Guy's Economics and the Internet Blog

Internet 2010 numbers

2011-01-13T09:39:00.001Z

The website Royal Pingdom has published a whole range of Internet stats for last year.

royal.pingdom.com/2011/01/12/internet-2010-in-numbers/

Economists and the Internet

2010-11-24T13:25:00.004Z

Hal Varian isn't the only economist working for an Internet company - see this story
Google, Yahoo, other Silicon Valley tech giants add economists to arsenal by Mike Swift of mercurynews.com.

The economics of online porn

2010-08-05T12:37:00.002+01:00

Gilbert Wondracek and some of his colleagues have written a very interesting paper on the economics of the online "adult industry". In conducting their research they even set up two of their own adult web sites so that they could gain a deeper understanding of how the industry operates. As they say, it is perhaps surprising that the sector hasn't been analysed much by economists, given that pornographic pages account for more than 12% of the total number of web pages with anuual revenues estimated to be between 1 and 97 billion USD. The paper distinguishes different types of players in the market, ranging from content providers, specialist search engines to redirector services and traffic brokers. It also examines security and cyber-crime issues.

Wondracek has also produced a podcast on the topic.

John Naughton's Everything you ever need to know about the internet

2010-06-22T09:41:00.002+01:00

John Naughton, a professor at the Open University who also writes a regular weekly column for the Observer, has this week produced an extended piece for that newspaper on the development of the Internet. He has put it together under 9 key points.
The internet: Everything you need to know.

Visualising the Internet

2010-03-19T13:28:00.002Z

The BBC has a nice set of slides showing how the Internet works under the heading SuperPower: Visualising the internet.

Debating the Digital Economy Bill

2009-11-27T10:41:00.002Z

A musical contribution from Dan Bull may be found on
The Spectator web site

The Internet at 40

2009-10-23T17:01:00.002+01:00

Today's Guardian newspaper has a special supplement "The Internet Turns 40" (also available online). Excellent stuff. I just wish that they would make sure that they refer to it as the Internet (with a capital I) and not the internet (lower case i). It is not any old internet, it is THE Internet. But then they call their own newspaper "the guardian". Stupid style guide!

Global Internet map

2009-08-05T09:46:00.002+01:00

TeleGeography has a nice online Global Internet map

Deal, no deal

2009-04-15T16:43:00.002+01:00

Google-Twitter?

A story in the ECommerceTimes says that Google is close to making a bid for Twitter - at a cost of around $250 million - see Richard Adhikari, Loud Whispers Hint at Google-Twitter Deal 3rd April 2009.

IBM not buying Sun Microsystems after all

The New York Times reports that IBM has withdrawn its offer to pay $7 billion to takeover Sun Microsystems - see Steve Lohr and Ashlee Vance, IBM withdraws $7 billion offer for Sun 6th April 2009.

Some recent numbers

2009-04-15T16:29:00.002+01:00

Spam

A recent Microsoft security report indicated that more than 97% of all e-mails sent are unwanted (spam) - see
Darren Waters, Spam overwhelms e-mail messages. 8th April 2008.

Facebook

There are now over 200 million Facebook users worldwide - see Barabara Ortutay, Facebook Nation Tops 200 Million 9th April 2009.

Sex drives the Internet

2009-03-27T15:35:00.007Z

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

2009-03-25T17:37:00.004Z

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 + Hypertext
Alexander 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

And here is yet another (September 2009)
The 'Web Squared' Era
Tim O'Reilly and Jennifer Pahlka
Forbes.com
24th September 2009
http://www.forbes.com/2009/09/23/web-squared-oreilly-technology-breakthroughs-web2point0.html?partner=alerts

Bhagesh's blog workshop

2009-02-12T16:29:00.002Z

This post is being written during a special Web 2.0 workshop being run by Bhagesh from the Economics Network.

He has just announced his claim to fame as being an extra in the French film La Belle histoire.

Some comments for my new group of students

2009-02-09T15:04:00.002Z

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

2008-09-16T10:43:00.008+01:00

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?

2008-04-11T14:08:00.008+01:00

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.

I've been working like a dog!

2008-02-21T12:39:00.000Z

Twice every year since 1998 (once each semester) I have started teaching a new class of students about the Economics of the Internet and the Digital Economy. It is really interesting but involves an awful lot of work. My other courses (on Mathematics for Economists and an Introduction to Econometrics) do, of course, require updates and revisions to them each time that I run them, perhaps to take on board some new tests or procedures that have been introduced, or because there is a new version of the recommended textbook or the software that is used. But these changes can be incorporated steadily and carefully planned. Publishers and software houses will let you know in advance about new products and you shouldn't really get taken by surprise.

But on my 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: the latest twist in the ongoing battle between Microsoft and Google for online dominance for example, a new contribution to the debate over network neutrality, or a new suggestion for dealing with problems of spam, online fraud and various forms of malware. The basic structure of my syllabus has to stay the same, beginning with a discussion of the history, growth and development of the Internet where we also discuss the importance of common standards and protocols and the relevance of network effects. Next we look at debates over the pricing of Internet access and use (which links up with the net neutrality argument and the problem of spam). Then we look at the growth of e-commerce, including problems of its accurate measurement. We examine the effects of the Internet on the prices of goods and services (online and offline) considering reasons why, perhaps counter-intuitively, online prices can show greater variation than the prices of goods bought and sold via traditional channels. We look at the impact of the Internet on various sectors of the economy such as the banking sector and specific industries such as the music industry and tourism. We look at implications for the labour market and international trade. Then there is an important section on business models and business strategy, covering pricing and investment policy as well as models based on securing revenue from advertising rather than directly from users. We look at mergers and acquisitions and the formation of alliances in the attempt to gain market dominance. Lastly we turn to issues of government and supra-government involvement discussing appropriate forms of regulation and taxation, and stances on innovation and dealing with different forms of the digital divide. So looking at my weekly lecture headings over the years, the titles of lectures haven't changed too much, but what goes into the lectures has often had to be revised even during the week of the lecture. As a famous American economist who studies the Internet once said “Competing on the Internet is like leading a dog’s life - it compresses seven years into every one” (Brad DeLong, 1998). That makes it a bit of a challenge for those of us who teach courses about it. But it also stops us ever getting bored by having to go over the same old stuff!

Video learning

2007-06-18T15:53:00.000+01:00

They say that a picture is worth a thousand words - so how would you value moving pictures with words - video clips ? Of course it all depends on the content, but if you are trying to learn about something it may be easier for many people to watch a video about it than just to read about it.

