Authors: Jeremy Rifkin
It’s estimated that Craigslist single-handedly wiped out $10 billion in classified ad revenues in print publications annually, replacing it with $100 million in online revenues, with operating costs representing a fraction of the cost incurred by newspapers and magazines, which long relied on classified ads to stay afloat.
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Craigslist’s global online bulletin board is managed by a staff of just 30 people in its office in San Francisco.
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A 2012 study by IBM Global Business Services with the provocative title “The End of Advertising as We Know It” acknowledges that the Internet social Commons “puts at risk the revenue base of incumbent, traditional content distributors and aggregators.”
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The problem for the advertisers is that their business model is predicated on financing much of the delivery of newspapers, magazines, television, and radio content. The content is generated by professional journalists, television producers, writers, performers, and artists. In the past, passive consumers were willing to put up with advertisements in return for receiving the content it financed. But with the Internet, an increasing amount of the content is generated by the users themselves and shared with millions of others for free on sites like YouTube, Flickr, Facebook, etc. When consumers become prosumers and exchange content for free with one another in a sharable economy, what added value is corporate advertising bringing to the table? Advertisers could elect to finance the delivery of professional content online but it would likely fail because what brings millions of people to the Internet is the participatory nature of the medium. It’s a Commons that operates in large part in a social economy governed by interactive peer-to-peer engagement.
While passive users of television might not be overly irritated by its scheduled advertising breaks, active and engaged online participants on the Internet are less tolerant of ads suddenly popping up in the middle of the screen blocking copy or interrupting their activity. The blast is seen as rude and intrusive. And Internet players are increasingly mistrustful of website search engines that sell access to advertisers by putting corporate sponsors at the front of the queue when users are looking for a particular resource or service.
Corporate advertising on a peer-to-peer medium is so strangely out of place that it is treated more like an interloper than a mere distraction and nuisance. Eric Clemons, a professor of operations and information management at the Wharton School, says that the very social nature of the Internet puts it out of bounds for commercial exploitation. He explains that the Internet “is participatory, like swapping stories around a campfire or attending a renaissance fair. It is not meant solely to push content, in one direction, to a captive audience, the way movies or traditional network television did.”
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So when we tack on the proviso that the majority of Internet users mistrust advertising messages and instead look to other users’ peer reviews of products as the most reliable source of information on what to buy, and that much of the content on the Internet is generated by the users themselves and not corporate advertisers, it’s difficult to imagine how the advertising industry will survive the shift to a peer-to-peer communications medium except in a very reduced role. Clemons believes that paid advertising “will fail as a major revenue source for most Internet sites” for all the reasons mentioned above. His conclusion is that “the Internet is not
replacing advertising but shattering it.”
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Even
The Economist
reluctantly agrees. In a sober editorial on “The End of the Free Lunch,” it takes umbrage at what it regards as a faulty assumption that if social media sites can aggregate millions of users by providing them with free content, advertisers will be anxious to target ads on the medium, in the hope of capturing a percentage of the “long tail.” But what if the users aren’t listening, aren’t watching, and are looking to their peers for product recommendations and validation? The
Economist
concludes that “the number of companies that can be sustained by revenues from internet advertising turns out to be much smaller than many people thought, and Silicon Valley seems to be entering another ‘nuclear winter.’”
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Advertising revenues are beginning to reflect the pessimism. Internet advertising accounted for $36.6 billion in 2012, while, as mentioned, total U.S. advertising revenue came in at $153 billion, bringing the Internet share of the U.S. advertising market to only around 24 percent.
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The growth in Internet advertising spending, however, appears to be slowing, indicating that the early euphoria about corporate advertising paying the bill for all the free content given away on profit-driven social media sites has softened. The rate of growth in Internet advertising declined from 23 percent between 2010 and 2011 to only 14 percent between 2011 and 2012.
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GM’s decision to yank ads from Facebook in 2012, saying they had “little impact on consumers’ car purchases” reflects a growing sentiment among some corporations about the real value of advertising on the Internet.
The rate of growth of Internet advertising revenue is likely to continue to fall as millions of users switch from computers to mobile devices. Google, the leader in Internet advertising revenue, is already beginning to see ad revenue dry up in this changeover. While clicks on Google using laptop and desktop computers were flat in the third quarter of 2013, clicks on mobile phones doubled and clicks on tablets were up by 63 percent.
