When the leaders of media, telecommunications, IT and Internet companies congregate, as they did recently in Davos, the talk is upbeat about new accomplishments but subdued about recent ordeals: the dotcom bubble; the telecoms crash; the music industry bust; the advertising downturn; the e-publishing revenue stagnation; the PC slowdown; the wireless saturation; the semiconductor slump; the newspaper recession; tile R&D retrenchment. And the question is, why do these predicaments sweep over the information sector so regularly
The prevalence of these problems points to fundamental issues beyond a specific industry or short- term period. Instead, we need to recognize that the entire information sector — from music to newspapers to telecoms to Internet to semiconductors and anything in-between — has become subject to a gigantic market failure in slow motion. A market failure exists when market prices cannot reach a self-sustaining equilibrium. The market failure of the entire information sector is one of the fundamental trends of our time, with far-reaching long-term effects, and it is happening right in front of our eyes.
The basic structural reason for this problem is that information products are characterized by high fixed costs and low marginal costs. They are expensive to produce but cheap to reproduce and distribute, and therefore exhibit strong economies of scale with incentives to an over-supply. Second, more information products are continuously being offered to users. And information products and services are becoming more "commodified", open, and competitive.