The current generation of students are used to viewing video clips on their mobile phones or via YouTube on their computers. For someone teaching or learning economics there is now beginning to be a reasonable library of online material out there that can help in classes (maybe just to break up the monotony of a lecture or to give a newsy illustration of a point or argument) or for homeviewing (as a less demanding alternative to reading a book or an article). And if, like me, you are teaching a course on the Economics of the Internet it is incumbent on you to provide links to some of the bast of this material.

The Economics Network of the Higher Education Academey here in the UK now has a links page to useful audio and video lecture material. Many other useful items can be tracked down via
Google and YouTube.

The BBC has an excellent selection of
online news clips and
news feeds.

But there are are other good sources too. Here are some that I think will be of particular interest to anyone interested in the economics of the Internet.

The Impact of Web 2.0 and Emerging Social Network Models. Webcast of a panel discussion at the World Economic Forum meeting at Davos in January 2007, featuring Bill Gates, Caterina Fake (Flickr) and others.
An Economic Response To Unsolicited Communication Professor Marshall Van Alstyne, Associate Professor at Boston University and a Visiting Professor at MIT discussing recent research on the application of "information economics" to fight spam.
Tim Berners-Lee discusses net neutrality
Five Forces on the Network Economy, a lecture by Hal Varian, October 1999.
Chris Anderson on 'The Long Tail'

I'll keep a longer list of videoclips on my ENET website .

User-generated content and Web 2.0

2007-03-19T15:03:00.000Z

In the last two or three years there has been a tremendous growth in the amount of user-generated content being made available via the World Wide Web. One manifestation of this has been the explosion in the number of blogs (weblogs). Another is the growth of Social Networking sites like MySpace and YouTube. Some observers have seen this as heralding a completely new phase in the development of the Internet and have referred to it as Web 2.0.

Is this really a clearly distinguishable new phase or just an evolutionary development of what we have seen before? Is it, as some skeptics allege, just a lot of marketing hype that will only lead to the creation of "Bubble 2.0" and a reun of the dot.com crash? And, whatever we think about the notion of Web 2.0, how will those sites hosting user-generated material be able to turn it into a reliable profit stream?

What is Web 2.0 ?
The term was originally coined by Dale Dougherty, an employee of O'Reilly Media, and then, after he had organised a conference on the topic, worked up into a more extensive document by Tim O'Reilly, the company's President and CEO. What seems to come across in all the discussions about Web 2.0 is that there are now many more web sites that are essentially interactive and two-way rather than static and one-way(permitting uploading as well as downloading of material).

Furthermore web applications have been developed to make it easier for users to upload their own user-generated content, or to comment and interact with content that is already there. So, for example, Google has its simple to use Blogger tool. Flickr (now owned by Yahoo) was set up to enable users to store and share photos. News media sites like BBC News encourage people to upload pictures and video clips of newsworthy items. Social networking sites like YouTube, MySpace, and FaceBook have millions of users who upload photos, video and audio clips to share with others, effectively enabling everyone and anyone to be a publisher or a broadcaster. Another key development has been the growth of wikis, websites that allow any one of a group of users to edit material on the website, that is to collaborate on the generation of material. Perhaps the most famous wiki of them all is Wikipedia, the collaborative online encyclopedia.

So the web has clearly developed as a platform. You don't have to have your own server connected to the Internet in order to place material on the web, you can just upload it through one of these web applications.

Whether this merits a label as pretentious as Web 2.0 is a moot point. Certainly contibutors to the IT industry online site The Register were virtually unanimous that it is all just hype. In a poll conducted in November 2005 few respondents accepted the idea that the buzzword had any real meaning. Most were scornful in their criticism.

Social networking
However whether these new developments deserve a special name or not there is clearly an expectation in some business quarters that there are profits to be made. Why else would Rupert Murdoch's New Corporation shell out $580 million to acquire MySpace (summer 2005) and Google take over YouTube in exchange for $1.65 billion worth of stock (October 2006). There is no doubt that they attract millions of users. MySpace has over 100m registered users (4m in UK). According to John Naughton,writing recently in the Observer newspaper, YouTube provides up to 100 million video streams every day. Successful acts like Gnarls Barkley, Sandi Thom and Arctic Monkeys have had their careers launched via their MySpace web sites.

These sites have tapped into the desire on the part of many users to share content in the form of words, pictures or videos with anyone out there who comes across it. And on the part of those who trawl through the material on these sites perhaps the appeal is similar to that which has fuelled interest in reality TV? So the owners of these sites can get huge numbers of visitors without having to create any content themselves. All they have to do is to provide the platform - the space on the servers and the web applications to process the material. This entails costs, of course, but nothing like as much as there would be if the content itself had to be paid for. It seems that, as Nat Torkington observed (quoted in O'Reilly (2005)), "..successful companies all give up something expensive but considered critical to get something valuable for free that was once expensive."

Business models
So the owners of the sites must provide storage capacity, network capacity and tools for uploading, processing and linking content but they get the content for free. How can they "monetize" it to generate profits? A number of different business models have been tried. First we had better note that some of the material on these video sharing sites is not free but provided by copyright owners. For example YouTube has done a deal with the Warner Music Group (see the BBC News story of 18th September 2006). It then made similar deals with CBS, Sony and Universal Music Group (see the AFX News story from the ECommerce Times of 9th October 2006). The YouTube business model is based on targeted advertising revenue through the Google Adsense system. But there may be limits to users' willingness to tolerate advertising. As Keith Regan notes in his piece in the ECommerce Times of 19th May last year, some MySpace pages are "drowning in advertising". This has led other sites to attempt to obtain revenue directly from users through monthly membership fees (Regan cites Classmates.com as an example).

It is still debatable though as to whether there is sufficient revenue to be generated from users and advertisers to justify the huge amounts paid out for these sites in recent years. Some commentators feel that they were over-valued.

Other issues
For the site owners The other big issue for the site owners relates to copyright concerns. If user place copyrighted material on social networking web sites will the owners of those sites get sued by the copyright holders? This is one reason why Google has been entering into deals with copyright holders like the Warner Group. After buying YouTube Google set aside $200 million just in case they found themselves suffering legal damages in relation to copyright issues. Now they face a legal challenge from Viacom who want $1 billion damages because of the display of copyrighted material.
For the users. Users might like to stop and think whether they can trust the owners of the social networking sites to look after their data. It is all very well taking advantage of the free storage and easy uploading of material to these sites, but a prime principle in data management is the separation of content and software. There is a danger that users are letting their data become too embedded in the software architecture. And what about compensation for content providers. YouTube CEO Chad Hurley indicated a move in this direction at the World Economic Forum held in Davos in Januray 2007.

