Article of the Day

Daron Acemoglu on technology and the future of work – MIT News


In short, software is eating the world

~ Marc Andreessen 

Economics of a pre-tech versus a tech world

Much of my startup experience is in what today is classified as ‘agtech.’ And agtech is by all evidence a big deal.  There are many accelerator programs related to starting agtech businesses, funding of agtech startups has grown, etc.

Funding for agtech startups has increased significantly.  As tracked by AgFunder News, investment in agtech increased from about $150 million in 2010 to more than $800 million in 2016 and more than $500 million in 2017.

Stepping back from agtech for this post, I’d like to address the larger issue of just tech.

Technology is nothing new, of course, whether agriculture of any other industry.  What may be new is the speed and scale at which technology can shape new opportunities and disrupt existing businesses and industries.

The taxi industry is not new.  Smartphones are relatively new, however.  Put a smartphone in the hand of someone who wants a ride and in the car of someone who is willing to provide that ride and there are significant opportunities for businesses like Uber and Lyft.  There are also a host of issues arising from incumbent businesses fighting to preserve the past order.

Uber and Lyft for the taxi industry, Amazon for books initially and now retail, AirBnB for lodging, Google for media – technology enables new businesses to disrupt the existing order of industries. New businesses creating new competition for incumbents isn’t new, but the speed and scale that technology enables is new.

At the heart of the economics of technology is its ability to alter both average total cost and marginal cost.  And to alter them both significantly.

Recall (maybe from ECON 101) that prices and quantifies in a given market will be determined where marginal costs equal marginal revenue.  The general rule is that the firm maximizes profit by producing that quantity of output where marginal revenue equals marginal cost.

The chart below is a simple description of what a technology can do for a market when marginal costs and average total costs are decreased significantly.  The world for an existing business in the pre-tech world doesn’t change just a little.  The world changes completely.

Economics Pre-Tech and With Technology

Prices with technology are below the average total cost of pre-tech businesses.  Tech-enabled businesses operate at quantities (horizontal axis) and a scale not possible pre-technology.  Tech enabled businesses operate at prices not possible pre-technology.

Pre technology businesses are obliterated by tech enabled businesses.

While a simplified and extreme example, the chart depicts why information technology, the Internet, machine learning, sensing devices, artificial intelligence, and other technologies are such a big deal for many markets and industries.

Two tech businesses, Google and Facebook, now bring in more than one-fifth of global advertising revenue.  Digital advertising was really just in its infancy ten years ago, and now two businesses have more ad revenue than the global publishing business combined.

Did newspapers and magazines do something wrong?  Not really.  But the world changed.  Having scale for advertisers not that long ago meant being able to reach perhaps hundreds of thousands of potential customers by advertising with a large newspaper or magazine.  Today with Google and Facebook, you can reach billions.  Or if you have a more targeted and local business, you can do that too.

In the next post, I’ll dive deeper into agtech.