The Digital Economy

On April 22, 1993, the launch of the first graphical Web browser signaled the birth of the commercial Web and by the late ‘90s, investors felt the Internet was old enough to learn to walk. A few cautious investments in Web-based startups, however, soon transitioned into impulsive speculation. Investors poured millions of dollars into companies with no revenue, and the Dot-Com Bubble burst soon after. Investors today cite this historic crash as proof the Internet cannot operate independently of traditional economics. As the advertising industry tries to adapt to the online market, however, economists are learning that the conventional revenue models cannot be readily applied. While experts disagree about the future of the commercial Web, there is consensus that the business of tomorrow’s Internet will be drastically different from that of today. Targeted ads, intent casting, and other innovative monetization strategies promise to revolutionize the economy of the World Wide Web.
Click Here for a New Paradigm
In contrast to the diversity of content on the Internet, online revenue strategies are surprisingly homogeneous. Many startups continue to operate under the assumption that viewership directly translates into value. Wharton Professor Eric K. Clemons tells the HPR, “If you look at what has made money on the net, there’s a very limited number of business models.” By far, the most popular source of revenue for Web-based companies is advertisements. Google alone displays nearly 25 billion separate ads every day. Historically, advertisements on the superhighway have served the same purpose as billboards on a regular highway, in aiming to reach a broad audience.
Though these general banner ads remain prolific, many experts predict they will sharply decline in the coming years. Author Jeff Jarvis, an Internet consultant for publications such as the New York Times, recognizes that “Mass ads don’t really work.” Instead, Jarvis argues, Web companies should focus on developing relationships with their consumers. The more a website knows about its users’ preferences, the more effectively it can advertise. Companies like Google and Facebook have become well known for their ad targeting, where they choose ads according to the search history and personal information of each user. “With targeting, there’s the opportunity to bring back value to advertising,” Jarvis claims.
Other experts are much less enthusiastic about targeted ads. Author Doc Searls, alumnus fellow of the Berkman Center for Internet & Society at Harvard, expects targeting to evoke a visceral reaction among consumers. When ads clearly correspond to recent Internet searches, Searls feels that “the advertiser has no manners and no morals here.” Searls would gladly pay to experience Facebook without their constant ads; he would even pay to choose the type of product that his Facebook advertises. He articulates the latter option in his book The Intention Economy. Searls described his thesis to the HPR: “This is called intent casting … For example, if I want a stroller for twins from Boston Commons, and I’m willing to spend $200, I can advertise that fact and businesses can come to me.” The intent casting model would be a dramatic shift, but Searls is confident that it would improve the efficiency and morality of the commercial Web economy.
Finding Future Revenue
Intent casting is one of the many emerging alternative business models for Web-based companies. In his research at the CUNY Graduate School of Journalism, Jarvis has surveyed how sites with limited viewership have started to monetize. He notes that some blogs are holding events in the real world, such as block parties, conferences, and flea markets. The Brooklyn-based Brownstoner.com, for example, began to host a flea market to help promote the blog. Now, the flea market (the Brooklyn Flea), a huge success, has become the focus, while the blog promotes the event. Jarvis admits, “There are no magic bullets that will recreate the old business models that we had before, but I am optimistic that we will find sustainable models … because I think there’s a demand for it.”
Yet many millions of blogs are still struggling to monetize. Blogger and veteran online advertiser Len Kendall hopes to provide an option for these bloggers through his young startup CentUp. With the qualifying detail that half the proceeds go to a charity of the blogger’s choosing, CentUp might be described as an iTunes for blogs. Rather than establishing a “paywall” and forcing users to purchase monthly subscriptions, readers can purchase blog posts individually for only pennies at a time. Kendall believes a “tipping point” is approaching “where people become more comfortable paying for certain types of content.
Firewalls to the Future
While evolving monetization strategies promise to make the Web economy more efficient, two large obstacles stand in the way of fiscal stability. The first lies in the fact that most Internet businesses offer their actual services or “products” for free. Jarvis notes, “Information is the most valuable thing that can come from media, but information is also not easily commodified. Once you know it … you can’t take that away from somebody.” The ease with which individuals can access and share information online creates crippling problems for content-driven industries such as journalism. Considering this issue, Professor Clemons argues that the Federal Communications Commission should “ban the theft of content,” preventing sites like Google News from aggregating millions of small-scale sources. Such regulations would likely provoke an outcry from Internet freedom activists, but alternative solutions remain limited.
The second roadblock in the path to economic efficiency is the lack of competition in certain domains. The Google search engine, which handles around one billion queries daily, has become an inseparable feature of the Web, and no other service compares. Professor Clemons asserts, “The market is not competitive, and … the ability [of Google] to extract money greatly exceeds the value that Google creates.” Given its size and influence, Clemons sees Google as “an essential facility,” and recommends that it be regulated as such. He notes search is “one of the very few industries where there’s no pressure on prices.” But Clemons’ view of Google does not necessarily reflect the majority of Internet economists; Jarvis’s 2009 book, What Would Google Do?, thoroughly praises Google’s business models.
Nineteen years into the life of the Internet, we now know a little more about the natural laws of online commerce than we did when the Dot-Com bubble burst. We have learned that having more users does not imply more value, banner ads are ineffective as a sole source of revenue, and content is difficult to claim as property. But we have only begun to scratch the tip of the economic iceberg. Whether the Internet will have Jeff Jarvis’ targeted ads, Doc Searls’ intent casting, Len Kendall’s CentUp, or Professor Clemons’ regulations, all we know right now about the Internet of tomorrow is it will be a Web woven in gold.