Some other observations
O'Reilly (p8) makes a very interesting comment that has echoes of an important principle of economics "..users pursuing their own selfish interests build collective value as an automatic byproduct". Like any other network a social networking site does after all reflect the usual network externality effect so that the value of the network to any one user automatically increases as more users are added. But more than that, by providing a built-in process for aggregating data network owners automatically reap the added value, which comes as much from the network links as
from the content itself. Freely chosen keywords and tagging of sites by contributors enhances the value of the database.

Niche networking sites
It is not only the mass market social networking sites that can benefit from the new approach to creating and accessing content. More specialist and niche networking sites have been established, such as the gay networking site gaydar which is reported to have a million UK members. i-spark is a specialist social networking site for engineers and scientists. And Reuters has recently set up a special social networking site for the financial services community (see Lewis Page, The Register, 7th March 2007).

Where will it end?
John Naughton notes that some analysts predict that by 2010 over 70% of web content will be user-generated. This is all part of the gradual reversal of the mainstream media "broadcast model" to one where users themselves decide what is seen through a self-rating system. For example the company Digg allows users to rate videos posted on YouTube and similar sites. This provides a collaborative and democratic approach to content programming. Consumers not only create content they also directly influence what other people look.

References

Leo Benedictus (2006) I told America to eat Jaffa cakes. The Guardian, 31st May 2006. Available online
John Breslin and Stefan Decker (2006) Semantic Web 2.0: Creating Social Semantic Information Spaces. Presentation at WWW2006, May 2006. Edinburgh Available online
Curt Finch (2006) The Web 2.0 transformation. Linux Insider 27th September 2006 Available online
Dan Fost (2006) The Internet Web 2.0. San Francisco Chronicle 23rd June 2006. Available online
John Hagel (2005) What is Web 2.0? September 2005. Available online
Bobbie Johnson (2006) Search giant sets aside $200m for YouTube court cases. The Guardian 15th November 2006. Avaliable online
Guy Judge (2006) Google and YouTube. guy's economics and the internet blog. 10th October 2006.
Available online
John Lanchester (2006) A bigger bang. The Guardian. 4th November 2006.
Available online
John Naughton (2007) Writers who work for nothing: its a licence to print money. The Observer 11th March 2007. Available online
John Naughton (2007) They're interfering with TV: please adjust your mindset. The Observer 18th March 2007. Avaliable online
Andrew Orlowski (2005) What is Web 2.0? You redefine the paradigm. The Register 11th November 2005. Available online
Tim O'Reilly (2005) What is Web 2.0. Design Patterns and Business Models for the Next Generation of Software. Available online
Tim O'Reilly (2006)Web 2.0 Compact Definition: Trying Again. Available online
Lewis Page (2007) Reuters to start MySpace for City traders. The Register 7th March 2007 Available online
Viviane Reding (2006) The Disruptive Force of Web 2.0: how the new generation will define the future. Youth Forum, ITU Telecom World, Hong Kong, China, 3 December 2006. Available online
Keith Regan (2006) Six degrees of separation from profits? Making Social Networking Pay. ECommerce Times Available online
Steve Rosenbush (2006) Socializing for dollars. ECommerce Times 16th April 2006 Available online
Bill Thompson (2006)N Learning to Love Web 2.0 BBC News 27th March 2006 Available online
Tim Weber (2007) Social networking, Web 2.0. BBC blog from the World Economic Forum 27th January 2007. Available online
World Economic Forum (2007) The Impact of Web 2.0 and Emerging Social Network Models. Webcast of a panel discussion featuring Bill Gates, Caterina Fake (Flickr) and others. January 2007. Available online

Full list of social networking sites from Wikipedia.

Google - a dream or a nightmare?

2007-03-05T14:36:00.000Z

A weird thing happened to me last night. I found myself "Googling" in my dreams!

I had been watching a TV programme just before I went to bed. Something in the programme had intrigued me and I made a mental note to find out more about it next day. So the thought was there in my head and somehow it wouldn't wait for me to wake up again this morning and start up my computer. As the alarm went off I found myself mentally scrolling through what looked like Google results, trying to work out which of my hits would help me answer my question. I guess it just goes to show how much Google has already occupied so much of my life.

Google has of course already extended is activities well beyond its original search engine territory. There is its gmail service, not to mention the very blogger tool that I have used to post this piece. And then the acquisition of the social networking site YouTube. On top of that there is its free web-based Documents and Spreadsheets service.

Some people are worried about where this is all leading. John Naughton, who writes the weekly Networker column in the Observer newspaper recently noted that Google had put together its e-mail, instant messaging, calendar, word processing and spreadsheets tools into a cheap ($50 per annum) commercial package called "Google Apps Premier Edition" which it is aimed at small businesses, educational institutions and other small organisations. As Naughton says this could look good value compared with Microsoft Office, particularly if Windows licences can also be dispensed with by running the software via Firefox browser using the Linux operating system (both free). However much they might deny it Microsoft and Google are increasingly rivals and up to a point it is a good thing that Microsoft can't have everything its own way. For some years Microsoft has effectively had a monopoly in the PC operating system and office software market. Such monopolies can often lead to overpriced products and a lack of pressure to innovate.

But Naughton thinks that Google has got other plans too that could give it more control over future Internet use than Microsoft has had over local networks. Apparently Google has been purchasing huge quantities of the fibre-optic cabling that provides network bandwidth. At the same time they have been creating data centres consisting of clusters of servers both in the US and in many other parts of the world. Naughton puts these two things together and suggests that the reason for them is that Google is expecting the expansion of online video transmissions, which has been started by the success of services like YouTube, to really take off. A company that could both store and transmit the large amounts of data needed for this would be in a very strong position. And, as we have seen with Microsoft, it isn't always healthy for one company to be in such a dominant position.

On the other hand there are also some who think that Google's decision to spend a lot of money on YouTube but leave its day to day management in the hands of its founders is a bad idea that could eventually cost the company dear. What is at issue here is copyright protection and the degree to which Google can deliver on its promise to ensure that YouTube content adheres to copyright laws.

It is too early yet to say whether this will turn into a Google dream or a nightmare.

References

[1] John Naughton. Microsoft first - then Google wants world domination. The Observer, 25th February 2007.
[2] Faultine. Will Google come to regret getting involved in YouTube? The Register 1st March 2007.

Spamonomics

2007-02-27T11:33:00.000Z

Spam, or Unsolicited Bulk E-mail (UBE) to give it its proper name, is a huge problem. Spamhaus, an organisation that tracks the Internet’s worst spammers, estimated that as of February 2005 over 75% of all e-mail traffic was spam. Of course a large proportion of that never reaches people’s mailboxes because it is filtered out by ISPs and e-mail service providers. But enough of it still gets through to make it more than just a minor irritation for most Internet users. Much of it attempts to persuade recipients to buy pharmaceutical and other products that are often of dubious quality or even illegal. Some e-mails carry viruses, Trojans and other “malware” or attempt to extract personal information by directing users to websites masquerading as official bank websites (“phishing”).

