THE question to raise now, is what drives shakeouts. At rock bottom, it is the overcapacity of competition and competitors in a given industry or subsector. Yes, despite that free markets are free entry, free exit, social technologies, there are Malthusian checks to growth of numbers and ratios of the parts therein, given an innovation peak or plateau.
Immediately innovation in a given sector peaks into a plateau, the point must be made that there is a limit to the amount of competition that given sector can bear. At that point, most or all marginal players will be making only accountant’s, not entrepreneurial profits. Accountant’s profits are the profits that can’t take any negative shocks or instabilities in the market. And markets are defined ironically by their uncertainties and shocks and gyrations. So, firms that only make accountant’s profits literally exist on the death row. It is meet to suggest that an external or internal industry innovation can pull the trigger and become a source of shock in the industry or subsector.
And there is nothing exotic in this. All organic systems, of which the free market is one, is built or self-directs itself to achieve an optimal state of relatedness or compositeness. This optimal composite state is the state all organic entities tend to, consciously or otherwise. That is, there is an optimal number of market group/players, and the ratios of those players to one another, that a market may bear. What this means is that the numbers and quantities of suppliers, buyers and brokers must in spite of themselves, tend towards optimal ratios or their most productive numbers, save an external invasive force, at its own costs, enforces otherwise. That is, a market out of harmony or optimal ratios of the players will implode or melt. This explains why and how soviet-style economies were full of and supplied with products nobody needed and short on those needed by the populace. So, the state is an invasive force in market stalls. And then, the soviet economy unable to be borne by government, acting as Hercules, collapsed. In a sense, the Soviet Union economy suffered a shakeout, only it had political consequences. And a key part of that political consequence was the dissolution of the Soviet Empire, or union. Nigeria Ronu!
Luckily a Financial Times ft.com/lexicon cleverly captures the overcapacity syndrome in this definition: Shakeout is when over-supply in an industry forces smaller competitors to merge with or be acquired by larger players or to exit the sector altogether. A shakeout is a fast drop in the number of independent producers in a given industry…. According to Jovanovic and MacDonald (1994), the reason for these changes is a technological innovation that dramatically increases the efficient scale of production.
And a Harvard Business Review article cleverly captures this the collapse of profitability for the marginal players who subsist on non-sustainable, non-going concern, accountant’s profit.
‘The shakeout in outplacement has followed a familiar pattern… Meanwhile, indirect competition in the form of “how-to” books, videotapes, and walk-in outlets lessened demand and undercut the industry’s specialised knowledge base. One firm saw its profit margins fall from 24% in 1988 to 4.5% in 1993.’ Strategies for Surviving a Shakeout George Day, the March–April 1997 issue.
The point here is that the new technology – a shock – forces the oversupplied market, operating at an old peak plateau to consolidate into dominant players or foreclose…
But these are the dramatic phases. The point is that as a market is oversupplied, the profit margins shrink down, tending towards zero. And this weeding out of marginal competitors goes on, but often not as dramatically as the exampled numbers above.
If we brought the review to the Nigerian market, the following is germane. All the Nigerian newspapers that came in to merely add to competition failed, both as viable products and as a price reducing agent. The newspapers that did well in the market did so because of innovation not competition, that is in spite of high prices. And Nigerian newspapers have always in the last 35 odd years been on a price rise, despite increasing numbers of competitors. This is proof enough, in the local Nigerian market, that competitions do not lower prices.
Of the major papers that came in and succeeded we will give three examples of the innovations that drove them: The Daily Sun came in as a new boy on the block tabloid. The Sun covered in detail and as a flagship, the news that was once taken as marginalia in the Nigerian media. She literally founded an untapped market.
