Digital disruption and its effect on Canada and profitable business

There has been a lot of coverage of the trouble that retail in the Western world is in, and Amazon is largely on the pointy end of the wagging finger. Generally, though, it's an intervention of highly digital, Internet- and data-driven companies against more traditional companies that have a higher dependency on widely distributed physical assets.

Canadian revenue diversion to US

From a Canadian perspective, I think we should be worried about these things in relation to the replacement of things that keep funds within the Canadian economy with things that send funds down to US-based companies instead:

• Newspapers: it's understood that newspapers are suffering, and this is largely due to a collapse in readership and therefore print advertising. Readership is generally older and naturally in decline, and this is not the demographic that many marketers want to target.

• Advertising: what's not so apparent is that much of this Canadian-made print advertising is largely being replaced by US-based digital companies such as Google and Facebook, which despite all appearances are really advertising companies. Google makes money from intercepting searches for things that you are looking for an steering you toward companies that pay to feature prominently in the search results, and again from anonymized data that can be used to sell things to your market/demographic. Facebook can target advertising to you directly based on the massive amount of detail it knows about you from the interactions you have on its platform, and every "like" advertises a product between friends, which is a far more trusted relationship than is the relationship you have with an anonymous corporation.

• Streaming: the collapse of Canadian-operated retailers like HMV and video rental outlets is largely being replaced by US-based streaming services like Netflix, iTunes, Amazon/Google services, or other foreign companies like Spotify. Worse, few of these services seem to collect Canadian sales tax.

It all seems like a significant diversion of revenue and value-added employment outside of the country, and Canada was already over-weighted on non-value-added commodities.

Unprofitable companies killing off profitable companies

It used to be that disruptive companies would enter an existing market, change the way that things were done, and become massively profitable as a result. And this has been the case with companies like Google, Facebook, and Apple. Apple's case is especially interesting, as they are the only smartphone manufacturer making windfalls despite having less than 20% of the market share.

However, what about companies like Amazon and Uber? As far as I can tell, these companies have largely been operating at a loss and threatening or killing off traditional retail and taxi companies and the jobs they sustained in the process.

In international trade, this is frowned upon and is known as "dumping". From Investopedia:

Dumping, in reference to international trade, is the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.

But I'm not clear why this is desirable domestically. Sure, it's private money and I assume these investors can do what they want with it. But where is the wisdom in not intervening in cases where sustainable businesses are being killed off in favour of businesses that despite considerable disruption and employment shrinkage haven't proven that they can be profitable? With the way that tech funding works, the goal will be to blow out the incumbents and take as much of the market as possible so that a strong position is demonstrated and the early investors can cash out their winnings in an IPO.

The shoe that hasn't dropped yet is the one that drops when the incumbents are largely gone or incapacitated and an effective monopoly is in place for the new digital companies. That's the missing piece in the story of how these new companies become profitable and we don't know what that will look like.

What happens next is anyone's guess, but perhaps it'll be come to known as Gig Economy 2.0 - living in a rented car that you also use to operate your ride-sharing business, with the car's rightful owner working an entirely separate job to pay off the 84-month loan he took out to buy the car. The "gig economy" meets "financial engineering".