Why is spam a problem? First, because there is so much of it networks can become congested. Time and resources are wasted in blocking and filtering it. It costs individuals and companies time and money to deal with it and productivity is reduced. Because of virus and phishing scares it may also have a deterrent effect on e-commerce. A number of studies have attempted to quantify the economic cost of spam. A study undertaken for the European Commission in 2003 estimated that the connection costs just to receive junk e-mails amounted to around 10 billion euros a year. Leung (2003) says that the annual cost of spam to US corporations is of the order of $8.9 billion. Costs relate not only to the time taken by consumers and businesses to delete unwanted e-mails but also the extra network capacity and file space that is needed to accommodate these unwanted messages, the cost of producing and using mail filters and blocking software and the more regular denial-of-service occurrences and network breakdowns that are caused by spam. In addition some important e-mail messages may be misclassified as spam (“false negatives”) and so never get delivered and read.

The two main approaches to dealing with the problem of spam that have been tried are legal and technological. Both can undoubtedly play a role in combating spam but in my opinion they do not get to the root of the problem which is essentially an economic one. The key fact is that it costs virtually nothing to send an e-mail message (in marginal cost terms) so a spammer can flood the system with unwanted e-mails without having to face the costs that he is imposing on the recipients of these messages. (This is an example of a negative externality – where private and social costs diverge. Spammers are either not aware of the costs that they are imposing or they don’t care about them.) Although there are some costs of maintaining an Internet presence and in creating or buying lists of mail addresses, bulk e-mails can be sent out for next to nothing. And even a very low response rate can then make it profitable. Leung estimates that the response rate to spam is as low as 0.005% - or 50 in every million people. But that is more than enough to generate sufficient revenue to make the operation profitable.

What can be done? A basic suggestion, originally strongly promoted by
Brad Templeton (the founder of the ClariNet company) is that e-mail messages should have to carry an attached electronic stamp (e-stamp). In fact the idea was originally patented by Todd Sunsted in 1999 and is supposed to deter spammers but not bona fide e-mailers. Only a small charge would be needed so it wouldn’t cost much for those who send even hundreds of e-mails a day – but it would start to add up to big money for those who send out millions.

The idea has been examined in a number of academic papers, including Kraut et al (2005) and Loder et al. (2006). As Kraut et al. note “…charging postage for mail causes senders to be more selective and to send fewer messages..” and “..charging a small price to send a message shifts the task of screening messages from recipients who don’t know the content of a message to senders who do.” Loder et al. also refer to this “information asymmetry” and propose an “attention bond” through which recipients can define a price that senders must risk to deliver a message. As many writers on this subject have noted the difficulty in designing a suitable system is in its detail. Much of the discussion has concerned who should collect the revenue and where it should go. For example some schemes suggest that recipients might wish to waive the charge for messages that they wish to receive and to donate charges levied for unwanted messages to charity.

A particularly ingenious version of an e-mail charging system is described by Scott Fahlman (2002). He talks about “interrupt rights” and argues that callers (the scheme can be applied to telephone calls as well as e-mails) who interrupt you in an effort to gain your attention should be forced to pay a price for doing so. Fahlman’s scheme allows each recipient to set their own price, so if an initial price appears not to be screening out enough calls or e-mails it can be raised. If interruptions are no longer free it should make advertisers and marketers think more carefully about targeting their messages. The beauty of Fahlman’s scheme is that it requires no new laws or special e-payment schemes as it can be attached to existing telephone and Internet accounts. And of course recipients can have a “white list” of callers for whom the charge is waived, which can be modified at any time.
Similarly there can be a “black list” which contains the addresses of anyone for whom no price would be high enough for an interruption to be acceptable. In between these extremes different prices could be set, according to how tolerable a message might be for its recipient.

As yet these schemes haven’t really taken off. Perhaps it needs more active promotion from ISPs and e-mail service providers. Or maybe just the backing of a big corporation like Microsoft. Bill Gates is certainly on record as supporting an economic approach to dealing with spam “In the long run, the monetary (method) will be dominant” he is
reported as saying one of the World Economic Forum meetings in Davos. However that was in January 2004 and at that time he also predicted that the spam problem would have been solved by 2006. It is high time that something more practical was put into place to deal with spam pollution!

References
FAHLMAN, S (2002) Selling Interrupt Rights: A Way to Control Unwanted E-Mail and Telephone Calls. IBM Systems Journal 41(4)759-766
LODER, T, VAN ALSTYNE, M and WALSH, R (2006) An Economic Response to Unsolicited Communication. In Advances in Economic Analysis and Policy, Vol 6 No 1 .
HERMALIN, B E and KATZ, M (2004) Sender or Receiver: Who Should Pay to Exchange an Electronic Message?,
RAND Journal of Economics, Vol. 35, No. 3 (Autumn). Earlier version available online
KRAUT, R E , SUNDER, S, TELANG, R and MORRIS, J (2005) Pricing Electronic Mail to Solve the Problem of Spam.
Human-Computer Interaction Vol 20 pp195-223. .

China, mobiles and a new Vista

2007-02-09T16:44:00.000Z

My blog has been “off the air” since the end of my last semester teaching at Surrey but now that the second semester course at Portsmouth on The Economics of the Internet is about to begin again it is timely to look at a few important current developments.

First, we have seen some recent figures published on the growth of the Internet in China. Information from the China Internet Network Information Center (CNNIC) show that the number of people in China connected to the Internet grew by 23.4% in 2006 taking it to about 137 million, which is about 10.5% of the population. This puts China in second place behind the United States (210 million) in terms of the number of people with online connections, and assuming that the rapid growth continues China will overtake the US in 2009 or 2010. Furthermore the majority of these are broadband connections (about 104 million). Another feature to note is that around 17 million Chinese connect to the Internet via their mobile phones – a development I return to next. There are still huge issues of censorship and government control relating to the use of the Internet in China, but however you look at it what goes on in China is going to be very important for the future of the Internet.

Turning now to the issue of the growth of mobile Internet use, according to the Mobile Data Association (reported by the BBC) UK mobile phone users connected to the Internet around 15.9 million times in December 2006. The MDA predicts that this will rise quite rapidly now as there is a large installed base of Internet-capable mobile phones that will itself grow because of improvements in pricing models. So far most connections have been for news, sport and weather updates but other applications such as music and video downloads are also increasing. People are also uploading pictures and video blogs to social networking sites such as MySpace and YouTube.

