Monday, May 2, 2011

Interrogating the Internet, Part Two: Commerce

In my last post I introduced a new mini-project, an attempt to gaze into the Internet and to see what it looks like.  A cursory glance at web traffic rankings suggests that there are three primary uses of the internet: information, networking, and commerce (or, as I called it in the first post, shopping).  My next few posts will address each of those areas, starting with the last of the three: commerce.

Beneath the surface of the Internet is money.  Each and every server - and therefore, each and every website, email account, or bit of streaming media - exists somewhere in the real world, if only as little bits of electrical charge on a hard drive somewhere, demanding day-to-day energy usage, maintenance by IT professionals, and the occasional replacement.  That the Internet feels "free" because the user experience is so abstracted from the silicon heart of the beast, but in reality it is anything but.

I don't just mean that the user pays his ISP a monthly connection bill.  I mean the very fabric of the web is financial, that sites like Google or Facebook are able to operate not because they are popular, but because they are profitable.  In the case of those two sites, extreme popularity and profit go hand in hand, of course, because they make so little from any given user that the user barely notices.  There are sites, however, with much smaller user bases that are just as profitable because of the nature of their work.

Amazon and eBay are, of course, the two biggest online marketplaces because they understand the capabilities of the Internet better than sites created by traditional stores that had a real presence before the web.  Amazon and eBay both thrive by allowing people to connect directly with each other, cutting the middle-man (the bookstore, for example) out of the buying and selling of used merchandise.  Where Barnes and Noble is just a bookstore online, Amazon is a whole different kind of beast, a commercial enterprise that simplifies and democratizes commerce.  Where Amazon started as a bookseller, primarily, they have been able to branch into just about every area of consumer purchases because they were built not on books (like Barnes and Noble), but rather on a retail process.

Make no mistake, however, about Amazon's motives.  As great a company as Amazon is, it is still profit-driven.  Stocking, shipping, and selling merchandise from their own warehouses is obviously a priority, given that they put their own results at the top of search results, and encourage consumers to register for Amazon credit cards, use "Super Saver" shipping, and so on.

Moreover, Amazon shares with eBay its primary means of making a profit: taking a small chunk out of every sale that occurs on the site.  Given the sheer volume of commerce occurring on these two sites, it's easy to see that the small (around 10%) cuts that the sites take adds up fast.

Even Craigslist - which does not charge a commission - remains financially solvent thanks to a simple business model.  According to, Craigslist survives by charging companies ($25, a pittance) to post job listings in the six largest US markets, plus a tiny $10 fee for New York apartment listings.  That alone more than covers the cost of operating the site for free in every other category it works in, and in every other city.

The lesson from Craigslist - or even from Amazon and eBay - is that there are a lot of people on the Internet, and it doesn't take much to run the machine.  But the machine must run, nonetheless.  Google, despite its fundamental role as an information search site, is also a business that absolutely rakes in cash pennies at a time.  When you click on that Amazon link from Google, you are greasing the wheels of the corporate Internet machine, because a small part of your Amazon purchase goes to Google, also.

It is hardly surprising that the Internet is commercial, but it's easy to forget.  Rare as it is to see people working for free in the real world, it is even more rare to see it online.  Indeed, the Internet is, in the end, a kind of abstracted, simplified version of real human interaction, with advertising at the heart of it all.  But advertising alone cannot drive any economy unless actual purchases follow, and on the Internet they certainly do.  What's more, since increasingly the things we purchase are digital to begin with, profit margins can be much, much higher in the web space.  The traditional economic notion that purchase cost is derived, at least in part, from production cost is essentially meaningless online, where a game developer (for example) or a book for the Kindle need only be produced once, and distributed according to what people will pay for it, and not what it is "worth."

Perhaps what a thing is worth is what people will pay for it.  That's a bigger economic and philosophical question.  Regardless, as sales of digital media increase, the profit margin for each sale approaches something close to 100% (minus the negligible, compared to traditional commerce, increased costs of managing more sales).  Scale - often a bugbear in traditional business - is the whole point of online business.  The more people buy a product or use a service, the better the company does unequivocally.  Does that make the capitalistic competition of the web more robust, or less robust?  Is the consumer better off in a digital economy?  Are businesses?  Are governments?  Those are important questions that to my knowledge have not been adequately answered.

Needless to say, the point here is remember that money makes the Internet go round, even more so than the material world.  To most people I'm guessing that is no surprise, but it might just give us pause as well move forward and try to understand what the Internet is and does.  First and foremost, it's a business, and it does sales.  What deeper value we are able to pull out of it may or may not be corrupted by this fact (I truly do not know), but at the least it bears remembering that behind each and every corner of the Internet is the wall of commerce.

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