Business Unusual

Super economies may sound great, but they also create super losers

(The Money Show is brought to you by Nedbank. See Money Differently.)

Every entrepreneur and artist would hope to reach as many people as possible with their products, services or art. The challenge in the past was that they could only reach those in their town or country.

Since the arrival of the world wide web though, you could argue that our towns and countries have grown or, more accurately, that the world has shrunk. This should be great news. Alibaba’s Jack Ma built his business on the basis that the internet could connect buyers and sellers all across China and the world.

Bigger markets, greater access and more competition do have significant advantages; however, there are some drawbacks too. The effect on economies that are suitable for digital distribution and consumption create what is sometimes called superstar economies or winner-takes-all-economies.

While the effect is most significant on pure digital services, the impact is beginning to be felt in any industry that has moved to become more digitally based.

The industry that may have seen the effect first was music, and it happened a long time ago. Before music could be recorded it had to be performed live. The best artists could only appear in one venue so if you wanted live entertainment and the first choice performer was not available you had to book the next best performer. The star would get more money, but there would be lots more work for many more artists.

Once the record player was invented and you could choose who you would like to listen to. There was less need to listen to other artists when everyone could listen to their favourite.

While there was still a large market for a variety of performers, the opportunities for those that were only a little less popular got a lot smaller. With each advance in recording and broadcasting in the music industry, the fame of that generation of superstar grew while the pool of superstars shrank and the difficulty of becoming a star increased.

We are now at the point where only a few artists become global superstars while many other just as talented performers will struggle to get paying work.

A star is retweeted

It was not all bad though. For artists that were able to do something new or were favoured by current artists; their chances of becoming stars themselves increased.

The first song to get a billion YouTube views was by a then little-known artist from South Korea. Psy’s Gangnam Style was a global hit in that it was both catchy and novel. He was already well known in South Korea but became a household name almost overnight. The track that currently has the most YouTube views is Louis Fonsi's Despacito which has over 5.5 billion plays. It was the fastest to reach a billion plays and became world famous in part thanks to a version that featured Justin Bieber.

Fame creates fame, so the challenge for modern stars is not only being good but maintaining their popularity. At the same time, the playing field for new artists to at least publish their work has grown and so established artists need to ensure their music is even easier to find and play over and over again. This has killed airplay as a significant revenue source but has increased the demand and profits for touring. That comes with its own challenges as it can easily take over a year for a top artist to do even a regular world tour.

There may be some help or even more competition on the way. As artists age, they can’t sustain their constant performing or for those that experience more terminal problems, no opportunity to tour at all. Holographic shows may help famous artists perform in more venues allowing them to visit the major cities while still "performing" in all the towns that could sustain a show. Next year, it is reported, that Amy Winehouse's family is planning such a tour.

As much as it may be a help, current artists could face sustained competition from former artists doing holographic concerts.

80% of the profits are earned by the top 10% of companies

The same dynamic affects athletes, and even companies. The FAANG’s consisting of Facebook, Amazon, Apple, Netflix and Google are not the only player in their category, but they completely dominate their sector.

So if the market now has such dominant players does it mean the end of disruption? Not according to research from the McKinsey Global Institute which reports that the top 10 percent of companies globally make 80 percent of the profits. So it is a case of the rich getting super rich in a winner-takes-all economy, but when they fall, they fall fast and far. When a disruptor enters the market, it can rise very rapidly too. Read the Financial Times coverage for more on the report

Tencent is an example of how a dominant company can be disrupted as a result of regulation. The Chinese Government set strict screen time limits for their gaming community with the shares having lost over $150 billion in under 12 months.

One reason incumbents need to be cautious once reaching a dominant position is how much easier it is for a product or service to get noticed under the right conditions. It is part of the odd situation that a company making losses but growing rapidly is still considered valuable because of the network effect that applies when adding new users increases the impact of the service exponentially. Don’t be misled that anything will grow though, it is still more likely a company will burn its way through its cash before it can stem the losses. Movie Pass is a recent example.

So while the superstar economy appears to continue to expand into more sectors, it does not mean there will not continue to be disruption, but for the those that can spot an opportunity and get access to enough funding to get noticed, it remains business unusual.

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