While perusing Glyn Moody's fine blog on all things open source, I chanced upon this little item.
As Glyn says, "this insightful presentation by Brent Williams, a self-styled "(temporarily) Independent Equity Research Analyst" is unusual because it manages to combine a good understanding of the open source model and world with some grown-up economics."
It was the section on the economics of software as commodity that set me thinking about the parallels with the PR business. Talking of commodity markets generally, Williams says:
No switching costs to buy from a different
producer (other than the notice period, there is no cost involved involved in firing an agency).
Market prices are a function of changes in
supply and demand -producers can’t affect demand, only supply. (Hence during the dot com boom, agencies could hike their prices due to demand - but can't stimulate demand in a shrinking market)
Pricing moves quickly to find a point of supply/demand equilibrium (hence the average day rates of agencies are falling - even if agencies try to keep them high, overservicing to satisfy client demand brings down the real rate)
“Excess” profits quickly disappear and producer profits revert to the mean of the economy as a
whole (which is why PR agency profitability is generally very low)
Lowest-cost producer wins in a commodity marketplace, because they can sustain “excess”
profits longer than all other producers. (Except with commodity PR, the biggest cost is people. So trying to squeeze costs on staff ie get them to do more for less, leads the well documented issues of morale and lack of quality personnel).
And given most agencies are operating in commodity mode, then the long term outlook for most of them is not exactly rosy.