Sex drives the Internet
Uncomfortable as it might be to some readers, there are good reasons to believe that adult entertainment (sex!) is one of the main drivers in the development and diffusion of technology.
Johnson (1996) argued that the availability of adult movies on VHS was a key factor in the early growth of the market in home video recorders; Mearian (2006) suggested that the success of the Blu-ray high-definition DVD format over the rival HD-DVD format could be put down in large part to the adoption of the Blu-ray format by adult entertainment studios. The growth and development of the Internet too, at least in some phases, has been bound up with the demand for and supply of pornographic images and video sequences. During the first phase of the commercialisation of the Internet in the 1990s huge numbers of websites sprung up around the world purveying pictures and video clips of sexual activity. Bill Tancer of Hitwise notes (in Tancer (2008)) that "sex" is one of the commonest search terms on the Internet, reporting that a Google search on the word in the summer of 2007 produced 445 million entries (admittedly some of the sites found might have been related to sex education and health rather than "raunchy" material). And much of the huge volume of spam that clogs up e-mail traffic is sex related, either attempting to direct you to pornographic material, or seeking to sell you Viagra. While it is difficult to know how much of the diffusion of webcam technology can be attributed to the establishment of web sites by amateur web cam girls, they were certainly amongst the early adopters of this innovating technology. The spread of broadband Internet access, offering high-speed data transfer to replace dial-up ISDN connections, may also have been driven to some extent by those wanting access to online adult video material. Edelman (2009) makes this point in his recent Journal of Economic Perspectives paper. He notes that in June 2008 broadband users outnumbered narrowband users by a factor of 18 to 1 at sites that comScore classifies as “adult”.
Edelman’s paper is interesting because he has managed to obtain (anonymous) subscription data across the United States for a top-10 online adult entertainment provider. The figures go right down to zip code level, and after adjusting them so that his dependent variable is the share of subscribers per 1000 householders with broadband, he is able to use regression analysis in which variables such as income, age, education, as well as other variables to represent the influence of religious beliefs, marital status and urban (or otherwise) location, are tested for their statistical relevance. Income has a positive effect on subscription rates, as does location in an urban area (after controlling for broadband access). Subscriptions are higher amongst the young (15-25 year olds) and lower for the old (over 65 years old) Subscriptions are higher in locations with a higher proportion of the population who are college graduates, although this effect is dampened when there is a high proportion of people with (post) graduate degrees. Although the coefficient of the religious convictions variable has the expected sign (negative), it is not significantly different from zero (it has a probability value of 0.848). However, overall the rate of adult entertainment subscriptions across the states is pretty similar and there appears to be no evidence of a major divide.
References
Edelman, B (2009)
Red light states: who buys online adult entertainment? Journal of Economic Perspectives Volume 23, Number 1 (Winter) pp209-220.
Johnson, P (1996)
Pornography drives technology: why not to censor the Internet. Federal Communications Law Journal Volume 49 Number 1 pp 217-216
Mearian, L (2006)
Porn industry decide battle between Blu-ray, HD-DVD. Computerworld May 2nd.
Ropelato, J (2006)
Internet pornography statistics. Tancer, B (2008)
Click: what millions of people are doing online and why it matters. Hyperion Books, New York.
Internet equations
A few recent articles about the web and the Internet can be neatly summarized in equation form. See if you can guess what these articles are about from their equations:
Web = Internet + HypertextAlexander G. Higgins
CERN Scientists Toast Web's 20th
TechNewsWorld 17th March 2009
http://www.technewsworld.com/story/66522.html
Digital = Free (to all intents and purposes)
John Naughton 23rd March 2009
http://memex.naughtons.org/archives/2009/03/23/7076
IBM + Sun: Bad for FOSS?Katherine Noyes
Linux Insider 23rd March 2009
http://www.linuxinsider.com/story/66582.html
Some comments for my new group of students
When I start teaching a new group of students about the Economics of the Internet and the Digital Economy I like to pick out some recent news stories and try to relate them to topics we will be covering on the course.
