“Summers and DeLong found themselves hopelessly trapped. Although economists and entrepreneurs never intended for the capitalist system to self-destruct (they expected it to reign forever), a careful look at its operating logic reveals the inevitability of a future of near zero marginal cost.
A near zero marginal cost society is the optimally efficient state for promoting the general welfare and represents the ultimate triumph of capitalism. Its moment of triumph, however, also marks its inescapable passage from the world stage.
While capitalism is far from putting itself out of business, it’s apparent that as it brings us ever closer to a near zero marginal cost society, its once unchallenged prowess is diminishing, making way for an entirely new way of organizing economic life in an age characterised by abundance rather than scarcity.”
In their marketing collateral SMSF software vendor Class Super emphasises the fact that practitioners can improve the efficiency of their practice by 400%.
Given the enormous investment that has been made, this is a claim for which the shareholders and staff should be rightly proud.
Expressed slightly differently what Class Super is saying is that the technology they have developed has improved labour productivity in relation to SMSF accounting and compliance by a factor of 5 vis-à-vis historical work practices.
This means – by definition – that if all SMSFs were managed using Class, there would be 80% less work to be done by the individuals that are currently employed in that sector, as illustrated by the following table.
Our Journey Towards Zero Marginal Cost
The journey that the stakeholders of Class Super have been on over the last few years is similar to the journey that human beings have been on for more than 200 years, spanning both the First and Second Industrial Revolutions.
Class is well on the way to disrupting an incumbent vendor (BGL) with a better, cheaper (on a per-unit basis), faster ‘mouse trap’ using a cloud-based architecture, with a particular focus on the integration of various third-party data sources.
But that is where the historical analogy ends, because what Class is doing is triggering deflation on a scale for which there is no precedent in modern economic history.
The following table illustrates just how much existing value Class is capable of destroying (based on their own representations as to the productivity improvements triggered by its technology).
In effect Class is seeking to replace approximately $1 billion in recurrent costs with $100m in recurrent software licence fees, and in the process destroying more than 70% of the current ‘value’ in the SMSF administration space.
(The micro and macro-economic implications of the above table should not be under-estimated).
The Deflation Trap
However – as per Rifkin’s quote at the top of this blog post – embedded in the very DNA of what Class is seeking to achieve are the seeds of their inevitable destruction.
The hypothesis that the deflation that Class is seeking to trigger is somehow an end-point in this process (or even a way-point which could be defended) is simply not supported by the evidence, not the least of which is the fact that Mclowd is in the process of replicating the core accounting logic using far less than 10% of the capital Class chose to deploy.
The shareholders of Class can’t have it both ways: they can’t claim to deliver per unit price deflation of more than 70%, and then deny the scale of the deflationary process in which they have been a key participant.
At its core the error which Class made was in failing to recognise the context in which they are operating – a context which involves our collective and inevitable journey towards zero marginal cost.
While no doubt unwelcome amongst the stakeholders of Class Super, my comments are not meant to target a specific incumbent (I could just as easily have used MYOB or Xero to illustrate the point being made).
One could also apply the same logic to pretty much any cloud-based software vendor (whose pricing bears no relationship to marginal cost). This fact has much broader implications for equity markets (both public and private) given the vast sums of capital that have been deployed in recent years based on assumptions which do not stand up to evidence-based scrutiny.