-tenth of global GDP. Its size and the difficulties in quantifying its effectiveness reflect the information asymmetry of doctors and patients. Patients can then instantaneously obtain information to verify healthcare professionals' opinions and prescriptions. It improves market efficiency in two ways: patients would be less likely to sue doctors retroactively, and health insurance costs and the overall amount of (time spent for) patient care are decreased.

Developed countries protect patients with legal protection against medical malpractice. That, in turn, prompts healthcare providers to overreact with treatment to avoid bad legal consequences. But this picture would change in the always-on world, as information asymmetry in patient-doctor relationships dramatically decreases.

This flattening of the knowledge world has profound implications for how societies will be organized and governed. Societies are governed by elites who control and process information. Information collecting, processing and disseminating are always costly. The existence of an elite class reflects the need for economies of scale in handling information, which gives advantages and privileges to those who happen to handle information. This advantage is often inherited and leads to a permanent ruling class. The declining cost of obtaining information has already led to dramatic social changes in the past century. The final collapse of information cost to zero will accelerate the trend.

How the information revolution is destroying businesses is a classic example of Schumpeterian creative destruction. New technology renders a significant share of the economy obsolete. Even though the technology improves efficiency overall, unemployment that results from business destruction could keep the economy weak for an extended period of time. However, it would be wrong for governments to stop the technology. Over time, the market will find alternative uses for unemployed workers. For owners of obsolete businesses, however, this is an unmitigated disaster as their tradable stock shrinks to scrap value.

As old businesses are destroyed, new ones emerge. The Internet has become a business world of its own, thriving on the fact that humans, if satisfied with adequate food and shelter, tend to focus all other activities on entertainment or earning to buy entertainment. The cheapest entertainment happens when people amuse each other, and the Internet makes this happen. YouTube, Twitter, Facebook, etc., are mainly platforms for people to entertain each other.

One could work hard to buy a Mercedes and find satisfaction in driving it. Or one could spend time on the Internet being entertained for free. The latter choice requires no hard work. So in addition to paving the way for the huge changes now affecting Taiwanese IT businesses, Chinese export manufacturing, the global PC market, the mobile phone industry and publishing, I suspect the Internet will decrease rather than increase productivity, at least in the traditional sense, in the always-on world. Unemployment and business failures may ensue. But, ultimately, people may be more satisfied.



source：http://english.caijing.com.cn/2009-07-06/110193611.html