The Digital Skeptic: 'Per Capita' Look at Web Makes Fools of Investors

NEW YORK ( TheStreet) -- With April 1 already taken up by rank-and-file foolishness, here's my big idea for April 2: Let's make it Web Fool's Day, the day investors set aside for a skeptical look at what's really worth what in the digital economy.

Take the so-called "per capita" -- or by-head -- perspective. In other words: What each and every one of us spends, makes or loses online on a person-by-person basis.

Looking at the Web through the per-capita lens hearkens back to the core one-to-one nature of a real-time, global information exchange. Be aware: They are strictly rated M, for mature investors only. It's grim stuff.

But understanding what is lost has helped me make the most value of what remains.

Devaluing the electricity the Web runs on
For reasons I have never understood, the Web takes a certain swagger in being worth basically nothing to any single person who uses it. Take last week's breathless buzz on Twitter's revenue doubling by 2014.

"The company will earn $582.8 million in global ad revenue in 2013 before nearing $1 billion next year," is what New York-based eMarketer reported.

The "logic" here is that with 200 million active Twitter users as of March, the whole shebang has to be worth something, right?

Except of course when you divide that $1 billion of expected Twitter revenue by even the current 200 million active Twitter users you wind up with average revenue per user of just $5 per year -- less than what that active Twitter user actively spends on, say, toothpaste.

And Twitter is no anomaly. When I gross up the annual revenue per user of Google ( GOOG), Facebook ( FB), LinkedIn ( LNKD), eBay ( EBAY) and Amazon ( AMZN) it takes real work to get to just $50 in total spent by any single user over 12 months.

These annual numbers are so low that for many Americans, there is an argument the Web devalues the electricity it takes to run it. Think about it. In 2010, for example, the U.S. Information Energy Administration estimated that power companies -- which do nothing but sell dumb old electrons to dumb old Americans -- still manage to get said Americans to fork over about $104 a month for power. That's $1,248 in average revenue per user per year.

Considering that level of spend, what does the $50 the Web makes mean either way?

Probably not much.

The value-free individual
But those figures do not capture the pure destructive power of the Web. For that investors need ask this one simple question: "What did it cost over the past 15 years for the Internet to wind up making the pittance it does from any one individual?"

Remember, mere hard costs reflected in expenses are not enough. What we want is the stock multiple affecting opportunity costs. That is what we all gave up in terms of sales, opportunity and value up to wind up with the no-revenue per-user Web we have.

Believe it or not, using a per-person analysis, it's easy to figure out just how bad things are.

Take the music industry. In February, the Web went agog when the International Federation of the Phonographic Industry reported that after more than a decade of collapse, for the first time since 1998 -- when total sales were about $38 billion -- total music revenues actually rose a bit last year, to $16.2 billion.

Never mind the 56% drop in sales. On a per-user basis, a much darker image emerges.

The number of accessible music consumers has risen dramatically during that decade. Irish mobile marketing research firm mobiThinking estimates there were 4.2 billion total global cell subscribers last year. Say you knock off a billion users as not being able to access a song from their phones. That leaves a cool 3 billion potential music customers worldwide. Let's argue that these consumers consumed music on a below-average 1998 basis. Say they bought a $15 album four times a year, or $60 per year per user spent.

Multiply our 3 billion-person market by that expected spender user, and we get an expected $180 billion worldwide music market. But what happened? We were stupid enough to give $164 billion in sales away, and a marvelous potential market was vaporized to wind up with the $16 billion in actual music sales we got.

The investor punchline -- or punch in the face, I think is closer to it -- is this: Similar hundred-billion-dollar markets were vaporized in publishing, the law, financial services and all the rest of the gutted information economy verticals.

Once you realize the golden age that was given up to have the Web we have, you realize the Internet is the cruelest joke of all.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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