Is Web 2.0 imploding?

Web 2 is marked by the middleman economy. Technology has been used to “simplify” access to markets and audiences, integrating payment rails and finance. Everyone is charging a percentage of somebody else’s value. Like in any legacy system, there are now so many layers and so many participants in the value chain that the middlemen extract the bulk of the value.

A recent UK government study of the media industry analysed advertising technology ecosystem fees. Publishers earn between 30% and 51% of every ad dollar spent by advertisers, the rest goes to middlemen. Exacerbating the issue is that publisher revenues are deflated due to a glut of cheap, fake inventory that is made easier to promulgate by the same middlemen.

In systems as big as Web 2.0, the decisions are no longer about quality but rather about scale. It’s possible to police 500,000 publishers, but not 5-million, so some standards need to drop, especially if they don't affect your revenues.  As an example of unintended consequences, eMarketer expects advertising fraud to reach $100bn in 2023. Significantly more investment is going into creating advertising fraud than into stopping it. The middlemen who we trust to provide quality advertising are merely facilitating the transactions; they can’t detect bad actors at this scale.

The Web 2.0 argument centres on efficiency; the concept that things are cheaper at scale. However, it rarely seems to be true for customers, as the monopoly power of marketplaces like Amazon extract as much as sellers can pay, and centralise merchants in a way that is confusing to the buyer and devalues the seller in the long term. Your offer does not remain unique when the bulk of the purchasing experience is the same as everyone else’s. The more scale, the worse the problem gets. Sellers are no longer easily discoverable organically on platforms like Amazon, so sellers use adverts, which means there is an additional layer of pricing.

So where does this end up? Decentralised systems, like decentralised autonomous organisation and blockchains, seem to do no better in managing this complexity; the debacle around cryptocurrency exchange FTX is a case in point. Regulators cannot keep up, as the effect of new systems is hard to predict and gatekeepers are a natural phenomenon of systems too large to comprehend. 

Maybe it’s as simple as a big tech breakup. Does Amazon Web Services need to be part of Amazon's e-commerce business now? Do it logistics arm? Maybe inefficiency is what we need to bolster competition and shake up entrenched leaders.  Maybe the next web should be built around keeping enough inefficiency alive that competitors and new entrants can compete. 

Nevo Hadas is a partner at DYDX.

The big take-out: In systems as big as Web 2.0, the decisions are no longer about quality but about scale.