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The problem is that mobile ads only cost one half to two-thirds as much as desktop ads and, worse still, they only lead to purchases of products and services a quarter to a third of the frequency of desktop ads, and there is no sign that this trajectory is going to significantly change. The reality is that Google’s primary revenue stream is weakening. The
New York Times
reports that
the price that advertisers pay [Google] each time someone clicks on an ad decreased for the eighth quarter in a row. It fell 8 percent from the period last year, largely because mobile ads cost less than desktop ones.
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With Internet users migrating quickly to mobile devices, the growth rate in advertising revenue is likely to continue to slow. The big question being asked in the C-suites of all the major for-profit social media enterprises is what the impact will be on their future growth potential.
Like other segments of the capitalist market, advertising will not altogether disappear with the rise of the Collaborative Commons. It will adjust and eventually settle into a niche within a maturing social economy. The reconditioning of the capitalist market to accommodate the social economy is a new phenomenon and difficult to accept in a world where for so long the social economy was the weak adjunct to market forces. In some instances, the market and the Commons will find potential synergies and even enjoy a symbiotic relationship that advances both. In others, like advertising, whose very thrust is at such odds with the collaborative peer-to-peer nature of the social Commons, efforts to find an accommodation will be more like trying to mix oil and water.
All the various enterprises chronicled
in the preceding pages are collaborative in nature, sharable in design, and take advantage of a distributed, laterally scaled IoT architecture. Some of the commerce is shareable in the sense of gift giving, like Couchsurfing. Others are mixed, combining gift giving and exchanges with some form of compensation. Still others are purely profit-seeking enterprises like eBay. If we think of a collaborative economy as both gift giving as well as redistribution and recycling with or without compensation, everyone is covered.
Recent surveys underscore the broad economic potential of the Collaborative Commons. A 2012 study by Campbell Mithun, a Minneapolis ad agency, in partnership with Carbonview Research, found that 62 percent of Gen Xers and millennials are attracted to the notion of sharing goods, services, and experiences in Collaborative Commons. These two generations differ significantly from the baby boomers and World War II generation in favoring access over ownership. When asked to rank the rational benefits of a sharing economy, respondents to the survey listed saving money at the top of the list, followed by impact on the environment, lifestyle flexibility, the practicality of sharing, and easy access to goods and services. As for the emotional benefits, respondents ranked generosity first, followed by a feeling of being a valued part of a community, being smart, being more responsible, and being a part of a movement.
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The public-opinion surveys show a profound change in thinking about the nature of economic activity among the younger generation. The shift from ownership to access, which I first identified back in 2000 in
The Age of Access
, is demonstrable and growing. Collaborative peer-to-peer economic activity is already robust, with a trend line that is only going to become more pronounced with the phasing in of the IoT.
How likely is it that the collaborative economy will disrupt the conventional business model? According to an opinion survey conducted by Latitude Research in 2010, “75% of respondents predicted their sharing of physical objects and spaces will increase in the next five years. . . . 78% of participants felt their online interactions with people have made them more open to the idea of sharing with strangers.” And “85% of
participants believe that Web and mobile technologies will play a critical role in building large-scale sharing communities in the future.”
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Many industry analysts agree with these optimistic forecasts. In 2011,
Time
magazine declared collaborative consumption to be one of its “10 ideas that will change the world.”
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The Collaborative Commons has the potential to massively undermine the conventional capitalist market much sooner than many economists expect, because of the 10 percent effect. Umair Haque, author of
The New Capitalist Manifesto
and a contributing writer to the
Harvard Business Review
, sees the collaborative economy as having a “lethally disruptive” impact at a much lower threshold of buy-in than normally expected because of its ability to undercut already dangerously low profit margins across many sectors of the economy. He writes:
If the people formally known as consumers begin consuming 10% less and peering 10% more, the effect on margins of traditional corporations is going to be disproportionately greater. . . . Which means certain industries have to rewire themselves, or prepare to sink into the quicksand of the past.
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The low threshold effect has already decimated the music industry, newspaper publishing, and the brick-and-mortar book trade. In publishing, e-books accounted for 22.6 percent of U.S. publishing in 2012.
