Overcoming strong network effects and uncertain business models.
This is from The Intersection column that appears every other Monday in Mint.
“…when trillions of dollars slosh around the world looking for things to invest in, esoteric digital tulips created with mystic technology become an asset class.”
In the event, last year was somewhere between a wake-up call and a devastating setback for promoters of 3-D metaverses and crypto services, with lower profits, higher interest rates and scandals delivering the due reality checks.And thanks to Elon Musk and still unfolding drama at Twitter, the third vision – of “Web 3.0”, an open, decentralised network that limits the power of corporations and governments – received greater interest and impetus. Mastodon, a thoughtfully-engineered open-source alternative to Twitter, went from 300,000 to 2.5 million monthly active users between October and November 2022, before slowing down 1.8 million last week. What is more interesting is that communities and corporations are installing their own Mastodon servers, much like they did with email and web servers 30 years ago.
See Craig Hockenberry’s frustrated blog post.
There is serious interest among developers and some European governments in a federated, interoperable “Fediverse” based on open protocols that takes control away from Big Tech.
It remains to be seen whether this movement can compete with Silicon Valley’s formidable technological and business models. But the world’s governments are pushing Big Tech hard on several fronts: anti-trust, privacy, data protection, consumer rights, labour regulations, safety and public order. As regulation catches up, costs will increase, profits might fall and political risks will abound.
Yet it is Web 3.0 that has a steeply uphill task if it is to emerge as a mainstream alternative to Big Tech. It has to overcome two hurdles: strong network effects and uncertain business models.
The first is obvious: any platform that aims to replace existing ones must contend with the massive inertial of the installed base. Even if some influential communities are migrating to Mastodon, Twitter still has 450 million active users. You can’t easily switch unless your friends and followers do. Even so, the short history of the internet has a number of examples of new players displacing seemingly entrenched incumbents like Geocities, MySpace, Orkut, Yahoo! and Skype. The challenger has to reach a tipping point before this happens. At the margin, Musk’s actions are pushing users towards alternatives, but there is still a long way to go before the trickle becomes a flood. Given that the Web 3.0 Fediverse alternatives are deliberately trying to be the kinder, gentler, calmer alternatives to emotion-triggering Big Tech platforms, their “pull” factor is weaker.
The second hurdle pertains to the economics of information. It is unclear how a decentralised Web 3.0 internet can be sustainable at global scale. Conceptually, the information space has characteristics of what economists call public goods, which are non-rival and non-excludable. The classic problem with public goods is that not enough people are prepared to pay for them because they can always free ride. This is the reason why subscriptions alone are insufficient to sustain news and media businesses, except in niche areas. The Fediverse cannot escape this problem unless it evolves organisation structures and financial models that can sustain operations.
Also, information transactions have sizeable positive externalities: everyone benefits from everyone else being well-informed. These social benefits are lost when, say, a paywall is erected to raise subscription revenues. Services like Patreon offer a way around this dilemma by filling the revenue bucket with donations, thus making the information freely available to everyone. It works for some, but is unlikely to become a mainstream model because of, again, the free rider problem. Why donate when you can enjoy the benefits of others’ generosity?
This is the reason why advertising has been the predominant way to finance the information on the internet. The downside is that an ad-supported business model incentivises greater engagement and surveillance. The former ends up pushing provocative and socially harmful content and the latter tends to violate privacy. I am cautiously optimistic though, that ad-supported but non-incendiary and privacy-respecting business models will emerge.
The Digital India approach of building open digital public infrastructure like UPI, ONDC, Account Aggregators and OCEN, offers another path, involving government support, to accelerate deployment at scale without being beholden to Big Tech. It’s not perfect, but is a feasible option for many countries that want to reduce their dependency on foreign firms. It is in India’s interests to make these technologies open and available to other countries.
At the same time, it is crucial that the governance framework of digital public infrastructures does not further disempower citizens vis-a-vis governments. As I wrote “Web 3.0 requires altering the balance between the state, the platform and the individual, while keeping an eye on the balance of power among states.” Taking control away from unaccountable corporations to accountable governments is a good step if the technology is designed to reinforce the accountability of governments.
There are many more The Intersection columns here
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