Thursday, October 18, 2007


There was another article in the NYTimes about the resurgence of cash flowing through Silicon Valley (and other location of the high tech economy) flooding over internet start ups that don’t have revenue models to speak of. It poses two possibilities, one a return to the irrational exuberance of the late ‘90s before the .com bust or a sensible investment strategy as capitalists position themselves to be part of the largest market ever known to man.

I for one am an internet optimist. I use this media everyday from blogging here, to researching, to reading the news, or engaging in debate on various forums. The massive amounts of content generated everyday by users in mind boggling. Surely, there has never been a time in our history where the volume of human creation was higher then now with the advent of video, blogs, podcasts, news articles online and the terabytes of data being generated daily. (The quality of these human creations, however, is another topic that I will address later.) The capitalists are right to see this burgeoning phenomenon and recognize the force it has on the economy. To ignore it would be negligent.

The fundamental technology and infrastructure is different then it was in the ‘90s. The speed and capacity of the internet has grown exponentially since the turn of the millennia. Businesses now have the ability to push and pull amazing amounts of data around the net allowing for more and more sophisticated applications that can assist us in enumerable ways. Further, the reach of the net is expanding so that we are no longer tethered to our desks or laptops but can access the net from an increasing variety of advanced and increasing portable devices. Thus, the internet, as the market for information and customers is, indeed, the future.

Despite the existence of this new technology, however, commerce is still, and always will be, the same. Goods and services will always be exchanged for some price and that price economically, remembering back to Econ 101, will be set where the supply and demand curves intersect. I find the concept of commerce, however, best explained in the psychological term of “value perception”. Commerce will always be fueled by perceptions of value. For example, early on in man’s existence, I assume, that someone who had meat but not shelter would value shelter higher than meat. They would search until they came across a person with excess shelter but a grumbling stomach. Then, given the value placed on each good by the other party, they would make an exchange; meat for shelter, shelter for meat. This exchange of value still persists today although facilitated with the exchange of money. For example, I go into McDonald’s with a number of dollars in my pocket. McDonalds has a number of McChicken sandwiches on their shelves. They value the dollar in my pocket more than the McChicken sandwiches on their heat rack and I value the McChicken more than dollar in my pocket and so we make an exchange. If these values were ever equal or switched, we would never engage in commerce. Thus, commerce still depends upon value perceptions (There are a lot of economics behind how value is created and earned and distributed and takes up thousands upon thousands of pages, but for moment I’ll just focus on the high level concept).

The basic problem with the internet is that most of the content is pretty worthless, aka lacking value. When I think of all the sites generating content that I go to on a daily basis; Google, HBO, Blogger, MySpace, Facebook, various podcasting services, etc… I have to question if anything they produce has much value.

In aggregate, I think they do. I go to these sites almost daily and I would not do so if I didn’t enjoy them, if I didn’t place some value on their content. But, if I had to pay for it, would I, what price would I place, where would the supply and demand curve intersect? If Google charged me to blog I would probably stop. If HBO charged me to read and comment I would spend more time studying for law school. If MySpace charged, well, I would just have human interaction again. If I did pay, I would probably only give pennies and thus, if I were the source of income, they would need billions of me to make any sort of profit. Yet, in an increasing bifurcated consumption model generating significant volume is the biggest challenge of all. End the end, all these sites do is generate viewer-ship, they produce hits, and the only consumers who values viewers more than the dollars in it’s pocket are advertisers.

Which is why the revolution of commerce some have promised with the internet has failed to occur. The internet, thus far, has only managed to provide an audience for advertisers, this is not revolutionary* (*the internet has also done great things at providing a new forum for traditional transactions – think Ebay or, a new sales channel, yes, but hardly a great new economic society). Ultimately, this just means that customers who were previously spending money on traditional sources of viewers like television, radio and print are just moving to this money to new, more profitable forums. More profitable, yes; more efficient, perhaps; larger markets, possibly; yet, in a rational world this does not explain why Google is a $600 stock with revenues 1/36th of IBMs or why Facebook should be a billion dollar acquisition.

The resurgence of companies without revenue models and the millions pouring into them is and is not troubling. The internet is a powerful media that will be the most important marketplace during my lifetime. Companies involved in creating and expanding this new market need to grow and foster new capabilities and if investors ignore them is at their and our own collective peril. Yet, commerce is still commerce. It will always be driven by value exchanges and so far the only value the current crop of internet companies seems to know how to create is for advertisers. I have no doubt, that somewhere, there is a revolutionary who will un-tap a new source of value from the internet, but I also have some fear that if this current bubble of exuberance bursts that this revolutionary might crushed by the stampeding investors out of the marketplace.

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