The first topic that we look at is the general pattern of the growth and development of the Internet itself. I emphasise that although the Internet has been around since the late 1960s (Vint Cerf has given the official birth date as 2nd September 1969 - see [1]) it was only in the mid-1990s, with the development of the World Wide Web and its easy to use browser interfaces, and the opening up of the Internet to commercial uses, that the Internet really took off. Network externalities then meant that once there was a critical mass of Internet users, growth was very rapid indeed. Internet usage figures for June 2008 (Source: InternetWorldStats.com - see [2]) show that nearly one and a half billion of the world’s population of about 6.7 billion people are Internet users – that’s a penetration rate of nearly 22%. Of course penetration rates vary considerably between countries (one manifestation of the so-called “digital divide”). There were plenty of headlines last month when it was confirmed that China had overtaken the United States as the country with the greatest number of Internet users; there are now about 298 million Internet users in China compared with 223 million users in the US. The growth in the number of Internet users in China is worthy of comment – the figure represents a growth of around 42% on the previous year – but the penetration rate in China is quite close to the world average, at 23%, compared with about 73% in the US. (See BBC [3] and Pew Internet and American Life Project [4] for details]. One other point to note about the figures for China is that 117.6 million of Internet users there access the Internet from mobile phones. This mode of access to the Internet is indeed gaining ground around the world and offers hope to people in some underdeveloped countries where there is limited landline and cable infrastructure for Internet connections.
Here in the UK last week saw the publication of an interim report for the government on Digital Britain [5] – the full report is due later this year. The report is partly about the future of public service broadcasting but also discusses how the country’s broadband network can be extended and improved. About 60% of UK households now have broadband Internet access but the government wants everyone to be connected (there is talk of replacing the Universal Service Provision which has long applied to telephone services with a similar requirement for broadband access). There has been an ongoing debate about the extent to which the public sector should get involved with investment in Internet infrastructure or whether it is best just to leave these matters to the market. Things may change a bit now in the light of the credit crunch and consequent recession. Gordon Brown has recently been quoted as saying that the digital economy will play a crucial part in lifting Britain out of recession. In the US President Obama has already announced a $825 billion stimulus package which includes money to expand high-speed Internet access in rural and underserved communities.
Interestingly the recession may not be affecting eCommerce as much as the High Street. Overall online sales slowed slightly in the US in the “holiday season” at the end of last year, but not as much as retail sales generally. Amazon recorded its best ever profits in the last quarter of 2008, up 9% on the previous year at $225m (Source: New York Times [9]).
Another issue that we discuss on the course and which has remained unsettled for a number of years concerns collection of sales taxes on online purchases in the United States. In much of the world, including all the countries in the EU, online retail sales are subject to value added taxes in just the same way as they are for High Street purchases. In the United States things are more complicated, mainly because of tensions between state and federal (national) jurisdictions. Twenty-two states participate in the Streamlines Sales Tax Project which is an attempt to harmonise the rates and collection of sales taxes across the country, but in many states sales tax is not collected for online transactions, particularly when the firm selling the product does not have a physical presence in the state where the consumer lives. Since the Internet Tax Freedom Act of 1998 there have been several moratoriums announced on the implementation of online sales taxes, meaning that for many people it was cheaper to buy online than offline. This has led to a number of distortionary effects, possibly over-diverting sales to the online channel. It has also caused major losses of tax revenue to some state and local authorities who are then limited in the extent to which they can budget for public services. With a new Democratic Administration in government in the United States and even more pressures on local government funds due to the recession, things may at last change – something for us to watch.
Something else that might change is the stance of the Federal Communications Commission in the United States towards the big hi-tech companies like Microsoft. Julius Genachowski, a former Harvard Law School class-mate of Barrack Obama, has now taken over as the head of the commission and he has quite a bit of experience in working with an for Internet companies. Several commentators have speculated that he will tend to be more supportive of small newly established companies and open technology standards rather than naturally siding with the big incumbents who often want to impose their own proprietary standards. Microsoft, who have recently released version 8 of their web browser Internet Explorer and who will also soon launch Windows 7, appear to be still facing antitrust challenges form the European Union over the bundling of IE as part of Windows. Microsoft has already had to pay around a billion euros in fines to the EU, mainly over the bundling of Windows Media Player which was judged to be anticompetitive. However it may be harder to argue that consumers are prevented from making a choice in the case of browsers as Internet Explorer has lost quite a bit of its market share in recent years to alternative browsers. Net Applications figures recently had IE still dominant with about 68% market share but with Mozilla’s Firefox now with about 21%, Safari having 7.9% and Google’s new browser Chrome already with 1%.