The latest 3G mobile phones are not just limited to mobile telephony and SMS texting, but can also provide digital camera and video capability, wireless Internet connectivity, radio and TV reception, GPS and even e-money functions. They are rightly viewed as multimedia devices. These changes go hand in hand with the convergence of TV, telephone (landline and mobile) and broadband Internet services and the bundling of all four services together under a single subscription by providers such as the new Virgin Media company (formed recently between NTL and Virgin Mobile). It was also interesting to see Miles Flint, the President of Sony Ericsson, arguing recently for a flat rate fee for all these combined services “Moving to flat rate charging is the key to unlocking the value of the mobile internet” (quoted in Tim Weber’s BBC report).

The appeal of flat rate charging also seems to be coming under consideration by the music companies. John Kennedy, the head of the International Federation of the Phonographic Industry, has said that he is willing to talk to ISPs about a blanket license approach, where users pay a fixed subscription charge and get in return unlimited downloads. Royalty payments and fees to copyright holders would then be passed on by the ISPs.

Finally, anyone with a computer will be very much aware of the recent launch of the new Windows Vista operating system (and Office 2007 that goes with it). Microsoft spokespeople have been busy emphasizing its benefits in terms of improved security, a new onscreen look (the Aero interface) and better 3Dgraphics (important for games and videos). But the pricing strategy has been heavily criticised (in Europe we are going to find ourselves paying about twice as much for it as our US colleagues). And it has also been criticised for renewing the problems for which Microsoft was heavily fined by the European Commission back in 2004 because it too closely ties operating system functions with those of applications. A group called the European Committee for Interoperable Systems (ECIS) – which includes IBM, Nokia, Sun Microsystems, RealNetworks, Oracle, RedHat etc. – has claimed that Microsoft is attempting to impose its own Windows-dependent standards and extend its monopoly further into the Internet. As Microsoft has still not fully complied with the earlier EC ruling this is likely to be an issue that it can’t suppress by simply going on about innovation.

References
[1] Internet Use in China Soars. Tim Gray TechNewsWorld 24th January 2007.
[2] China net use may soon surpass US. BBC News 24th January 2007.
[3] Is the web going mobile at last? Tim Weber. BBC News 17th November 2006.
[4] NTL renames itself Virgin Media. BBC News 8th February 2007.
[5] Mobile internet ‘upgrade’ launch. Rory Cellan-Jones, BBC News 16th November 2006
[6] Vodaphone, MySpace Team on Mobile Social Networking. Tim Gray, TechNewsWorld 7th February 2007
[7] Has the music industry warmed to fee-based downloads? Victoria Shannon, EcommerceTimes, 27th January 2007
[8] Vista illegal in EU, charge Microsoft Rivals. Chris Maxcer. ECommerceTimes, 26th January 2007.
[9] Can Vista reanimate the PC-based gaming market? Walaika Haskins, TechNewsWorld 8th February 2007

Innovation, intellectual property rights, patents and prizes: open-sourcing and crowd-sourcing.

2006-10-18T09:43:00.000+01:00

A recent article in the New Scientist magazine by Nobel prize winning economist Joseph Stiglitz questions the effectiveness of the patents system in delivering innovation in the modern economy. Patents are intended to grant exclusive rights to inventors for the use of their inventions for a certain period after the registration of the patent. They thus effectively provide the firm with a monoply on the exploitation of the innovation and a chance to earn profits that will allow it to recoup its R&D expenditure before other firms can get in on the act. (Of course patent holders can grant licenses for others to make use of their ideas in return for payments, providing an alternative way of recovering initial outlays.) As we all know with a monopoly there can be higher prices and lower outputs than in a competitive market. There is a danger that the monopoly power granted to a patent holder could be abused. Stiglitz notes that courts around the world have found Microsoft to be guilty of such abuse of market power.

Stiglitz argues that the patents approach to innovation carries with it another danger. Sometimes knowledge that is in the public domain but does not have specific property rights attached to it is appropriated by a company who use it as part of a patent registration and thus effectively privatise it. People find that they now have to pay for the use the intellectual property concerned when before it was free. You could argue that the fault here lies not so much with the general idea of the patents system but with the inappropriate enclosing of already established knowledge. But Stiglitz also notes that conflicting claims over patents can make innovation more difficult. Until a legal dispute is clearly resolved nobody is able to make use of an innovation which is the subject of a patent dispute. A related point was made by Carl Shapiro in a paper published in 2001. He suggested that in an area subject to rapid technological change, such as ITC, a "patent thicket" can develop where there are so many new patents being granted that it becomes difficult to keep up with what has been registered and unwitting infringements of patents can easily occur.

Stiglitz's main concern relates to the pharmaceutical sector and the harm that unreasonably stringent enforcement of patents can cause for the availability of low cost life-saving drugs for fighting diseases such as AIDs and malaria. Although patent disputes in ITC might not be so immediately life threatening they can nevertheless inhibit the very innovation they are supposed to promote. And there is another legal and regulatory issue that Shapiro has identified. Cartels, price fixing and other forms of collaboration among market competitors are rightly discouraged and regulators take legal action under anti-trust laws to penalise firms that have been found to engage in such practises. But some fledgling markets may only get established if firms work together to establish agreed standards and protocols. Such collaboration and associated research should be seen as "pro-competitive" rather than anti-competitive and encouraged rather than discouraged. Shapiro distinguishes between competitition in the market and competition for the market. Once a market has been established competition between suppliers should be rigorously enforced, but at the early stages of a market's development regulators should recognise that some forms of cooperation and collaboration where expertise is pooled are not anti-competitive.

But what other models of innovation are there? Clearly incentives must play a key role here as rational behaviour would suggest that developers of new ideas will expect some kind of return for their efforts. One idea to have found favour recenly, and one which Stiglitz feels whose time has come, is the use of prizes that can be offered in return for successful innovative ideas. As he notes this approach is not totally new - the Royal Society of Arts in the UK has been advocating such an approach for many years. But perhaps it is catching on. In his freakonomics blog with Stephen J Dubner, Chicago economist Stephen D Levitt notes that the online DVD rentals company Netflix has offered a prize of $1 million for the development of a movie recommendation system that would improve the current take up rate by 10%. Rather than just researching in-house Netflix thus effectively outsources development work - but not to a single research team but to anybody out there. Jeff Howe, writing in Wired magazine, called this phenomenon "crowd-sourcing". However it seems to me that unless a prize is publicly funded it doesn't get over the patent problem. I don't believe that Netflix plans to share any improved recommendation scheme that is developed as a result of its prize offering with all and sundry. It will surely patent the system and then let others use it only under (paid) licence. Nevertheless I'm sure that the prize offer is a useful way of developing new ideas from beyond its own research team.

