In his 1937 work, The Nature of the Firm, Nobel Prize winning economist Ronald Coase proposes that transaction costs are the catalyst behind the creation of ‘the firm’.
More specifically, where transaction costs are high, individuals get together to form ‘firms’, pooling their resources to overcome their common enemy: transaction costs.
With the decrease in transaction costs brought on by the digital/Internet age, i.e. The Internet reduces distribution costs to almost zero, etc., the need for ‘the firm’, in certain areas, has been dramatically reduced.
Take, for example, content creation and distribution.
It used to be prohibitively expensive for someone to make a movie and distribute it. Now, anyone with a camcorder can make a movie, post it on YouTube, and instantly reach a planet-wide audience.
The world has changed: from a centralized top-down structure controlled by large companies, dictated by small groups of professionals, to a distributed, user-generated, structure which bubbles up from the masses.
Whereas users were once relegated to being solely consumers of content, they are now consumers, creators, and distributors of content.
The social media phenomena is, in many ways, a consequence of these changes.
Specifically, when you reduce transaction costs, you reduce the need to form firms, enabling individual users to create and distribute their own content.
By removing the technical hurdles and transaction costs associated with creating and distributing content, sites such as Flickr (photos), Blogger (text), YouTube (video), and Odeo (audio), facilitated the proliferation of user generated content and the creation of social media.
But what is so special about this user generated content?
Why is social media important?
Think about a country suddenly shifting from an absolute monarchy to a constitutional democracy.
What is occurring in the media sector is no less radical a transformation.
Social media marks a distinct break from traditional media in the sense that it is participatory and interactive--the user can both initiate, and take part in, the conversation.
From an economic standpoint, the shift to social media is no less important given its profound effect on Internet advertising--one of the engines fueling the growth of the entire technology sector.
Traditionally, advertising dollars were divided among existing forms of media such as newspapers, magazines, radio, and television according to “reach”.
“Reach” referred to the number of viewers who would see a particular advertisement. The greater the reach, the higher the concentration of advertising dollars allocated to a particular form of media.
Increasingly, viewers are abandoning traditional forms of media--newspapers, magazines, radio, and television--in favor of the Internet. The reach of the Internet has therefore been increasing relative to traditional forms of media.
Simultaneously, the two-way nature of the Internet enables levels of relevancy, timeliness, and measurability impossible with traditional forms of media, further increasing its attractiveness to advertisers.
Social media is important because large numbers of users are spending large amounts of time on social media websites.
Social media sites such as Flickr, Blogger, YouTube, and Odeo as well as social networking sites (which are essentially hybrid social media sites) such as Orkut, MySpace, and Facebook, are grabbing an inordinate amount of reach.
Going forward, social media sites should continue to grow in importance as: transaction costs associated with content creation and distribution continue to decline; advertising dollars continue to migrate to the Internet, and, allocations within the Internet segment begin to target social media.
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