Disruption through low margins

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Good Old Trend

For a long time, I’ve been writing about technology as the main source of disruption in the media industry. Yesterday I started thinking that perhaps I’ve been wrong. Technology plays a part, but perhaps it’s a factor rather than the main cause.

The most disruptive thing must be people that don’t play with the same rules as the rest of their peers.

Simply put, companies are judged on their revenues minus their costs and their desired profit margins. If there is money left over, they are doing better than expected. If they don’t make enough, the company is failing to meet its expectations.

Technology plays a large part in lowering the costs. This in itself has proved to be disruptive. But even more disruptive, is to lower the expectations and possibilities of the margins.

Take Craigslist as an example. According to TechNewsWorld in 2004, they took $65 million from the newspapers in the area (and that was five years ago). The same year, Craigslist was expected to make $10 million of their own. As they were taking most of the classified ads, it’s easy to see that they could have made more than the expected $10 million. But they decided not to.

Due to technology, they had lower costs. But due to not maximizing profit, they didn’t have to charge as much for their ads as they could have done. They even let most of them be completely free, and still do.

As the product was comparable – better than the competition even – there simply was no reason to use the classifieds page in the newspaper ever again. But even worse – the newspaper couldn’t accept such a low margin, and through that made it impossible for them to compete. Game over.

Open source works in a similar way. There’s no expectation or requirement to present a profit. Therefore the price can be zero. And that is difficult to beat, if you’re in a company that doesn’t accept zero as a margin.

Disruption comes in many forms. Technology has made it possible to create a lot with little. The internet as a whole has brought back the notion that for a lot of people and companies, it’s good enough to make a living, rather than getting rich. Combine the two and you have the most difficult hurdle to overcome for any profit-driven company today.

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