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Don't Worry, It's Not Socialism

We're starting to see the emergence of new economies in the Internet in which the exchange of money isn't the straightforward path from customer to merchant that we're all used to. This has led to some alarmed hand-wringing about socialism, when in fact what we're seeing is the good ol' free market at work in strange and new ways.

Leading the way in this trend: Teen-agers on sites like MySpace and Facebook, people posting silly pet videos on YouTube, as well a the legions of geeks who create and contribute to open source software.

Nicholas Carr kicks off the discussion, noting that Web traffic is concentrating on a few mega-sites, including MySpace and Facebook, which together account for 17% of all Web traffic in November.

One of the fundamental economic characteristics of Web 2.0 is the distribution of production into the hands of the many and the concentration of the economic rewards into the hands of the few. It's a sharecropping system, but the sharecroppers are generally happy because their interest lies in self-expression or socializing, not in making money, and, besides, the economic value of each of their individual contributions is trivial. It's only by aggregating those contributions on a massive scale - on a web scale - that the business becomes lucrative. To put it a different way, the sharecroppers operate happily in an attention economy while their overseers operate happily in a cash economy. In this view, the attention economy does not operate separately from the cash economy; it's simply a means of creating cheap inputs for the cash economy.

I'm uncomfortable with the phrase "attention economy"--it looks like a pseudo-scientific buzzword to me, like "meme." And, besides, what sites like Facebook and MySpace are selling isn't attention. Just putting up a page on those sites isn't necessarily going to bring viewers and their attention.

Ed Felten is more precise. These sites offer Web hosting, as well as software and services to package up and present content. If you're a commercial site (like InformationWeek), you pay a lot of money for those services. You can go to a site like TypePad and pay a little for those services. Or you can get it for free from Web 2.0 companies, like MySpace and Facebook.

Felten concludes with the following, intriguing point:

Underlying all of this, perhaps, is a common but irrational discomfort with transactions where no cash changes hands. It’s the same discomfort we see in some weak critiques of open-source, which look at a free-market transaction involving copyright licenses and somehow see a telltale tinge of socialism, just because no cash changes hands in the transaction. MySpace makes a deal with its users. Based on the users’ behavior, they seem to like the deal.

The traditional way capitalism works is that the merchant provides a product or service, which the customer pays for. But Web 2.0 and open source products operate differently. In the case of Web 2.0, usually no money changes hands between user and merchant. So the merchant has to find new ways to make money.

One of those "new" ways is actually centuries old: Advertising. The user uses the Web 2.0 merchant's services to post their content to the Web, and the merchant then turns around and sells ads based on that content. If everything is going right, then everybody wins -- the user gets to publish his content, and the merchant makes money by selling ads.

Some companies get fancier. Spurl.net, a social bookmarking service, mines information about the bookmarks its users generate.

NewsGator primarily makes its money providing RSS services to companies. They also make an excellent Web-based feed reader which anyone can use for free. I asked them a while ago how they can afford to do this -- they said they also license the feed-reader to businesses, and the free version provides them with valuable user input that helps them refine the paying product.

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