(Transfered from Blogger / Typepad)

If there’s a sure fire sign that the bubble is building again, it’s the resurfacing of .com-era economics projections.These economic ‘models’ work something like this:

Let’s assume there are 1bn internet users world wide. Let’s say 0.005% of those people might be interested in my new $10 train spotting kit. Therefore, using nothing more than my pocket calculator, I can prove that my train spotting kit
website is worth $50m. That’s a profit of $25m. Mum, I’m a millionaire.

There’s three rather major flaws with this reasoning unfortunately, although none of these have had much of an impact on slowing down the use of the formula.

  1. Cost of sale. While selling online is cheaper than building a store or a distribution network, it is not free and neither is marketing. It costs as much money to build a brand online as it does to build it offline
  2. Captive market. The web makes connection with your buyer easy, but it does the same with the billion other products competing for your audiences $10. The web provides the framework for perfect competition. If you’re making a super-normal profit other train-spotting kit manufacturers will come in and compete with you.
  3. The internet is task based. While people might occassionally be distracted by online advertising, they are typically busy doing other things, not considering the train-spotters kit.

So the reality of the sum is easy. 1 bn x 0 = 0.