Web2.0’s international profit paradox

internet cafe sign - Varkala, IndiaSlowly but steadily, the world is becoming wired; internet penetration in developing countries is growing at a surprising rate, and the residents of said countries are taking to Web2.0 like ducks to water. Great news for start-up entrepreneurs, right? [image by piccadillywilson]

Well, not entirely. Citizens of developing nations are providing a huge influx of users to Web2.0 platforms, certainly, but the problem is that they chew up a lot of expensive bandwidth without returning much in advertising revenue:

Web companies that rely on advertising are enjoying some of their most vibrant growth in developing countries. But those are also the same places where it can be the most expensive to operate, since Web companies often need more servers to make content available to parts of the world with limited bandwidth. And in those countries, online display advertising is least likely to translate into results.

This intractable contradiction has become a serious drag on the bottom lines of photo-sharing sites, social networks and video distributors like YouTube. It is also threatening the fervent idealism of Internet entrepreneurs, who hoped to unite the world in a single online village but are increasingly finding that the economics of that vision just do not work.

I imagine this problem has been magnified recently by the economic slump; the pricing of online ads everywhere has taken a nosedive in the last year or so. That may be temporary, though, as print media venues close their doors in response to the same pressures. [via SlashDot]

What’s most likely, as the NYT article points out, is a sort of tiered service; MySpace is allegedly planning to serve its Indian userbase with a stripped down page design to save bandwidth (a course of action that, if deployed globally a few years ago, might have stopped people from abandoning it in droves for Facebook), while Veoh has entirely blocked users from many developing regions from watching videos on its service.

A big outfit like Google can afford to bleed money on this sort of thing (and indeed it is – some people estimate YouTube is costing them $1.65million every single day), but not forever. Which means that, if things continue in the same vein, the internet may become the latest frontier where the omnipresent (and ever-growing) gap between the haves and the have-nots makes itself manifest.

It’s a bit of a Catch-22 situation: ad revenue in developing countries is low, but it will only increase at a decent rate if the internet in those areas doesn’t become a second-rate ghetto with limited services. It’s the ages-old battle between idealism and profit margins… and a crucible test for Google’s “don’t be evil” manifesto.