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Daniel Knowles
Daniel Knowles is an Assistant Comment Editor on the Telegraph website. He writes about politics and economics and is @dlknowles on Twitter.

The internet is a profit- and jobs-destroying machine
By Daniel Knowles Politics Last updated: May 23rd, 2012

Yellow pages – this business used to make lots of money
I do like getting things right. Last week, I wrote that investors would be mad to buy into Facebook for $38 a share. It turns out that lots of investors agreed with me. Since the floatation, the newly formed Facebook INC has lost 19 per cent of its value – the share price is now a little over $31 and still dropping. Quite soon, its price may even vaguely resemble a reasonable valuation based on the company’s potential profits.
Anyway, I won’t go on gloating. The reason I come back to Facebook is because of another story in the newspapers today. Yell, the company which publishes the Yellow Pages, is renaming its online offering "Hibu". According to Mike Pocock, the company’s chief executive, Yell is "viewed as a dinosaur" by the public, and so it must be renamed. "It doesn’t have any pure meaning behind it,” he said, of the new name. “It needed to be short, easy to pronounce and to sound edgy and innovative. It doesn’t mean a lot by itself, but if you turn the clock back, neither did Apple [sic] and Google or Yahoo!".
I’m not sure why Mr Pocock reckons that changing the name to Hibu, which sounds a little like the name of a Shoreditch pop-up restaurant, will make any difference. This year, his company has posted a loss of £1.4 billion. Its total debts are £2.2 billion. Its revenue has plummeted from £2.2 billion in 2008 to just £1.6 billion last year, and its investors clearly don’t expect it to recover. Its market capitalisation is now just £57 million – less than the company actually made in profits in 2010-2011.
But here’s what struck me: not long so ago, Yell was making revenue of £2.2 billion and profits of £300 million a year. That’s not all that far off what Facebook is making now. But Yell was a company that only published a business directory that we barely ever even leafed through – even back in 2008. Facebook is a global company with 900 million users. Even if you assume that every single adult in the United Kingdom leafed through the Yellow Pages every once in a while, the company made 15 times more per customer in 2008 than Facebook does now.
Perhaps that ought to reassure the investors who piled into Facebook last Friday only to see their money shrivel on Monday morning. If Yell could earn 15 times more, why can’t Facebook, which has a much deeper integration into people’s lives? If the company can replicate Yell’s earnings just in its core market of the USA and the UK, it could multiply its current profits 15-fold or more. Yay for Facebook.
But I’m not so sure that it can. I think that the lesson from Yell is that the internet is actually an enormous machine for destroying jobs and profit. Take a different example: Wikipedia. Not so long ago, Microsoft had a pretty amazingly profitable business selling a global encyclopedia called Encarta, which came on a CD, often free with Windows. I remember my childhood seemed to be spent looking up fierce animals and historical wars on it. Or playing the Encarta MindMaze, obviously.
Microsoft stopped producing Encarta in 2009. Before Encarta, there was another big profitable business selling print encyclopedias, run by Britannica, which employed literally thousands of academics – 4,411 in 2007 – to write articles, hundreds more editors to put it together, and, for a time, salesmen to sell it door to door. The last print Britannica came out in 2010.
I looked up all of the facts in that last paragraph on Wikipedia. The global, online encyclopedia has a paid staff of 35. All that information is marshalled by unpaid amateurs. The website, even though it delivers huge and unquantifiable benefits to its users, generates no income besides what it raises in donations. Wikipedia isn’t alone. All sorts of things we used to pay large sums of money for are now nearly or completely free.
This, ultimately, is the story of the internet. Highly profitable local monopolies are broken down by global competition. I should know: the newspaper industry is another victim. In Britain, we are lucky enough to have had a competitive print media already, but in the US, where newspapers are local operations, the industry is on its knees. Its customer base has turned to the web for the classified adverts that used to be known as "rivers of gold".
For consumers of information, and small business advertisers, this is, of course, great. Creative destruction is good; the Luddites were wrong. I love Wikipedia, just as I love all the stuff I get free from Google (never tried Google Docs? When you do, you will understand why Microsoft Office will be the next to die).
But for investors – pensioners and so on – and employees at those companies, it’s catastrophic. And it’s happening so fast that I’m not sure we’ve quite worked out how to address that yet.
Update:
All right, all right, please stop yelling lump of labour fallacy at me. I know what that is. I shout it often enough myself. I’m not saying that the internet is going to cause mass-unemployment.
What I am saying is that it will help hollow out wages for workers with specific skills – like academics – at a fairly impressive rate. And also that investors are being absurd if they expect internet businesses to ever match the profitability of the firms they are replacing. These are interesting trends – and I’m not sure we’re properly prepared for them.

http://blogs.telegraph.co.uk/news/danie … g-machine/

Statistics: Posted by yoda — Wed May 23, 2012 10:22 am