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  • Economics of the Blogosphere

    By: David Evans on August 6th, 2007

    The blogosphere is one of the biggest and most influential global industries created in the last decade. Technorati tracks almost 100 million blogs and estimates that about 20 percent of blogs are active in the sense that they were updated in the last 90 days. Hundreds of millions of people globally either operate blogs or contribute to them over the course of the year. With 1.5 million new postings a day, blogging likely consumes billions of hours of effort globally. According to comScore, blogs accounted for slightly more than a third of the 173 billion US Internet visitors in May 2006. All told blogs have become a significant source of competition for all of the on and offline businesses that make their living attracting eyeballs and selling access to those eyeballs to advertisers. The blogosphere creates vast amounts of news and opinion. It is one the major destinations of the many readers fleeing newspapers.

    Despite its size and importance the blogosphere earns little revenue. About 10 percent of blogs make money from advertising but few of those make enough to pay their operators the minimum wage. Of course some blogs now attract millions of visitors a year and earn their operators lavish compensation from the advertising they sell. PerezHilton.com, a highly popular entertainment blog, reportedly gets $9,000 a week per ad and it posts many ads on its web pages. But, by and large, this global industry does not seem to be based on the quest for profits. Most of its participants are volunteers. Like open source software it seems to defy the laws of market economics.

    Nevertheless, the dismal science can provide some insights into what makes the blogosphere tick by looking at the incentives of its participants and the strategies that blogs use to build and maintain traffic. (Check out Lerner and Tirole on the Simple Economics of Open Source for an analogous analysis of the motivations for open source software.)

    People are motivated to spend effort to operate blogs for one or more of the following reasons.

  • Blog to make money. They create blogs to generate traffic that they can sell to advertisers.
  • Blog to influence. They value the ability to influence opinion. They start a blog to help get others to see things their way.
  • Blog for fame. They want to become better known. They start a blog because it is a way to get attention.
  • Blog for reputation. They want to enhance their reputations as an expert. They start a blog to help enhance their stature in their profession.
  • Blog to enhance another business or sell another product. They are employed by a for-profit business that has established a blog to enhance its brand and indirectly increase sales.
  • Blog for information. They want to learn from others. They start a blog to get information from people who participate in the blog.
  • Blog for interactions. They enjoy communicating with people. They start a blog because they just like having a conversation about interesting topics.
  • In many cases people operate a blog because it helps them achieve something they value directly such as influence, information, or interactions with other people. In other cases people operate a blog because it helps them make money directly through advertising or indirectly by building up their professional reputations or cross-selling another business. Fame is a mixed bag—people may blog for fame for fame’s sake or they may blog to capitalize on their fame or a bit of both. But in the end, the benefits they get from these various avenues must be enough to compensate for the hours they spend on blogging.

    People who contribute actively on blogs, do so for some of these same reasons. Some just enjoy the interactions, others want to influence opinion as well, and still others are trolling for information. (By the way I have probably missed some motivations. I expect many bloggers to add to my list and enrich my explanations.) Some of the motives for operating or contributing to a blog are similar to those for open source software. Open source volunteers also participate to build up their reputations as programmers, to secure fame, and to help build ancillary businesses. On the other hand, open source software projects generally involve solving a real problem and people participate in part because they benefit from the solution. There’s no obvious parallel in the blogosphere.

    Financial motives will probably become increasingly important in the evolution of the blogosphere. That’s what happened to open source. Once the open source movement demonstrated the power of the volunteer-based decentralized production model, lots of businesses started trying to figure out how to make money off of it. Many of the “volunteers” for open source programming are paid employees of companies that believe they can benefit from open source programming by helping to sell hardware (IBM) or by getting free help in perfecting their software (Apple). We’re already seeing this happen in the blogosphere. Companies, for example, are encouraging employees to do blogs to enhance the company’s reputation, to communicate with the public, and to glean information. Now that the blogosphere is a well-known method for securing influence (as we are seeing with the presidential campaign) or building audiences, we would expect to see big businesses as well as VC-backed start ups get into the act. We will also see more entrepreneurs start blogs with the hope of repeating the financial success of the founders of engadget.com, huffingtonpost.com, and perezhilton.com.

    Whether people who start blogs are in it for the money or not, the ones who are serious about building traffic have to ignite and stoke the sort of catalytic reaction that Dick Schmalensee and I have discussed in our book Catalyst Code: The Strategies Behind the World’s Most Dynamic Companies. At the risk of oversimplification it is useful to divide participants on blogs into three main categories: provocateurs, reactors, and passives. Provocateurs provide most of the content and usually include the person(s) who have started the blog. Reactors are the contributors who tend to react to the postings placed by the provocateurs. They contribute content but don’t really have a direct stake in the success of the blog. According to a PEW survey of American Internet users, about 2 percent were active contributors and 15 percent were occasional contributors. The passives are people who go to blogs just to read the content—they are the audience and account for most of the traffic that provocateurs value. These three groups feed off of each other. Provocateurs attract reactors who often make the blog more interesting. Both attract passives. And reactors and passives together increase the value to provocateurs in one or more of the ways mentioned above. There is a virtuous circle between provocateurs, reactors, and passives.

    To ignite a catalytic reaction, a blog has to start with provocateurs. They must attract reactors and passives. If they don’t the provocateurs will have no one to influence or converse with and will lose interest in the blog. The blog is dead. If they attract enough reactors and passives not only will the provocateurs realize value from the blog, they will attract more provocateurs to the blog. As more provocateurs come on board and provide more material, more reactors and passives will join. Blogs don’t have to be enormous to stay viable: but they do have to reach critical mass of the three major groups to sustain the reaction.

    While firm data aren’t available, it is apparent that most blogs are dead or are on life support—they can’t reach the critical mass needed to build a self-sustaining community. Eighty percent of blogs hadn’t been updated in the last 90 days according to Technorati. And even the ones that are updated more frequently—say once a month—are unlikely to attract an audience. The total number of blogs has declined in recent years probably because more people recognize that it is hard to start a successful blog and because there is more competition for doing so.

    If you measured the blogosphere by revenue it would barely register. One estimate puts the total revenue at $500 million, which sounds big but is not considering the amount of effort. In fact, it works out to about $5 of revenue per blog and $25 per active blog. Nevertheless this new media industry has a significant and growing impact on the economy as well as culture and politics.

    The newspaper industry mentioned earlier is the obvious example (see my other posts on this). People go to the blogs for news and opinion, and read newspapers less. Advertising revenue has fallen at newspapers because there are fewer readers and because advertisers have a better option for reaching people through blog advertising (as well as in other online venues). The newspaper industry is in a reverse catalyst reaction or what I have described elsewhere as a death spiral.

    Other media industries are likely to face competition from blogs as well. As magazines race to get online they will find that there is a similar blog providing content and attracting advertisers. And YouTube and other video sites make it easy for blogs to compete with traditional and online video entertainment. If blogs continue to attract audience and volunteer labor, digital media will find it increasingly hard to make the sorts of money online that they grew accustomed to make in the fat and happy years of the last half of the twentieth century.

    David S. Evans © Copyright 2007. All rights reserved.



    Economics of the Blogosphere

    By: Catalyst Code on August 6th, 2007


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