When transaction costs approach zero

Posted on April 16, 2016  /  0 Comments

pennies_0We at LIRNEasia have always seen transaction costs at the heart of much of what we do. Our interest in ICTs in value chains, for example, has been focused on changes to transaction costs made possible by ICTs. This fascinating article on the business models underlying cloud computing foregrounds the scale economies perfected by the likes of Amazon. But perhaps the real story is in the negligible transaction costs of billing?

This economics of tiny things demonstrates the global power of the few companies, including Microsoft and Google, that can make fortunes counting this small and often. In other words, you have to be really big to worry about making money off things that are really tiny.

Google charges pennies for search ads and spends $9.9 billion annually building out a global computing business. Given enough software, in the realm of millionths of pennies, it could do even better. Good luck to any new entrant without the scale of these tech giants, however, as customers come to expect that sort of cheap metering.

Cloud-computing companies are not the only ones focused on the small. Banks, of course, have for years been content taking a sliver of big transactions, so long as there are many of them. Uber, which enables private cars to temporarily become taxis, can monitor drivers and riders to adjust prices and routes, changing the value of things throughout the day. An auto insurance company called Metromile charges customers based on how many miles they drive a year.

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