web2.0 is cheap

8/2/2019 Web2.0 is Cheap

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Web 2.0 is Cheap: Supply Exceeds Demand

Thierry Rayna

Imperial College Internet Centre, Imperial College London, 180 Queens Gate,

London SW7 2AZ, UK

Ludmila Striukova

Department of Management Science & Innovation, University College London,

Gower Street, London WC1E 6BT, UK

Abstract

The aim of this article is to evaluate, from an economic perspective, the efficiencyof Web 2.0. It demonstrates that, because of the non-monetary nature of Web2.0, several sources of inefficiencies (search costs, externalities, crowding out andadverse selection) exist. Nonetheless, the economic nature of digital products andthe expected low value of most online content make it impossible to adopt a simplemarket scheme for Web 2.0. In contrast, this article introduces a concept of demand-driven Web 2.0 (as opposed to the current Web 2.0, which is supply-driven) that isexpected to provide stronger incentives, through financial reward, for high qualitycontent within a Web 2.0 environment.

Key words: Web 2.0, Transaction costs, Externalities, Adverse selection, Efficiency

1 Introduction

It is undeniable that Web 2.0 is a success and has considerably changed the

internet and the way online products and services are created. From the verymuch centralised and, in fact, not very interactive paradigm that ruled the ini-tial version of the web, there has been a switch towards a highly decentralisedand fully interactive model of the internet.

The large adoption of Web 2.0 technologies, as well as the tremendous amountof material that has been produced using these technologies are a testimonial

Email addresses: [email protected] (Thierry Rayna),[email protected] (Ludmila Striukova).

Preprint submitted to ECRA 17th June 2008


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of the success of Web 2.0 and of its superiority over the more traditional wayof building the web that existed beforehand. Nonetheless, although Web 2.0has undoubtedly enabled a further growth of the web and bettered Web 1.0,in many ways, it has also left some previously existing problems unsolved andit is fair to say that some issues have, in fact, been aggravated by the advent

of Web 2.0.

The best known is the copyright issue, that has been abundantly discussed andcommented, but has not, to this day been resolved. For instance, YouTube hasbeen the target of multiple lawsuits because of its inability to remove copy-righted material from its servers. While it is true that the issue of copyrightinfringement existed before Web 2.0, the explosion of the number of sourcesand contributors makes it a far greater challenge than ever.

Another, related, but so far unaddressed, issue is the problem of funding ofthe production of material and content. Like copyright issues, this problemhas existed before the advent of Web 2.0. Like copyright issues, Web 2.0 hasamplified this problem. From the early days of the web, it has become evidentthat the structure of the internet and the economic nature of the goods andservices present on the web made it difficult to price and charge for goodsand services as before and the profitability of entire parts of the economywas wiped out (among others: encyclopaedias, news reports, directories) [1].Although many marketing strategies have been elaborated and tested, it hasbeen eventually universally admitted that the most successful strategy wasoften to give free access to web material and to finance the production ofdigital goods and services through advertisement.

Before Web 2.0, the recipient of the advertisement money was, most of thetime, the producer of the good or service. However, Web 2.0 has singularlyaffected this in the sense that the recipients are now, very often, only inter-mediaries and that producers do not, usually, benefit financially from theirproduction 1 . Although, this might seem, at first, as a non-issue, due to themassive amount of material wilfully provided within Web 2.0, this raises im-portant economic and social questions.

The economic rationale of free market is that the right incentives are provided

to all participants, through the price mechanism, for a (privately and socially)efficient outcome to prevail [2,3]. The original version of the web was, already,a serious departure from this, since incentives were provided to some partic-ipants (in this case to producers only), not through the price, but throughadvertisement income instead. Since the relationship between advertisementand value is, to say the least, rather loose, market distortions and inefficiencieswere already likely to arise. Web 2.0 goes one step further in the sense that

1 There are exceptions to this rule. Blogs, for instance, can be directly fundedthrough advertisement. This issue is discussed further in the following sections.

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most participants do not receive any incentive from the market, but insteadare incentivised by personal motivations (such as ego, reputation, altruism,self-gratification) that do not have any reason a priori to correspond to thesocial value of their production.

In many respects, Web 2.0 may look like the abundance horn: a (virtually)unlimited amount of content available for nothing. This should not hide thefact, though, that, from a social and economic standpoint, the more is seldomthe merrier and that it may be the case that the current version of Web 2.0might be inefficient or even wasteful.

The aim of this article is to analyse the output and incentives of Web 2.0and identify potential sources of inefficiencies (Section 1). After consideringthe challenges raised by the economic characteristics of the good and servicesexchanged on the web (Section 2), alterations to the Web 2.0 paradigm will

be envisaged to conciliate the strengths of Web 2.0 with economic and socialefficiency (Section 3).

