Comment The title is terrible (Score 3, Insightful) 231
The napster situation and the driverless cars are not analogous.
As to falling revenue... the mistake here is conflating the fees with "Profit"... that's revenue.
Technically I can make more money selling you something for 1 dollar as a percentage of expenditure than I can for something I sell for a million dollars.
Companies that sell seemingly cheap shit are often very profitable. Why? Because it easier to over bill someone for something really cheap then it is to over bill them for something really expensive.
If I sell you a candy for a dollar and it costs me 10 cents to make that candy then I'm making 90 cents profit on every dollar of revenue. Could I do that if I were selling you something for a million dollars? Much less likely. This is why for high ticket items the profit margins tend to shrink.
On the point of insurance, the profit is the revenue they take in minus the cost of paying out claims. Now they increase the fees based on two things.
1. What they estimate their claims are going to be.
2. What they think you're willing to pay which relates to what your competitors are offering, market conditions, etc.
Now if the autonomous cars crash less that means the estimated claims are going to go down. And that means costs go down. And that means that due to competition, your competitors are going to lower fees for that insurance because they can get a competitive advantage by doing that. This forces you to lower your own fees until the set price hovers somewhere above costs based on market conditions.
Now for a business to be profitable it has to make a certain percentage profit on capital expenditure. Otherwise your business doesn't make sense. Even making a tiny profit doesn't make sense because there are more profitable things to do with the same amount of capital and you'd be better off closing your business down and doing that other thing instead.
So you need a certain percentage profit. And that means since its on a percentage basis that reducing revenue doesn't actually mean you lose profitability so long as the percentage holds.
Lets say the insurance business goes from collecting 100 billion in fees to 50 billion. Okay... but if the percentage of the fee that goes to profits remains the same then the business while smaller will remain as profitable as ever.
You can't say the same for the music business. What has killed them is that the percentage profits has collapsed ALONG with the revenue. Both collapsed at once. AND the whole thing poses an existential threat to the record industry itself.
That would be a napster moment.
What is more, if anything, I could expect percentage profits to go UP as revenue declines due to cheaper policies in auto insurance. That is, I believe people will get less price conscious as the absolute fees go down. So lets say it costs me 20 dollars per person to offer this insurance to you. Could I get away with charging your 30 dollars for the policy? I could do that much more easily than if the costs were 200 dollars and I wanted to charge you 300 dollars for the policy.
See?
If anything insurance should get more profitable as costs go down. The actual percentage profits of high ticket businesses is often anemic. I've seen lots of businesses get by year after year on 2 to 5 percent profit margins and that is a TOUGH business.
Just think about that... servicing customer after customer and making 5 cents for every 95 cents you spend servicing them. But that's not uncommon.
Ideally where you want to be as a business is having as high a profit margin as you can possibly get your greedy fingers on.
50 percent... 100 percent... 500 percent. You want big fat margins. Even a little renvenue at those margins is gold because it gives you lots of wiggle room to absorb unexpected losses or shifts in market conditions.
If you're making 2 percent per transaction and things change... you could easily be LOSING 20 percent per transaction. *snaps fingers* in a heart beat.
And a lot of businesses operate in those environments. They survive by being very very competent and by having 'ways' of adjusting their expenses either by reducing quality or by putting cost pressures back on suppliers so their costs actually go down when market conditions hit their bottom line.
Anyway... the title is stupid and I question the premise.