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The diminishing marginal cost of producing and delivering e-books has reduced retail prices significantly and forced smaller publishers and many retail book sellers out of business. Even the cheaper e-books are facing ever stiffer competition from copyleft publications that are distributed for free or nearly free.
We observed this same low threshold effect in chapter 5 in the disruptive impact renewable energy is having in Germany, where the generation of just 22 percent green electricity is already making it cost-prohibitive for power and utility companies to bring on line new backup fossil fuel power plants.
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The amount of time these plants would need to be used would be less because of the surges of solar and wind electricity being fed into the grid by millions of prosumers, making the companies’ payback time to cover their fixed costs too long and unpredictable to warrant the up-front costs of building them.
What’s becoming apparent is that a growing number of giant capitalist enterprises across a range of commercial sectors that are already facing plummeting profit margins will not be able to survive for very long against the rising tide of near zero marginal costs in the production and delivery of goods and services. Although the thousand or so highly integrated, vertically scaled megacorporations that currently account for much of the world’s commerce are imposing and seemingly invincible, they are, in fact, highly vulnerable to a collaborative economy that is quickly eating away at their already precariously low profit margins.
It’s not unreasonable to expect a significant die-off of the vertically integrated global companies of the Second Industrial Revolution when the Collaborative Commons accounts for between 10 and 30 percent of the economic activity in any given sector. At the very least, we can say that conventional capitalist markets will increasingly lose their dominant hold over global commerce and trade as near zero marginal costs push an ever greater share of economic activity onto the Collaborative Commons in the years ahead.
Chapter Fourteen
Crowdfunding Social Capital, Democratizing Currency, Humanizing Entrepreneurship, and Rethinking Work
T
he near collapse of the global banking system in 2008 terrified millions of people. Lending froze and the U.S. government was forced to bail out the biggest financial institutions in the country with the rationale that they were just “too big to fail.” The American public was enraged that $700 billion in tax revenue was handed over to banks, rewarding them for financial recklessness, while millions of Americans were losing their homes because they couldn’t pay off their mortgages. In other words, they were “too small to matter.”
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Peer-to-Peer Social Lending
In the aftermath of the banking debacle, a new kind of lending institution emerged on the Internet. It’s called peer-to-peer lending or social lending. Online banking platforms like Zopa, Lending Club, and Prosper lend money directly to individuals and projects. These online financing
mechanisms are becoming popular alternative lending vehicles to traditional banks because they eliminate the middlemen and the high fixed costs of large financial institutions that are passed on to lenders in the form of higher interest rates.
Web-facilitated scaling of financing brings the marginal cost of lending to borrowers to near zero, which translates to lower interest rates and fees. Zopa, the U.K.’s first peer-to-peer lender, has processed loans of more than £414 million.
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Peer-to-peer social lenders brokered $1.8 billion in loans by the end of 2012, forcing the big banks to take notice.
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A more recent offshoot of peer-to-peer social lending is something called crowdfunding. Kickstarter, the leading crowdfunding enterprise, was launched in April 2009. Here’s how it works. Kickstarter goes around conventional investment vehicles and raises finance capital from the general public on the Internet. Originators of a project put their plan up on a site and pick a deadline by which the necessary funds have to be raised. If the goal is not reached by this deadline, no funds are collected. This provision ensures that the project has enough financing to at least make a go of the venture. The money pledged by donors is collected by Amazon payments. Kickstarter collects 5 percent of the funds raised and Amazon charges, on average, an additional 3 to 5 percent.
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Kickstarter, unlike traditional lenders, has no ownership in the ventures. It’s merely a facilitator.
By November 2013, Kickstarter had fostered 51,000 projects with a 44 percent success rate. The projects had raised more than $871 million. Kickstarter limits the project funding to 13 categories—art, dance, design, fashion, films and video, food, games, music, photography, publishing, technology, and theater.
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Various crowdfunding platforms offer different forms of compensation. Donors can either pledge funds as gifts or receive the comparable value of the funds extended to the borrower in the form of goods or services once the project is up and running, or provide funds as a straight loan with interest, or invest in the project in return for equal shares.
