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How Information Technology Advances Affect Capital Flows & Investments

PIMCO Managing Director Paul McCulley recently wrote a guest post on The Big Picture, where he mentioned how an increasing number of network connections and IT advances are altering the face of financial services:

Information technology advances are dramatically increasing the number of “connections” we are capable of achieving and maintaining in our everyday lives. These connections allow us to specialize and super-specialize not only our manufacturing processes, but increasingly also our service-based processes, predominantly so in financial services. The mobility of capital combined with the mobility of information across countless interconnected nodes, hindered occasionally by politics and the transparency tolerance of various governments, gives the largest holders of capital something of a “God-complex” in today’s global economy. Small banks expand to become mega-banks, regional banks consolidate to become universal banks, and foreign central banks “self-insure” to become sovereign wealth funds. Wealth and capital supercede the common CEO, the everyday purchasing manager, and humble central bankers of today in velocity, mobility and connectivity. Global central bankers in particular need to catch up quickly.

Building and maintaining a brand and marketing it is getting much more expensive. Well known designers and programmers are writing blog posts fighting over marketing strategy.

Most other online business costs outside of labor and marketing are sharply dropping. As the network gets larger, smarter, older, deeper, and more diverse many industries will feel pain

  • low level jobs that can be replaced by software
  • anything that can be packaged as bits (copyright as a business model, proprietary software)
  • any industries where lasting direct relationships between artist and fan may spring up (killing the need for many publishers/intermediaries)
  • professional services that can sold a la carte (if the industry gets broke into piece you may as well be the one selling them)
  • any industry that generally works against the network effects baked into the web (like proprietary vs open source software, high cost offline publishing - especially for general topics)