2 Identifying Web 2.0 inefficiencies

The term Web 2.0 was coined some time during 2004 2 . Although there aremany definitions of what Web 2.0 exactly is, it usually refers to blogs, socialnetworks, content communities, forums/bulletin boards and content aggrega-

tors [4]. Despite its short history, Web 2.0 applications have become a routinepart of everyday life [5].

Individual users have always provided online content, from the early days ofthe internet, by creating websites and participating in forums, however, asthe number of internet users grew and new technologies appeared, a higherlevel of user participation became possible. Wikipedia, is a perfect exampleof how user participation has developed over the years. Wikipedia started in2001 and there were already more than 100,000 articles in 2003 and morethan 7 million in 2008. Wikipedia.org is currently the ninth most popularsite on the web 3 . Furthermore, 36% of adult internet users in the U.S. haveconsulted Wikipedia [6]. Similarly, there were only 23 known weblogs at thebeginning of 1999 [7], while in 2007, about 120,000 new weblogs were createdeach day (3,000 to 7,000 of them being splogs) [8]. Another example of Web2.0, YouTube, was created in 2005 and had already, in 2007, around 10 hoursof video uploaded every day. In April 2008, there were 83.4 million users andYouTube was hosting 6.1 million videos. Overall, visits to Web 2.0 style sites

2 Presumably for the OReilly Media Web 2.0 conference in 2004.3 http://www.alexa.com/data/details/main?q=&url=wikipedia.org

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have increased by 668% in two years (from 20042006) [9].

However, the large amount of online content is currently uploaded by a rathersmall number of participants. The Hitwise [9] survey shows that only 0.16%of YouTube and 0.2% of Flickr visitors upload material online. The results

for Wikipedia show a higher degree of participation 4.6% of visitors editentries. The Hitwise report, however, indicates that, in addition to the userswho create new content, 1015% of the visitors make minor contribution (e.g.add comments or tags, etc.) [10]. Forresters survey, conducted in late 2006,was broader than Hitwises study and in addition to the content sites (e.g.YouTube and Flickr) also studied blogs and social networking sites. The surveyshowed that as many as 48% of the internet users participate in Web 2.0 sitesin one way or another. According to the Forrester report, 13% of users activelycreate content (Creators), 19% commented on the content (Critics), 15%use RSS and bookmarking/tagging services (Collectors), and 19% use social

networking sites (Joiners). This leaves 23% of users who are Spectators, or,in other words, those who read, listen and watch the uploaded content [11].

2.1 Incentives in Web 2.0

Web 2.0 has, as a characteristic, that users are, usually, not required to con-tribute in order to access the content posted by other users. Besides, a vastmajority of Web 2.0 contributors do not directly benefit from their contri-

butions. In this sense, it might be surprising to see any contribution at all.Without any incentive (because there is no direct benefit) nor obligation (be-cause there is free access) to publish, content in Web 2.0 is akin a public good[12] to which Web 2.0 users are asked to contribute. In such a situation, therational decision is to free-ride [12,13] and to access content without providingany. Based on this theory, Web 2.0 should be totally empty, while it is, in fact,full of content.

To understand the incentives in Web 2.0 it is worthwhile considering thoserelated to open source software. Like Web 2.0, open source software can beused without contributing and should, theoretically, not be produced at all.

Yet open source software has been increasingly successful since its introduc-tion, in the same way Web 2.0 has. To understand why open source is sosuccessful, in spite of the temptation to free-ride, the incentives to contributeto open source software have to be considered. These incentives can be relatedto immediate (bug fixing, improvement of software, or enjoyment of workingon the project) or delayed (signalling incentives, related to career concernsand ego gratification reputation) benefits [14] . Furthermore, altruism, com-munity identification and human capital [15,16] are reasons to contribute toopen source projects.

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Although it could be expected that the incentives to contribute to Web 2.0are similar to those related to open source, it should be noted that there aresignificant differences between the two. The major difference between opensource and Web 2.0 is that open source is mostly related to a professionalcontext (although open source games, for example, exist), while Web 2.0 is

mostly related to a leisure context (although professional Web 2.0 applicationsexist). Nonetheless, one could expect that immediate (satisfaction of produc-ing content) and delayed benefits (ego gratification, reputation) as well asaltruism and community identification play an important role in the decisionto contribute to Web 2.0. While career concerns and human capital may playa role in some particular cases only, it can be assumed that there are, indeed,enough incentives to produce Web 2.0 content, even in the absence of properremuneration.

Several studies have been recently conducted to investigate the incentives to

contribute to Web 2.0. For example, the main motivation of Wikipedia con-tributors is their desire to publish the true facts about the world [17] andWikipedia users edit articles when these articles correspond to their own in-terests or activities [18]. Furthermore, positive feedback received on a con-tribution motivates users to contribute further [19]. Likewise, users are 12%more likely to post again when there was a reply to their message [20].

