Web economics

April 17th, 1996

Who has a profitable web-based business model? With few exceptions, almost no one, it seems. What's more, through all the red ink and headscratching, one explanation for the dearth of revenue seems to have been overlooked: namely, that the inability of companies to make the web pay isn't simply emblematic of short term growing pains, but instead point to a permanent, unpalatable truth: a web presence is, in terms of the logic of traditional business models, intrinsically uneconomic.

The revelation doesn't entirely surprise a small cabal of thinkers who, unnoticed for the most part, have been laboring in recent years at attempts to define the laws of web economics or, as it's more commonly termed, "information economics." The answers are proving elusive. As Jay Ogilvy, a principal at the Global Business Network, and one of the savviest minds thinking on the subject, has observed: "There's a Nobel prize going to the person who figures out the economics of information."

But whatever the elusiveness of the story, a consensus is emerging that the rules of web economics appear to sit heretically at odds with the laws of economics as we familiarly regard them. The web, quite simply, seems utterly resistant to the many of the economic "truths" that have long supported commerce as we know it - as puzzled expressions and empty coffers around the web, testify.

Indeed, there appears much about the dynamics of web economics to suggest that not only do they fly in the face of many of the immutable truths of capitalism-as-we-know-it, but that when workable web-based business models do emerge, they inherently "supersede" business models based on the rationalities of an offweb economy. So, given current trends, with an end user audience apparently fast approaching the 200 million mark, there's a good chance that for many existing companies the web represents not so much the possibility of 21st century riches in the making, as their potential undoing.

Interestingly though, the heart of this threat has little to do with the size and spectacular growth of the web population - what you might think of as a secondary web characteristic. Instead, it derives from the fact that what makes web-based business models so different from their off web equivalents is that they literally work or do not work according to a different set of rules - the rules of a manufactured, virtual reality. Or to be more specific, an interconnected virtual reality. And, as such, these "rules" literally hold those of us who use it, business included, captive to the rationalities of an interconnected or "sublime" reality, as opposed to the mechanistic or "material" reality which, among things, has made economic "sense" so far.

So, what makes the web an interconnected reality and what does it mean? A quick primer, then, on web ontology. Internetworked hypertext creates a universe of meaning quite unlike anything we have yet encountered. Essentially, everything on the web, whether a poem, a video clip, a product description, an avatar world or an order form, is part of the same space. Don't think highway, think brain. As such, the impact of every page on the web is constantly influenced by what happens elsewhere on the web. Everything and everybody on web is a competitor. Another page added anywhere to the web, for example, is another page you have to compete against, whether you know about it or not: its influence lessens your relative influence within the whole. A rate cut by an ad-chasing site instantaneously pushes down the relative value of your site as an advertising vehicle: its influence lessens your value within the whole. Likewise, make your site more appealing and its relative strength in the mix of all other sites, improves: your influence ensures you attract relatively more attention, and others less. In other words, because you're all part of the same interconnected space, the same universe of meaning, the influence of your virtual presence and the influence of others is instanteously affected not only by the influence of your site, but what everyone else is doing, too. And there's simply no way for you to know the complete ever-evolving story. Your virtual presence is constantly and unknowingly influenced by the context in which you're nested, and you also influence the context unknowingly for others.

Of particular note here is that the ever-changing influence of your web presence isn't limited to your web site itself, but to the "real world" impact of whatever it is you're attempting to achieve with that presence - your impact upon the world "outside" and its impact upon you. Your web site is a business model. And it has business meaning, whether it consists of attempts to deliver a message or make a software product available, for example. A web site is nothing less than an effort to extend your influence - an effort to draw others and persuade them to act. The relative influence of your web presence can be thought of as the meaning of your efforts with regard to the whole.

An understanding of the dynamics of influence-making within this context gets to the very heart of making sense of how to use the web effectively. Indeed, influence-making, the engaging of end users in an engaging experience, appears a primary determinant of the economic rules which govern doing business within a sublime as opposed to material reality.

What does this mean in day-to-day terms? In a nutshell, the strength of your influence is a reflection of how effectively you engage the minds of consumers - how effective you are at providing an experience that engages and keeps their attention span.

And here we get to the first axiom of web ontology: the most effective way to extend your influence is to provide the most compelling and enduring experience you possibly can. As common sense suggests, the best, indeed the only way to communicate the true value of an experience is to provide your audience with the experience itself, rather than a description or approximation of it. Not of course, that there's anything too radical with this posit - marketers have long made efforts to persuade us to take test drives at the local auto showroom, for example. But, shift this truth into an interconnected information-based reality such as the web, where the logistical cost of distributing experience essentially amounts to zero, and the rules governing such influence-making prompt a revolutionary shift in the economic relationship between the influencer and the target of that influence.

