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May 12, 2014
University of Milano BicoccaURBEUR-QUASI PhD Programme
The evolution of the Web Part II: The driving forces
Roberto PolilloDepartment of Informatics, Systems and CommunicationsUniversity of Milano Bicocca
www.rpolillo.it
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The paradox of Free
"People are making lots of money charching nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00.How did this happen and where is it going?"
Chris Anderson,Free – The future of a radical price (2009)
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"Lots of money?"
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(born1975)
Devices, Apps & content
(born 1998)
Ads(born 1975)
Software(born 1994)
e-commerce
( born 2004)
Ads main business (but things are not so simple…)
12 months ending March 2014, according to WolframAlpha
Billion USD
344
83
23
483
174
37
381
60
13
160
8 1,5
157
66
0
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What we will try to do today
Understand some of the driving forces which are shaping the economics of the Web ecosystem…
…and their impact on us
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We will do it in 6 steps
1. One, two and multi-sided markets2. Network esternalities3. The new technologies adoption cycle4. The drift to monopolies5. Customer lock-in6. The problem of the net neutrality
… and will discuss some important consequences
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One, two, multi-sided markets7
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One-side market
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Buyer
Seller
Product / Service
$
"You pay money, you see camel"
Anonymous(probably from circus)
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Two-sided market
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Cliente(tipo 1)
Cliente(tipo 2)
Fornitore
Credit-card companies
Venditori Titolari di carta di credito
SubscribersAdvertisers
Media companiesNight clubs
Men Women
Serv
izio
2
Servizio
1
$1 $2
Not everybody must pay with
money
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Example
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Audience "pays" with his/her attention
Audience "pays" with his/her attention
Large, “subsidized” user base
Large, “subsidized” user base
Small, profitable customer base
Small, profitable customer base
Product / service
, [$]
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Example
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Product / service
Google, Facebook, …
Google, Facebook, …
User info
Subscribers
Targeted ads
Online services
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OTT subscriber
OTT content / service
provider
Internet
N-sided market: example
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Internet Service
Provider 1
$1
Internet Service
Provider 2
Connectivity service 1
$2
$3
Connectivity service 2
Connectivity service 3
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There is no free lunchThe question is how you are paying itand if you are willing to do it
Anonymous
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Network esternalities14
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Externalities (network effects)
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Buyer
Seller
Product / Service
$
We have an externality when the value of a product or service for its user depends on the number of its users
Positive externality: when I buy a product or services, I generate a benefit to the other usersE.g.: telephone, fax, sjype, social network, …
Negative externality: in this case I generate a damage to the other users E.g.: when I connect to an Internet access point
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Externalities (network effects)
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Customer(type 1)
Customer(type 2)
Supplier
Serv
ice
2
Service
1
1 2
3
4$1 $2
4 types (each can be positiva or negative)
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Positive externalities: consequences17
The number of subscribers of services based on networks can grow extremely fast
When there are many subscribers, they may accept to pay an higher price for the service
Typical example: a service is initially free to grow the user base, then paid
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The new technologies adoption cycle18
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New technologies adoption curve
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100%
50%
0%
S-shaped curve("logistic function")
Innovators Earlyadopters
EarlyMajority
LateMajority
Laggards
"entusiasts" "visionaries""pragmatists" "conservatives""skeptics"
Bell curve(incremental growth:
S-curve derivative)
"chasm"
Cfr: G.A.Moore, Inside the Tornado, 1995
Here the process may stop
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Example: penetration of fixed telephony in the USA
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Wall Street crash (1929)
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http://bit.ly/VIIoX1
Product with positive externalities
Product without externalities
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Example
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http://b.qr.ae/10CAuAB
Instagra
m(approx)
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http://thinksocialmedia.com/tag/growth/
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The drift to monopolies24
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Positive feedback
If a product / service with positive externalities gains a larger market share with respect to its competitor, it will obtain larger and larger market shares, toward the 100% market share
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W.Brian Arthur, “Increasing Returns and Path Dependence in the Economy”, 1994
« For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them. »
Matthew, 25-29
Positive feedback,"Law of increasing
returns","Winner takes all"
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Consequences 26
First mover advantage: he who gains market shares before his competitor has a very large competitive advantage
Butterfly effect: the success of a technology may depend on fortuitous facts which afford small advantages at the beginning, which start an "avalanche effect" which may have nothing to do with its technical qualities
Standard de facto: computer industry is dominated by de-facto standards dictated by first movers (de-iure standards aften fail)
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Example: Facebook vs Myspace
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Typical market shares…
In traditional markets: n.1: 60% n.2: 30%n.3: 5%.
