From Web 1.0 to Today

My perspective as an old economist on social media and crypto

At a meeting of tech-minded folks in Austin, the organizer asked me to describe myself. “In two words,” he joked.

“I’m old,” I responded.

In particular, I am old enough to have been very caught up in Web 1.0, from 1994 through 1999. This affects my perspective on social media and crypto.

I am a devotee of Varian and Shapiro’s Information Rules, which anticipated the issues in business strategy that the Internet would create. In particular, content delivered as bits precludes the classical textbook concept of setting price equal to marginal cost. The marginal cost is too close to zero for that to work. Although one way to fund content was with advertising, I never liked the advertising model as much as other methods.

I drank the Kool-Aid of decentralization. Books like Daniel Pink’s Free Agent Nation. I thought that it would be cheap to launch an enterprise on the Web, so that more income would flow to small firms than to large ones. I failed to appreciate that centralized services would be able to provide the best user experience, so that you end up with Google and Facebook and Amazon.

I had plenty of skin in the game during the Dotcom bubble, the crash, and the aftermath, so that episode made a deep impression on me. Investors were right that the Internet would provide a gold rush, but they bought too much Fools’ Gold while failing to appreciate that Google and Amazon would turn out to be genuine nuggets.

My perspective on social media, and legacy media on the Internet for that matter, is that the advertising model is finally tapped out. Google has captured the lion’s share of ad revenue, and for everyone else it is too many content providers chasing too little ad revenue.

For everyone other than Google, it is time to think in terms of patronage/subscription models. I think that Substack epitomizes this, and it will be interesting to see whether Substack proves sustainable.

Andrey Mir coined the term “donscription” (donation/subscription) to describe what legacy newspapers as well as some new media sites have come up with. The NYT is an example, in which subscribers are in effect donating to support a leftwing point of view which they share. As a result, the NYT is subject to audience capture by the left. The NYT can only afford to report all the news that’s fit for an audience that wants to be reassured that conservatives are benighted.

Part of the challenge that Elon faces with Twitter is that moving to a donscription model would require Twitter to stay on the left. Meanwhile, the advertising model has at least a two problems. One is that Twitter is just one of many companies fighting over the scraps left over after Google does the feasting in the market for advertising. Another is that Twitter does not capture the sort of personalized data that one can use for automatic ad targeting. Instead, an ad campaign on Twitter has to be custom-designed by a team of humans, so Twitter’s ad marketing does not scale well.

As I’ve written before, I think that Twitter is ripe for switching to a model with paid subscriptions. They can let casual users stay on the site for free while offering a bundle of features that only paid subscribers can access.

My perspective on crypto is based on my reading of what happened with Web 1.0. As with the Web, crypto needs help with the user experience. But companies that provide services that allow crypto to reach the mass market will probably turn out to be centralized. That in turn will create the sorts of risks, including risks of regulation, that crypto enthusiasts are trying to escape.

Although I mourn the centralization that took place on the Internet, I have come to accept what happened. But centralization of crypto sounds to me like an oxymoron. Centralization would strike me not just as altering the vision for crypto but defeating its purpose altogether. And yet I am unable to see expanded mainstream use without centralization.

The Dotcom crash of 2000 did not discredit the Web. Just because there was a temporary mania in Internet stocks did not mean that the Internet itself was useless. On the contrary, enthusiasm about the future of the Internet was justified, and most people were persuaded that the technology itself was only going to become more entrenched in society.

I don’t see reasons to be similarly enthusiastic about the future of crypto, largely because I never saw reasons to be similarly enthusiastic about crypto in the first place. It may turn out that crypto will rebound from 2022 and SBF the way that the Web rebounded from 2020 and the Dotcoms. But the probability I would place on that scenario is not high. If you want to catch the next wave, you are probably better off jumping into AI or biotech.