On the course we look at the problems of spam, phishing e-mails and online fraud from an economist’s point of view. It is easy to see why there is so much spam. The cost of sending out millions of e-mails is minimal compared to the revenue that can be obtained even if there is a very low response rate. Economists have proposed various market solutions usually involving low priced e-mail “stamps” that would have little impact on legitimate e-mail (charges could even be waived if the recipient of a message confirms that it is not unwanted) but would help internalise the externalities imposed on the rest of us by spammers. The Guardian recently reported (6th January) that the Anti-Phishing Working Group (APWG) estimates that there are about 150 million phishing e-mails sent each day.
One of the things that we look at in considering firm’s strategies in the digital economy is mergers and acquisitions behaviour in the hi-tech sector. Forbes magazine recently described 2008 as the year of non-deals and noted that the value of deals that fell through exceeded the value of those deals that did go through. Prominent amongst the non-deals last year was the Microsoft-Yahoo takeover that never happened. It will be interesting to see if this is revived during 2009.
The music industry has been affected more than most by the Internet with file-sharing hitting CD sales and causing music companies initially to adopt a very heavy-handed approach in pursuing through the courts people illegally acquiring digital music files. With the success of Apple’s iPod and iTunes, legal digital downloads have now become well-established and other companies such as Amazon have tried to get in on the act. Some recent developments that we will consider on the course are Apple’s decision to drop Digital Rights Management (DRM) protection of the millions of songs available from iTunes and its policy of variable pricing of tracks (see [13]).
A big topic last year was “cloud computing” (the move towards keeping software and data on big servers across the Internet so that the end-user’s device becomes more of a terminal). Users are already accustomed to this approach with their e-mail, and many also keep their collection of photos and video clips on Flickr or MySpace. Now they can do the same with spreadsheets, word-processed and other documents, allowing access from multiple points on the Internet which has advantages for people on the move or who wish to give shared access to files. The key to this as a commercial success, as with many online services, has been advertisements, especially contextual ads that target those likely to have an interest in the products being advertised. Google has, of course, been the big player here and it will be interesting to see what else it does in the coming year, especially as it can call upon the advice of the well-known expert on the economics of the digital economy, Hal Varian. It will also be interesting to see if, as Brad Stone and Ashlee Vance suggested in the New York Times [16], the “cloud” computing model will mean problems for Microsoft as more people switch to simple netbooks (running with Linux operating systems) to access the Internet.
Using advertising to generate revenue to support online services is not the only viable business model. If, like Wikipedia, you can get volunteer enthusiasts to provide your content for free while at the same time picking up donations to cover your core costs you can operate without advertising or the need for subscription or pay-as-you-go fees; Wikipedia raised about $6.2 million in 2008 including $3 from the Alfred Sloan Foundation (source: Associated Press, 2nd January 2009 ).
Another site that depends on user-generated content is the social networking site Facebook. As it celebrated its firth birthday last week it was reported that it has now overtaken MySpace with 150 million active users (compared with 130 million users). Facebook does depend on advertising revenue and market research company eMarketer is predicting that Facebook’s US advertising revenue will fall by 20% this year to $208 million. What will founder Mark Zuckerberg do with Facebook? Is there a long-term business strategy, or will he sell it on to a bigger company?
