The Deflationary Credit Collapse and IT
In case you haven't noticed, the wheels are coming off the international financial system. Banks and investment banks are dropping like flies, and the derivatives market is coming apart at the seams. The waste of money that was the Bear Stearns bailout (and Fannie, and Freddie) did not accomplish anything.
We are now in a real, honest-to-goodness deflationary credit collapse. The REAL money supply (which includes credit) is shrinking at an incredible rate. Oil is back below $100 a barrel, real estate is crashing, and just about everything is getting cheaper. Deflation is in full effect, and even if the Fed WAS inflating (which it isn't), there's no way it could print fast enough to compensate for the credit destruction.
The credit collapse claimed Lehman and Merrill Lynch today, and Larry Dignan took a swag at what, if anything, this means for IT. Rather than looking at Merrill and Lehman directly, I think it's a little more interesting to look at the conditions that drove those firms into oblivion and the effect they'll have on IT. I've written before about what the recession will do to IT spending, but what does a deflationary credit collapse mean?
- For starters, don't expect any massive capital outlays such as data center buildouts or large software deployments any time soon. Companies will probably not be able to find financing for them.
- If you sell anything, whether it be a software product or your time, lock in prices now for as long as possible. Wage deflation hurts.
- Prices will be forced down across the board. Deflation has not yet hit the software market, but it will. Expect to see price cuts. If you can afford to wait to buy something, do it. Rent if you can.
- Online ad rates will continue to drop, as will the amount of money they generate. Since every dot com in the world monetizes itself using advertising now, I think we have more places to run ads than we have ads to run. This popular revenue model will be the kiss of death for many startups.
- Software as a Service (SaaS) will continue to be white hot, particularly in the small business market. While bigger companies will probably let internal IT projects stall or grind to a halt, smaller companies will try to save costs by replacing outgrown and broken systems with software in the cloud. There's a much smaller upfront cost and you don't need financing to do it.
Web startups will be interesting to watch. Over the past 5 years cloud computing has changed the playing field here. On the one hand I'd be tempted to say that the capital to start new businesses won't be there because VC's and angels won't have as much to spend, however you can literally host a scalable consumer Web site for $100 a month with Amazon now.
As I wrote before, this is really going to burn any startups out there that don't create real value. As in, things people are willing to pay cash money for. The "free" business model will go the way of the Dodo. What kind of business model is "free" anyway? It sounds like a practical joke. If you provide value you should get paid for it. Farmers don't give their tomatoes away for free while making you look at ads, neither should valuable software be given away for free while making you look at ads.
On the other hand, if you do add value, this will be a great time to establish your company. You will be making money while the fuel (VC and ad revenue) needed to sustain the "free" products will evaporate, killing them dead. You'll also have access to dirt-cheap advertising space!
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