Monday, February 27, 2006

The price of being online

It has never been easier to check the prices of products online, either by checking on retailers' web sites directly or by making use of price comparison tools such as Froogle or Kelcoo. Where can I get the cheapest flight to Athens in July or the best value mp3 player?

But a curious paradox is that one thing that it is quite hard to check on is the price of being online (Internet access ). Kelcoo does give comparative figures for broadband access in the UK - you can compare what is available in different price ranges (£10-20 and £20-£0 per month) or by download speed (512K, 1 Mb, 2Mb or 8Mb) - but of course there are a number of complications. Some offerings have a set up charge, some have a monthly download cap (ranging from 1Gb to 30Gb). Most packages bundle Internet access with other services, in themselves often desirable (e-mail accounts, spam filtering and blocking services, free web space, parental control tools etc.) but making it hard for users to work out the true cost of Internet access itself, as opposed to all the other add-ons. Then there are a couple of other things to look out for with this kind of subscription service. Lock-in and price discrimination against existing users. You might find that new users are being offered the same package that you have, but at a lower price.

These are some of the things that I look at in the lecture on Internet access pricing on my course on the Economics of the Internet at the University of Portsmouth. I start by considering why these days most Internet access services are based on a flat-rate charge. You will pay the charge whether or not you actually use the Internet during the month - you don't get a refund if you go away on holiday and don't use your home Internet connection. And you don't have to pay more to use the Internet at peak times when everyone else wants to use it than in the middle of the night when there is little if any congestion. What happens instead is that you may find that congestion slows down response speeds at peak times and you get in a queue with others who are also trying to gain access to scarce bandwidth.

A number of economists have argued that we should have some kind of "smart market mechanism" or "responsive pricing" scheme that would make users pay more at peak times to compensate for the negative externality that is imposed when you crowd out other users. As long ago as 1993 Mackie-Mason and Varian made a case for smart pricing which would take account of the "marginal congestion cost". But as Greenstein (2001, 2004) notes, such schemes have typically remained interesting theoretical proposals rather than practical propositions. In practice there are a number of reasons why both consumers and ISPs prefer flat rate charging systems. From the consumer's point of view a flat-rate charging system makes it relatively easy to make comparisons between different providers (although I argue above that it often turns out not to be as simple as it sounds, it would be a lot more difficult to make comparisons if some charges incorporated peak rate premiums). With a flat-rate you know in advance what you have to pay and so you don't need to worry about keeping track of how long you have been online. Providers too know in advance what their revenue stream will be and there is no need for them to monitor use or issue complex bills. Of course this kind of flat-rate pricing isn't limited to Internet access. As Odlyzko (1999) reminds us the Paris Metro has a similar pricing system. You pay the same for a ticket for a short journey or a long journey.

It can also be argued that consumers do have a choice between slow and limited dial-up services and high-speed always on but more expensive broadband services. Someone who only wishes to use e-mail and do a bit of web-browsing may be happy enough with the former type of service, while someone who wants to view video clips or regularly download large files would need the latter type of service.

Which brings us to what might at first be considered the strange recent decision by AOL to offer boadband and dial-up services for the same price to its subscribers in the US [see Jesdanun, E-Commerce Times 23rd February 2006]. Indeed from early March AOL is increasing the price for dial-up subscribers to the same fee that broadband users must pay. Clearly they are more interested in driving dial-up users onto broadband than gaining any benefits from segmenting the market and maximising their subscription revenue. The reason for the push is that there is evidence (from the Pew Internet & American Life Project) that broadband users spend more time online than dial-up subscribers. And AOL can get more money from advertisers if the advertisers feel that they are reaching a bigger audience and with greater regularity. So we must remember that the ISP's business model isn't just about getting the maximum number of subscribers, or even the maximum amount of subscriber revenue. It is about extracting the maximum total income from all sources (subscribers and advertisers).

An interesting footnote to the new AOL pricing strategy is that AOL will permit those subscribers who don't want broadband to continue on a lower-priced dial-up scheme - but as Anick Jesdanun notes, they are not advertising this option and unless dial-up subscribers specifically request that they have this type of subscription they will automatically be switched to the new more expensive service.


[1] Greenstein, S (2001) Pricing Internet access. IEE Micro 5-7. April pp5-6.
reprinted in Greenstein, S (2004) Diamonds are forever, computers are not. Economic and Strategic Management in Computing Markets. Imperial College Press/WorldSci Books.
[2] Mackie-Mason, J K and Varian, H R (1993) Pricing the Internet. Paper presented at the conference "Public Access to the Internet", JFK School of Government and in Kahin B and Keller J (eds) Public Access to the Internet, MIT Press, Cambridge MA.
[3] Odlyzko, A M (1999) Paris Metro pricing for the Internet. In Proceedings of the ACM Conference on Electronic Commerce (EC-99) pp140-147.

Other links

[1] Anick Jesdanun, AOL to charge same prices for dial-up, broadband E-Commerce Times, 22nd February 2006.
[2] Guy Judge, Web page for The Economics of the Internet (ENET) course .