References
[1]
A Brief History of the Internet, version 3.32, Vint Cerf et al, The Internet Society (ISOC) Last revised 10 Dec 2003. http://www.isoc.org/internet/history/brief.shtml
[2]
World Internet Users and Population Statistics. http://www.internetworldstats.com
[3]
Surge in Chinese internet users. BBC News 14th January 2009
http://news.bbc.co.uk/go/pr/fr/-/1/hi/world/asia-pacific/7827765.stm
[4]
Degrees of Access, Susannah Fox and Jessica Vitak, Pew Internet and American Life Project, July 2008 http://www.pewinternet.org/PPF/r/251/presentation_display.asp
[5]
Digital Britain: The Interim Report. Cm 7548, Department for Culture, Media and Sport and Department for Business, Enterprise and Regulatory Reform. http://www.culture.gov.uk/
[6]
Plans target Digital Britain push. BBC News 11th January 2009. http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/7857402.stm
[7]
Mixed reaction to digital plans. BBC News 29th January 2009
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/7858946.stm
[8]
Broadband ‘in every home by 2012’ BBC News 29th January 2009 http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/7858498.stm
[9] Technology Gets a Piece of Stimulus. Steve Lohr, New York Times 26th January 2009
[10] Profit rises at Amazon as shoppers seek deals. Brad Stone, New York Times, 30th January 2009
[11] Buying on Web to avoid sales taxes could end soon. Rachel Metz, Associated Press, 13th January 2009.
[12] Facebook clocks fifth birthday. Maggie Shiels, BBC News 5th February 2009. http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/7868403.stm
[13] Apple drops DRM copy protection from millions of iTunes songs. Bobbie Johnson, The Guardian 6th January 2009 http://www.guardian.co.uk/technology/2009/jan/06/apple-drops-itunes-copy-protection
[14] Microsoft is accused by EU again. BBC News 17th January 2009
http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/7834792.stm
[15] EU aims to sever IE, Windows link. Erika Morphy E-Commerce Times 19th January 2009
http://www.ecommercetimes.com/alert/65887.html
[16] $200 laptops break a business model, Brad Stone and Ashlee Vance, New York Times, 25th January, http://www.nytimes.com/2009/01/26/technology/26spend.html
China, the mobile web, Google Chrome and the future of the Internet
This will be the first Economics and the Internet blog to be read by most of the students who have just enrolled on this year's Internet for Business Economists (IfBE) module at the University of Surrey. I usually try to enthuse a new batch of students by picking out some current developments that connect with some of the topics they will be studying.
An obvious starting point this time is the news that China has overtaken the United States to become the country with the greatest number of Internet users. (This will be particularly interesting to those students on the course who come from China.) According to the Economist (2008b) there are now over 250 million Internet users in China. John Markoff, writing in the New York Times, (Markoff, 2008) had earlier reported that China overtook the US in June. He notes that there are economic forces driving this trend, as China and the other fast growing economies invest in the nation's infrastructure. Of course in terms of Internet penetration (the proportion of that population using the Internet) China has a long way to go. A report in the Economist in January 2008 (Economist, 2008a) gave a figure of 16% at the end of 2007 for China compared with around 70% for the USA.
Not only is the geographical pattern of Internet use shifting, but so too is the mode of access. As the September Economist article reports, 29% of Internet users in China (over 73 million people) use mobile phones to go online. And, according to the China Internet Network Information Centre, this is where the growth in Internet access is mainly coming from in China (it rose by 45% in the six months up to June). This shift of focus towards mobile access is one of the most important Internet trends, and it will no doubt affect the way that many web sites are structured for delivering information to users. The Economist article also discusses the potential for mobile banking and mobile phone based payment systems. But the main point that the author makes is that developing countries now have the possibility of leap-frogging the industrialised world in the era of the "mobile web".
Another interesting development this month has been the launch, in beta version, of Google's new web browser Chrome. You can view a "comic book" style introduction to Chrome on the Google web site (Google,2008). Of course Microsoft's Internet Explorer still has the greatest share of users in the browser market (74% compared with the Mozilla Foundation's open-source browser Firefox which now has 18%). But once Internet Explorer had well over 90% of the market (having crushed its earlier rival Netscape). Analysts see Chrome as part of Google's strategy to take on Microsoft, with Chrome functioning not just as another browser but one designed to become the online operating system specially developed to support the growing number of "Software as Service" web-based applications. Google itself has a number of these in its Google Apps suite - a spreadsheet, a word processor etc - which enable users to create files to be stored on Google's servers. This approach enables file sharing from anywhere on the Internet, not just on a local network - a big advantage in the Web 2.0 era where collaborative projects are so important.(Another term that you will come across in these discussion is "cloud computing" which is about giving companies access to computer power and programs not on their in-house servers but on computers around the world that are connected to the Internet.) If users can be persuaded to use these online software products rather than Microsoft's desktop applications then Google can really challenge Microsoft's position. Users would need only a very basic operating system on their PCs - perhaps an open-source product rather than Windows (which to many users is expensive and bloated).