In rare case, Web 2.0 can also be a source of actual financial gains and thesalaries of professional bloggers usually fall within $90K$120K p.a. range 4 .In such cases, money is generated through various means such as advertising(paid per click or sold for a fixed amount per month), affiliate commissions,

product sales, donations, etc. However, before a blog starts to generate money,it has to achieve reputation and traffic. Reputation can be obtained throughparticipation in forums and online communities and promoting ones profileon social networking sites. Traffic can be increased by marketing the blog,therefore a professional blogger should be familiar with concepts, such as blogpublishing software, feed aggregators, blog carnivals, search engine optimisa-tion, tagging, etc. Basically, in order to create a successful blog, the time spenton marketing is expected to be, at least, the same as time creating the blog[21].

2.2 Web 2.0 and search costs: a reversed tragedy of commons

It has been generally acknowledged that internet has significantly reducedsearch costs [22,23,1,24]. Search costs are part of transaction costs [25,26]and are a source of market frictions and inefficiencies [27]. However, to fully

4 http://blogs.payscale.com/salarystories/2007/04/financial_blogg.

html

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comprehend the recent trends in regard to internet search costs, it is importantto consider how search costs are built.

Search costs can, in fact, be subdivided into two subtypes [28]: external searchcosts, related to monetary expenses or opportunity cost of search, and internal

search costs related to cognitive costs. While external costs depend on exoge-nous factors, such as market structure, technology, etc., and are, most likely,the same for everybody, internal costs reflect the cognitive effort individualsor firms must engage in to direct search queries and sort information to formdecisions. These costs are related to the cognitive ability to process incominginformation, which, in its turn, is determined by prior knowledge, as well asby factors such as intelligence, education or training.

While internet has been greatly beneficial in regard to external search costs,it is quite arguable that it has, in any way, affected internal search costs. Of

course, search engines have, over the years, become more intelligent andhave, as such, transformed part of the internal search costs as external (sincethey process and sort information for the users). In this respect, comparingthe results obtained, with the same query, from the one time market leaderAltavista and the current market leader, Google, provides a quite strikingexample. While Altavistas engine was based solely on indexing web pages(and thus did not process information for the users), Googles algorithms havemade search engines more relevant. However, there is a limit as to how muchprocessing can be done by engines in place of the users and significant internalsearch costs still have to be borne by the internet users.

This issue is, in fact, directly related to the quantity of information availableon the internet. Indeed for search costs to, overall, remain constant, the ratioexternal/internal search costs has to remain the same. External search costscan be considered, nowadays, minimal and it is rather unlikely that they canbe decreased further. In any case the current level of external search costs makeany further improvement nothing but marginal. At the same time, cognitivesearch costs are positively correlated with the quantity of information available the more information, the more it is costly to process. Search costs are,thus, expected to increase, unless new algorithms take a more important partin information processing. However, it is quite unlikely that search engine

algorithm will improve at the same rate as the growth of information availableonline.

While a steady growth in the content available online has been observed sincethe advent of the internet, Web 2.0, by making creation of web content ac-cessible to the masses, has radically sped up this trend. For this sole reason,search costs are bound to increase. Another reason is related to the availabilityof content is the search engines databases. Although it is a known fact thatsearch engine were never able to fully index all the content available on the in-

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ternet, Web 2.0, because of its dynamic nature and because it is not based ontraditional web sites, is even more likely to leave a large amount of content outof the reach of search engines (for obvious privacy reasons, Facebook personalpages are, for instance, not accessible to search engines). As the proportion ofcontent not referenced in search engines increases, the (external) search costs

increase as well.

Furthermore, the changes brought by Web 2.0 go far beyond text content andthe new generation internet services have enabled users to easily publish multi-media (video with YouTube, photos with Flickr, etc.) content on the internet.In regard to search costs, multimedia content creates a far more difficult chal-lenge than textual content. The main issue is that search engines are fullyunaware of the content of multimedia files unless users provide information(relevant file name, tags, etc.). With textual content, creators did not have toadd information, since all relevant information was already part of the con-

tent itself5

. With multimedia content, creators need to provide information,as otherwise their content may remain invisible. The problem, of course, isthat providing such information (tagging is time consuming and/or costly. Itis even increasingly costly, as providing more information necessarily impliesincurring further costs. Moreover, accurately tagging a multimedia file usu-ally requires a significant amount of information and, thus, a non-negligibleamount of time and/or money.

One could argue that this issue existed long before the advent of Web 2.0and it is true that indexing multimedia content has always been a challenge.However, Web 2.0 differs in the sense that (relatively) more content is created,

the proportion of multimedia is greater and that creators are (in most cases)not rewarded for their contributions.

A typical Web 1.0 website would be likely to directly benefit (through ad-vertisement, based on higher usage, or through subscribed content) from pro-viding exhaustive information related to its multimedia content, which wouldgive incentives to tag content, despite the cost. Furthermore, untagged con-tent is likely to be less valuable for such website, so there is, at the same time,an incentive to tag (marginal benefit brought by additional tagged contentpublished) and a disincentive of publishing too much content (since there is

a marginal cost of tagging new content6

) which corresponds to some kindof economic rationality. A Web 1.0 website is likely to publish a quantity oftagged multimedia content such that the marginal cost of the last publishedcontent equates the marginal cost of publication.