Tuesday, February 21, 2006

Internet statistics

A question that I am often asked by students is "Where can I find statistics on the use of the Internet?" This question, of course, really needs more precision. What is it, exactly, that you are looking for, and why?

Are you looking for figures on the number of people with Internet access in different countries or regions, perhaps to inform debate about the "digital divide"? Even here you might want to distinguish different forms of Internet access (e.g. broadband versus dial-up, access at home, or at work or via an Internet cafe or public library). You must be careful to be clear about the exact definition of any series that you obtain. The number of active Internet users, for example, is not the same as the number of users with Internet access at home.

Or perhaps you are looking for time series data so that you can chart the growth of the Internet over the years. As well as the number of Internet users you might want information on the number of (host) computers attached to the Internet, or the number of web pages, or the value of e-commerce sales. Again you must be very careful with your definitions. There may be other factors to consider too. Zook (2000) argues that we should be careful in using the number of hosts when discussing the growth of the Internet. He points out that this measure includes both company (and other organisation web servers) and personal computers that are linked to the Internet. There is a danger in failing to distinguish between the supply side (companies putting information up on the web) from the demand side (individuals trying to access the information). He prefers to look at the number of registered domain names as this better reflects the growth on the supply side. For those attempting to track the growth of the use of the Internet in individual countries Zook reminds us that companies are increasingly using generic top level domains (such as .com and .net) rather than those relating to specific country top level domains (eg.

Internet statistics of different kinds are produced by a variety of organisations, ranging from official national statistics offices such as the Office for National Statistics in the UK or the Department of Commerce in the US (part of the US Census Bureau) through to private research and consultancy firms such as Nielsen//NetRatings and Point Topic.

Other places to find Internet statistics include regulatory bodies such as Ofcom (in the UK) and international bodies such as the United Nations.

Sometimes you will get useful little "factoids" as part of a story on a news organisation web page - I have listed a few examples below.

Whereever the information comes from remember not only to check the definitions, but also to consider the methodology behind the data collection and the reliability of the group putting out the figures.

[1] Kiiski, S and Pohjola, M (2002) Cross-country diffusion of the Internet. Inforamtion Economics and Policy. Vol 14 Issue 2 pp297-310.
[2] Zook, M (2000) Internet metrics: using host and domain counts to map the Internet. Telecommunications Policy, Vol 24 Issues 6-7 pp613-620.

[1] Official UK Internet statistics from National Statistics Online
[2] US E-Commerce Sales data from the US Census Bureau
[3] Internet Domain Survey Host Count form the Internet Systems Consortium.
[4] Internet Usage Statistics by Continent from Internet World Stats.
[5] DSL Broadband Internet Subscribers - Top 20 Countries from Internet World Stats.
[6] Internet Trends and Statistics from ClickZ Stats
[7] Internet usage trends form the Pew Internet & American Life Project.
[8] Point-Topic.Com (Detailed tables and reports require subscription)
[9] Nielsen//NetRatings (Detailed tables and reports require subscription)
[10] UK Broadband connections from OfCom.

A few other "factoids"
[1] Technorati, a firm that tracks Weblogs or "blogs" says that there are now 27.2 million of them. [Source: "Blogosphere growing, but is anybody reading?", Jennifer LeClaire, TechnewsWorld 9th February 2006.]
[2] 420 million single tracks legally downloaded in 2005. [Source: IFPI Digital Music Report 2006 discussed in "Digital downloads top $1 billion worldwide", Jennifer LeClaire, TechnewsWorld 21st February 2006.
[3] By 2100 the Internet will influence nearly half of retail sales (in the US). [Source: JupiterResearch, relayed by K C Jones in InformationWeek , 6th February 2006.]

Tuesday, February 14, 2006

China and the Internet

This week I welcome a new group of students who have chosen to take my course, The Economics of the Internet, at the University of Portsmouth. As a large proportion of the students are from China it would seem appropriate to take a special look at the Internet in China. Unfortunately we must also mention some issues of privacy and censorship and the stance taken by some of the biggest Internet companies, especially Yahoo! and Google.

Let's look first at the number of Internet users in China. In the list of countries ranked by the total number of Internet users China now stands in second place, behind the USA. A round figure estimate is 100 million people (source: [1]). Of course as a proportion of the total population (which is somewhere around 1.3 billion) this still represents a small minority of the people (rather less than 8%). However the number of people in China connected to the Internet is growing rapidly, and a report produced by the market analysis company Panlogic predicts that by the year 2008 China will overtake the USA in terms of the number of Internet users (see [2]). However the Panlogic report also notes that most people in China don't have direct access to the Internet at home or at work - instead they connect to the Internet via one of the many Internet cafes. Internet access at the moment is very much of an urban phenomenon and is clustered mainly around the country's three main cities on the east coast of the country.