There is, of course, another approach to innovation that is particularly effective in the area of ITC, namely open-source development. The Mozilla Foundation for example, is a not-for-profit organisation that exists to promote the development of open-source software. Code for software such as the browser Firefox and the new e-mail system Thunderbird is made publicly available for anyone to look at and to provide improvements and to identify bugs. In a sense here the incentive is CV enhancement - work put in on software development is not entirely altruistic as career opportunities can be improved when it becomes known that individuals have been responsible for important contributions to such projects. I guess blogs are a bit like this too!

References

Jeff Howe. The Rise of Crowdsourcing. Wired Magazine June 2006.
Steven D Levitt and Stephen J Dubner Netflix $1 million prize. Author's blog, Freakonomics.com.
Carl Shapiro. Navigating the Patent Thicket:. Cross Licenses, Patent Pools, and Standard-Setting. University of California at Berkeley. March 2001.
Joseph Stiglitz. Innovation: a better way than patents. New Scientist Issue 2569, 16th September 2006

Google and YouTube

2006-10-10T09:36:00.000+01:00

There is no question about what this week's Internet Economy news story is. It is the $1.65 billion (£880 million) acquisition of the social networking/video-sharing/ entertainment site YouTube.

According to press reports YouTube will continue to operate independently "to preserve its successful brand and passionate community". Apparently it was this reassurance (and maybe just a bit the money?!) that persuaded YouTube CEO and founder Chad Hurley to sell. In July media reports already put YouTube ahead of its rivals MySpace, Flickr and Bebo with a 3.9% share of global Internet daily visits. The deal with Google will presumably further promote the growth of the site and give it access to the Google team's technical know-how and experience. PcWorld reports that Google Video will continue to operate although one would think that in the long run it would make sense to merge its activities with YouTube operations.

YouTube is of course an example of what some writers have called Web 2.0. People who use this phrase stress that recent developments in web use have tended to involve users much more, with web sites accommodating user-generated content rather than simply displaying company material. So as well as these social networking sites like YouTube we have seen the growth of blogs, podcasts and Wikipedia. I have been rather sceptical about whether these developments constitute on their own a new phase of Internet development. But Google executives obviously think that it is worth paying a huge sum of money (well via highly valued Google shares actually) to get hold of YouTube. And the market has responded well with Google shares up by $8.50 (=2%) on news of the deal. Is this another dotcom bubble that will have to burst at some point or the genuine creation of new wealth?

Google's business model is of course based on revenue generated from personally targeted advertising. So Google will hope to generate additional revenue from adverts linked to YouTube content. There are two interesting elements to this. First, there has been an emerging market for video advertising so that what you see when you click onto an advertiser's link is not static text or graphics but a short video clip. Obviously it makes sense to put video advertising next to user generated videos. Secondly, some of the revenue generated in this way is promised to the creators of the YouTube content who attract users to their site. This extra revenue could allow content creators to be more imaginative and creative in what they do and provide an explosion of high quality content, challenging the traditional TV and movie industries even more.

There are still some problems to be faced however. There have been complaints that YouTube has aloowed pirated clips to be uploaded and so Google may face expensive copyright lawsuits. Of course some entertainment companies have already signed deals with Google - Warner, SonyBMG and Universal Music Group among them. Perhaps Google will find a way through this and set up a system where copyright holders (whether multinationals or just individuals) will get paid for what they have made as it is viewed. While Google has seen itself become a rival to Microsoft on one front now it will increasingly face a challenge from Rupert Murdoch's News Corporation. Not only is the company the owner of MySpace but it also has FoxTV as part of the global empire. Exciting times!

Links
Google nets YouTube in $1.65bn takeover Andrew Clark, The Guardian 10th October 2006.
Google buys YouTube for $1.65bn BBC News 10th October 2006.
Google swallows YouTube for $1.65bn Joe Fay and Chris Williams. The Register, 9th October 2006.
Dot-Com Boom Echoed in Deal to Buy YouTube Andrew Ross Sorkin, New York Times 10th October 2006.
Adding to the House of Google John Markoff. New York Times 10th October 2006.
Google to buy YouTube for $1.65 billion Eric Auchard, Reuters 10th October 2006.
It's Official: Google Buys YouTube Nancy Weil, IDG News Service, PcWorld.Com, 9th October 2006.
YouTube may add to Google's copyright worries Declan McCullagh. C|Net News 9th October 2006
Google signs video deal with Sony, Warner Music AFX News Limited. E-Commerce Times, 9th October 2006.
YouTube Inks Content Deal With CBS, Sony, Universal AFX News Limited, E-Commerce Times, 9th October 2006.
YouTube in 'landmark' music deal BBC News 18th September 2006.

Google video lectures - not yet properly indexed!

2006-09-27T09:06:00.000+01:00

In collaboration with Google, the University of California at Berkeley is making available lectures on a range of topics at http://video.google.com/ucberkeley.html

This is a very interesting development and there are a number of talks relating to the Internet, mainly to do with issues about search. Unfortunately several of the talks seem to have been incorrectly indexed by Google!

I have attempted to correctly align the links below.

Search advertising Hal Varian
Intellectual property and search Jason Schultz
Search engines, technology and business Sergey Brin (cofounder of Google)
User experience issues in web search Daniel Rose
Quality and search Geoff Nunberg
Web spam Marc Najork

Critical mass

2006-09-21T11:50:00.000+01:00

One of the terms that you come across in discussions about the growth of the Internet, or of Internet applications or services (for example the use of Internet telephony or the adoption of a new browser like Firefox), is critical mass. Once this critical mass has been reached there are enough customers in the market using the product or application for the positive feedback effects associated with network externalities to really kick in and for the product to takeoff. Until this critical mass has been reached there might still be doubts about whether the new product will establish itself and so potential new users may be reluctant to get on the bandwagon.

There are plenty of examples of products where this critical mass was never reached and so the product eventually failed and was withdrawn from the market altogether. An example described by Rolhfs in his book
ROHLFS, J (2001) Bandwagon effects in high technology industries is Picturephones in the 1970s. As he explains, it was technically possible to make telephones that displayed a picture of the caller on a screen, but the product never took off - critical mass was not reached. (Of course today mobile phones that take pictures are all the rage but that is a completely different type of product).

