Manufacturing scarcity in the age of abundance

There are two people I know of who’ve been able to to explain why the internet-era economy is the way it is better than anyone else: Ben Thompson (Stratechery) and Alex Danco. They have observed that the new economy often diverges in radical ways from what conventional economics and business strategy would suggest, and have unpicked the underlying dynamics behind this.

Both see one feature of software as central to understanding internet-era economics: zero marginal cost of production and distribution. In the software world of bits (not bytes), conventional economic constraints melt away. Rather than Coca Cola having to pay for ingredients and materials to create each bottle, and then finding ways to transport those bottles to the furthest reaches of the earth, you have Instagram in 2012: 13 people sat in a room for two years and made something used by 25m people all over the world. That just defies all economic logic from the industrial era. It is mind-bending. But its also obvious: each extra user costs (next to) nothing, and distribution is simple as uploading it to the app stores, so why should these outcomes be surprising?

But the thing is scarcity has value, this is 101 in economics: price is a function of supply and demand. It is intuitive, and you feel the power of this anytime you see people clamouring to get an invite for Clubhouse, or when people hear the super markets are about to run out of loo roll.

Arguably one subtle arc of innovation in tech companies has been the introduction of artificial scarcity into the core product design. That is the intentional creation of scarcity where there is no economic need for it whatsoever. Scarcity be design, not by necessity.

The format innovation of Tik Tok and Twitter was to introduce scarcity to the creator side of the product: people can only tweet 140/280 characters; you can only make videos up to 15 seconds long. This has the effect of forcing creators to condense everything they’re saying into a very dense format, it is a forcing function for getting to the point. Arguably this limit provides a sharp edge against which creative output can be honed, refined, and the ‘value’ of it concentrated.

Snapchat did something similar with the introduction of 10 second disappearing messages: you see it once, then its gone forever. This has the curious effect of making it feel more special and intimate than a permanent message. The scarcity gives it greater meaning and value, somehow.

The arenas most driven by abundance dynamics are those without any marginal economic touchpoint to the world at all: less so Amazon, Tesla, Apple, Spotify, Uber, Peloton; more so Google, Facebook, Instagram, Zoom. But what is clear is the grandaddies of the high-abundance arenas did not make use of scarcity dynamics. Google, Facebook, Instagram, WhatsApp, YouTube. Te introduction of scarcity came from the second-mover companies into these spaces: Tik Tok, Twitter, Snapchat, etc.

This makes sense if scarcity by design is a mechanism for differentiation and value creation in a market already dominated by large players. The innovation arc can be seen in YouTube > Tik Tok; Facebook > Twitter/Snapchat.

Clubhouse is arguably a first-mover within its format — live audio. What will be interesting to see is whether second-mover companies into live audio over the next decade seek to introduce scarcity by design as a mechanism for forcing value creation and differentiation. The feature equivalents here would be limits on the number of people in a room; or perhaps limits on the length of time people can speak for. But with so much wide open space to track and value to harvest from the format itself, we could expect Clubhouse to follow the first-mover social app and not need to introduce artificial scarcity

Contrived scarcity can take many forms (crypto, freemium software, ‘gated’ online communities) and here we’ve only looked at a particular manifestation — scarcity of content creation or consumption in social/new media apps. But like a mirror to abundance, the way the tech companies craft and manufacture scarcity artificially is potentially an important consideration in how the industry evolves over time.