Jabe's Twitter Musings [Special Edition] - March 31st
Chapter 1: The Internet Adds Zero to the Equation
The industrial revolution walked so the internet revolution could run. Both used technology in a major way to upend the business world.
The industrial revolution used hardware technology to scale the supply of goods. Imagine being able to manufacture goods in an automated way with the help of machinery. You could mass produce food, clothes and even cars!
Despite the stepwise increase in supply, fulfilling demand was still constrained on the distribution of the goods. Much of the world's economic power flowed to the companies that controlled distribution and the underlying infrastructure.
Rightfully so, as it was the scarce resource in the value chain. These companies got the mass-produced goods in front of people willing to buy them, collecting a profit in the process.
A handful of these worldbuilding companies included:
Carnegie Steel
Standard Oil
The House of Morgan Finance and Steel
General Motors
Procter & Gamble
Kraft Heinz
Pepsi
Fast forward to today’s internet revolution, and we are introduced to new software technology that is primarily made up of a bunch of 1s and 0s. This software boom has unblocked a key constraint from industrial times. Distribution.
What hardware technology did a fantastic job at during industrial times (and still does today), was driving the marginal cost of production down.
While software technology also does a fantastic job at decreasing marginal costs of production, it does an even better job at driving the marginal cost of distribution down. Especially for digital goods!
Put it this way, it doesn’t cost much to have one more person read an article they found on Google search or from their mother-in-law's Facebook feed.
It doesn’t cost much to have one more person stream Tiger King on Netflix or download The Silent Patient on their Kindle.
You can push one button and reach the entire world.
**Understanding Marginal Cost of Software**
Let’s take a brief timeout to better understand zero marginal cost in software. As an example we will use one of my favorite things out there, Bitmoji. First we will understand the flip side. Let’s say the Jordan brand released a new shoe. Each shoe needs to be produced in a factory somewhere. This costs money. That shoe then needs to be sent on a container ship. This costs money. Then that shoe needs to find its way to a retail store, or warehouse. This costs money. Each kid out there who wants the new Jordan shoe is going to have to pony up to cover these costs. Now in the world of Bitmoji, the new Jordan shoe is digital. As such, you can deliver it to that same kid for free. There is no manufacturing, no shipping, no storage and thus no costs. You can not only deliver to that kid, but as many kids as you want. It’s as simple as copy pasting like you’re in Microsoft Word. That is zero marginal costs of digital goods.
Since 1s and 0s are infinitely copyable, software theoretically moves quantity to infinity. That is how we approach the asymptote of 0 for the marginal cost.
The problem is, I don’t think we’ve updated our understanding of what happens to the Economics 101 equations and formulas as a result.
Economists have generally welcomed the idea of reducing marginal costs. But I don’t think anyone modeled out exactly what happens if software and the internet bring those costs to zero…
If we borrow from computing, a program error may result from an attempt to divide by zero. That error could be a crash.
So what happens to our world if we try to divide by the infinite supply and distribution of the internet?
What happens is we get deep YouTube conspiracy theories, Mark Zuckerberg as the most powerful arbiter of truth, a Tesla cult as the most valuable automaker in the world, a Chinese owned TikTok with the ability to influence the NBA, and Donald Trump as your American President.
In the next post we will look deeper at the outcome of infinite supply and free distribution, also known as abundance. Until then, enjoy the surplus!
...Quick plug for my latest Learn With Jabe YouTube video :)