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There is no "New Economy"


When I first started saying this a couple of years ago, I really did feel like a contrarian. Now, time seems to have proven me right. However, just so we don't leave any room for doubts, let me once and for all dispel any myths about there being a "new" economy.


People started talking about a "new" economy about the time that the tech boom was heating up. Some people have used the new and old economy dichotomy to divide high tech companies (particularly those having anything to do with the Internet) from manufacturing, heavy industry, and other "traditional" types of companies. However, this usage seems adequately covered by the term "high tech", and I prefer to focus on what appear to be the two major attributes of the new economy.


The first attribute of the new economy is that the market valuation of a company is based less on its current actual worth than on its future worth. At best, this reminded me of the tulip market in 17th century Holland. At worst, it’s nothing more than speculation and gambling. In 2002 I don't really need to say much more about this. The market has spoken loudly and clearly.


The second attribute of the new economy is a bit trickier, but I still hear people talking about it. It most recently surfaced in an address by Bill Gates in which he described "new economy" companies as high tech companies whose products have virtually a zero incremental cost of production after initial development. His example was software companies (like Microsoft of course) who are able to sell and distribute their products on the Internet for almost pure profit once the development costs are recouped. I think Mr. Gates has shown that he knows about as much about economics as he does about software architecture and security. The concept is questionable for several reasons. First, there are several companies in the so-called "new economy" sector that produce goods or services with non-zero incremental costs of production and distribution. Computers, peripherals, and IP routers are a few that come to mind.


So, let's limit the scope of Mr. Gates' comments to software companies. Leaving aside the fact the model may not even fit Microsoft (a lot of their distribution is through hardware OEMs, so distribution is even easier for Microsoft than his model), it leaves out quite a few other aspects of the picture. It fails to account for the very high cost of production of software. Aside from things like licensing fees and overhead, it is almost pure labor. And, it's not just production of the current version that needs to be accounted for, but also development of the next version. As Microsoft has shown us so well, in order to stay in business you can't just sell the customer the software once. You have to keep selling it time and time again with new versions if you really want to make any money. The useful product lifetime is very short, and the lifetime of the revenue stream is extremely short compared to the products of other industries.


Finally, there are other types of organizations that don't quite fit into his "new economy" category that have the attribute of almost zero incremental costs of production and distribution. Living in the Pacific Northwest, he should be very familiar with the Bonneville Power Administration. Once you build the dams and the distribution grid, it costs almost nothing to produce and distribute hydroelectric power. That's about as "old economy" as you can get. Mr. Gates has made a very good case that the economies of the software industry are different from the economies of most other industries, but I don't think that he's done much more than that.


For all the blathering and pontificating about the "new economy", it really doesn't amount to much more than that - blathering and pontificating. The fundamental rules just don't change. Making a profit, providing customers with good value and service for their money, and taking care of your employees are what business is all about, "new" economy or old.


April 30, 2002


© Michael C. Rawlins