Glut economics

The problem with the dot-com phenomenon was not a lack of good ideas but a glut of everything, from ideas to free music. This is what the so-called new economy is really about: abundance.
Written by John Dvorak, Contributor
The Internet's free, all-you-can-eat buffet has made us fat and lazy.

A commonly held assertion of the dot-com collapse is that things will soon be back to normal, that all good ideas will once again be successful, and that hard work will pay off big.

Unfortunately, the problem with the dot-com phenomenon was not a lack of good ideas but a surplus of them. In fact, when we look at the Internet we find a glut of everything—from ideas to free music. Abundance. This is what the so-called new economy is really about, and until we understand it the downturn will stay with us. For example:

Content. Talk about abundance. From the beginning the pundits said content was king, and they were right. So right that everyone believed it, and as a result there's so much content that it's almost impossible to monetize. From news sites to gossip to newsletters to an inundation of e-mail, from free music to free videos to shareware to clip art, the vast amount of gratis content online is unlike anything we've ever seen before, even after the dot-com shakeout. The overwhelming amount (and quality) of freebies guarantees that very few of those trying to sell content on the Web will succeed.

Advertising. The natural attempt to monetize content fell to advertising, but because of the sheer volume of content, excess inventory could not be naturally controlled. So much for that idea. There are so many Web pages that there has always been and will always be an excess inventory of vacant ad spots. To make up for plummeting rates, publishers added multiple ads to a single page, worsening the inventory problem. Today there is essentially infinite space available for online advertising and no one to buy it.

Products and Services. You don't realize that goods and services can become oversupplied until you think about a world market. While there may be a shortage of food in much of Africa, there is no shortage of dolls, antique pins, buttons, Geiger counters, and other products people buy and never use. These things used to languish in the attic and now they are on eBay. Everything is for sale. What was once rare is now common, and all of it is junk.

Communications. While bandwidth isn't free, it's getting closer to being so. Once you have a DSL, fixed wireless, or cable modem connection you are one short step away from free phone calls. And there are ways to get free Internet access. Although most free Net models have failed due to oversupply, you can still go to a souped-up coffee shop with a Wi-Fi card in a laptop and surf the Web for free (coffee not included).

Technology. Finally, it's important to understand that although the actual products that make technology work are not free, they do continue to plummet in price—or at least increase in power for the same money. The flip side of Moore's Law: You get more for your money the longer you wait. This epitomizes the economy of abundance and an economic state of true depression. Depression is the result of deflation, falling prices which result in cautious spending and a slowing economy. Why buy today when it will be cheaper tomorrow? Tech companies have learned to live with their unusual economics by creating a compelling reason for people to buy today rather than wait for a better version. It's what I call "need immediacy." To make need immediacy work to sell a computer is hard enough (especially now), but Internet-related overabundance makes it a real challenge.

Worst of all, there is no real mechanism except the market itself to keep things from getting even worse. It's a new economy, all right, but the market is old. If we develop new concepts instead of continuing to swamp the already saturated market with more product, things will stabilize. Otherwise we are doomed. Micropayments, anyone?


John C. Dvorak is a contributing editor at Ziff Davis Smart Business. E-mail him at dvorak@ziffdavis.com.

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