Monday, October 15, 2007

I just made a bunch of comments on a post Steve Rubel made on the "economics" of Web 2.0 where he tries to offer economic defense of his argument that "It's going to get very hard for advertiser-supported startups to get any scale when it comes to revenue.". I thought it might be useful to collect my comments here:

Steve misstates his point but in the way most people misstate it for shorthand:

A) As the supply of content rises, attention decreases and demand lowers - e.g. traffic thins

B) As the supply of ad-supported media rises, inventories swell - e.g. this equals less ad revenues

Supply and demand actually go "up" and "down" *independently*. What changes is the price at which they "meet" - the clearing price. To logically make the sort of point he is trying to make, he actually needs to hold either supply or demand *constant*. So to properly state his points (which are really the same point restated using different currencies to measure price), I suggested restating as follows:

A) As supply of content goes up & demand for that content stays constant, the price we are willing to pay per piece of content (in attention) decreases.

B) As the inventory of ad supported content goes up & the demand for that inventory stays constant, the price per unit of inventory goes down.

Important to note that in these scenarios, aggregate attention and revenue *may go up*, that is the economy may get bigger. It's the price per unit that goes down...hence a push for businesses to play for either efficiency (keeping costs low) or volume (aggregating many transactions).

Two additional things worth noting:

1. In the attention economy (the experience, media and entertainment industries) it is useful to treat demand as constant (i.e. "people only have two hours a day to spend on entertainment) because there is no substitute for the currency of time (we can make more money, but we cannot, as yet, make more time).

2. Even in the case that demand goes up (due to factors out side of the industry like shorter workdays leading to more entertainment hours), the point of these statements still holds even if demand increases, as long as it increases *less than supply*.

Finally, the least immediately relevant, but the most interesting thing to note is that it is possible for businesses to unlock markets within the attention economy (capture latent, unmonetized demand) as Google did with AdWords and as we intend to do with future products at ffwd.