Is the Internet killing profits – and sense?

The internet has made many aspects of everyday life easy, efficient and cheap; and it has certainly provided excitement for thousands of Silicon Valley geeks. However, according to British advertising expert Tom Goodwin, the tech revolution is also creating a potentially unsustainable economic model, where consumers are expecting to get most of their web-based products for free.

In a recent article he wrote for Techcrunch.com, Goodwin, founder of marketing and advertising consultancy Tomorrow Group, suggests that while the present technology revolution has many similarities from those of the past – huge job losses and massive disruption, for example – it has one significant difference: the emergence of an industry where consumers are users, not buyers.

“In our desperation to count users, we forgot to make money, the assumed by-product that never materialised. 

“Perhaps the internet killed the profit margin and also common sense.”  

Goodwin says consumers have it better these day, as everything can be done more quickly, safely, efficiently – and cheaply – than ever before.

However the variety, simplicity and convenience of the new products, combined with the rush by companies to recruit new users, has stripped many businesses of an ability to make money. 

The internet has become so powerfully efficient that margin has been lost, Goodwin says.

Nowhere is this trend more evident than in the music industry, which is rapidly growing, but without financial rewards for the players involved, he says.

Users can listen to music in more ways, wherever and whenever they want.  But while the traditional box set of music has inherent tangible value, the shift from physical form to digital has destroyed the ability to charge a premium. 

Legacy players such as Pandora, with over 250 million users, and 14 years of history has had losses for all but one year. Meanwhile Spotify, which has over 10 million monthly paying users, has never come close to making money. 

“We’ve listened to music in more ways and places, yet after reaching its peak in 2000, the music industry earns half the money it used to, having lost over $US7 billion of its revenue and more than half its value since the dawn of the internet,” says Goodwin. 

He says the industry is unlikely to make any real profits from streaming music because it cannot afford to charge less, while customers aren’t willing to pay more. 

The same issue has affected TV companies like Amazon Prime Video and Vudu, which have never come close to making a substantial profit.  Audiences are simply users and no longer paying viewers. 

Goodwin says the next declining industry is online advertising.  More than 80% of apps and news programmes rely on advertising as their primary means of funding.  However, the unspoken killer of ad funding is that digital ads just don’t seem to work. 

“The performance of digital ads is declining and the value of each ad is getting lower.  As contrary as it seems given the optimism, the advertiser-funded internet isn’t working and that won’t soon change,” says Goodwin.   

Companies such as LinkedIn connect people and jobs, thus taking business away from recruitment agencies, he says. Meanwhile daily deals websites like Groupon have led to a culture where few people are willing to pay full price for a haircut or facial.

Basically the internet is cutting margins, he says.