The Mobile Gold Rush

Here's the basic mobile gold rush model: poach advert spending in a stagnant economy.

The mobile gold rush of Web 2.0 continues to attract thousands of techie fortune seekers to San Francisco. It's an old story, and a compelling one: there's gold in them thar hills, and I'm a-gonna git me some. The only thing that changes is the nature of the gold.

The dot-com boom of the late 1990s created a new gold rush in San Francisco and Silicon Valley that fizzled in the early 2000s as the same old reality hit home: only the first few gold-seekers hit it big, and most of the late-comers trudge home empty-handed.

Over 50,000 people left the San Francisco Bay Area as employment in dot-com technology imploded.

The new gold rush is mobile--mobile apps, mobile services, mobile anything. And so the timeless gold rush story is dusted off and launched anew: young coders are paying $600 a month for the right to sleep in someone's laundry room; the average rent on a one-bedroom apartment is over $2,500.

Developers are breaking ground on dozens of residential highrises that will add thousands of apartments and condos to the Market Street corridor. Rent for a postage-stamp studio: $2,000 a month (maybe more if the market will bear it), but we know hipsters like bicycles so they'll be plenty of secure bike-racks. Amenities galore!

Though there are already thousands of pricey restaurants in San Francisco, dozens more are opening every month as entrepreneurs rush to claim their piece of the tech "miners" spending.

You know the story: the canny folks didn't bother seeking gold, they sold the tools to the miners and fed them--a fresh egg, after all, could fetch a princely weight of gold in the feverish economy of gold mining towns.

It's too bad the actual gold in the mobile gold rush--income streams in the billions of dollars--doesn't exist. All technology boils down to this: either it increases productivity or it's a time-sink. Some technologies serve both masters, of course, and perhaps mobile technology is the ultimate in promising productivity but delivering time-sink.

Let's disassemble the mobile gold rush into its constituent parts. The easiest way to do that is to follow the money.

1. How big is the income stream generated by sales of mobile apps, services and hardware? Most apps are free or sell for a few dollars, ditto services. With Android tablets going for $45 a piece in China, hardware profits are heading down. How much premium will people pay for an Apple or Samsung tablet?

People like to tout $1 billion in sales in this or that; fine, but what's the net, and is that net rising or falling? What else is in the pipeline that offers similar functionality for free?

2. People now expect free everything except their monthly 4G service bills. The real money in mobile is the monthly service fees; people routinely pay $150+ a month for their smart-phone service; no wonder you can get a free phone if you sign up for a lengthy service contract.

As correspondent Mark G. recently observed, you will soon be able to buy a fully functional Android-OS tablet for $1--if you sign the service contract.

3. So if there's no money in selling apps/software or hardware, then what's left? Marketing. The hot new vein of gold the frenzied tech-miners are digging is mobile advertising and targeted marketing.

The scenario that everyone imagines is this: carefree wealthy young people are out on the town and they seek a pizza. They open an app (free of course--the money is made in delivering the advert) and all the nearby pizza places that paid to join the advert network show up on their little screen. Oh joy, the terribly difficult task of locating a pizza place has been simplified, and the restaurant owner gladly ponies up the advert fee for the special delivery of a customer.

Nice, but how realistic is this scenario? How many billions can it possibly generate? The entire ad industry is about $170 billion a year, and that covers everything: television, radio, print, Internet and mobile. Advertising & Branding Industry Overview. Mobile adverts are still a thin slice of that: $4 billion.

That's the gold everyone's seeking: a larger slice of the advert pie. It is obvious that mobile can poach a lot more advert dollars from other media, hence the gold rush to mobile everything that serves adverts.

It is a given that a targeted ad, specially sent to the most important consumer in the world, you, based on your own unique desires of the moment, will be more effective than a TV, radio or print advert that reaches thousands of people with the same message.

Big Data machines are grinding away at reams of marketing data to select the most effective platforms and techniques to "grow mobile's share" and make advertising even more compelling to enterprises. Everyone will soon have a specialized mobile advert campaign designed for them, with "guaranteed" (ahem) results that beat every other competing media.

These truisms are feeding a corporate frenzy for mobile technology. The game plan for all these hot-shot coders seeking nearly instant wealth is not to design a service that generates tens of millions of dollars annually--the game plan is to rough out an idea, claim it will generate tens of millions of dollars and then sell it for millions of dollars to some corporation desperate for a "mobile strategy."

Is that a sustainable model? No, because once every corporation has scooped up a company with 11 coders for a couple million dollars, then the need to scoop up more start-ups fades.

All this overlooks the basic mobile gold rush model: poaching advert spending in a stagnant economy. If we look at who pays income taxes as a rough guide to how many people have disposable incomes large enough to have money to blow on excess consumption, we conclude that only the top 10% of U.S. households have enough income to respond to adverts, as The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%.

As noted here many times, real median income (adjusted for inflation) is down 8%. If we subtract out the income of the top 10% (which is rising), then the decline for the bottom 90% is a lot more than 8%.

Bottom line: fewer dollars of income, higher costs for essentials leaves fewer disposable-income dollars left to blow on consumption.

If only the top 10% have significant disposable income, then advertising is a diminishing-return game, as everyone chases the dwindling number of dollars available for purchases of non-essentials. Is poaching adverts a solid foundation for a gold rush? Not by historical standards.

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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