Arrington on Bubble economics

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Good observation by Mike Arrington on the state of affairs in the web indy these days, what with a dead IPO market, and a lot of money chasing very few good ideas.

I particularly like his point that Web 2.0 principles (whatever they may be I leave to your imagination) can conspire to bash down barriers to entry for copycats and competitors. I  assume he is positing open standards, data portability, etc.

But even in this new reality, we’re seeing what looks like way too much money chasing too few good ideas. And when someone does have a good idea, all of the principles of Web 2.0 work to destroy competitive barriers companies try to put in place to protect their business (See Todd Dagres of Spark Capital make this argument recently in the Wall Street Journal).

So when we see a few companies fall, people run for the hills.

But I disagree that Web 2.0 companies cannot become sustainable businesses. The Network Effect is still the most powerful force driving Internet success today. People don’t, for example, go to Digg because it has great software. The original Digg, as launched, cost Kevin Rose less than $2,000 to create. Anyone can create a Digg clone, and many have. The reason Digg is, and will continue to be, successful is because of the community it has created. People go to Digg because everyone else goes to Digg, and every new user who submits stories and/or votes occasionally adds value to the whole network. The Network Effect is also driving Facebook’s success, and YouTube’s. None of these companies have interesting software. All of them have an incredibly valuable community. All of these companies have to work hard to keep their lead, but it is nearly impossible for new entrants to catch up.

Author: David Churbuck

Cape Codder with an itch to write

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