Wednesday, July 18, 2012

Hidden economies of Internet

In market economy, we measure dollars exchanged for goods sold.  Higher the value to the buyer (consumer), higher the price will be paid to seller (producer).  In this traditional economy, it is straight forward to calculate the amount of value created and exchanged by following dollars.

When you look at Internet today, it is not so clear.  We customers often get our value from producers without paying directly for that value.  There are lots of examples like this.  One example will be this Blogger, Google's blogging platform.  I am getting value out of by using blog hosting service provided by Google.  But I don't directly pay for it myself.  Service is offered to me free of charge by Google.

Every Internet users recognizes this sign;
it means you are creating content/data for provider
to monetize; yet you won't do it unless you see value.
Now as I continue to blog and start attracting traffic to my blogging site with my content, then roles start to blur.  Because I am creating content to be hosted on Google, Google gets to monetize traffic that is generated by my blog.  In this scenario, I am a producer and readers of my blog will be consumers.  Google is intermediary who provides the hosting service to my content.

Once I start running ads on my blog, roles get a little more complicated.  Google starts selling ads on my blog page, once user views and clicks the ads, Google shares the profit with me.  Google becomes more like producer helping me monetize my blog entries, and ads buyers are consumers who pays for targeted user traffic.  In this case money is exchanged between consumer and producer.

As you can see there are many services that are available on Internet where consumer is not paying directly for service that's provided by producer.  Open source code will be another good example.  People can download and start using it freely.  Yet they can create additional value on top of free tools, and sell those services or content to other Internet users.

Without this hidden economies Internet will be a much less vibrant place.  Just imagine if you had to pay to set up Blogger account.  How many users would have started sharing their ideas in blogs?  Probably a lot less than what we have today.  The hidden economy of Internet allowed a guy like me to start running a blog.

A problem with this hidden economies of Internet, however, is that it's not nicely quantifiable.  When revenue is generated and reported, we all understand how much value has been created by people participating in the economy.  But when there are no dollars exchanged, it's very difficult to grasp the size of hidden economies. Yet as we can see with earlier example, without hidden economy allowing me to jumpstart my blogging site, following subsequent values to Google, to my blog readers and to ads buyers would not have been possible.

April 24, 2012, Hacking Society invited Tim O'Reilly to talk about the hidden economies of Internet.  Panel discussion covered benefits of understanding them and what we can do with recognizing their values.

I particularly liked the idea of how we can pull all these hidden values together to make a compelling argument for making more balanced public policy decisions.

Following up on O'Reilly's comment about Clothes Line Paradox, one idea would be to calculate the price of value if it were to be done with prior approach of paying directly.  It would allow you to see the value of (or savings that you had from) using values from hidden economy.

Yet another would be to calculate all subsequent traditional economic activities and their values (in my blog example, it would be values provided to Google, blog readers and ads buyers).  All subsequent values would not have been possible with hidden economy's no up-front cost, so all the subsequent value creation can be attributed to the initial hidden economic transaction.

Whatever it may be, it sounds like an interesting idea to visualize this hidden economy of Internet.

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