Analysing Web 2.0 businesses: Shoutwire vs Digg case study

December 28th, 2006

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The advent of the Internet heralds the Information Age, which brings in radically different ways of doing business from the preceding Industrial Age. Unfortunately, the Information Age is relative new and many business people have yet to fully grasp and understand the implications of this paradigm shift. With the proliferation of Web 2.0 businesses (e.g. Digg, Youtube, Google, etc), how are we to comprehend the significance and viability of each one of them? Hence, we will look at the art of analysing Internet businesses for their investment merits, using Shoutwire as a case study. For today?s topic our recommended reading is New Rules for the New Economy, which among the books in the Recommended Books section.

Before that, let us give a quick introduction to the idea of community-based news. The philosophy is very simple. An individual in the community will submit news stories to be voted (in favour of or against) by the rests of the community. Through voting, the community express its collective view on the value of the submitted story. Popular stories will be promoted to higher visibility whereas unpopular ones will be demoted to obscurity. Thus, the power of the community?s collective wisdom is harnessed to do the bulk of the dirty work of promoting, editing, filtering and censoring. This is a very powerful concept. A few web businesses emerged to implement this concept. To name a couple: Digg and Shoutwire.

However, not all businesses are created equal. Some will survive and others will wither and eventually die. In this article, we will look at Shoutwire as a negative example of how not to do a web business. As Graeme Philipson said in this article, The coming digital showdown:

We are not even a decade into the digital millennium and already the battle lines have been drawn. Two camps have emerged, each with widely divergent views on the nature of information, who owns it and how it should be distributed.

The forces are at this stage evenly matched, and it is not apparent from the day-to-day squabbling which side will emerge victorious. But one side must, because their views are diametrically opposed and can’t coexist in the long term.

On one side are those who believe information is a commodity that can be owned, bought and sold, and its distribution controlled. This naturally leads to a restrictive view of information. This group comprises most of the music, publishing and film industries, and most hardware and software companies.

On the other side are those who believe that information by its nature should be free, and that its distribution should be uncontrolled. This viewpoint naturally leads to an expansive view of information.

It would be clear from this article that which camp Shoutwire belongs to.

First, we look at their submission policy, which in our view is detrimental to the long-run viability of their business: ?Remember that ShoutWire is primarily a news site and submissions which have little or no news value are more likely to be deleted than those that are news. It might seem like we delete a lot of stuff, but remember that ShoutWire is your site after we give you our brand of quality; besides that, all links that make the front page are decided by ‘you’. We?re just trying to ensure that the selection of links you have to choose from when looking for stories to shout is of the highest possible quality.?

We have quite a number of criticisms on their submission policies because they contradict the original philosophy of having a community-based news. On one hand, they deemed that the ?the front page are decided by ‘you’?, yet on the other hand, they play the role of police and arbiter in deciding which news are worthy of be voted by the community. Our views are:

  1. Their staffs perform the role of the police and arbiter. We see a significant weak point in such business policy. Firstly, staff members are people who have their own personal bias, prejudice, predisposition and perspective. This implies that any news that can make it to the voting gallery are already ?censored?. That is why some people think that Shoutwire has an ?agenda??their very policy of ?management? (in the name of quality) doomed their stories to possess a slant.
  2. Such ?management? (censorship) implies that subjective judgements of their staffs will inevitably override some of the collective viewpoints of the community. This defeats the entire purpose of having community-based news in the first place.
  3. At this point in time, they have enough staffs to play the roles of police and arbiter. But how can they possibly continue to do so without being overwhelmed in the long run when the number of submitted stories grows in magnitude?
  4. There is no way for Shoutwire staffs to be an expert in all fields of human knowledge. As such, how is it possible for them to be competent judges on the quality of technically specialised stories? For example, this site holds contrarian investment viewpoints. Does that mean we are conspiracy theorist lunatics? Or are we independent thinkers? The only way to tell the difference is to study the merits of our arguments, reasoning, logic and the origins of the school of thought that influence us. A person without specialised technical knowledge is in no position to make such a judgement.

We can see that Shoutwire?s insistence in controlling the quality of their news stories will be the cause of their decline in the long run. The whole point of having community-based news is to harness the collective power of the community to do the quality control. As such, do you think they have a cause to worry about angry teenagers, conspiracy theorists, spammers, advertisers, parasites, self-promoters and so on from ruining the quality of their stories? Such policies of theirs weaken the whole philosophy of their business model in the first place.

Next, we look at the possible long run result of Shoutwire and their rival, Digg. As Kevin Kelly?s book New Rules for the New Economy says:

Mathematics says the sum value of a network increases as the square of the number of members. In other words, as the number of nodes in a network increases arithmetically, the value of the network increases exponentially.* Adding a few more members can dramatically increase the value for all members.

By frustrating their users through deleting their submissions and locking their accounts, Shoutwire is driving their users away to their rival, Digg, which adopt a more laissez-faire and liberal approach. As a result, Digg will grow more and more in size as their members and the number of news stories increases. This in turn will increase the value of Digg?s network exponentially (e.g. more members means that there will be more pair of eyes ensuring the quality of stories), which in turn will attract even more members and news stories submission. That in turn will further increase the value of Digg?s network exponentially. The curious nature of the network gives rise to what is called a ?natural monopoly? in economics.

So, if Shoutwire continue such a self-defeating policy, we believe that the long run feasibility of their business will be put in serious question. So, after reading this article, if you are given a choice to invest in either Digg or Shoutwire, which one will you choose?

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