In contrast, Web 2.0 contributors are unlikely to see any direct benefit from

5 Although tagging a text can (marginally) improve search.6 Such a web site is also likely, as opposed to Web 2.0 users, to face extra hostingcosts when publishing new content.

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tagging the content they publish. At the same time, if they choose not to tagtheir content, this means that they do not face any marginal cost when pub-lishing new material. This explains the current content of Web 2.0: untagged(because of the lack of marginal benefit) and abundant (because of the lackof marginal cost). This situation is, of course, socially inefficient. Untagged

multimedia content dramatically increases search costs (both internal and ex-ternal) and it is clear that less, but fully tagged, content would be preferableat a social level.

In this respect, the current situation of Web 2.0 is a reversed 7 tragedy ofcommons: because the private marginal cost of contributors is null (or, atleast, smaller than the increase in social cost created due to the increase insearch costs), too much is produced and this results in a waste of social welfare.

2.3 Web 2.0 and externalities: double trouble

It was demonstrated in the previous section that the massive amount of con-tent published since the advent of Web 2.0 is likely to have significantly in-creased search costs (internal search costs, in the case of textual content;internal and external, in the case of multimedia content). The current struc-ture of Web 2.0 is such that this increase in cost is not reflected in the cost ofpublication of content. There is, thus, a negative externality. The (marginal)private cost incurred by the producers/contributors differs from the (marginal)social cost. The difference is the (marginal) external cost that is borne by the

society, but not by the creators of the externality.

As expected, in this case, without a proper corrective mechanism, the goodthat gives raise to the externality is overproduced [30]. Unless a solution isadopted to make the cost of publishing content equal to the cost borne by thesociety (that is, unless the additional search cost is borne by the creator ofthe content), the amount of content produced by Web 2.0 is socially wasteful.

A straightforward solution to this problem would be to force upon the con-tributors the cost of tagging. In this case, one could imagine that less content

would be produced. However, there is probably no way to check that contrib-utors indeed produce meaningful tagging of their content. Besides, this wouldonly be a solution for the increase in external search costs (i.e. the expensesof retrieving information) but not for the internal costs (i.e. the expenses ofprocessing information). Furthermore, this would assume that the social value

7 Traditionally, tragedy of commons relates to a common resource being over-consumed because of a lack of cost (or a private cost lower that the social cost)[29]. Here it is related to a common resource being over-produced, due to a lack ofcost.

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of any content is the same, which is, obviously, not the case. By doing so, itmight be the case that some socially valuable content is not published, whilesome totally useless would still be published. Incentives received, in Web 2.0,by contributors are not related to the social value of their contributions.

This dissociation between incentive received and social value also gives raiseto positive externality. Indeed, the reward obtained for publishing Web 2.0content is, most of the time, subjective and has very little reason to correspondto the actual social benefit of the publication. Since the (marginal) privatebenefit is likely to differ from the (marginal) social benefit, there is a positiveexternality equal to the difference (marginal external benefit). In such case, itis expected that the products at the source of the positive externality be under-produced because producers misperceive the actual value of their products(and, besides, do not have enough incentives to produce more)[30].

It is quite peculiar that Web 2.0 is, at the same time, source of both nega-tive and positive externalities. This should not come as a surprise, though.The incentives and costs perceived by contributors have, at the moment, noreason whatsoever to correspond to the actual social benefits and costs. Un-fortunately, this means that low (social) value content is very likely to beover-produced, while high (social) value content is, probably, produced in in-sufficient quantity, thereby leading to an inefficient outcome.

This does not mean however that valuable content cannot be found on Web 2.0sites, quite on the contrary. As stated in Section 2.1, the incentives providedby Web 2.0 environment might be enough for valuable content to be published.Furthermore, it might even be the case that the incentives perceived by somepublishers actually correspond to the social value of their product. However,there are, at the moment, no Web 2.0 mechanisms that systematically ensurethat incentives correspond to social value.

Of course, it could be argued that because of the Long Tail effect [31], which isoften associated with Web 2.0, each single content is, in fact, socially valuable,so there is no problem of efficiency. However, a study constructed on YouTubeand Daum traffic [32] revealed that 10% of the videos account for 90% ofthe views, which is even higher than the traditional 80-20 Pareto principle.

Furthermore, despite the growing number of files, the file distribution is stillskewed towards a few very popular files.

2.4 Quality in Web 2.0: Crowding out and adverse selection

Although Web 2.0 environment is largely non-monetary, it nonetheless followseconomic rules. Therefore, the large increase in the supply of content has,

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undoubtedly 8 , led to a decrease of the market value of online content. Indeed,Web 2.0 content has not replaced previously existing content, but instead hasestablished itself as a new way to obtain content.