This Day came in to give undeserved honour or at least honours they wouldn’t have deserved otherwise, to businessmen. Suddenly, characters who were distinguished only for making money were candidates to grace the cover of a newspaper with national reach. Additionally, This Day stratified, innovated and cultured the illusion or reality that certain classes of emergent Nigerians, who should be running the economy and politics have been unduly neglected. And it catered to their ego. In payback, these classes took This Day as their existential hymn book. These can be characterised as the young adults who feel and were told [by This Day], they were too achieved or over-qualified not to be sought out by a nation, Nigeria, in distress.
The Guardian came in on the template that there are those who ‘owned’ this country and it is to their interest that the country should be stabilised. So, The Guardian chose to be temperate not to overheat the polity or even the economy. It was for them the best of all possible worlds. And those who really owned the country, who wanted it to endure, and harmlessly evolve, berthed and swore on The Guardian, as the last word in Revelation. Of course, the rest of them, the Punch, Vanguard, etc., were innovators also in their ways and days. Lest it be forgotten, the angle of entry or innovation with these papers did not in all remain static, as an operating business model. The papers themselves evolved and reinvented themselves. So, their present circumstances may not be what it was that gave them market entrée or coming out party.
So, they all, The Sun, This Day and The Guardian, representatively, all broke into the market, sustainably, by innovation not [price] competition.
And to repeat, it so happened that the papers whose names we need not mention, who only came in to compete not only failed at it, but could not reduce the general price regime. So, competitions do not lead causally to the lowering of prices in the marketplace. What does is [in] innovation. The market is an organic unit and like all organic systems, has optimal ratios of parts and players. That is, a dynamic optimum does not distract from this.
To give a hint to the unknowing ways of Lai and Kachikwu, let us illustrate with their GSM-telephone template. First, as it happened before Moore’s law and the digitalisation of the telephony. Let us illustrate with a piece from our retained American swimming lessons teacher, Penelope Niven. She wrote a delectable book, Swimming Lessons. She writes: ‘Since my father’s death… I miss his impromptu midday long-distance telephone calls – an extravagance for a frugal man.’
As is apparent her father existed in the world and economics of Adam Smith. There and then, distances were economic factors or issues. In fact, distances were measures of diseconomies, as was scale of productions. And this held true for virtually all transactions.
Now, if we spoke generally about the telephone market, the following are the facts in issue. Before digitalisation or Moore’s law there was the industrial or smokestack era. And telephony was a part of that era. And telephony subsector was subject to the old Adam Smithian laws or lore. In that economy, distance mattered and was some vital and crucial economic quantity and consideration. “You can’t bring coal to new castle’’, for instance, is one of those old industry logic, as recorded innocently by speech makers, emphasising the issue of distance. Then distance mattered, was a disincentive, and there couldn’t have been any CNN or digital/satellite television.
Presently, however, that world is gone and a new world has come. It is the so-called global, or more precisely digital village. And for our purpose, it won’t do much harm to tag it Moore’s village. In this Moore’s village, there suddenly were no distance barriers or diseconomies. That is, for telephony, therefore, there are no long and or short or medium distance calls. Here, the digital world is one world distance, and eliminates the smokestack costs of variable distances thereof.
That is to say that the digital distance between this correspondent and President Muhammadu Buhari is same as that between Buhari and the United States’ President, Barack Obama. Yet, the facts are that we and Buhari live a few kilometres away from one another, in the greater Asokoro Rock prefecture. Meanwhile, Obama is one hell of a universe away. Thus this new reality of the immateriality of distances, demands a new economics. Old and venerable Adam Smith is now as ancient as Miliken hills.
And this new world on non-distance economies are valid for all the sectors of the economy that have migrated to the digital platforms. Additionally, because of this new economy, suddenly there are no marginal costs. That is the cost of replicating the next good comes to zero or near zero. To give an example. In the old world of musical long plays, LP, it costs a kobo or more to produce one more plate. But now, immediately one has P-Square on his laptop, sending it away to whoever he deems has no costs of consequence. And more, doing it is so fungible and portable. This is what makes all digital or e-goods so easy to pirate, which is another matter.
Kindly visit: www.bracenomics.org to read the rest of the essay.