Although still a small player in the financial sector, crowdsourcing funders are playing an important supporting role in the creation of many of the new start-ups in the IoT infrastructure build-out. Mosaic, mentioned earlier, used crowdfunding to raise $1.1 million for a dozen solar projects. Mosaic posted its first solar investment project offering a 4.5 percent return to investors who could pony up as little as $25 to participate. Billy Parish, the company’s cofounder, expected to raise the initial $313,000 in a month if all went well. He was taken by surprise, however, when 435 people crowdfunded with all the necessary funds in less than 24 hours. The company had 10,000 investors in its portfolio in 2013, ready to make loans to get its solar projects built.
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One of Mosaic’s solar systems, partially financed by crowdfunding, along with government and private investment funds, has been installed
in a 26,000-square-foot building in Oakland, California, created by the nonprofit Youth Employment Partnership (YEP). The solar system cost $265,000. Mosaic leases the system to YEP. The 85 percent drop in utility bills is a significant cost saver, allowing YEP to use the funds for its vital programs. The deal is made even more enticing with the option for YEP to buy the system from Mosaic after ten years, giving it nearly free power from then on.
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The demand for solar technology is expected to surge in the coming decade. Bloomberg New Energy Finance estimates that more than $62 billion in financing will be required. Social lending, and especially crowdfunding, is expected to carry some of the load, allowing millions of small players to finance each other’s micropower installations—another example of the lateral power of peer-to-peer collaboration.
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Lest the cynics doubt whether millions of small players can phase in an energy revolution via laterally scaled collaborative efforts, recall, as mentioned in chapter 8, that in Germany, the world leader in renewable energy, 51 percent of the installed renewable energy is owned by small businesses and individuals while the nation’s giant utilities own a mere 7 percent of green energy production.
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Crowdfunding platforms like Indiegogo, Early Shares, Crowdfunder, Fundable, and Crowdcube are appearing everywhere on the Web, thanks, in part, to the passage of the Jumpstart Our Business Start Ups Act in 2012, which allows small businesses to raise as much as $1 million in investments annually from the general public via crowdfunding platforms.
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Crowdfunding enthusiasts emphasize that it’s not about the money. They enjoy being intimately involved with helping others pursue their dreams and feel that their small contribution packs a wallop—that it really counts in moving a project forward. The Gartner Group estimates that peer-to-peer financial lending will top $5 billion by the end of 2013.
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The sharing economy, in all its various incarnations, is a hybrid creature, part market economy and part social economy. While the market economy is regulated by laws and by the inherent rules that underlie the capitalist system, the social economy, being a Commons, follows a different regulatory path. Although some of the oversight and regulation is government directed, much of the rest lies with the self-governing norms that millions of players agree to voluntarily as a condition for their participation on the Commons.
Reputation Rankings and Commons Currencies
Social trust, rather than “let the buyer beware,” guides the social economy. And like more traditional Commons, the new Collaborative Commons has experimented with a range of protocols to maintain the high level of social
trust necessary to ensure sufficient social capital to build a collaborative ethos, including sanctions to punish and even weed out free riders and spoilers. Virtually all the major collaborative social networks have instituted reputation systems to rank the trustworthiness of their members. Unlike conventional credit-rating systems that rank one’s credit worthiness in a market economy, reputation systems are designed to rank one’s social capital in a Commons.
ThredUP operates by what it calls its “golden ThredUp rule,” that asks its members to only send the “quality of apparel” they would expect to receive in return. ThredUP ranks the “quality” of each members’ items on a four-star scale. A second rating, called “style points,” which goes from 0 to 10, ranks the items on their “stylishness.” The final ranking is a measure of the “punctuality” of their members’ shipments.
The online collaborative consignment shop has a zero-tolerance policy with regard to parents who send clothes that are frayed or torn. First-time offenders are identified and second-time offenders are removed from the Commons.
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Members with consistently high ratings are matched with each other to encourage all members to ratchet up the quality of their contributions.
Reputation services on the Internet Commons, similar to credit-rating services in the market economy, are becoming an important mechanism for regulating activity, ensuring compliance with agreed-upon norms and building social trust. TrustCloud is among a new crop of reputation services. TrustCloud “measures your virtuous behavior and transactions online then turns it into a portable TrustScore you can use anywhere within the Sharing Economy.” Each member is ranked from 1 to 1,000 (the latter being a perfect score) for his or her truthfulness.
