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Digital
Kapital Something is happening to the economy. A sudden influx of value is being mined by Yahoo!, Amazon.com, Excite, Lycos, E*Trade and many other Internet startups. As I've shown in previous issues, the raw materials exploited by these companies comes straight out of the minds of millions of people on the Net who create sites, post comments and generally share expertise generously. What's all this worth? In the next several issues, I'll propose some basic approaches to understanding how much value we're looking at, how accessible it is, and what the potential risks of building a business on this foundation. Let's examine the basic unit of the Web. Is the Web based on the page or the site? Which is the right basic particle for purposes of understanding the value created each time another contribution to the Web is made? I'd suggest that the site is the most important, since it will generally be focused on a single topic or, to the extent that a site is multi-themed, the ability to navigate to the appropriate information is a characteristic of the site. As in biology, where molecules play the dominant role despite the presence of the more elemental particles, atoms, we should treat the Web as an aggregation of sites, not pages. Sites collect even the disparate bits of intelligence tossed onto the Web via Usenet and listservs - archives are presented as sites. According to the April 1998 NetCraft survey, we're talking about a universe of 2,215,195 sites. And contributing to those sites, one can conservatively estimate that one-fifth of all Internet users post, comment, or email information that is archived on a site - so, there are approximately 23 million contributing editors to the macro-publication that is the Web. Granted, a lot of what's on the Web is unmitigated, confusing crap. From an efficiency fanatic's point of view, the Web has to be one of the poorest examples of productive output in history. Finding what one wants to know is difficult, and determining the accuracy of information is nearly impossible. Given the relatively low penetration of the search engines into the total body of information on the Web, it will be many years before we actually refer to the Web as we do books for verified, edited and accurate information. Even books don't perform very well on this score, however they are a far sight better than the Web. In any case, the journey is part of the fun on the Web. Especially to newcomers, a commodity on the Web if there ever was one. As the novelty of Web's bigness and freeness wears off, the work will move upstream from consumers to site developers, who will be expected to deliver timely, accurate and appropriate information on demand - and not always for a fee. What we want to know for purposes of this discussion is, first, how do the sites that generate value on the Web use the raw materials available to construct a salable product? Where is the gold in them thar hills? When I was a boy, my family took one of those interminable car vacations. Somewhere in Montana, we had a chance encounter with a grizzled prospector who could have come right off a Hollywood back lot. He showed us how to pan for gold and we even found some. When we asked where the gold had come from, he pointed up at the mountains, typical up-thrust peaks with layers of rock showing in the sunlight. He indicated a particular stratum in the mountainside some miles away and said that, if he had to guess, the gold came from about there. "Why aren't you up there?" I asked, because I hadn't learned the adult propriety that prevented my dad from asking the question written all over his face. It seemed to me that up there was where the money was. "The work's easier down here," he said. If he'd spat and stalked away, it would have been like an encounter with Festus, from Gunsmoke.
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In my opinion, early Net companies are doing the relatively easy work, since there are plenty of streams of wealth running off the vast natural resources of the Web. As long as you choose the right place to stand and know how to operate the equipment (this is saying a mouthful, I know), you can make money on the Net. Let it suffice to say, there are plenty of folks standing in the wrong streams. Economist Paul Krugman explains accurately the state of the economy, saying in Foreign Affairs that the economic growth rate has not accelerated and in Red Herring that by 2005 it will be clear that the Internet's impact on the economy will be no greater than the fax machine's. "What may have changed is the ability of the economy to make use of capacity without getting overheated," he goes on to say in Foreign Affairs. What Krugman misses, I think, is the eruption of a vein of value into the economy from a segment of society that previously was non- or pre-economic, the vast informational contribution of people's hobbies, passions and weirder predilections. With the open and easily accessible audience of the Web, a wave of previously uncounted productive information has been made economically malleable. This has allowed the information industry to grow at a rate twice as fast as the rest of the economy, accounting for the lion's share of the low-unemployment/low-inflation growth in the U.S. economy. This previously uncounted value, which has produced a bunch of companies employing some half-million people and an additional $40 billion to $50 billion in market capitalization on the stock markets, may very well be the economic relief valve that has prevented the rise of inflation. This is the real cyber-gold, a new alloy of private passions and public rancorousness that can be manipulated by business concerns to generate traffic and, through that traffic, revenues. How does a Yahoo! successfully mine the Net for value? Well, if you ask me, it's simply because they cast such a wide net. The staff of surfers who assemble themed directories of sites are like a gold prospecting collective that, by sharing the effort and profit with advertising and service partners, manage to occupy enough streams to ensure reliable traffic to the Yahoo! sites. Only in the books, computing and travel areas have companies proved themselves capable of moving to