The Free Services and Service monopoly business model
By: Amit Bhushan Date: 4th Mar. 2018
While much is written on the looming ‘trade wars’ and the US trade embargos. There is also a lot usually written around agricultural subsidies by our noted self-acclaimed economists in the media. It is usual for the press to write about the agri-subsidies of the West and how it hurts India. However the internet based service models and how it impacts the countries with higher population is not analyzed usually. Basically, technology transformed the nature of ‘services’ or the ‘service industry’ as it existed in past. Earlier it was assumed that services have to be consumed as soon as they are produced, and that most services have to be locally produced, storage of services was limited to very few segments and so on. The technology changed much of that. However the biggest change were ‘standardization’, ‘death of distance’ and its ‘storage along with on-demand supply through internet’. This ‘productization’ of services on the back of technology and its exports based on suitable ‘commercialization models’ had little challenge hitherto as the domestic services industries in the emerging markets were nascent. The rise of economic nationalism in these markets seems to be changing the same and the ‘trade war’ is result of these pressure points when the freedom to goods trade is being revisited politically. There is no need for ‘modi-fication’ of these pressure points and distort the debate, but somehow the media also seems to love that.
That this transformation of service industry has allowed the more developed West to produce services or more appropriately the technologies to produce services in bulk and put them on internet so that the same can be supplied easily and a reason for their economic dominance of service industry. The commercialization models were worked out to support this business, but what these basically involved were ‘easy market/consumer access’ and ‘commercialization models to support monopolies’. It was assumed that once such a monopoly is evolved it would be hard to displace. However changes in technologies as well as human barriers of culture and people’s expectations based on the same were natural barriers to such models. Nevertheless, the great journey of the developed world got hitched onto this kind of business model even though there may not have been an enduring advantage with relation to the labour costs that has material implications on such models. With the technology access steadily becoming cheaper and rise of the competency level in the emerging markets, these markets started to yearn for their domestic industry that suited their domestic cultural preferences. So the older ‘Free services and service monopoly based business models’ are increasingly coming under threat although it’s a bit too early for jury to be out. The actual productized services from emerging markets are still in evolution and their ability to formalize some globally accepted models is far from reality. But nevertheless some good competition for ‘Uber’ and ‘Ebay’ from the Chinese players, some CRM players or Bank-tech players emerging in India etc. are a case which point towards the likely direction.
While the observers in our print media are looking at the ‘trade wars’ and shouting ‘protectionism’, the underlying pressure points for these lie ‘somewhere’ else. In fact the services are being left out from the analysis is itself a great miss, if not total dis-service to their readers. The retreat of some of the great ‘free services’ business a la ‘Uber’ is a case in point but too early to discuss the same, may be. This is because the emerging markets are yet to develop much heft in this regards despite the progress, however for that happen new successful ‘commercialization models’ would need to emerge for which competition is simply a bit too much for present. But the copycat businesses have emerged and seem more than a threat to ‘global players’ in some of the markets itself seem to be a big challenge because the technologies keep evolving over time. And sustaining these changes from the low cost emerging market is likely to be much more cost effective, though these again may have its own ramifications. Other dimensions being support for local market nuances, which again is much more sustainable from low cost locations. This however challenges to the nuance of over-reliance on services and its exports based on the mentioned commercialization models in much of the developed world seem to be a bit unsustainable and thus a need to re-evolve manufacturing. It may not be the Chinese steel and aluminum, but the Chinese ability to support the domestic tech-based service industries in the emerging markets that would eventually be the ‘real threat’.
Having said the above, what would be the consequences of the ‘trade war’, if that term is to be used. Basically, there is likelihood of a sustained rise in the service industry capabilities in the emerging markets (and also in the goods production ability). The commercialization models based on monopolies/oligopolies would be under pressure and likely to undergo change. Would that mean rise of prices, may be yes. However there is huge over-capacity for service production based on technology, and any growth is likely in the arena of customized service products or niche spaces to begin with. This would expand the markets as well as consumption and a possible increase in prosperity. This may however also lead to further deepening of the demand for protectionism as these niche players want to expand in some of the more generic service areas where the monopolies/oligopolies dominate. So the ‘trade wars’ enthusiasts are going to have a gala time writing about the same and proclaiming winners and losers. However, since the trade as well as some ambiguous as well as unambiguous subsidies are also part of the trade, so the same also needs to be analyzed in a wholesome manner. The analysis could be more interesting if the same also includes support for Chinese to its basic metals, solar and electronic chips industry to create and sustain global monopolies or to support agri or services industries based on cash subsidies or policy measures in other more developed countries. The case in point has been nations going all out to support what they believe is the 'core competency' and wipe out competition for such domestic businesses for globalization, but the same coming to threat when it becomes unsustainable beyond a point. The caution required is to keep close watch on evolving situation while continued denunciation of monopolistic/oligopolitic businesses by powerful nations including guidance for the domestic players on how things may be shaping up. Let the ‘Game’ evolve…..