Again, keeping an eye on the context is important. Because no matter what you are attempting with your web site, you're competing for attention span, on equal terms, with everyone. And you are competing on equal terms not only because everyone is part of the same markeplace, but because you are using the same vehicle to speak to people - information. Your web site, the message you're attempting to communicate, the meaning of that message, the experience you are creating, is mediated through the common denominator used by everyone else - information. Information is the vehicle of experience. As far as consumers are concerned, your company, the products and services you have to offer are, quite simply, nothing less or more than an experience mediated by information.

This brings us to the second axiom of web ontology. Information, which mediates a "sublime" as opposed to "material" experience, is intrinsically sacrificial. The only way to communicate an experience mediated by information is to literally share that information with a potential customer. But unlike an auto showroom's ability to take its car from you once you have finished your test drive, once you surrender an information- based experience, you have essentially, relinquished the economic value of that experience to the person experiencing it. There's no half way house. The experience is known. And with that loss of control you lose your ability to transact on the basis of the experience you have shared.

So what, you say? Why then make a point of giving away a fullblown experience you can't charge for? Because when you add the need to compete to the mix, the rules change the incentive irrevocably.

The web browser market provides an apt example of competition in action, not least because it was arguably the first commercial market to fall to the rationalities of competing within a sublime reality - when, for example, was the last time someone successfully charged you to test drive their web browser? And as you're probably well aware, the web browser giveaway was initially prompted by Netscape, who chose to extend the "Netscape experience," onto millions of desktops by making available the richest web browser experience away it possibly could, for free. In so doing, whether wittingly or not, Netscape stumbled across a third axiom: to be the company of choice is to be the company of choice experience; and to be the company of choice experience, competitive advantage lies in doing everything you can to make that experience the experience of choice. And as Netscape proved, what this essentially translates to is: to exist, you must share better than your competitors. And to stay ahead, continue sharing better than your competitors.

The Netscape browser give-away, the follow on by all other companies in the web browser market, the rollover of the trend to other web related software markets is simply a reflection of the nature of web-based competition: in a competitive market it makes no sense whatsoever to charge consumers for the right to their attention span. Anything you do to provide less of an incentive go to with you is akin to tying your own hands. And that's because the attention span is the salient currency of the information age. Without its attention you simply don't exist in the minds of your target audience.

The great web give away is, of course, simply the sharp end of a trend sweeping though the information content industry in general - content is increasingly being given away with income derived, instead, from related services such as support, training or aggregation. Indeed, the trend suggests that most information-based products competing on the web will quickly follow, because if information is intrinsically sacrificial, then communicating all information-based experience is intrinsically sacrificial, and the very essence of web-based competition is intrinsically sacrificial.

This is the lesson that companies are currently learning. You can't even begin to engage customers in a transactional relationship unless you first get noticed and stay noticed. And being noticed is nothing other than being experienced. And, in a context where the cost of information distribution is essentially nil, charging consumers for an experience that engages them most effectively makes no sense, because it's an approach that represents nothing less than charging for the right to extend your influence. Furthermore, in a marketplace in which every competing influence and, what's more, every competing influence you can never know about, is no more than one connection away, the only sensible competitive approach is not only not to charge for what you share, but also to share as rich an experience as you possibly can in every given moment.

Needless to say, this approach flies in the face of the economic rationalities of traditional business models where revenue typically derives from what might be best described as the controlled release of experience. "We promise you'll be happy with the experience this product will provide you. Pay now and know the experience later." As such, traditional business models typically derive revenue from withholding an experience until it is paid for, and then releasing it.

This points to the elemental contradiction between the economic models that work in a "material" reality, and the realpolitik of the web where, quite simply because it is possible, we are forced to compete by surrendering experience rather than the promise of it.

It also explains why web based business models based on the old paradigm simply aren't working on web. It's not so much that companies haven't begun sharing (what is a web site, after all) but that they haven't yet extended their notions of sharing as competition, to incorporate a follow on rationale for profit. Companies are still, for the most part, attempting to derive income from what the necessities of information economics force them to give away for free to compete effectively.

So where is money to be made? As a rule of thumb, probably where you haven't been looking so far. Indeed, it appears the companies set to take center stage in the Web Era are the ones who understand that the net represents, elementally, a means of creating a relationship with a consumer. The fact that the means is an information-mediated experience and, as such, intrinsically sacrificial, suggests that where possible, the most effective business models will be designed from the outset not to derive income from from the means of securing attention span - the sharing of a product, for example - but rather from the relationship the product creates. It also suggests that if companies are able to develop workable business models which function profitably on this basis, then they will not only get ahead of the competition competing on traditional terms but, potentially, destroy it overnight. That's because, given a choice, consumers will choose the richest experience shared for free. And if a competitor of yours is able to develop a business model that delivers for free what you can only charge for - whether it's software or a cellular phone - best clear your desk. Your business model will, quite simply, make no sense. On that note, expect some shocks on the way. Because the learning curve, though steep, is flattening fast.

In memoriam, Ceinwen Faulkner, wife to Peter, April 1996.


April 15th, 1996