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The future of the internet: economics, not politics

The future internet will be shaped not so much by politics or laws but by economic forces.

Some people fear that excess government regulation will strangle the internet and quash the freedoms we currently enjoy. Others counter that the anarchy of the web is unsustainable. I argue that the future of the internet will be defined by economic forces rather than by political or legal ones.

Premise 1: The web in its current form is unsustainable

The current internet is unsustainable. It is not a bubble like the housing market was a bubble. It is a giant bouncy castle, where 18-year-old self-styled CEOs are having a marvelous time competing as to who can bounce the highest and scream the loudest. At some point, the music will stop, too many kids will climb on board and the bouncy castle will suddenly deflate. Everyone will fall at the bottom in a heap.

Why? For many reasons, of which these are the main:

  1. Online advertising (including tracking and selling user data to advertisers) is currently the main form of financing for many internet companies and has been growing by over 20% a year. (Source: Reuters)
  2. Online advertising does not create value.
  3. Online advertising does not pay enough and never will, as this interesting article on TechCrunch explores.
  4. Online advertising is almost impossible to pull off on mobile devices, which account for a rapidly increasing amount of internet usage. According to an article in the Financial Times, “Mobile internet use accounted for 10.1 per cent of media use in the US at the end of last year but attracted only 0.9 per cent of the total money spent on advertising.”
  5. Inexperience with business causes naive young entrepreneurs to mistake investment capital for revenue. Because there is cash in the bank, they think they’re making it.
  6. Many companies do not have a profitable business plan. Facebook is the most high-profile example, as this article in Forbes succinctly explains. It is reliant upon advertising (see problems 1, 2 and 3), but people do not go there to shop, and are increasingly accessing it directly through mobile apps (see problem 4). Facebook do not appear willing to charge companies for Facebook pages which are, after all, a form of marketing. Hence Facebook shares have plummeted since its much-anticipated IPO, as investors get scared.

Premise 2: The collapse of the internet bubble will benefit everyone

When the tech bouncy castle bursts, a much healthier situation will arise whereby only companies with solid business plans, that create value for users by delivering high-quality content, products and services, will succeed.

This is not necessarily the big companies. As we have seen, Facebook itself is in trouble due to a lack of sound business plan. Innovative start-ups will be able to succeed in their place.

The collapse of sites that rely solely on online advertising will hopefully remove some of the more useless blogs whose sole purpose is to recycle poorly researched gossip in order to attract traffic to the site and clicks on the ads. (For an easy-read explanation of the economics of the blogosphere, read Ryan Holiday’s Trust Me I’m Lying.)

Premise 3: Micropayments will be fundamental to the economy of the web

The new internet will have to find a more sustainable economic system to finance the content and services we currently enjoy for free or nearly free. One solution, freemium, is already being used with some success by companies such as Dropbox, Flickr and Pandora.

I predict that micropayments will be a major form of economic support for the future internet.

You may argue that micropayment systems have been tried in the past, and have failed. The great guru Jakob Nielsen predicted that “most sites that are not financed through traditional product sales will move to micropayments in less than two years.” This was in 1998, so his prediction is 12 years late.

It is true that micropayments have not been popular in the past. But that is because until now we have not been comfortable with the idea of online payment. Now that our credit cards and (especially) Paypal accounts are hooked up to the web, and now that we’re used to one-click payment, we will be more comfortable with a micropayment system.

Micropayment makes sense for users. I don’t wish to pay for a full, annual subscription to the Wall Street Journal. I do, however, want to read the occasional article. I would gladly pay, say, 20 cents to read an article over my morning latte in Starbucks. I would pay over the odds for this flexibility.

Micropayment makes sense for companies. Under a micropayment system The Wall Street Journal, who would previously have got nothing from me and not benefited at all by denying me access to that article, now gets a steady stream of income as I pay small amounts for the articles I want to read. Lots of small payments for lots of articles worldwide equals lots of money. (As a beneficial side effect, it would also provide a very clear feedback mechanism for determining the content that readers deem important enough to pay for.)

The same model would work well for scholarly journals, which are currently almost all inaccessible unless you pay an expensive subscription. I would even appreciate the same model for books – I regularly wish I could pay $2 for a chapter of a book rather not buy the book because it costs $10. Clay Shirky doesn’t think micropayments will work. For the sake of allowing the devil his advocate, I’ll let you read his reasons here.

We can already see micropayment becoming mainstream, thanks to Apple’s innovative 99-cent song downloads via iTunes and to Amazon’s one-click payment and $1.99 movie streaming. Images, too – many people, me included, purchase the rights to stock photos for a small fee, rather than stick to poor-quality free images or pirated copies. I wouldn’t know, but I’ve been told that the same goes for porn.

Premise 4: The digital divide will be both formal and flexible

Ultimately, I predict that the internet will split. On the bottom will be a giant pool of free, poor-quality content and services full of bugs and limitations. On the top will be a relatively small collection of innovative services and high-quality content which you must pay to access.

Of course, some internet sites will bridge the divide. Sites such as Wikipedia and Tripadvisor provide a valuable service which may well remain free, since the cost of running them are low and the content is mostly provided by users themselves.

I don’t necessarily think that this digital divide will be bad for the internet or for users – as long as micropayments make the system flexible enough that even poorer users can participate.

Conclusion: Economics will revolutionize the web

Economic forces will revolutionize the web if we allow them free reign. Yes, there will be abuse and hacking of the system, and people freeloading on other people’s payments. But this will be better regulated by companies themselves seeking to minimize fraud than by the heavy hand of government.

Bring on the bursting of the tech bubble, or bouncy castle. Let the pain come and be over with. Let a healthier internet society be the result.

 

 

 

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