There are a number of reasons why critical mass might not be reached for a product. It might be too expensive in relation to the features that it offers for it to be attractive to buyers. Or it might have been poorly marketed. That is why economists often advise firms with new products that might exhibit network effects to keep the price low early on even if that means that costs are not covered, and to spend money on marketing and promotional campaigns to get the product talked about. So long as the product will be profitable once sales have passed a certain level then it will be worthwhile in the end. The price discounts and marketing costs can be viewed as an investment. You might even see a product given away for free in the early stages of its life as a way of pushing up its use beyond the critical mass. Once this level of use has been achieved other people will want to have it too and you can start to charge for it. There are lots of examples of software and web-based services that were given away free in this way early on but then require payment or subscription fees once it had become established.

How big is the critical mass?
An obvious follow up question that might be asked at this point is "how big is critical mass?" - either in terms of the number of users or the share of a market. There is no easy answer to this question. It depends on the size of the market and its competitiveness.
Here are some examples from recent news reports.

Firefox at Critical Mass? Jim Wagner, Internet News, 6th January 2006.
Wagner reported that Firefox had achieved a market share of 9.57% in December 2005, just under the 10% figure. He quoted Vince Vizzaccaro, executive vice president of marketing and strategic relationships at NetApplications, the company that collected the data "Firefox is very close to hitting a critical mass of 10%, which could mean a more rapid adoption rate".
US Broadband Market Reaches Critical Mass Kirsten Fischer, In-Stat Press Releases, 6th April 2004. The report says that "with close to 27 million US business and residential subscribers, broadband is now clearly a mainstream service". It goes on to mention some of the applications such as home entertainment, VoIP and online gaming that require a broadband connection and quotes Daryl Schoolarm a Senior Analyst at In-Stat "This starts a cycle where growth in both broadband and applications feed the growth of each other". This is what Rohlfs means by complementary bandwagon effects.
MP3 Players Reaching 'Critical Mass InternetWeek 13th April 2005. The story quotes JupiterResearch analyst David Card as saying that the number of MP3 players (in the US) was close to reaching around 18 million. "Historically, any new device or medium that reaches a US household penetration of 15 percent to 20 percent creates a critical mass of customers for other products and services. This is good news for digital stores and subscription music services. Subscription services and devices will fule each other's growth."

Some references to critical mass seem to imply that it is the level at which a product becomes profitable. This is not quite correct. In an established market there will be a break-even point beyond which revenues exceed costs and so the firm sells enough of its product to make a profit. This is related to economies of scale. Enough units are being sold for the fixed costs of production to be shared over many units so that average costs come down. In a new market with an untried technology the cost of production might initially be high in any case. Costs can come down as the market is established partly due to economies of scale, but also because the production process itself is likely to be improved once the firm moves beyond the pilot stage. What is correct then is that a firm will probably not be able to earn profits unless it can reach a critical mass.

Another myth is that having a big market share is necessarily going to lead to profits. As John Kay noted in his article in the Financial Times back in March 1998, the share of large firms in total output is not going up. He underlines his point by identifying the automobile industry as one which has become less concentrated over the years despite it being an industry that is often used to illustrate the importance of economies of scale, market concentration and critical mass.

Footnote: the term critical mass itself probably comes from nuclear physics. It identifies the amount of plutonium needed to start a chain reaction.

Different dimensions of the digital divide

2006-09-11T15:44:00.000+01:00

According to some recently released figures almost 60% of households in Great Britain (13.9 million) now have home Internet access (source: Internet access: households and individuals, Office for National Statistics, 23rd August 2006). This represents a big jump of around 26% since 2002 and is around 5% up on last year's figure. Moreover nearly 70% of households with Internet access have a broadband connection. To put it another way about 40% of UK households now have broadband Internet access.

It would appear that the government strategy of leaving it to the market to deal with the matter of Internet access, with government limiting its role to providing appropriate regulation via Ofcom to ensure competition, has been working. However these national figures do hide some noticeable regional variations. For example, while two-thirds of households in London and the South-East of England have some kind of Internet access at home, in Scotland and Northern Ireland the figure is closer to 50%.

The reasons for this geographical digital divide are varied. The problem of reach has now largely been overcome. At one time there was a marked urban/rural divide and this to a large part could be explained by the inability of the Internet Service Providers to provide adequate connectivity to certain places in the country. Although there are a few remote locations where Internet access is physically impossible, some kind of link either via telephone lines, cable or even a wireless network is now available to most of us. So the remaining differences must be explained by non-technical factors.

One significant factor is the age of the members of the household. The ONS report reveals that 83% of people in the age range 16-24 had accessed the Internet in the three months prior to the survey, but only 15% of those in the 65 years and over group had done so. There are gender differences too - 40% of women surveyed had never used the Internet while only 30% of men had not done so. Respondents were invited to give reasons why they had chosen not to arrange home Internet access. About a quarter of the sample stated that the Internet had no interest or value for them - and about the same proportion said they lacked the skills. It could be that these are the same people, lacking both an awareness of what can be done on the Internet and the knowledge of how to use it.

Other respondents replied that equipment and/or access costs were too high. The price of PCs and laptops has fallen substantially in recent years, and the price of Internet access is also coming down as the market expands and becomes more competitive, so there should be further scope for the proportion of households with Internet access to rise still further in the future. However household income is clearly important here. A few hundred pounds may be easily found for a PC in an affluent household but impossible to justify in a poorer one. Class and race may also be a factor. Just today I came across a report on a study in the US that found white children are far more likely to use the Internet than are black and Hispanic children. (See Racial digital divide lingers among US schoolchildren, Jennifer LeClaire, TechNewsWorld 11th September 2006).

You can find many other interesting contributions to the debate about the digital divide on the web. Here I highlight just a few. On the Ofcome website you can find a Report following the Remote and Rural Communications Symposium in February 2005. There is also plenty on the Ofcom website about the need for greater liberalisation in the telecoms market to ensure that there is an appropriate market structure to guarantee efficiency in the market.

The ISOC website links to a contribtion by Madanmohan Rao
Struggling with the Digital Divide: Internet Infrastructure, Content, and Culture. Is a progressive Internet environment enough to close the gap between North and South?
.

The Pew Internet and American Life Project provides evidence on the age dimension to the digital divide in the US - see for example Wired Seniors: A fervent few, inspired by family ties, September 2001.

Finally go to the UN's website and read what Kofi Annan wrote back in November 2002 On the digital divide.