Even though online products are never perfect substitutes of one another,

there is, most of the time, some degree of substitutability between them. Evenif amateur lower quality content is not as valuable as professional high qualitycontent, its large availability and its low cost (it is, most of the time, free)drive the overall value of content down. Web 2.0 is, thus, at the root of acrowding out effect. Lower quality content crowds out good quality contentby way of very low prices for online content.

This crowding effect can be easily understood from a consumers perspective.All online products are competing for a part of consumer leisure time. Al-though, for consumers low quality content and high quality content do not

lead to the same level of utility, their substitutability enables to substitute alarge quantity of (free) low quality content for a small quantity of (costly) highquality content. There is so much content available that consumers can easilyfill all their leisure time with free content (and are even likely to be able toconsume the best quality free content) and have neither time nor incentive toconsume high quality content. Of course, if less low quality content was avail-able, consumers would, eventually, run out of new free content (of reasonablequality) to watch and would devote more time on consuming paid-for content.

The fact that good quality content might be driven out from the marketby low quality content is quite similar to the famous Akerlofs market for

lemons [33]. Since there is a risk that high quality content is not (or less)present in the market because of an insufficient market value caused by thepresence of lower quality content, Web 2.0 may give raise to adverse selection.

Adverse selection, however, usually arises due to information asymmetries.In the case of Web 2.0 is should be noted that online content is, in general,experience good [1]: its actual value for the consumer cannot be evaluated(or is too costly to evaluate) before consumption [34,35,36] 9 . There are thus,information asymmetries in Web 2.0, related to the quality of online content.Obviously, all content providers claim that their content is of good quality.

However, consumers are aware of these asymmetries of information and arelikely to base their valuation (and thus the amount they are willing to pay forcontent) based on their past experience and observations.

What is particularly interesting, when one considers traditional models of ad-

8 For this not to happen, the demand for content should have grown at least as fastas the supply.9 In the same way, in [33], the actual quality of the car is unknown to the selleruntil the car has been purchased and consumed.

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verse selection, is that the consumers willingness to pay is a weighted averageof the quality present in the market. It is, thus directly related to the pro-portion of low quality content. If a proportionally large amount of low qualitycontent is produced, the consumers willingness to pay becomes close to zero.In the case of Web 2.0, it is undeniable that while very valuable content is

published, the significant amount of content that is socially not valuable 10 isexpected to drive consumer willingness to pay to such a low point that highquality content may be driven out from (or never reach) the market.

The usual solution to adverse selection is signalling [33]. Producers should,somehow, be able to signal their quality trough an objective and unambigu-ous signal. Although there is a clear distinction between professional content,available for a fee, and amateur content, usually available for free, the distinc-tion paid content/unpaid content cannot be used as a signal, since there ishigh quality content available free of charge and paid content of low quality.

The problem of signalling is that it should be costly and even though the costshould decrease with quality, in an environment where the benefits obtainedfrom publishing are mostly non-monetary, it is quite doubtful that contrib-utors would be willing to bear additional cost. For instance, usual signallingstrategies, such as guaranties, money back, etc. are largely inapplicable in aWeb 2.0 context. Besides, it is quite arguable that it would be possible todefine a universal signalling criterion: unlike Akerlofs lemons, which value isfully objective, the value of online content is mostly subjective.

A further complication with Web 2.0 is that the multitude of amateur providers

mean that they are likely to lack the knowledge of the market and do not haveenough experience to accurately assess the market (or social) value of theirproducts. In traditional models of adverse selection, sellers are fully aware ofthe quality and value of their products and, based on the cost of signalling,take signalling decisions accordingly. In Web 2.0, quality information is moreimperfect than is it asymmetric. Consequently, even if an adequate signallingmechanism could be designed, it might still not be sufficient, since some pro-ducers of low value content might overestimate its value and decide to signal,while providers of high value content might underestimate its value and decideagainst signalling.

Finally, as mentioned in Section 2.1, professional bloggers usually have todevote as much time promoting their blog as writing it. This goes along a rapidchange of technologies and ultimately the question is whether a successfulblogger is someone who understands technology and keeps up with changeor who provides a quality content. The current incentive system, even forprofessional bloggers, is not so much about the quality of the content, but

10 While it still may be valuable to its author and close relatives or friends.

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instead about the ability of the blogger to play the rules of the game andmake their blog more known than others.

3 The challenge of monetizing Web 2.0

In the light of what was exposed in the previous sections, it could be thoughtthat simply monetizing Web 2.0 could be sufficient to reconcile Web 2.0 out-come with economic efficiency. Unfortunately, the particular economic natureof digital products, on the one hand, and the existence of transaction costs,on the other hand, make it particularly difficult to apply a simple marketscheme to Web 2.0. This should not come as a surprise, though. There is cer-tainly a reason why Web 2.0 was born and succeeded in a mostly non-marketenvironment.

3.1 The public nature of digital goods

All internet content has a particular feature its digital format. Due to thisdigital nature, internet content is fully replicable, i.e. can be copied withoutloss of quality or information. Furthermore, the cost of duplicating digitalgoods is, nowadays, so low that it has become negligible.

