Digital giants are destroying our high-streets

By Alex Brummer, August 30, 2012

Hang out the bunting, let’s celebrate. Apple has miraculously become the most valuable quoted company in history. How did it reach this exalted status?

The easy answer is that Apple has pioneered breath-taking new products like the iPod, iPhone and iPad, that have changed the way that new technology is used. After all, no self-respecting executive would be seen at a high-level meeting without their iPad, in a garish cover, typing away feverishly .
The truth is, of course, that Apple, Amazon, Google, Facebook and the other celebrated stars of the web are no different to the corporate giants of the past, despite their stylish image. They are ruthless businesses, charging the most economically efficient prices that they can get away with, and constantly seeking to keep down production costs and widen margins. And if along the way they take down a few traditional businesses, so be it.

In Britain there is no better example of this than what has happened to the UK’s music business. HMV, once Britain’s flagship chain of music stores, is in free-fall, leading to the recent departure of chief executive Simon Fox — once a favourite to head ITV — who has fought a valiant fight to keep the company afloat.

Despite the homage to British classics at the opening and closing ceremonies of the Olympics, EMI, the proud producer and distributor of Elgar, the Beatles, Coldplay and many more, is currently in the ownership of American bank, Citigroup. The bank has sold EMI on to French-owned recording group Universal, which is splintering the company in an effort to get it past EU regulators. Amazon, Google and Apple all have played roles in this tale of destruction.
The on-line supermarket group Amazon has decimated the nation’s book-selling industry by price cutting, is doing the same to music and is now taking on the electronics retailers. Dixon’s has suffered badly, Comet has been sold off and Best Buy’s proposed expansion into the UK has been called off and its miracle rise in the US, stymied.

Among other things, Amazon encourages its customers to shop in other stores and use its bar code app to prices check before going online to buy more cheaply. It is using predatory practices to establish a dominant position in the markets. Then it will become possible, if it so chooses, to raise prices and margins.
Google operates under the rubric “don’t do evil” and is a big advocate of open access on the internet. A consequence of this is that if one searches a well-known artist, several sites that come up will be piracy related.

In the US it successfully led the campaign defeat SOPA, the Stop the Online Piracy Act in the Senate. By allowing piracy sites to offer their wares it is, in effect, allowing intellectual property to be harvested without any reward to the creative industries. This undermines future investment in new music, publishing, games and other sources of intellectual property.

Apple can at least claim that through iTunes it does operate a legal download option where a proportion of the takings are funnelled back to the artist. Again appearances deceive.
Apple is the dominant force in the legal online music business accounting for some 70 per cent of the paid-for downloads. Because of its obsession with brand and control, Apple insists that users of its devices can only use its licenced applications for downloading. But it is doing its online savvy consumers no favours. When it launched in 2003, it argued that a 30 per cent profit margin on every download was fair because of the high risks it was taking in competing with traditional music channels and the pirates.
Almost a decade later it has become the major player in the market and the margin has been held at the same level even though the main competition; the high-street retailers, and other download sites, have been all but eliminated from the marketplace.

Among the reasons why Apple is so profitable is because its profit margins are so high. The company may be best known to the public for its enticing designs, but it is also a very efficient manufacturer that keeps a close eye on costs.

The design may be American but most of the assembly of the iPhone takes place in China’s Foxcomm factories. A report earlier this year by a Hong Kong workers’ rights group, SACOM, found that conditions in Foxcomm factories are cramped with 20 to 30 workers sharing three-bedroom flats. Apple says it is addressing the issues, particular those of overtime among supplier companies. But the reality is that low manufacturing costs (after accommodation wages can be as low as £90 per month) have helped to boost Apple margins and made it an investors darling. There is a tendency to see the dominant companies of the digital era in a different light to the big trusts of the past like Standard Oil of New Jersey, AT&T and IBM — all of which were eventually brought down to size by the American authorities in the effort to encourage competition.

The online giants are seen as different because the creators of wealth are smart hoodies, writing code who speak the language of algorithms rather than management textbooks. The reality is that the business models they use are damaging creative industries and turning great swathes of the high street into ghost towns.

Alex Brummer is City Editor of the Daily Mail and author of Britain for Sale

Last updated: 9:48am, August 30 2012