October 10, 2006

Google Buys YouTube - the structure of Bubble 2.0

Did you hear? Google buys YouTube. After thinking about it, I actually have something to write about it that's a good update on the state of Bubble 2.0, and an explanation to anyone who cares as to why it won't be my fortune (or, to the handful of people reading this, why it probably won't be your fortune either).

We'll never see the likes of Bubble 1.0 again, for decades (the next one similar to that will probably be commodity-level biotechnology, but that could be 20 years away or more). But there are smaller bubbles at more frequent intervals, and Bubble 2.0 is one of those. Unfortunately, I'm close enough to see it, but the economics of it isn't favorable for me.

As a quick check, I looked at the status of the Harvard RSS investment fund, which I'm using as a bellwether. They wanted to raise 100 million dollars, but when I counted what was known about their investments, I came up with only around 6 million dollars. Seems like the party isn't in full swing yet.

Anyway, Bubble 1.0 was about people paying very high prices for assumed productively gains from the Internet. Take "Pets.com" - look, you can order pet food over the Internet! Cool - but how much would you pay for that company? The key was that it didn't cost a lot to play that game. Find some niche, make a little improvement, profit.

Bubble 2.0 is all about data-mining and getting suckers to work for free (this last is called "user-generated content" or "citizen journalism"). But that's a fairly expensive game to play (maybe not expensive from a venture capital fund standpoint, but it's not a garage operation). It also requires a huge amount of marketing. It's necessary to either somehow convince all those suckers that they should work for free, or find out what it is that they'll do that you can exploit (this is why there's a bunch of pilot-fish around the sharks, saying something like "Ecosystems are conversations. When the shark eats you, you are a *participant* in the circle of life - you are the nourishment formerly known as prey, think of yourself as a citizen-lunchmeat"). Both are tough sells, either to the little people that they really want to enrich you by doing grunt labor, or to the big people that they really don't want to pauperize you by suing about copyright infringement from all that "sharing".

There's definitely businesses here. But it's all built on becoming some sort of enormous silo filled with tiny grains, which requires a substantial capital expenditure, as well as winner-take-all contests with other silos who want to be the central place to store grains. To succeed, that requires a certain combination of rare circumstances that are unusual, though somebody wins the lottery.

Basically, Bubble 2.0 does have a model, but it's a very much a multi-level-marketing scheme model. As opposed to the Bubble 1.0 model, which was inflated expectations. The key difference is that mostly everyone can play at inflated expectations until it all crashes, while playing multi-level-marketing doesn't work if you're not already good at marketing.

Tangentially related, I was very amused to read about a online news conference kerfuffle, where a business focused bubble-blower apparently gave a typical blog-triumphalism rabble-rousing presentation, and got thoroughly chastised by other blog bubble-blowers - some of whom just happened to be in various partnerships and consulting arrangements with the "Old Media" companies which were targets of the rabble-rousing presentation. Links omitted out of self-preservation, but the reaction was hilarious in a cynical way: No, no, that's the speech for the chumps, what we feed to the rubes - don't give it in the faces of the moneybags who are hiring us, it'll just offend them.

Some of the evangelism rhetoric, when examined closely, has always been very weird. Paraphrased, "We will storm the ramparts, lay siege to the castle ... in order to be chambermaids and valets, for free!"

Nick Carr was prophetic:

One day, a blog-peasant boy found buried in the dust beside his shack a sphere of flawless crystal. When he looked into the ball he was astounded see a moving picture. It was an image of a fleet of merchant ships sailing into the harbor of the island of Blogosphere. The ships bore names that had long been hated throughout the island, names like Time-Warner and News Corp and Pearson and New York Times and Wall Street Journal and Conde Nast and McGraw-Hill. The blog-peasants gathered along the shore, jeering at the ships and telling the invaders that they would soon be vanquished by the brave royals in the great castle. But when the captains of the merchant ships made their way to the gates of the castle, bearing crates of gold, they were not repelled by the royals with cannons but rather welcomed with fanfares. And all through the night the blog-peasants could hear the sounds of a great feast inside the castle walls.

That feast is starting now, and the main dish is YOU.

[Update: Tristan Louis sends an examination of prices: "No Bubble 2.0 yet"]

By Seth Finkelstein | posted in cyberblather | on October 10, 2006 10:59 AM (Infothought permalink)
Seth Finkelstein's Infothought blog (Wikipedia, Google, censorware, and an inside view of net-politics) - Syndicate site (subscribe, RSS)

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I suspect it's more the case of canny tailors presenting emperors with the latest in new fashions, or con men selling the Eiffel tower to gullible oil magnates.

The peasants aren't losing out here - in the sense that all their work remains theirs to enjoy. The fact that the illusion of its ownership is being flogged to those used to owning public works, simply exploits the blindness of the luddite media magnates.

Where the peasants are really losing out is in the form of loss of interest on their pension funds due to tulipomaniac investments down the line from the fund managers in the latest batch of dot cons.

Posted by: Crosbie Fitch at October 10, 2006 11:33 AM

wow. that is an interesting way to look at it. I wonder where this whole thing is going to go? It seems like an interesting purchase at a time when a lot pf people are trying to watch less television...check out this conversation http://www.changeeverything.ca/watch_less_television#comment-653

Posted by: Kate at October 10, 2006 01:42 PM

The more things change, the more they stay the same.

Posted by: dustnashes at October 10, 2006 04:02 PM

I'm losing my edge, because I care so little about this purchase. But I do like the analogy of all the serfs demanding to be let in to be unpaid servants.

BTW, this is a comment, which means that I therefore have purchased a wee bit of controlling interest in this site.

In other words, you b-listed butt belongs to me.