occupy a stream of Web content to drive revenue. Amazon uses extensive customer input to provide a deep experience of books. In fact, today I noticed a book that had a reader comment from Amazon.com masquerading on the back cover as a critical comment. Preview Travel, Expedia and Travelocity use the Web to personalize travel experience, drawing not only on their own sites, but information from across the Internet. And, of course, there are five giants and a lot of wannabes in computer publishing vying for dominance in the market for reporting about the Internet. Where are such streams, ready for other gold-rushers to plumb for new wealth? Here's a question that must be answered on many different dimensions, but the first step is to identify the qualities that make information valuable. We're back to Claude Shannon, who postulated that the value of a message was measured by the degree it reduces uncertainty. Let's imagine a Cartesian coordinate system that plots the value of information, accuracy on the vertical axis and timeliness on the horizontal. If you'd like to see what I am talking about, visit my site at TK, where I've posted a coordinate system graphic. Information that is timely and accurate would be in the upper right-hand sector of the chart. Information that falls in the upper left of the chart, the untimely but accurate, would be, at least, marginally more valuable than that in the lower left quarter, which is timely and inaccurate in nature, and the upper right quarter that is accurate but untimely. Timeliness is important, because even information that was accurate when it posted on the Net could have been obsoleted by new findings. Ultimately, accuracy is everything, unless you are looking for information that reinforces your beliefs regardless of their truth. Now, value is a subjective thing. Someone you know may prefer information that confirms beliefs that make them comfortable. One of the most troubling aspects of the Web today is its capacity to convey and lend validation to falsehoods. Anyone who has used the Net to do research knows the perils of taking data at face value, without extensive sourcing of facts, usually off-line. What Yahoo!, Excite, Lycos, and the other search engines provide is not any form of accuracy, only direct routes to data. So, their services cover the entire range of information plotted on the coordinate chart. The user is left to sort out truth from fiction. Book sites, travel sites and sports sites, among others, must add to the simple act of finding data by ensuring it is accurate. If you show up in Cannes and can't find the charming bistro promised on the Web, you're going to be upset. From the travel site's perspective, it must ensure data integrity before the fact, because someone who knows better will point out the error, causing damage to the site's reputation. We're a long way from the traditional definition of value, since the transfer of data is not equivalent to the transfer of a commodity from one person to another; the quality of data must be ensured. Information is a product not only of the original labor that created it, it is the result of a vetting process in which the value of work by additional contributors accretes to the original datum. Shannon's postulate treats information only at the end point of its developmental process, when it received by the consumer. Information value is a wave that builds as it travels across the coordinate map from the center point, up and to the right, toward a theoretical perfect-accuracy and perfect-timeliness. Accuracy develops through a process not unlike the scientific crucible, in which theories are tested, challenged and, if they survive, become "more true." Search engines have succeeded by merely lending assistance with finding information on a particular topic (if you consider two million hits on "macroeconomics" helpful, that is). What's the right strategy moving forward, because it is apparent to me that the electronic gold rush will give way to a time when you cannot simply put your hand in the stream and pull out money. Targeting of services is certainly one strategy that will work. Some sites will be very good at filtering high-value information from the data silt on the Web. There is a lot of room for better search engines, which accounts for the ongoing success of commercial data retrieval companies. If, as I say, a wide range of new information and subject matter has been economically-activated by the advent of the Web, there are myriad new markets to be served by filtering experts - everything from a Siskel & Ebert of porn sites (there is one) to the Beckett Baseball Card Guide to baseball card collectors on the Internet. But, beyond targeting subject matter, there is the opportunity to target audiences and, by creating exclusivities through limited access to high-value information filtering services. For example, I believe it is perfectly reasonable to imagine a service that provides executives access to vital and actionable business intelligence and to one another within a secure and confidential setting. At this level of service, which could sell for many thousands of dollars a year, the barriers to entry are in the cost of expertise, the cost of service and the value of confidentiality in a wide-open data marketplace. In this scenario, the Web company is aiming not just for the upper right quarter of the Cartesian coordinate system, it is very selective about which of the population of potential information sources it actually selects for distribution to its customers. In other words, it has headed upstream toward the source of the gold that others are picking up in down in the lowlands. At this point, it would be fitting for me to introduce a formula for analyzing informational value at any point in the data flow, one that accounts not only for the position of data relative to accuracy and timeliness, but also for the perceived value of information among segments of the population. Alas, I am still submerged in the calculus and Shannon's Mathematical Theory of Communications. I hope to provide a series of formulae in the future. |
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Sites on my mind: Far
Eastern Economic Review
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