blogs and bad incentives

Transaction costs are apparent in all institutions. With better technology, there is a reduction of information costs. However, there are some transaction costs that cannot be solved through technology. The incentives for sharing the information limit the amount of information shared even despite the reduction of information exchange costs. A fairly recent development of information exchange was the creation of the blog, which create an avenue to share information from a singular individual perspective. The ways in which a blog gains profit should be from providing a consistent quality product. However, the incentives are limited to profit through advertisements. This creates a separation of incentives between the author and the reader. However, with the creation of organization-supported blogs, incentives are re-aligned with the benefit of the reader in mind.

Technology and the advent of the internet have greatly reduced information-based transaction costs. Availability of essentially any information is at the grasps of anyone with the access of a computer. There are also avenues to promote your own thoughts: blogs. Blogs are the creation of technology which enables you to share your own voice. Originally, many blogs were journals; highlighting day-to-day activities. They have since transformed into a vehicle of discussion on a multitude of compelling topics. They have created companies to manage blogs, to organize them, and to profit from them.

Most blogs are but a mere collection of one person’s thoughts. However, if those thoughts are particularly useful or they come from someone who is an expert, it is capapble to monetize the viewers of the blog. For example, Chris Anderson, author of the book The Long Tail, runs a popular blog due to expertise and insight he showed in his book and advertises the sale of the book by those viewers who discovered his blog first.

Originally, blogs had a limited availability of ways to profit from viewers. They were limited to goods sold, like Mr. Anderson’s blog which promotes his book. Then, Google created the Adwords process of milking profit from strategically placed advertisements that are associated with the subject. With easy use and implementation, Google’s Adwords revolutionized blogging into something that could support the authors financially.

A fundamental shift began. It transformed the blog from something that facilitates the sharing of information for the sake of being heard to making money. It created a separation between the authors of the blog, who wants to make money, and the reader, who wants useful information. The incentives of blogging were no longer aligned with the original purpose of the blog.

The most successful blogs, however, do provide useful information to their viewers. By giving useful information to the viewer, ideally, the amount of viewers would increase and consequentially provide more profit to the blogger. In a recent post about successful blogs, Kathy Sierra, author of the top 100 blog Creating Passionate Users, states that “what's good for [the reader] is what's good for the blog. And for me.”

The fundamental business model of a profit-oriented blog is still aligned with the benefit of the viewers; if you offer a quality profit, the readers will give a return on that information through the use of Adwords. However, the majority of blogs offers a poor quality product and expects returns from the poor quality product. One of the most popular blogs is problogger.com. This website’s focus is only to explain how a blogger can gain the most amount of money from their blog. When profiteering is the major focus of a blog, the incentive is no longer aligned with the benefit of the user.

Advertisements are also a direct cost to the consumer. The costs are created when forcing the customer to view an advertisement before or while the product is provided. The customer pays the costs for these dilutions. Google, one of the most popular websites on the internet, foregoes profits from advertisement on its websites, limiting the costs to the consumer who have to read the ads. It could be viewed that Google is actually investing in their customers by foregoing those profits. This provides a better product to the Google consumer.

Incentives need to be realigned. I have found that some of the most useful blogs are those which are supported by an outside institution. The institution provides the blogger with an income, which shifts the incentives from profiting through Adwords to providing quality information in effort to ensure continual sponsorship from the supporting institutions. Such institutions that support bloggers, who provide more useful information, are academic institutions or publications, like the Harvard Business Review. Other institutions that provide support are companies such as the New York Times. The bloggers do not provide a direct source of income but create a market for other profitable aspects of the company.

One extremely popular blog is postsecrets.com. Viewers send their secrets to the author of the blog via small, art-driven postcards. The author, Frank Warren, has no advertisements on his blog, except a link to a website that allows you to book Warren as a speaker at your college campus. Mr. Warren does not profit from the blog specifically, but makes money by using the popularity of the blog to create a market for his speaking events. This minimizes the transaction costs of viewing the website, but still provides a source of income for the author.

Profiting by providing information to people through blogs is not fundamentally bad. It is those authors who wish to gain profits more so than providing useful information to user does a problem arise. The transaction costs in this separation could reduce the amount of viewers and consequentially the amount of profit made. The better quality the product with a lesser amount of transaction costs will result in higher profits and, most importantly, benefit the viewer in greater amounts.

With transaction costs reduced and the flow of information increased due to the internet, it is extremely profitable to share information. However, the incentives must align for the benefit of both the creator and the beneficiary. If the current method of incentives does not cater to this interaction, alternative methods and incentives must be created. Market creation through blogs is the most viable incentive which benefits both parties.