There’s an interesting opinion column in today’s New York Times by Ross Douthat, The Facebook Illusion. The gist of the article is that the Internet economy is not capable of producing the economic growth, prosperity, and support of previous economies.
…the problem is not that Facebook doesn’t make money. It’s that it doesn’t make that much money, and doesn’t have an obvious way to make that much more of it. … The result is a company that’s successful, certainly, but whose balance sheet is much less impressive than its ubiquitous online presence would suggest. This “huge reach, limited profitability” problem is characteristic of the digital economy as a whole.
When you read the column, I suggest ignoring Douthat’s claim that the Facebook IPO flopped, and instead remember that IPOs primarily benefit founders, large shareholders, and investment banks. The more important observation comes later: the type of wealth the Internet economy makes possible doesn’t create many jobs, and therefore it has “created a cultural revolution more than an economic one. Twitter is not the Ford Motor Company; Google is not General Electric.”
Now, proponents of the Internet economy suggest that the Ford/GE-style manufacturing and consumer economy are dying, and they will have to adapt. The problem, perhaps, is that there is no way to adapt that also creates general economic benefit—i.e., benefit for more than startup founders and investment bankers. Here’s Douthat again:
The “new economy,” in this sense, isn’t always even a commercial economy at all. Instead … it’s a kind of hobbyist’s paradise, one that’s subsidized by surpluses from the old economy it was supposed to gradually replace.
That is to say, the reason companies like Facebook can exist is because so many people have leisure time bought by jobs in the non-Internet economy that make it possible for them to freely participate and contribute to these high-leverage online startups. Thus, the suggestion that everyone become an Internet entrepreneur has a major problem: the Internet economy only “works” is because people still have jobs that pay them in order to have the leisure to become the products of Internet companies (as data, as advertising). Which suggests a question: what are we supposed to do for a living in the “new economy?” If the entire thing is propped up on an implicit subsidy from the consumer economy, then the answer to that question might be… well, you tell me.
Comments
Jack Everitt
The answer is to become a Diablo 3 weapons farmer.
Seriously, I don’t know if there is a right answer. The world’s economy seems more fragile than most think, and it’s directed by greed rather than reason, need or a thought to the future.
“I suggest ignoring Douthat’s claim that the Facebook IPO flopped” – totally agree. It succeeded beyond the wildest of expectations. The goal was to get the maximum price per share and they so did that. Those crying “flop” didn’t get to cash in like usual and are just greedy whiners.
Gordian Dziwis
Implicit subsidy from the consumer economy works fine for the financial sector, why should it be a problem for the Internet economy?
Ian Bogost
The financial sector is a special case. It’s all about invention. All they’ve ever done is converted anything and everything into financial instruments. It’s like alchemy.
I suppose everyone could either make websites or do the banking that converts those websites’ leveraged “value” into financial instrument, but isn’t that a bit of a tenuous tower to build? It’s not like we haven’t seen one such structure collapse in recent memory…
Johann Lau
The whole thing just being about advertising is a problem IMHO.. Just look at TV. So much crap, most of it supported by advertisement — advertisement, generally, only buys crap and only gets you so far.
Software as a product can work, and services as a product can work, too. E.g. My RAW converter is just as important to my photography as the battery is or the flashcard is, and I don’t ever regret paying my webhost a few bucks a month. I also don’t mind paying for my phone, or paying my ISP, etc.
I wish we could extend that common sense to websites, too. To the ones that deserve, it anyway.
Jeremy M
This is going to be a very important question. It is already a very important question. 50% of college graduates of the last ten years are unemployed.
As more and more money goes from the real “exchange for goods and services” kind to the imagined “buy this future that is betting against the likelihood of this other future happening” smoke-and-mirrors-pilfering coming out of wall street, as civil unrest grows to the point where no amount of Mad Men distraction can hold it down…what then?
We’ve built a culture based on an assumption that theres a ‘consumer’ class out there whose main job in life is to buy the things that marketers tell them to, be it through an awesome twitter account or a crapppy commercial. But the consumer class, it turns out, doesn’t have any money anymore. And we’re not inclined to help them anymore.
So, what now?
What’s next?
Surely we can’t all live on AdSense.
Dan
Internet companies aside, the new economy will be built by entrepreneurs who build their businesses locally. Long gone are the days of pensions and the gold watch after years of faithful service. If people become small business owners, they would reap more of the rewards of their success even with the greater risk.
The question that remains is this: How are we teaching the next generation about entrepreneurship? Our children are being groomed for careers not for building businesses, unless we teach those lessons ourselves.
Fernando
I think the point about subsidies is not about users time, but it points to the fact that capitals invested in startups and in stocks from Facebook, Google, etc., come from earnings from different sectors, that don’t know where to go after the subprimes debacle. How could a company be worth billions when the estimated benefits are so low in comparison? They’re overpriced, as they were during the previous bubble, and their prices could drop in case of panic or just obsolescence. How could anyone bet that Facebook growth will go on for another 20 years, when human population grows arithmetically and MySpace dissappeared? Please excuse my english 🙂
Mayo
I think the poster hit the nail on the head. If we transition into an internet economy then we will simply have built our house in the sand. We need industry for countless reasons, so to push for an internet economy is foolish when manufacturing is a perfectly fine medium to go.
Facebook however…. I told subscribers to run from that garbage stock. The profits had been sucked up. Any time a Venture Capitalist has money in a company and it goes public you can rest assured that the stock will tank because the VC will begin collecting his share of the profits.
stonebits
I think this just shows a lack of imagination. FB and Google may or may not be platforms for the future economy, but Apples various App stores are, downloadable games are, and streaming movies are.
Each is an example of a sustainable model (perhaps small scale) that survives in the face of freely available competitive content. I don’t think anyone believes that you shouldn’t start a movie studio because everyone has a video camera in their pocket and posts free videos to youtube.
I find the whole material versus immaterial dichotomy overblown, consumers have always been willing to pay substantially for “immaterial” goods — just think of the substantial $ premium attached to living in a prestigious neighborhood.