There are many other interesting developments taking place right now, but I won't try to deal with them all in one post. Please leave a comment and come back again!
References
- The Economist (2008a) Alternative Reality, 31st January.
- The Economist (2008b) The meek shall inherit the web, 4th September
- John Markoff (2008) Internet Traffic Begins to Bypass the US, New York Times 30th August
- Google (2008) Chrome
Where for Yahoo?
Back in February I wrote on
this blog that on my Economics of the Internet course "..every new day brings the possibility of change. I never know when I switch on my radio in the morning, or go online to check for the latest news, what important new development might have occurred overnight; for example what has been the latest twist in the ongoing battle between Microsoft and Google for online dominance".
Well that certainly is the case right now as, having yesterday printed off the notes for next Monday's lecture (On Taxation and Regulation Issues) today I am faced with reports of three new significant developments.
First comes a report that Yahoo! and Google are going to conduct a two week trial in which they will be sharing some advertising space in their search results space (see BBC News (2008,1)). During the pilot Google will be able to place ads along side 3% of the Yahoo! search results. The idea is to test whether Google’s approach to search linked advertising displays is more effective in terms of raising revenue than the one currently employed by Yahoo!. Of course this has rung alarm bells with Microsoft, who have a bid on the table for Yahoo! of $44.6 bn. Should the link between Yahoo! and Google become more permanent and extensive, it could give the alliance, in which Google would be the senior partner, control over 90% of the search advertising market. Such an alliance would, of course, first have to be approved by competition regulators – something that seems unlikely. But industry analysts interpret this announcement less as the forerunner of a permanent link between Yahoo! and Google and more as a tactical move to force Microsoft to up its offer if it wishes to take control of Yahoo! Google has an interest in preventing the acquisition of Yahoo! by Microsoft.
Yahoo! executives would prefer a solution that retains some degree of independence for the company, but it is also reported that they are also in discussions with Time Warner’s AOL about a possible merger (see BBC News (2008,2)). The BBC News report says that Time Warner would make available cash to the value of 20% of the merged firm so that Yahoo! could then use this money to buy back some shares. Meanwhile it is also reported that Microsoft could be joined by Rupert Murdoch’s News Corporation in a joint bid to acquire Yahoo! (see BBC News (2008,2) op cit. and Sorkin and Helft (2008)). News Corp. of course already owns MySpace. Microsoft has HotMail and MSN, so as Sorkin and Helft note, such a deal would create a new “Internet landscape”. But, say Sorkin and Helft, we should not yet rule out the possibility of a separate News Corp – Yahoo! link up without Microsoft. Hansell (2008) wonders whether Microsof should ignore Yahoo and try to buy AOL and MySpace? Whatever the eventual outcome, it seems to me that Yahoo! has been right to resist the initial bid by Microsoft (see also the views of Business Week writer Catherine Holahan ( Holahan (2008)).
References
- BBC News (2008, 1) Google and Yahoo to share web ads. BBC News 9th April 2008.
- BBC News (2008, 2) Microsoft and Yahoo ‘seek allies’. BBC News 10th April 2008.
- Desmond, M (2008) Micro Who? Google Rules The Ad Roost Forbes magazine, 13th April 2008.
- Hansell, S (2008) Is Yahoo the Odd Man out? New York Times 10th April 2008
- Holahan, C (2008) Is Yahoo right to resist Microsoft? Business Week 8th April 2008
- Levy, A (2008) Yahoo Says Ad Program Still Priority Amid Google Test Bloomberg.com, 12th April 2008
- Regan, K (2008,1) Microsoft nearly done asking nicely. E-Commerce Times 7th April 2008
- Regan, K (2008,2) Yahoo Pulls Together Rebel Alliance. E-Commerce Times 10th April 2008
- Sorkin, A R and Helft, M (2008) News Corp. may join Yahoo bid with Microsoft. New York Times 10th April 2008.