Chinese people use the Internet mainly to keep in touch with friends and family, or to get the news. E-commerce is still relatively underdeveloped in China. The Panlogic report says that credit cards are still quite rare and most people still prefer to pay for goods in cash. However this is gradually changing as more foreign banks open branches in China.

One area of activity on the Internet where there has been dramatic growth in China is the online games market. A year ago reported that in 2004 over 20 million of China's Internet users were online games enthusiats. [3] A more recent report [4] gives the total number of online games players in China as 26.34 million for 2005, generating in revenue as much as 1 billion yuan (around US$120 million).

Privacy and censorship. Now let's turn to the controversy about the behviour of some of the major US Internet companies as they have sought to expand into the potentially very lucrative Chinese market. Perhaps the strongest criticism is reserved for Yahoo! over allegations that the company supplied the Chinese government with information that led to the conviction and imprisonment of two Chinese men who have been critical of Chinese government policy (see [5]..[9]).

According to these reports Yahoo! provided details to the Chinese authorities on the author of various postings that criticised the government and the way that it has dealt with accusations of official corruption. The information led to the identification of the man, Li Zhi, who was later charged with subverting state power and sentenced to 8 years in prison. Last year Yahoo! was also accused of providing information to the Chinese authorities which led to the imprisonmnet for 10 years of the Chinese journalist, Shi Tao. Yahoo! says that they only complied with what they were legally obliged to do.

Google has also come under fire for censoring its search services in China - a compromise which it feels has been forced on it by the Chinese government (see [1]..[20]). The site restricts access to terms that are sensitive to the Chinese government, such as Tiananmen Square (the site of the 1989 massacre when troops with tanks attacked protestors) and Taiwan (the independent country that China still regards as part of its territory). Although Google has been heavily criticised by such groups as "Reporters Without Borders" and the "Free Tibet Campaign", BBC commentator on Internet matters Bill Thompson believes that the company made the right decision and applauds what he calls their "constructive engaement"(see [13]). He notes that the new Chinese language service lets users know if their search results have been restricted, something that wouldn't have happened if the filtering was being done by the Chinese government itself. And in the New York Times, Tom Zeller describes how determined Internet users in China can evade restrictions by the use of proxy servers and anonymous communication networks [16].

Let's finish with some reports on areas where China is making a positive contribution to the future of the Internet. Back in April 2004, as a concession during wide-ranging trade talks with US government officials, the Chinese government agreed to drop its own standard for wireless technology and move to the standard being used by most of the rest of the world [21]. The adoption of common standards in Internet technology is one of the key reasons behind the rapid growth of the Internet, which is then able to function as one integrated interconnected network instead of a set of smaller parallel networks.

Last month China and the European Union signed a joint statement relating to strategic cooperation on the development of high-speed network infrastructure [22]. And China is making special efforts to upgrade its networks to broadband standards {24]. Beginning later this year 18 provinces in the south and 8 in the north will have their Internet links upgraded.

[1] 100 million go online in China. BBC News 28th June 2005.

[2] Chinese 'to overtake US net use'. BBC News 20th January 2005.

[3] Online games soar in Internet-mad China. ChannelNewsAsia.Com 15th February 2005.

[4] Internet games on the rise. ChinaView.Com 12th January 2006.

[5] Chinese man 'jailed due to Yahoo'. BBC News 9th Febraury 2006.

[6] Yahoo! in second Chinese dissident rumpus. The Register 10th February 2006.

[7] Fresh US outrage ahead of China Internet hearings . Reuters, via C| 10th February 2006.

[8] Yahoo grapples with online rights. Tom Zeller Jr. New York Times. 13th February 2006.

[9] Firms face moral dilemma in China. Jane Wakefiled, BBC News 7th September 2005.

[10] Google censors itself for China . BBC News 25th january 2006.

[11] Google move 'black day' for China . BBC News 25th January 2006.

[12] Version of Google in China won't offer E-Mail or Blogs. David Barboza. New York Times. 25th January 2006.

[13] Why Google in China makes sense . Bill Thompson, BBC News 27th January 2006.

[14] Google says China decision painful but right. Ben Hirschler, Reuters. 25th january 2006.

[15] So Long, Dalai Lama: Google Adapts to China. Joeseph Kahn, New York Times, 12th February 2006.

[16] How to outwit the world's Internet censors. Tom Zellner Jr. New York Times, 29th January 2006.

[17] Microsoft opens up censored blogs. BBC News 2nd February 2006.

[18] China Tightens its Restrictions for News Media on the Internet. Joseph Kahn, New York Times, 26th September 2005.

[19] Chinese expert says Internet can't be controlled in China. The Star Online 22nd November 2005.

[20] Internet a voice China can't quiet. Patrick Casey. Associated Press 22nd November 2003.

[21] China is praised for preserving global wireless standard . Elizabeth Becker. TechNewsWorld 23rd April 2004.

[22] China, EU cooperate in developing next generation Internet . People's Daily Online 13th January 2006.

[23] Chinese revolution turns hi-tech Spencer Kelly, BBC News, 6th January 2006.