The gift economy that powers much of web 2.0 is unsustainable. The internet offers an unmatched infrastructure for the distribution of communication, information and entertainment. But professional creators i.e. bloggers, video producers or application developers that build web 2.0 products and help us realize the value of that infrastructure won’t keep making their content and giving it away for free much longer. Why should they?

Professional creators need to be fairly compensated for their work. But their avenues for compensation are tightening fast and the access to capital that allows start-ups and artists to develop their business is closing. The runways are shortening:

The overnight IPO died in the dot com bust.

Liquidity markets are drying up or are morphing into unregulated and untested private issuance markets.

M&A activity for content and tech is disappearing.

It’s a buyer’s market. There’s too great a supply of every category of web 2.0 sites. Applications, once acquired, are category killers. Google doesn’t need to buy another Youtube and Yahoo’s not looking for another Flickr.

Most importantly, consumers feel a sense of entitlement, having grown up with the web culture being all about FREE. That means that unless transfer costs become too high to make switching from one cocial network to another, Facebook can’t implement a subscription fee for basic services.

Don’t get me wrong. I love the gift economy. I exploit it as much as the next guy and am happy using the web for the services it offers. But I also think that the gift economy has frozen the web’s development in it’s current state because the financial gain for increased innovation is stunted.

Why is that?

There’s been far too much artificial exuberance, or abundance as covered by Hank Williams. The current capital tightening is a natural correction which should lead to greater scarcity of talent which will lead to increased efficiencies and ultimately, better products in the market. But it means that the gift economy will diminish and, one way or another, we’ll have to start paying for our favorite applications, blogs and entertainment content.

There are a variety of ways that can happen and there’s a short term and a long term path.

In the short term it’ll be increased advertising. We’ll see more gateway advertising, meaning you will go to MySpace and be served an entry point advertisement (hyper targeted, of course).

In the long-term we’ll be re-introduced to the idea of exclusive ISP subscription services packaging, much like what Synacor has done. The best analogy for this is to think of ISPs as your cable companies, to whom you pay a fee, and the web services as channels. Some are broadcast over-the-air and are free, some are on basic cable for a small fee and some are high-end premium and require an additional fee. This will require a revamping of the regulatory policy and FCC intervention which means a deep dive into Net Neutrality. That’s coming soon, imho.

But what happens if the gift economy doesn’t go away? Professionals creators will exit the web and take their products elsewhere, leaving amateurs to fill the void. That may be ok for the amateurs, but it’s neither good for the professionals nor the general consumer. It means that outside of the oligopoly of profitable netcos, innovation regresses to become the web’s version of amateur hour.

Is that already happening? Consider the following example from an entertainment perspective.

Ze Frank is one of my favorite creators. I think we can all agree that he’s a unique talent that has not only blazed paths for other creators, but deserves to be fairly compensated for his creativity and the brand he’s built.

A few years ago while working at a movie studio, I was asked by an executive to explore a collaboration with Ze Frank. The studio wanted to develop an original, cross platform series that would debut online.

Having been a big fan of Ze’s work, I was unbelievably excited about the opportunity. He’s always been someone who I felt got the medium and understood how to create art which leveraged digital’s unique interactive capabilities. I became an instantaneous champion of the project. I spoke extensively with with Ze and his producer, an established TV showrunner, to develop his idea. It was a great project with a ton of upside, fit perfectly with our brand and most importantly, just to be in business with Ze would have been a major win for the studio.

When it came to budgeting the project, the studio felt that the numbers didn’t make sense. They couldn’t see the forest for the trees and the deal fell through. There was no amount of protest that I could make that would change the boss’s mind. Ze wanted bigger budgets and the studio wanted to pay less. Without going into the details, Ze’s numbers were relatively modest, but that type of innovative digital deal couldn’t be made within the studio system. Too many concerns with ownership, copyright, guild issues, politics led to overt risk aversion, not to mention a belief that there would be another one of these types coming soon and we could get him for less.

Ze’s show went away and was never seen (as far as I know) by any audiences. That’s bad for the general consumer because we miss a chance to enjoy Ze’s art and it’s bad for Ze because he didn’t get paid fairly to make his show.

So where is Ze now? Apparently he’s still doing what he loves, being very creative and performing on digital platforms. I hope he’s well compensated. My friend Jenn sends me updates about his Color Wars. I can only guess if he’s still interested in producing a show. He’s probably ok leaving it to amateurs.

For a look at Chris Anderson’s view of the gift economy: