The Economy is shifting from Atoms to Bits

There has been a lot of discussion over the past few years about how we are shifting from an economy centered upon the trade of physical goods (atoms) to one that is concentrated in the exchange of intangibles such as services, information and intellectual property (bits).  Some have referred to this as the “weightless economy.”

This shift away from atoms towards bits really accelerated about 15 years ago with the rise of the Internet.  Think about companies such as Google, Microsoft, Yahoo, Facebook and Twitter that now dominate the business headlines.  Each of these companies has very little association with atoms or the physical world.  They were not the first to create information-centric businesses.  Companies such as Experian, Moodys, D&B and Nielsen were the true pioneers of these models.  But Google and Facebook (as well as Amazon and Apple) have tipped the balance of focus amongst entrepreneurs and startups towards bits.  For example, there are hundreds of companies being launched each year to build on the APIs offered by Facebook and Twitter.  And there are thousands of companies whose sole purpose is creating “apps” for Apple tablets and “content” for Android phones.

Another good example of corporations focused on bits rather than atoms are those which trade purely in intellectual property.  Many people affectionately refer to these organizations as “patent trolls.”  There are hundreds of these organizations who have no desire to provide any goods or service, but merely focus on acquiring, licensing and selling patents, trademarks and other intellectual property assets. 

Numerous categories of consumer products are shifting from atoms to bits as well.  The photography industry is a good example.  Few people by film these days or for that matter even print copies of their photos.  Images are captured on memory cards and shared on social networks.  Although digital SLRs remain popular, the highest volume of photos is taken on smartphones.  And while there are lenses and flashes on iPhone, Blackberry and Android phones, the camera is really more of a software application embedded in the operating system of the device.

The media and entertainment industry offers examples of the shift from physical to digital products as well.  Over 10 years ago consumers began to prefer MP3s (bits) over CDs (atoms) for music products.  Soon thereafter video games (which have been bit-oriented from the start) began a similar migration.  First physical game cartridges were augmented with online experiences.  Think Massively Multi-player Online Role Playing (MMORP) games.  Today many of the most popular video games (think Angry Birds, Words with Friends or Temple Run) are not even available for purchase as a physical cartridge.  They exist only in digital format playable through a tablet, smart phone or traditional computer. 

Movies have followed a similar path.  More and more consumers are opting not to purchase DVDs or Bluray discs (atoms).  Instead they are streaming movies over Netflix, downloading them on iTunes or playing on-demand on Verizon’s FiOS.  The Kindle and the Nook have converted millions of book readers from atoms to bits.  Authors such as Seth Godin and David Meerman Scott have chosen to no longer print their new titles, but only distribute digitally.  Various newspapers and magazines have elected to stop print editions (or print with less frequency) as their audience shifts to online editions.  Not every company has been successful in making the transition.  Giants such as Tower Records, Blockbuster Video and Borders Books have all been casualties of the digital era.

More thoughts in my next post.