Posted by: Shelley at October 11, 2006 01:33 AM

The public are working for the public.
The public benefit from their own work.

All that's being purchased here is eyeballs, and thus the advertising channel.

It's the advertisers who are the real suckers - harvested for the money they gladly burn.

Posted by: Crosbie Fitch at October 11, 2006 05:05 AM

Like I said in the comment section of my blog:

"Seth, anyone who subscribes to such a simplisitic view of Web 2.0 as the one you just described will probably fail in this space.

And while they fail, other people succeed. Life goes on."

Look on the bright side. You're giving people permission to fail. Some will thank you for that.

Posted by: Hugh MacLeod at October 13, 2006 10:23 AM

Crosbie: Nobody is giving the peasants millions and billions.

Shelley: Sure. It probably works out to about two cents. If I sell out, I will be sure to return your investment to you at venture-capital rates, making it about a quarter. :-)

Hugh: And as I replied:

It is possible that what you say is both:

1) Completely correct


2) Not a refutation

Indeed, the phrasing tends to rather confirm both points (probably not
what you intended, but still the implication).

As in: "Amway is a multi-level-marketing pyramid scheme where a few top distributors rip off everyone else"
"Anyone who subscribes to such a simplistic view of Amway won't be an
Amway success story, and others will" (true, but actually confirmatory of the original!).

Posted by: Seth Finkelstein at October 13, 2006 11:07 AM

Like I said, Seth, some people will thank you.

Posted by: Hugh MacLeod at October 13, 2006 12:08 PM

The public already own the work they publish. They instantaneously enjoy the value of their work.

How can the public be paid for what they already have?

Should the public be paid for their own eyeballs?

Two cons going down here:
1) Selling what you don't own - public works
2) Selling unrealisable potential - eyeballs

I'm sure there will be a very bouyant market in selling public works and access to them to advertisers. The former, like a Ponzi scheme, will eventually grind to a halt as people realise it can't actually work. As for the latter, eyeball prices will of course gradually settle as people understand their cannibalising consequences (the more they're used, the less of them you have).

But hey, a fool and their money are easily parted. And there are many successful businessmen who might more politely term them highly advantageous value propositions.

Posted by: Crosbie Fitch at October 13, 2006 12:11 PM

Fools & Money! Yay!

Posted by: Hugh MacLeod at October 13, 2006 12:46 PM

I think anybody over 5 can't help thinking "OMG, easy money again !" - but while I have doubts about the viability of CGM as a business, I do not have any about their viability as an opinion forming tool.

They existed before anybody tried to make money out of them; they will exist long after people give up on that.

Posted by: Gianni at October 13, 2006 06:38 PM

I don't see where the "easy money" idea came from. I've never seen blogs as a particularly easy way to make money... but I suppose the people who make money from it, make it look easy.

An easy trap to fall into, right, Seth?

Posted by: Hugh MacLeod at October 14, 2006 09:06 AM

Crosbie: I think your use of the term "the public" there is making things too obscure.

Gianni: There are no new scams, just new ways of doing old ones. but that's not much reassurance.

Hugh, do you really not see where the "easy money" idea comes from? The marketing hypesters strive to give that impression, and then turn around and apply the excuse of the hustler, that you can't cheat an honest man.

Consider the slogan of a lottery - "It could be *you*! [who wins]". Now, did that say you would win? No. Technically, it's a trivial statement - if there's a one in a billion chance, it's theoretically possible, so it *could* happen. But it *sounds* like more than it is, inviting people to read it as much more than it is. And the excuse would be that they never said you would win, even had much of a chance of winning, and really, you should be playing just for the fun of it anyway.

Again, do I really have to go through this?

Posted by: Seth Finkelstein at October 14, 2006 09:32 AM

Who is this "they" you refer to? Name some names. Give us some links.

I tell people all the time: it works for me. Does that mean it works for you? Maybe, maybe not. Depends.

Posted by: Hugh MacLeod at October 14, 2006 07:53 PM

No. Been burned too many times at a game I call "A-lister wins" (that is, an A-lister is heard to *orders of magnitude* more peple than I am, so even if I'm right, they can just haul out a personal attack and "win" that way - yeah, I know the logical problem there, sometimes it's just not solvable in practice).

Somebody wins the lottery. This doesn't make lotteries a new form of economic advancement. Somebody makes a kiilling on a hot stock tip. This doesn't make day-trading an overall profitable activity. Somebody makes out like a badit on a pyramid scheme. This doesn't mean such schemes are a good idea. The whole problem of Bubble 2.0 is that a large number of people who will never see much return are needed to support the tiny number of people making money from it.

Posted by: Seth Finkelstein at October 15, 2006 01:54 AM

Hmmm... I find your view of bloggers as "victims" a patronizing one.

Posted by: Hugh MacLeod at October 15, 2006 07:47 AM

That's not a refutation of the accuracy of the description. It's an appeal to emotion, denying the proposition simply on the basis that it's very emotionally unpleasant. You wanted names, links - as a very small example, look at what you just did, and how it functions as a marketing pitch and not a meaningful argument.

Posted by: Seth Finkelstein at October 15, 2006 08:40 AM

You're not interested in meaningful argument, Seth.

Posted by: Hugh MacLeod at October 15, 2006 02:53 PM

It is unclear what you would accept as a disproof of that assertion. It true that I'm not interested in the very trivial arguments along the lines of (summarized briefly) that it works for all who believe and are worthy, so if it doesn't work, one must either not be believing hard enough, or not be worthy. I find those deeply tedious.

Posted by: Seth Finkelstein at October 15, 2006 03:17 PM

I just have to say that "citizen-lunchmeat" is brilliant.

Posted by: Wes Felter at October 16, 2006 07:18 PM