Web 2.0 Economics 101

This is going to be a short post about economics, a subject I never studied in school. Even though I am no Bernake, I do know one thing: capitalist economies operate on supply and demand. As supply goes up, it indicates that demand is heading down. As demand goes up, then it points to supplies going down. Any 7th grader knows that. It's the law. (Tell me if this severely math-challenged monkey has this all wrong.)

Yet people are not thinking about economics when it comes to the web - particularly Web 2.0. Here are two key trends to consider.

A) As the supply of content rises, attention decreases and demand lowers -  e.g. traffic thins
As I wrote earlier this week, the entire concept of measuring sites on traffic is becoming totally moot. Why? Yup, good ol' uncle supply and demand. It's much harder to attract people to web sites when there's much more content and it becomes a commodity. The people who got in early and achieved scale or have a truly differentiated approach will be the winners (thanks in part to Google Juice). The Attention Crash is another force at bay here too. It's directly related.

B) As the supply of ad-supported media rises, inventories swell - e.g. this equals less ad revenues
There's a good story on Reuters today about how there will not be enough ad dollars to go around to all of the sites that hope to make money from it. Why? Yup, uncle supply and demand. As media proliferates, the ad budgets gets flattened across all of these sites. There is one key exception, however. Advertisers still - for now - like to buy lots of eyeballs. So once again uncle supply and demand spoils all the fun and that's why consolidation rules.

The economics of the web are truly deflating. These two trends are directly related. When people start ignoring basic economics that spells trouble (which rhymes with bubble). If you're a start up or an advertiser, pay attention to these two trends. They will have a big impact. It's going to get very hard for advertiser-supported startups to get any scale when it comes to revenue.