This replicability (and the low cost of doing so) has important consequences inregard to the economic nature of digital products. Indeed, although they are,most of the time, provided privately, digital goods are public goods (i.e. non-rival and non-excludable). While the medium (CD, hard drive, etc.) used tostore digital goods is, itself, rival, digital goods are non-rival, since consumersare able to make copies of the same unit of digital good and everyone canconsume it at the same time 11 .

An important consequence of this non-rivalness is that it results in digitalgoods being non-excludable. Indeed, although the producers of digital goodsalways have the possibility to prevent (exclude) consumers from consumingdigital goods, they cannot prevent consumers from obtaining digital goodsfrom other consumers. Thus, although digital goods are directly excludable,they are indirectly non-excludable. Since digital goods are non-rival, con-sumers have little reason not to let other consumers copy the digital goodsthey own (letting them copy will not deprive them from the usage of the good).This means that, as the number of consumers who own a copy of a particular

11 A good is said to be rival when the consumption of one individual decreases the(potential) consumptions of other individuals.

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digital good increases, the actual excludability of this digital good progres-sively decreases to a point where the digital good is virtually non-excludable who would try to obtain (buy) a digital good from the producer, when thesame good can be obtained (for free) from other consumers?

Since digital goods are (evolutionary) public, they are subject to free-riding,which is, in the case of digital goods, piracy [37]. The main issue of monetizingWeb 2.0 is, therefore, the large level of free-riding/piracy that would arise. Itshould be noted than the effect of piracy on Web 2.0 could be expected to beeven more dramatic than in other sectors. Indeed, considering that very pow-erful and large firms, such as Microsoft, have been unable to curb piracy, howcould small Web 2.0 contributor be able to protect himself. Furthermore, largefirms have means to earn money in spite of piracy that Web 2.0 contributorsare unlikely to have (for instance, the O.E.M. contracts signed by Microsoftensure a minimum of revenues).

Besides, two further issues can be considered in the case of Web 2.0. Thevery nature of Web 2.0 is collaborating and spreading. In this case how canproperty rights on content and the nature of Web 2.0 be conciliated?

3.2 Transaction costs and micropayment

The idea that introducing pay-per-use and micropayment in Web environmentwould be a better model than the, widely used, free-access advertisement

model, has been, for some years, quite popular in the e-commerce literature.In the light of what was presented in Section 2, such a model would also havethe potential to lead to a more efficient Web 2.0. However, the issue likelyto arise if Web 2.0 were monetized is the amount of transaction costs thatthis would generate. Web 2.0 is characterised by a multitude of content anda multitude of suppliers. The large amount of content would be sufficient togenerate large transaction costs. It is, moreover, coupled with a very largenumber of individual providers. If this was not enough, users consume a verylarge amount of diverse Web 2.0 content every day. Monetizing Web 2.0 would,therefore, result in a very large number of transactions.

Another particular aspect of Web 2.0 is, as discussed in the previous sections,the relative low value of individual online content. If users had to pay to accessWeb 2.0 content, it is likely that most of the payments would fall within themicropayment category. The issue is then to determine whether the micro-amount paid will offset the costs generated by this extra transaction.

Although some work has been done in the recent years on how to optimisepayments systems to lower transaction costs, within a micropayment setting[38,39], the question of whether transaction costs could be reduced sufficiently

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to make micropayment worthwhile has remained open. More importantly,most of studies only consider the financial aspect of transaction costs.

Monetary transaction cost is only one of the components of transaction costs.The other main components are opportunity costs (related to the time spentfor the transaction to happen) and cognitive costs [25,26,28]. Furthermore,these costs are not only caused by the transaction itself, but also by the searchfor opportunities, coordination, monitoring and enforcement [40]. Switchingfrom free-access content to pay-per-use content in Web 2.0 is likely to lead toa dramatic increase in transaction costs.

From the users perspective, the increase of cost, besides the actual price paidfor the content, is obvious. So far, the only trade-off consumers have to face isrelated to time and the expected quality of content. They have to base theirdecision solely on the time they can devote to consuming content and on theexpected utility derived from consuming a particular content. If they have topay-per-use, the problem becomes more complex, since the price of contentbecomes a part of the trade-off. While consumers, nowadays, only have toconsider the quality of content, they would then have to consider the relativeprices of all online products. While, nowadays, one can, reasonably, assumethat users always consume the content most valuable to them, introducing pay-per-use would mean that users are likely to face a dilemma between consumingfewer goods of higher value or more goods or lower value.

Consequently, one can expect that the behaviour of consumers would change.

From casual browsing (made possible by the free access to content) they wouldhave to switch to fully investigating all possible options and collecting allrelevant information to make a rational choice. This, of course, takes time,money and cognitive resources. Furthermore, as online content is, for mostof it, experience goods (i.e. their actual value cannot be realised prior toconsumption), even an extensive search might only result in an exhaustiveamount of information.

