Editor’s note: This article was first published in November 2011. The context and forecasts reflect 2011, including video calling inside social networks replacing conventional phone calls within a couple of years, falling text-message revenue, and Zara’s online store being less than a year old.
When people talk about starting companies, adapting to the new technological era or boosting startups so they can compete in the market, very few may have stopped to analyse the viability of the internet business model. It’s a business model we all need to get on board with because, as we’ve said hundreds of times, a company created on the internet requires less investment, lower costs and fewer staff. That’s exactly where the problem lies: in the medium to long term we could be looking at a job destroyer rather than a job creator.
Perhaps that’s the conclusion we reached this morning while analysing the “bubble 2.0” question. We found that we are not facing a bubble in company valuations, since, as we’ll see below, most of these companies are worth what they cost. Instead, we are gradually creating something I wouldn’t call a bubble, although if technology keeps advancing at this pace, job creation could fall to historic lows all over the world. Some people don’t see this as harmful to the economy, because we are “changing the way business is done” and going through a process of adaptation.
The problem lies rather in the model itself. On the internet, a company tends to grow very fast; in fact, if you don’t grow quickly you get overtaken, provided your business idea is good. There are dozens of internet companies that make the profits of 5,000 medium-sized businesses with 70% fewer staff than a traditional company would need to bring in a tenth of that revenue.
The internet is entering the dangerous “everything’s free” zone, funded by advertisers. We may have set our sights on piracy, when the film and music industries are really just where the problem starts.
What will happen when video calling is fully built into an app inside a social network? The forecast is that within a couple of years neither individuals nor businesses will need conventional phone calls. This could cause a considerable drop in the telephone companies’ business, on top of the fall in text-message revenue they are already seeing. In other words, an app costing around 100 million dollars, bought by an internet giant, could cause the telephone companies losses of billions a year.
Perhaps the most visible example of how the internet is advancing is banking: banks in Spain could keep their revenue while cutting 20,000 jobs. Online banking offers customers better terms, is more convenient and is full of discounts on all kinds of transactions. The collateral damage is that no branch is needed and, therefore, no employees either.
We could apply this equation to any product or service that can be sold online. By a rough calculation (which an economist or professional analyst should confirm), if things continue at this pace and online commerce grows by 20%, we would have added 3% to unemployment. And that’s just commerce. It doesn’t include services that consumers used to pay for and that are now completely free on the internet, since the economic loss, let alone the jobs destroyed, couldn’t be calculated, although we could add another 2%, always erring on the low side.
That would explain why the United States has seen slight economic growth despite rising unemployment. And the United States is no exception.
Let’s take an example. Imagine Inditex closed all its physical stores around the world, laying off the many thousands of people the group employs today and keeping only its online store. Inditex would then have revenue of roughly 743 million euros, the approximate turnover of Zara’s online store less than a year after it was launched. In Spain alone there are more than 150,000 clothing shops with annual turnover below 300,000 euros, employing more than 800,000 people.
Inditex could bring in roughly the same as 2,500 of those shops with just 20 employees running the online store. To top it all, in this case Inditex wouldn’t pay taxes in Spain, because another advantage of the internet is that you can choose which country you invoice your sales from. Inditex, specifically, has chosen Ireland to invoice its online sales, saving roughly 18% in taxes that way.
In this hypothetical scenario, Inditex would not only destroy thousands of direct and indirect jobs; it would also take trade away from Spain and add to unemployment, and the Spanish government wouldn’t receive a single euro from those sales made on Spanish soil. Let me ask you: do you know many businesses that turn over 700 million a year with just 20 employees?
Obviously we don’t have a problem yet, since for now we are adapting to progress, but it wouldn’t hurt for someone to analyse the viability of this business model over the next 10 years in terms of the jobs it creates and destroys.
It’s not that I had pessimism for breakfast this morning or woke up anti-progress. We’ve simply used mathematics and common sense once again and, as we’ve set out in this article, the numbers don’t add up in the long run.
Featured image: Yoshizumi Endo, CC BY-SA 2.0, via Flickr.
