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There’s this famous conundrum of logic that deceives by pretending to be a mathematical one. Three friends walk into a hotel. They pay the receptionist $30 for a room each and go up to their rooms. Later, the receptionist realises he ought to have charged the guests only $25. So, he calls over this shady-looking bellboy, stuffs $5 in his palm and tells him to return it to the gentlemen with an explanation and apology. On his way up the stairs, though, the bell-boy begins scheming. They’d find it pretty hard to split the $5 three ways, he rationalises. And either out of a sense of compassion or arithmetic roundness, he pockets $2 and give the three guests $1 each.
So, here’s the riddle – if, in the final tally, the three guests have effectively shelled out $27 ($9x3) in total, and the bellboy pocketed $2, that would account for $29 ($27+$2), right? So, where’s the missing dollar?
On the face of it, though, this riddle is baffling. It seems to insult your decades of arithmetic experience. How can a transaction be conducted and both sides not tally, even after having accounted for embezzlement? And in a way, the digital economy is similarly confounding.
The truest driver of innovation in the world today has to be the Internet. Or the Interweb, as the cool kids are calling it. The Internet, with its all-empowering ubiquity, has pretty much bogarted the game of evolution, wrenched it out of its glacial gait, and set it on the exponential path. Or is it the other way round, that the vogue of the Internet struck human civilisation as a result of a pre-emptive spurt in human capability? It’s pretty hard to tell. A symbiotic thing like the Internet significantly blurs the line between cause and effect, between user and provider, consumer and producer.
And in all this, the dynamics behind human transaction have been modified in radically sophisticated ways.
I’d like to assure myself that in the final tally, the online business model squares itself. That it is viable. That it is profitable enough to justify the worldwide shift towards the online platform, be it with respect to e-commerce, online publishing or any other traditional service prefixed with an ‘e’.
But take a look at what’s driving this e-paradigm. It certainly isn’t being financed by the Rs.2,000 you might pay every month for your 1GB broadband connection. And the Internet is meant to be this Leftist disruptive medium that allows the consumer to bypass the extortionist gatekeepers, so most things are free once you’re logged in. In fact, this free-for-all approach to copyrighted content has been quite controversial too in addition to the web’s dubious financial viability. It took Google — which just last year settled a 7-yearlong $1-billion lawsuit with cable company Viacom Inc. for YouTube’s “immoral” business model of broadcasting copyrighted content — 8 years to break even with its $1.6-billion purchase of YouTube. So, who’s paying for the vast services on the Internet? Where are all the missing dollars?
Well, among the various offbeat business models that drive the Internet marketplace, it’s evidently supported mainly by advertising revenue. Google gets 95 per cent of its $66-billion revenue from selling advertising. This is the same game-changing revenue model that TV and broadcasting thrived on in the latter part of the last Century. It’s simple enough. Give the actual commodity away at gosh-low prices. Try to survive the earth-shaking stampede of customers salivating over the word “bargain”. Now, call in a bunch of businessmen and have them set up stalls to advertise their wares before the sea of consumers. And collect a cool sum from the stall-owners as rent for the marketspace you let them use to influence prospective consumers.
Real estate on the Interweb is infinite. So, there’s no scarcity to bump up the demand and escalate its price. What does put a higher price tag on certain websites is the amount of user traffic they are able to generate with their content. If your web site is really popular, commands the loyalty of a big visitor count and scores high on other cyber-analytics parameters, it’s prime real estate for advertisers.
According to emarketer.com, U.S. marketing companies spent around $180 billion on paid media in 2014. Twenty-eight per cent of this went towards online advertising, 10.6 per cent in mobile. If you think the 17.7 per cent rise in spending on online advertising in 2014 was huge, a foreseeable spurt in mobile users was expected to raise the digital marketing investment by another 15.5 per cent in 2015.
But ask yourself this. How often do you click on an ad you came across online (accidentally doesn’t count; well, actually it does, but that’s just the point: it isn’t legit)? I don’t know about you, but I never click on an ad if I can help it. Mostly, I find ads annoying even though I know they’re paying for all the stuff and services I enjoy online. In fact, I hate those ad servings that try to fool you by placing the close button on a counterintuitive corner of the pop-up, so you end up clicking the ad when trying to get rid of it. And I always keep my cursor trained on the “Skip Ad” button and pounce on it the moment the pre-video ad on YouTube has buffered for the obligatory 5 seconds.
We have to question this notion that online display advertising is actually effective for all the billions of dollars being spent on it. Check out some statistics reported by digital media analytics firm Invesp about how optimal the conversion rate is from the advertisers’ point of view:
Now, Google’s certainly not complaining about the conversion rate of advertising campaigns so long as Adwords keeps going ka-ching. But the stats, which show ineffective consumer targeting, clearly indicate that a lot of the money being injected into the digital economy may well be inefficient and wasteful. And suboptimal.
Does that last adjective ring a bell? The last time massive deals were made on the basis of speculative but mistaken notions of profitability, a certain subprime recession with lasting critical global ramifications was spawned. The housing bubble in the United States of America was created by a false belief about the rising economic value of home-ownership. It eventually burst when people realised that it wasn’t genuine, authentic demand driving the prosperity but a whole load of speculation and mindless herd behaviour.
The Greece debt crisis too has a lot to do with cooked books and undeserved credit. If we still had the gold standard to lend credibility to our currency, governments wouldn’t be able to print money willy-nilly, and the Zimbabwean dollar wouldn’t have turned into scrap paper because of brutal rates of monetary expansion and hyperinflation.
It’s like for as long as Roadrunner’s nemesis Wile E. Coyote doesn’t know he’s overshot the ledge and keeps cycling his legs, he can run even on thin air. But once he becomes aware of the absence of actual ground beneath him, gravity takes over and he has nothing to do but plummet to the arid canyon floor in an underwhelming puff of smoke.
If online advertisers one day come (god forbid) to think that there is no causative – but at best a correlative – relationship between online advertising campaigns and sales, what might happen to the Internet as we know it? If marketers suddenly begin to feel their online ad campaigns are giving a pretty poor return on investment, how long before they decide online real estate isn’t worth investing in? And what would that spell for the Interweb? Because remember, there’s nothing propping the digital economy but third-party sponsorship. The actual content and intellectual commodities are given away for free. There’s no fallback. Information wants to be free. And now it’s had a taste of the good stuff for a good while, there ain’t no going back.
So when Earth becomes plagued with pestilence and dust storms, Matthew McConaughey can just strap on his space suit and go off colonising extraterrestrial worlds. But can we risk watching our beloved digital virtual world shrivel up and implode when its lifeblood is drained from it?
There’s a reason I brought up the riddle of three hotel guests, the bellboy and the missing dollar at the start. It was to give me hope. I know that the inconsistency in that riddle is artificial. The confusion is manufactured by a logical fallacy in how the calculation is laid out and the question is formulated. You don’t try to account for the $30. You have to only try to account for the $25 that is finally chargeable. The guests ended up paying $27, true. And that’s because the dishonest fellow pockets the $2 that they were owed ($27-$2=$25). Voila.
So, tell me I am mistaken about the digital economy. Because to me, it looks like it’s a bubble fit to burst.
