Sunday, September 10, 2006

Laws That Can't Be Ignored

I just finished reading the April Newsweek article "The New Wisdom of The Web" by Leve and Stone. While it provides an interesting and optimistic overview of a number of the major web 2.0 players, the authors enthusiasm seems to prevent them from taking a more critical look at the companies they are profiling. True, the ability of the web to overcome some of modern economics hard and fast rules regarding incentive and self interest is astounding, one only has to look at the success of the open source software movement. However, much of the evidence suggests that these economic improbabilities are built on the most tenuous of contextual changes. Sure the web may have lowered the personal costs of contributing to a collective effort by such a degree that altruism, enjoyment and recognition prove sufficient motivators, but an equally small push in the other direction may be all that is required to break the system. This is why so many, if not all these web 2.0 enterprises are burning holes in the pockets of their owners and investors.

What the article fails to mention is that many of the web 2.0 flagship sites have yet to turn a profit, relying on cash from venture capitalists much like their 90's dot com bubble counterparts. YouTube recently valued at 1 billion dollars continues to loose money hand over fist, not to mention the potential for further dramatic losses due to intellectual property law suits. Business Week recently feature founder Kevin Rose on its cover with the headline "How This Kid Made $60 Million in 18 Months". However, Rose was quick to respond in his weekly podcast that he can barely afford to buy a couch, the site still drawing on its venture capital cash.

In response to the, "show me the money" demand, one often hears that the magic of the Chris Anderson's "long tail" will come to the web's rescue. One is often directed to look at Amazon and Netflix for proof of every web 2.0's companies viability, but to leverage the "long tail" one has to have a product and flickr, YouTube and Myspace don't seem to. Without their users (and their content) these sites have nothing and the minute they place an impediment to their users participation they'll start a classic race to the bottom. Make the site less appealing to use through more intrusive ads or charging for access and users will cease to generate content. Once the content begins to dwindle so to will the users willingness to tolerate the ads and or cost, which will only further the loss of content, and users.

Adding to all this is fact that much of the aging infrastructure on which these sights rely was largely built during the dot com bubble and was thus significantly subsidized by all those investors that lost their shirts and pension in the bust. Today's cheap broadband is largely a product of bargain basement bankruptcy sales. Unless middle class of North America are willing to again turn over their life savings, such as they are, for the betterment of broadband access for all, costs for these sites are only going to rise. Rises in infrastructure costs will hurt sites like YouTube the hardest because of the data intensive content they provide, but rising costs for any money loosing startup cannot be good.

I do not mean to spell doom and gloom for the web 2.0 industry. All I am suggesting is that to look at it uncritically and consider only the value and not the costs is a mistake, one that was made by many not so long ago. The "long tail" provides a economic model for many an online business, but not all. Appealing to the masses is great, but it does not give one carte blanche to ignore economics.


No comments: