Trading for their own account

I promised recently to publish more of my reflections on what I’ve learned from studying the parallels between Web 2.0 and financial markets, one of the real wake-up calls was the way that Wall Street firms moved from being brokers to being active players “trading for their own account.” Ever since I heard Bill Janeway point out that over time, Wall Street “firms began to trade against
their clients
for their own account, such that now, the direct
investment activities of a firm like Goldman Sachs dwarf their
activities on behalf of outside customers,” I thought, whither Google, Yahoo! and Amazon?

And sure enough, there is lots of evidence that this process is already far advanced. These sites, once devoted to distributing attention to others, are increasingly focused on consuming as much of the user attention as possible. What else do you make of Google’s recent sally against Wikipedia, the so-called knol. Anil Dash’s analysis was spot-on:

Google’s announcement of Knol shows that they understand some of
their key business drivers very well; With as much as 5% of the
search result links for popular terms going to Wikipedia pages,
a solution to capturing some of that traffic in an environment
that Google can control and display ads on makes good business

[But] Knol shares with Google Book Search the problem of being
both indexed by Google and hosted by Google. This presents inherent
conflicts in the ranking of content, as well as disincentives for
content creators to control the environment in which their content
is published. This necessarily disadvantages competing search
engines, but more importantly eliminates the ability for content
creators to innovate in the area of content presentation or

Everyone applauds when Google goes after Microsoft’s Office monopoly, seeing it simply as “turnabout’s fair play,” (and a distant underdog to boot), but when they start to go after web non-profits like Wikipedia, you see where the ineluctable logic leads. As Google’s growth slows, as inevitably it will, it will need to consume more and more of the web ecosystem, trading against its former suppliers, rather than distributing attention to them. We already take for granted that common searches, such as for weather or stock prices, are satisfied directly on the search screen. Where does that process stop?

And much as I support what Google is doing with Google Book Search, I am troubled by the fact that they give preference to their own content repository over digital copies provided by publishers or other aggregators. (See my post Book Search Should Work Like Web Search.)

We see the same pattern at Amazon, which is aggressively pursuing authors for direct publishing on the kindle and seeking to displace publishers by making themselves the sole source for books on the device. [Update: And reader GL, in the comments on this post, observed “this year I found it quite interesting that YHOO made such a large effort to become a ‘super affiliate’. The amount of product reviews tied to affiliate links was amazing. Would you rather make $2 per click selling PPC ad or make $25 per click (5% of a $500 sale by advertising along side other ppc advertisers? I think the answer is simple. Interestingly, in this scenario YHOO wins on both sides of the trade.”]

Ultimately, I think we see this pattern in the economic development of every innovation. When a new technology is introduced, there’s a lot of green-field opportunity, and so much value is being created that there’s no need to capture it all. But as the technology matures, the winners need to capture more of the total value being created. They gradually crowd out suppliers as well as competitors.

Fortunately, there’s another side to Bill Janeway’s unorthodox history of Wall Street (as told in the Release 2.0 issue on the subject), and that’s the one we’re focusing on at the Money:Tech Conference in New York in February. And that is the rise of new opportunities for specialized information and data mining services that go deeper than what’s available in search engines. I’ll write about that next week.

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