Collecting information would only be the first step, though. Users would thenhave to coordinate their actions with the chosen seller. A contract will have

to be drawn (what is going to be delivered, how, for how long, using whichpayment system?), the transaction will have to be made (filling a form andentering credit card details, using one-click method, using PayPal?) and finallythe contract will have to be enforced. In case the contract is breached by theseller (e.g. the agreed content, quality of content and/or quantity of contentwas not delivered), the buyer will have to spend, again, time, money and cog-nitive resources taking actions against the seller (this is to be contrasted withcurrent situation when, if, for instance, a blog does not deliver as expected,this is not costly, since there is free access and no contractual relationship).

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The above discussion might not be surprising, as it is indeed how e-commerce,in general, works. However, can users reasonably be expected to accept allthese costs for a few-line blog or a few-second video? Even if one considers asituation where monetary transaction costs have been minimised, will usersbe willing to go through the hassle of (even leaving search costs aside) going

through a one-click payment (which still requires an authentication procedure)for something that is worth very little to them?

Micropayment has been brought into focus in e-business literature because itis generally thought that the value of online content for users does not exceeda few cents of Dollar/Euro. However, even if technology improves to such apoint that the monetary part of transaction costs would become negligible, theopportunity cost and cognitive costs induced by monetizing Web 2.0 make itunlikely that users will be willing to participate in such a scheme.

Situation for sellers in a pay-per-use Web 2.0 would actually be even morecostly. Indeed, sellers need to collect the same amount of information as buyers(what are competitors doing? what are the substitutes?) and are expected tospend far more time and cognitive resources devising an adequate pricing andproduct strategy. Although the same strategy can be used for many users, inthe case of the very few successful content providers, strategies have to beadapted almost in real time, in order to maximise profit. Even in the case of avery successful provider, it is rather arguable that the micropayment receivedwill offset the transaction costs incurred.

It is, thus, necessary, to diminish transaction costs in order to enable monetary

Web 2.0. In this respect, it is important to consider that reducing the numberof actual transactions may not be sufficient, since search costs are a part oftransaction costs, and that the number of potential transactions would haveto be reduced as well. This means that, in regard to the amount of transactioncosts generated, pay-per-use is unlikely to be the best option for Web 2.0.

Alternative options, such as subscription to content feed, are better in termsof transaction costs volume, but are not generally applicable to all Web 2.0content, for example it would be difficult to price a subscription for contentpublished irregularly. Furthermore, the very large number of Web 2.0 contrib-

utors means that a large amount of transaction costs is still to be expected.

The only remaining option would be to operate through intermediaries whowould charge a subscription fee to access content. A typical example wouldbe YouTube charging users an access fee 12 and then paying content providersaccording to a certain rule (based on usage, for example). Such situation would

12 Note that this access fee would probably had to be a flat fee, as, otherwise, theamount of transaction costs, although lower than with individual pay-per-use, islikely to remain high.

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not be, in fact, much different, from what happens with ISPs and mobile opera-tors when they bundle content to their telecommunication offers. Nonetheless,it is to be noted that all the attempts to use such a scheme on the internethave been so far unsuccessful.

The particular issue of Web 2.0 and transaction costs is related to the factthat, in Web 2.0, participants are, at the same time consumers and providers.Due to the constant and multiple exchanges happening between participants,attempting to charge for these exchanges would be extremely costly. Besides,participants who consume equally each others products would actually endup paying each other as much as they would be paid by each other. At the veryleast, a balance mechanism between participants should be set up to save ontransaction volumes. This, however, would have little impact on the amountof transactions related to time and cognitive resources spent searching andmaking a decision.

Although it is rather rare, situations when participants are both consumerand producers and are constantly exchanging exist in the economy. Firms,for example, are a very good example of this. This example is, in fact quitesignificant, since the Transaction Costs Theory [25,26] was built precisely toexplain why firms and institutions exist, as opposed to individual people trad-ing goods and services. The explanation is that there is a point at which theinteractions between individuals are such that the amount of transaction costsbecomes too high to operate within a market environment and that is why, insuch case, non-market entities 13 , such as firms are created. Bearing that in

mind, it is, thus, not surprising why a heavily collaborative environment suchas Web 2.0 has evolved into a mostly non-monetary environment.

On a final note, even if transaction costs associated with pay-per-use couldactually be lowered, the profitability of such marketing strategy for providersis, in fact, quite debatable. Indeed, the rule of profit for information goodsis, in most cases, to bundle information goods and/or usages of informationgoods [1,41,42,43]. Of course, it is usually difficult for small providers to offerbundles and larger providers are more likely to successfully apply this mar-keting strategy. Nonetheless, the profitability of bundling is so strong that it

is even the case that small providers join their products and offer them as abundle 14

13 Although there are financial relations between individuals within the firm, thereis no market inside the firm.14 The MacHeist, for example, is a bundle of independent shareware.