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Rankings take into consideration a person’s consistency, generosity, and transparency, based on past activity on the Internet. TrustCloud algorithms search for behaviors like responsiveness and longevity in drawing up its trustworthiness profiles. Members then receive a TrustCloud badge with the ranking, all at no cost.
Couchsurfing has its own rating system. Opening up one’s home to a stranger to stay in, for free, is a bit harrowing. Then, adding to the angst, both host and guest are expected to socialize and share their respective cultures with one another. After each stay, both the host and guest rate each other and provide a reference. Couchsurfing’s gold standard is called vouching. Users are allowed to vouch for other members, if at least three other couch surfers have actually met them and vouched for them previously.
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With the sharable Commons already estimated to be worth more than $100 billion and growing by leaps and bounds and the social economy becoming an ever more important part of people’s everyday lives, expect social-capital ratings to become as important to millions of participants on the Collaborative Commons as credit ratings were to consumers in the capitalist marketplace.
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The collaborative economy is coming on strong. Just before sitting down today to write, I happened to read this week’s cover story on the sharing economy in
The Economist
—the editors and contributors extolling its virtues and arguing about its potential impacts on the traditional market economy. Many observers are wondering how the entrenched capitalist system and the upstart Collaborative Commons will adjust to each other. A tantalizing clue might be found in the new kinds of exchange currencies that are being established to differentiate the way people do business on the Commons versus how they do business in the market.
The currency a society uses to enable its members to trade goods and services with one another is a good marker of the underlying values held by the community. In his masterful book
The Philosophy of Money
, the nineteenth-century sociologist Georg Simmel reminds us of the critical role that money has played throughout history in extending and deepening human social interaction. Simmel points out that coins are promissory notes, backed by an unstated collective trust among strangers that guarantees that at some future date the token passed on in an earlier exchange will be honored by a third party in a subsequent exchange.
While currencies have been backed up by all sorts of valuable metals, the most favored over time being silver and gold, anthropologists observe that behind these assets lies a deeper asset—social capital—without which currency as a medium of exchange would be valueless. The Trobiand Islanders in New Guinea, for example, engaged in an elaborate exchange of native shells, often canoeing long distances to pass the tokens back and forth, as a way of establishing bonds of mutual trust. The exchange of social currency built up sufficient social capital to enable trade to flourish.
Until the collapse of the global economy in 2008, which exposed the hollow innards of a dysfunctional, and even criminal, global financial system, most people took for granted that the world’s currency system was reliable, if occasionally volatile. And even if the currency was in trouble, we assumed the government would guarantee our bank savings—in the United States up to $250,000—if a bank were to fail. Behind the banks, the Federal Reserve System, at least, would be there to rescue the dollar.
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It’s only when economists began to suggest that if the currency system were to plunge to the very bottom, we would be saved from the abyss because the U.S. Treasury could always print more dollars and put them into circulation, that millions of people became very scared. We began to realize that behind all the rules, regulations, and firewalls lay an empty chasm.
The global financial collapse exposed the longstanding myth that commercial exchange is a primary institution. There are no examples in history where people created commercial markets and exchange before creating a culture. We have mistakenly come to believe that commerce
precedes and makes possible the development of culture when in fact it’s the other way around. As mentioned in chapter 1, culture is the sphere where we socialize ourselves. It’s where we create the social narratives that allow us to extend our empathic sensibility and cohere in larger fictional families. Our shared sense of identity builds bonds of social trust, allowing us to accumulate a sufficient reserve of social capital to function as an integrated whole. Our shared identity is what allows us to create various symbolic tokens that serve as promissory notes, assuring us that we can trust each other to honor both past commercial commitments and future transactions.
We too often forget that commerce has always existed as an extension of culture. Commerce feeds off of society’s accumulated social capital. On those occasions in history when commercial institutions, and specifically financial institutions, have compromised society’s social trust and depleted its social capital, as they did in 2008, it’s not surprising that people have come to fear the currency mechanisms and begun to search for alternatives.
In 2008, millions of people turned to gold—sending its value to record highs in the world market—hoping that it might provide a degree of security in unpredictable times. Others began to question the value of holding on to a metal brick that, for all intents and purposes, was just another symbolic token whose worth was not a measure of any intrinsic value of the metal but, rather, a measure of the paranoia and fear brought on by financial institutions that had rapidly depleted the social capital and trust and, with it, people’s faith in conventional currency.