The Commercial Internet

This week I read “The Long Tail” by Chris Anderson, “To do with the price of fish” in The Economist, “Shared,Shared, Collaborative and On Demand: The New Digital Economy” by Aaron Smith, “$1 Billion for Dollar Shave Club” by Steven Davidoff Solomon and “Robopocalyspe Not” by James Surowiecki.

These readings were all about the economic effects of the internet on both novel online industries as well as on real-world business. In the case of the Economist article, wireless networking was used to coordinate fish sales in India. Cell phones allowed for fishermen to call ahead and decide where to go to sell the day’s catch for the most profit. Originally, prices differed a lot between markets because if one boat came back with a good catch of a certain fish, others would too and the increased supply often lead to drops in prices at one market while supply was too low at another. Cell phones, and the internet generally, can help to coordinate pricing and make the larger economy for efficient. Ironically, this is what the Soviets were trying to do with their OGAS as I wrote about earlier, while in the US it was illegal to use the internet for commercial purposes until it was privatized circa 1990 (Erik Fair).

Online businesses have also had a huge impact on the retail industry. Chris Anderson discusses this in “The Long Tail” where he shows that low sales volume products are profitable on the internet even when they wouldn’t be worth the shelf space in a physical-world store.  These products are the “long tail.” The three main industries he talks about are the music, books and film industries. Anderson argues that the new ability for record labels and the like to keep selling low volume items past their typical due dates is a great opportunity to make more money, even as peer-to-peer file sharing networks are distributing more and more music less legally. His argument is that as long as the cost is low enough, people prefer buying to downloading illegally because there are costs associated with getting not free things for free on the internet (like getting caught, and the general hassle). Therefore, if record labels provide older and smaller market songs for a low price (49 cents) then people will prefer this to alternative methods. As the record label wasn’t able to sell any of these songs before online sales this would just be extra cash. This argument goes against the oft-touted the-internet-is-killing-our-industry complaint from record labels (although he does predict that the retail (what’s a CD?) music industry won’t last long).

What struck me most is that Anderson wrote this article in 2004 and his analysis still makes sense and his predictions are quite accurate. He predicts that flat fee unlimited streaming services will take over in the future. However, what he doesn’t predict is the rise of crowdsourced and peer-produced content. His article predates YouTube by a couple of months so this omission isn’t a big surprise, but sites like YouTube have been incredibly disruptive because the audience and the content creators are the same. YouTube doesn’t pay people to upload videos, and especially for the first few years of its existence, the site was dominated by amateur videos produced by people who were guarantied no compensation for their efforts. YouTube is a video entertainment company that crowdsources all its content production and only shares advertising profits after the fact — video producers don’t sell their content to YouTube, they only get a share of the revenue it creates. YouTube also became successful before it started sharing profits at all through its partner program in 2007.

12 years after Anderson, Steven Davidoff Solomon wrote about Unilever’s 1 billion dollar purchase of the Dollar Shave Club. Solomon writes that the Dollar Shave Club business strategy was innovative in that the company was only a marketing platform that contracted all the real-world work. It managed to compete against Gillette’s market dominance through a mix of branding, costumer loyalty, and convenience. It also undercut Gillette by forgoing relationships with retail stores (or retail stores entirely). Solomon notes that anyone could have bought Dollar Shave Club razors without branding directly from their supplier’s website — and save money. They didn’t invent a cheaper razor, they just came up with a better way to sell them.

These online “platforms” are very elaborate and often brilliant schemes to profit off of other people’s work. Just like the Dollar Shave club that connected costumers with a cheaper razor manufacturer through an extremely convenient interface, many online companies are just specialized retailers that connect costumers with products. Some, like YouTube, even manage to turn their users into both their products (advertising targets) and the producers of their content. “Platforms” also have the benefit of not having to deal with labor relations and can masquerade as software companies. Of course, not of this is to say that I think this is all bad, YouTube especially has played an important role in lowering the barrier of entry to content production and online music libraries have allowed far more musicians than just the big hits to profit off of their work and connect with fans.

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