In markets dominated by network effects:n.1: 95%n.2: 4%n.3: 1%.
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Customer lock-in29
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Two product categories
Non-systemic products Can be used independently from other products E.g.:: umbrella; Coca Cola; banana“Law of decreasing returns”: negative feedback
Systemic products To be used, they need other productsE.g.: Car (needs gas stations, roads, …); Software (needs a complex ecosystem …)“Law of increasing returns”: positive feedback (“winner takes all”)
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Example: QWERTY keyboard
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Christopher Sholes, circa 1870
Other “rational” layout were never accepted
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Example: why all clock hands turn “clockwise”?
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Firenze, 1443 (turn anti-clockwise)
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Example: MS-Dos/Office and the Microsoft growth
Rev
enue
s (B
n U
SD)
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The problem of the net neutrality34
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What is “Net Neutrality” (NN)
It is the principle by which all data get carried with the criterium of "best effort”
I.e. data are all treated equally, and the network does not discriminate on the basis of their origin or destination, of their content, and the platform used
It is (more or less) the basic Internet design principle This principle is now strongly debated
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Internet protocol hierarchy
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HOST HOSTROUTER ROUTER
Applicazione
Trasporto
Internet
Network
Internet
Network
Internet
Network
Applicazione
Trasporto
Internet
Network
The transport network is “stupid”
Here all the application intelligence
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"Net neutrality means an Internet that enables and protect free speech. It means that Internet service providers should provide us with open networks – and should not touch any apps or content that ride over those networks."
www.savetheinternet.com
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ISP positions
Bandwidth requirements are continuously growing→ the infrastructure must grow
This entails large investments by ISPs, but now the big money goes only to the CSPs (content service providers)
→ we need new pricing mechanims to remunerate these investments
→ we need to be free to explore new business models → avoid restrictive rules, let the free market get its
equilibrium
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ISP: some possibilities to increase revenues
CSP tiering:Commercial agreements between ISP andCSP to prioritize their trafficUser tiering: "Walled gardens" Paid “Quality of Service” on specific services
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In synthesis
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Source: Net Neutrality - EDRI Papers Issue 08
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The risks
CSP tiering: Traffic from competitor CSP is degraded → major CSPs monopoly Startups are left out
User tiering: Low quality for non paying users Walled gardens: access to information and expression is limited
In both cases: large ISP have a large influencing power on our access to information and possibility of expression
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"Allowing broadband carriers to control
what people see and do online would
fundamentally undermine the principles
that have made the Internet such a
success"
Vint Cerf
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Some conclusions44
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Where are we now and where are we going?
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The two sides of the net
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The two sides of the net - 1
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Free services
The end of the privacy”
We stop paying in cash, but in information about ourselves The citizen as a consumer
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The two sides of the net - 2
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Every information at our fingertips
…. but unreliable”
“The distinction between trained experts and uninformed amateurs becomes dangerously blurred, truth becomes a commodity to be bought, sold, packaged and reinvented “ (A.Keen)
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The two sides of the net - 3
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Individualized assistance
The “filter bubble””
The variety of information is reduced by filtering algorithms, which filter away what we and our social network do not "like”“Imagine a world where you never discover new ideas” (E.Parisier)
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The two sides of the net - 4
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Freedom ofexpression
Ease of control”
Our opinions can be easily monitoredE.g. E.Snowden case
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The two sides of the net - 5
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Augmentedsocialization
Social interaction overload300 ml photos shared daily on Facebook
The “dictatorship” of notification systems”
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The two sides of the net - 6
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Powerful cognitive
augmentation
Unknown cognitive reshaping ”
“Is Google making us stupid?” (N.Carr)
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The two sides of the net - 7
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The quality of access
The end of the “net neutrality””
What we access online is regulated and filtered by complex, multi-sided market agreements
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The two sides of the net - 8
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The rapid growth of technological
innovation
Job loss
“The effect of today’s technology on tomorrow’s jobs will be immense – and no country is ready for it” (The Economist, Jan 2014)
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It is a difficult world, take care of it!