Commoditizing Web Development and Leveraging Economies of Scale

Economies of scale, in microeconomics, is defined as 'the cost advantages that a business obtains due to expansion'. A simple example of this in action: in manufacturing, the unit cost of the product being manufactured usually goes down as the number of products produced goes up, because the initial costs are amortized over all the products manufactured.

Online media companies have been slow to use this theory to their advantage in many ways, and in fact more often fall victim to the opposite, diseconomies of scale. Everyone wants to make the next Facebook, or Myspace: a huge mega site that is viewed by millions and millions of people a day. But, the reality is, those sites aren't all that efficient in a lot of ways. For one, there are expensive technical challenges to scale up to support that much traffic. Huge server farms are needed and tons of money goes into developing the infrastructure and coding to support these behemoths and keep them running. For sites that are content based (rather than having all content provided by users) content creation and management costs can add up as well. Also, since those huge sites are rarely able to be very targetted in their demographics, it can be hard to get suitable advertisers. Many will want to advertise on your site because of the huge number of eyeballs, but they aren't likely to pay all that much since their conversion rates will be so low.

Creating a large network of smaller sites and levaraging this economy of scale has many advantages over the 'mega site' model, including:

1) Low Scalability Costs
- no need to worry about how to get the site running with huge numbers of users. Also, with today's adaptable, auto scaling cloud computing technologies (ie Amazon EC2) you never need to worry about being 'slashdotted' on one of your little sites, because you can handle that. It also takes a lot of effort out of admining your servers. Launching and configuration new servers for your new sites is as easy as clicking a button. (Note, these technologies are a real boon for the 'mega site' approach as well, but smaller sites still have the advantage of not having to change their code at all to implement clustering etc).

2) Greater Diversification and More Specific Targeting
- with a network of many sites in the same 'niche' you can have one for every sub-niche (for example, a fitness network can have sites on yoga, bodybuilding, pilates etc) so that every one gets what they want, and the traffic you get is usually very targetted - a goldmine for advertisers and marketplace sellers

3) Much Higher ROI and Revenue Growth
- a single site (that is probably weakly targeted)  that derives it's revenue from advertising generally needs to get a large amount of traffic to get advertisers interested, and that takes time (or money) to build up. If you launch a network of very targeted, well-branded niche specific sites, there are numerous higher value revenue streams than a weakly targeted low CPM social network.

4) Content Production is also Scalable
- Each niche specific site requires quality, niche specific content and each Incendia Media site has a combination of 'member journalists' as well as subject matter experts that create authoritative content for that niche.

- However, in a diversified network, content can be repurposed through niche-similar sites. This dramatically increase traction and stickyness while keeping content costs extremely low.

5) Initial development costs of the platform/framework are amortized over many properties rather than just on one.

Of course this 'network approach' has its own drawbacks. If your production costs per site are too high, the model fails. You need to be able to launch numerous, high quality content-driven social networks at marginal cost. You also have to make sure managing a large number of sites (both on the project management side and the content side) has the same economies of scale as your technology platform.

Basically, you need to 'commoditize' the creation of websites or more specifically, branded social networks and marketplaces. All large networks feature a kind of blandness that is required to appeal to a large broad base demographic. As such, the brand loyalty for these sites is minimized. The ad targeting is severyly reduced. And since many of these networks aren't content driven, a large proportion of the 'page views' in them are social actions (which aren't monetizable). People are also more likely to migrate to a content-driven site or social network that has not only a similar feature set, but also a compelling brand that speaks to their specific passions, needs and desires.

Incendia calls this 'quality commoditization' (or commodification) it's not a simple process, since there are so many factors involved in the process it requires a whole separate textbook. But parts of the process involve open source frameworks, cloud computing models, democratization of ideas and content, pyromarketing strategies, marketplaces and building strong brands. You've seen the beginnings of this in the current Incendia Media network. Stay tuned for more in 2009!