Why the Market Economy doesn’t work for Digital Content

The “marketplace of ideas” does not operate like a typical marketplace for products or services. Online content has the properties of a public good in that it is both non-exhaustible and non-excludable. Due to these properties it is difficult for the market to price online content the same way it can price other products or services and the result may be market failure.

In economics, a market failure is commonly defined as a condition in which resources are distributed inefficiently in the economy, or where individuals’ economic incentives do not lead to efficient results. As such, it is evident that when it comes to online content — and reliable, quality content in particular — all the current business models of the market economy (advertising, subscription, sponsoring, donations, and self-funding) result in market failure.

Photo by Marta Branco from Pexels

Advertising

The advertising-based business model, which is the dominant model online today, affects both the quality and reliability of the content. Since this model relies on ratings to generate revenue from advertising, content creators have an incentive to prioritize quantity of content over quality. Intense competition for ratings results in a race to the bottom where content creators increasingly rely on divisive, sensational, hyperbolic, and controversial tactics to boost their ratings at the expense of quality and credibility.

Such tactics essentially “crowd out” content creators who wish to maintain a high quality of content — which is usually more expensive to produce — and result in the proliferation of low quality, unreliable content. Additionally, when an advertiser directly sponsors content creator the content is more likely to promote the interests of the advertiser, thus negatively affecting the reliability of the content.

Subscription

The subscription-based business model, which is the second most popular model online today, primarily affects efficient resource distribution. Since online content can be distributed in abundance and at virtually no cost (other than the initial cost of production), the laws of supply and demand prescribe that the cost of content should be approaching zero as well. Yet, partially due to competition with other business models, subscription costs are a few orders of magnitude above expected market rates. This means that only a small fraction of people have access to the content, making distribution extremely inefficient.

Additionally, since this model does not rely as heavily on ratings as the advertising-based business model there is less pressure to rely on disrespectable tactics to boost ratings. However, a content creator is likely to be pressured by his or her base of subscribers to align with their views or ideology or suffer a loss in revenue, thus affecting the content creator’s intellectual independence and credibility.

Sponsorship

In the sponsor-based business model — where a corporation, wealthy tycoon or government sponsor a publication — the primary effect is on the credibility of content. In this model distribution may be at no cost and the content may be of high quality — these are due to ample funding from the patron. However, the reliability of the content is highly suspect as the content creator is largely viewed as promoting the interests of its patron.

Donations

The donations-based business model is perhaps the most favorable among current business models when it comes to efficient distribution of resources, quality and reliability of content. The main drawback of this model however is its lack of economic viability. Indeed, the few notable exceptions where the model works successfully at scale- Wikipedia perhaps being the most prominent one — are the exceptions that prove the rule.

Self-funding

Finally, the self-funded business model, where the content creator does not intent to make money from their online content (this model is common among bloggers, hobbyists and so on) is essentially not a business model at all, and therefore does not work at scale.

Thus, all the current business models of the market economy result in market failure in one form or another; either the business model results in content that is unreliable or of low quality, the model inefficiently distributes resources by restricting the vast majority of people from accessing the content, the model is not economically viable, or some combination of these. Even when a content creator combines multiple business models this does not eliminate the drawbacks but rather compounds them.

What is needed therefore is a system that can valuate online content, incentivize the creation of high quality content that is credible and reliable, and efficiently distribute online resources by allowing everyone the broadest access to content.

In the next article we will discuss a system that accomplishes all of the above. The system is based on a mechanism that establishes a standard unit for evaluating all online content — this standard unit of value can be exchanged for other currencies at a market rate.

Abundance Protocol: Solving the Problem of Public Goods through Crypto.

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Michael Natanzon

Michael Natanzon

Abundance Protocol Founder — how web3 solves the problem of public goods