Zero Friction

Zero Friction

Not tomorrow and not next year, but over the next few years, the Internet is going to smooth out almost all of these sources of friction. We will live in a world where there are no ignorant customers, where there are no local monopolies, where the search costs have gone to zero and where transaction costs have gone to zero. In that world, a lot of companies are going to find their profits under enormous pressure.

The reality is that all of the same tools that every company is using to drive efficiency are also going to be put in the hands of their customers. It's going to take a while, but the Internet will represent the final evolution of bargaining power from producers to consumers. And they are going to use that bargaining power to hammer down prices.

The good news in all of this is that if I have a product or a service that is truly cool, unique and differentiated, I can escape that pressure. A while back, I was looking for a new SUV for my wife. She had thought that she might like a BMW X5. So I did what all auto buyers do today. I went online, I found the dealer cost, and figured that since it's a BMW, then maybe they have to make $500 instead of $200 on the deal. I then went to my local dealer ready to do battle. I told the salesman this: Here's what you paid for this thing—and here's what I'll pay over that. He looked at me as if I was crazy. He told me that he'd sell it to me for $10,000 over list price. Why? This vehicle is very cool, people love it, it's a source of pleasure to customers, and that's the price BMW dealers can get.

And I had a little epiphany at that point. I understood very clearly that if you're making a Ford Explorer or a Chevy Blazer or some other product that does not particularly differentiate, all of this power ending up in customers' hands is going to be quite murderous for you. On the other hand, if you're making something that's differentiated and truly appealing, the Internet is your friend. You're going to get word of mouth and a buzz going and a user community and whatever else. For the makers of truly differentiated services and products, the Internet is going to create a world in which there's no place for mediocrity to hide and in which the only kinds of competitive advantages left are advantages that deliver amazing value to customers. That's why I think the Internet is one of these unstoppable tides of history. The genie is out of the bottle, and consumers are not looking for the cork. I don't believe for a moment that all margins go to zero. What it does mean is margins go to zero for companies that don't have cool products and services.

It won't be hard to differentiate. Here's why: Despite the enormous growth in IT spending, the average operating margin for the S&P 500 has hardly changed over the last five or six years. What is happening? We're spending billions, and it's not going to the bottom line. Well, the first reason is that this money is going into customers' pockets. The second reason is that most companies' IT strategies are highly convergent in the sense that they're all working on the same kind of initiatives. In fact, the major trends in IT over the last few years tend to drive strategy convergence rather than divergence. Most companies today are running industry- standard platforms, whether DB2 from IBM or R/3 from SAP.

We are also all outsourcing to the same handful of companies, talking to the same few IT consultants. We are all joining industry hubs and exchanges, where we're purposefully trying to homogenize IT policies across companies. We are increasingly relying on external ASPs. So if you think about it, all of those things are diminishing the probability that you're going to use information technology to create something unique and distinctive for your own company. Most IT executives are out for the biggest bang for their buck in terms of efficiency, and the way they're doing that is outsourcing and borrowing best practices from somebody else.

This article was originally published on 08-01-2001
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