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4 From supply-driven Web 2.0 to demand-driven Web 2.1

The challenge of monetizing Web 2.0 is to find a mechanism that is able to:

(1) Better align individual incentives with social value.(2) Take into account the economic nature of digital products.(3) Not generate a lot of transaction costs.

According to what was discussed in the previous section, it is probably notpossible to fully align individual incentives and social value, without under-mining the benefits of Web 2.0. However, the issues described in Section 2 aremainly related to the risk that Web 2.0 would hinder the production of highquality content. If incentives targeted at producers of high quality contentcould be created, this could improve the way Web 2.0 works.

At the same time, the economic nature of digital products needs to be takeninto account. Because of the public nature of digital goods, it is illusory tothink that piracy can be prevented, so it is unlikely that a lot of money canbe made on reproduction and distribution of existing digital content.

Finally, since attempting to charge for each access to online content withinWeb 2.0 leads to an amount of transaction costs which is too large, it shouldbe ensured that any attempt to monetize Web 2.0 would lead to a restrictedamount of transactions.

A way to achieve these three goals at once would be to switch from a supply-driven only Web 2.0, as it is at the moment, to a demand-driven Web 2.0.The idea is that, instead (or in parallel to, demand-driven and supply-drivenWeb 2.0 can complement each other) of publishing content and hoping thatthis content would meet a demand, content is published on demand. Thecontent can either exist prior to publication (for example, holiday pictures of amonument) or actually be created on demand (following the exact specificationof the demander).

Such a mechanism would indeed satisfy all the above defined conditions. Itwould create incentives for high quality content, since content will be paid for.Also, if such a system coexists with traditional supply-driven Web 2.0, it islikely that providers who anticipate that their content has a high value wouldwait for demand to exist before publishing it, while users aware of the lowvalue of their content would publish it the traditional way.

Secondly, such a mechanism would acknowledge the public nature of digi-tal products. Indeed, digital goods, as any other public good, become non-excludable only once they have been produced (published, in the case of digi-tal goods). The first unit of a public good (and of a digital good) remains fully

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excludable and this is when it is still possible to charge for the access to thegood. However, since after a particular content has been published, it quicklybecomes non-excludable, no particular attempt should be made to preventaccess and/or copying from other users.

Such a scheme also provides a solution for the third issue, the amount of trans-action costs. Indeed, it is suggested that only the initial publication shouldbe charged for, which would lead to a much smaller amount of transaction(and transaction costs) than charging for each usage. Even if we assume thatproducer and the initial buyers attempt to charge for accessing the contentwhile it is still partially excludable, this should not lead to a major increasein transaction costs.

This idea is, in fact, compatible with a new stream of research in economics[44,45] which demonstrates that an efficient competitive market outcome can

be achieved with digital goods (which was thought to be impossible due to thepublicness of these goods) as long as there is finite expansibility (i.e. the goodsdo not spread instantly in the economy). Since it takes time for digital goodsto spread among consumers, these goods, thus, remain partially excludable forsome time and it is possible, in the meantime, to charge people for accessingthem. Furthermore, the initial buyer is able to identify downstream profits(since it is possible for this buyer to sell access to the good) and is willing topay even more. In this sense, it is not unlike the premium that news agenciescharge to important clients who are willing to pay a lot to access crucial piecesof information first.

In practice, such a system would consist in people registering existing poten-tial content (holiday pictures with detailed tags) or ability to provide content(such as coding skills, the location of their next holidays) with an intermediary.Meanwhile, users could register demands and needs with the same interme-diary. Demanders and potential suppliers would then be matched and wouldagree on price and modalities. Once the digital good has been delivered, al-though the producer remains the holder of the copyright, both producers andbuyers have the possibility to diffuse or resell as wanted. A reputation systemcould be included to provide further incentives.

The goal of a demand-driven Web 2.0 would not be to replace the currentWeb 2.0, but instead to complement it and help provide incentives so thathigh quality content can be produced in Web 2.0 environment. Although it isnot a first best solution, in the sense that it does not guarantee an efficientoutcome, it is thought that it could, at the same time, increase the relativequantity of high quality content and curb search costs (because less low valuecontent is published and/or because it gives incentives to tag content 15 ).

15 Untagged content has less probability to be matched with a demand.

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5 Conclusion

The aim of this article was to evaluate, from an economic and social per-spective, the efficiency of Web 2.0. It has demonstrated that, because of the

non-monetary nature of Web 2.0, several sources of inefficiencies (search costs,externalities, crowding out and adverse selection) exist.

Nonetheless, it has been shown that the economic nature of digital productsand the expected low value of most online content make it impossible to adopta simple market scheme for Web 2.0.

In contrast, this article has introduced a concept of demand driven Web 2.0 (asopposed to the current Web 2.0, which is supply-driven), that is expected, bytaking the economic characteristics of digital products and keeping transactioncosts at a low level, to provide stronger incentives, through financial reward,for high quality content within a Web 2.0 environment.

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