Internet developments and enduring issues

2006-09-07T12:21:00.000+01:00

This week I welcome another new group of students to one of my Economics and the Internet classes. Since September 1999 I have been teaching final year undergraduate students on the BSc Business Economics at the University of Surrey on a module called The Internet for Business Economists. I also teach a similar module called Economics of the Internet to postgraduate students at the University of Portsmouth. As the Surrey course comes in the first semester and the Portsmouth one comes in the second semester I have to update my material twice each year, which is just as well as Internet related matters change on almost a daily basis. Brad DeLong once said (1998) that "Competing on the Internet is like leading a dog's life - it compresses seven years into every one". Things can change very quickly and there is a lot to keep track of.

The other courses that I teach also need updating each year, of course, but the changes that are needed are usually very minor. I might have to add in a couple of references to some recently published articles or a new edition of the textbook but this can usually be done at a single sitting. But with the economics and the Internet courses I might even have to change stuff in the week that I give a lecture to recognise a new advance, to acknowledge a new milestone in the development of the Internet or to incorporate the latest figures on the amount of e-commerce. If you want to keep up to date with developments it is a good idea to sign up to one or more news alert service, which comes either in the form of a regular e-mail newsletter or as a news feed such as the ones from the BBC, Google, The Register or E-Commerce Times. You can specify appropriate keywords such as Internet, e-commerce etc. if you want to narrow down what you get. Some other sources that I find it very useful to watch are the Pew Internet and American Life project, Nielsen-NetRatings, and Information Week. For links to up to date statistics see my earlier blog Internet statistics. Of course I will try to use this blog to direct you to important news that is relevant to the course.

But even though the technology may change there are plenty of enduring questions that remain the same that we shall be considering on the course. How can economics help us understand the rapid growth of technologies like the Internet and e-commerce? [See my blog on bandwagons and network effects]. Would an e-stamp help in the fight against spam? [See my blog Controlling spam via e-mail charges]. What has been the impact of the Internet on the prices of goods and services? [I have got a blog on this too.] Why not browse now through this and all my other previous blog postings to get a better idea about what economics has to say on these and other Internet issues?

Towards the iPoK epoch

2006-04-03T14:34:00.000+01:00

Last week I was commenting on the spate of mergers and acqisitions in Internet related companies, linking it in part to the convergence of technology and the excitement of moves towards "triple play" - that is the unification of (broadband) Internet, TV and telephone systems. But there was an angle that I missed really - the continuing trend towards mobile wireless platforms.

I'm not suggesting that people won't want big screen viewing of movies, sports and other TV programmes in their living rooms. Far from it - but there is a definite move towards on the move digital facilities, linked to cell/mobile phones.

Already we have seen the huge success of the iPod and Apple's iTunes online store, which recently sold its billionth song less than three years after being set up. And now "Crazy" by Gnarls Barkley has raced to the top of the UK singles chart, becoming the UK's first number one single based on download sales alone.

Maybe the attractiveness of the iPod design means that people will prefer to retain a separate device for listening to music, but mobile phone companies are hoping that they will be just as happy to download sounds to their cell phones. Given the phenomenal success of downloadable ringtones, who would bet against it?

Already you can take photographs with your mobile. You can add to that basic Internet connections, texting and of course telephone calls, making it a multi-functional device.

A recent story in the Financial Times reported that Virgin Mobile and BT are in talks to launch a mobile TV and radio service via the cell phone. The BT Movio project has already been successfully trialled and a spokesperson said that the results were "extremely positive" and demonstrated a "clear consumer demand for broadcast digital TV and radio to mobile phones". Virgin Mobile is currently the acquisition target of NTL but a takeover would not in any way delay the introduction of the Movio service, which is based upon the Digital Audio Broadcasting (DAB) network to deliver sound and pictures to mobile phones.

And three more stories about mobile phone developments caught my eye last month. First I read that already in Asia mobile phones are used as mini scanners. Once a phone has an inbuilt digital camera it is relatively easy to add in scanning functions. Then I read that PayPal is preparing to launch a cell phone payments system, allowing customers to make purchases or money transfers using simple text messaging facilities on their mobiles. Customers of the PayPal Mobile system would complete the transaction by entering their pin to give confirmation when PayPal calls them back. Lastly I read that RealNetworks regards the cell phone as an important platform in the future for online games. Adding the ability to talk to other players would significantly enhance the reality of games, particularly team games.

So there you have it. There is clearly scope for increasing the functionality of the mobile phone, turning it into what I have called an iPoK - short for "in your pocket"! I hope nobody has got a trademark on this name, which I have based on Apple's iPod and Hewlett-Packard's IPAQ. I did do a quick Google search to see if I could find this name being used anywhere and was delighted to find that I couldn't - apart from on a website discussing the supernatural beliefs of the Melanau people for whom the "ipok" are the most powerful of all beings, in control of all the world's happenings. A suitable name, I thought, for a handheld device that would give you TV, music and online games, as well as telephone calls, texting and e-mail, other Internet connections, online banking, digital photographs, scanning, and who knows what else.

Mergers, acquisitions and alliances for a "triple play" world

2006-03-29T14:25:00.000+01:00

The last twelve months has seen a spate or mergers and acquisitions in Internet related industries. Examples include the acquisition of Macromedia by Adobe in April 2005, the purchase of Skype by eBay in September 2005, the takeover of WebCT by Blackboard in October 2005 and the purchase of Friends Reunited by ITV in December 2005.

Rupert Murdoch's News Corp has been involved in several acquisitions, buying up Intermix Media (to get hold of MySpace), Scout Media (an online sports company) and IGN entertainment (an Internet games company) in the space of a few months last year. BSkyB (in which News Corp has a major stake) also acquired the broadband ISP EasyNet. Right now the telecoms equipment companies Lucent technologies (of the US) and Alcatel (of France) are in merger talks, Ericsson (of Sweden) having already acquired Marconi (of the UK) last October.

And if you add into the mix companies buying just a stake in other companies (Google bought a stake in AOL last December), or entering into partnerships or joint ventures to pursue specific projects (Virgin Mobile is going to work with BT on plans for delivering digital TV and radio to mobile phones) you can find even more interesting activity. What is this all about?

Mergers and acquisitions can take place for a variety of reasons of course. Horizontal mergers or acquisitions (involving two firms in the same type of activity) are often motivated by the drive to pool costs and derive economies of scale. In an increasingly global market this could explain some of the cross-border mergers. More cynically you might think that horizontal integration sometimes occurs because it will give the new company greater market power (over consumers in output markets or over suppliers in input markets).

Vertical mergers or acquisitions relate to the backward or forward links in the production and distribution process. In this way companies internalise the procurement of inputs and gain direct control over their design and production. Of course there have been moves in the opposite direction too, with companies outsourcing activities that have traditionally been in-house.

Mergers and acquisitions might also occur as a means of diversification into markets outside the usual area of business. This could just be a case of risk spreading (particularly if the traditional core business area is going through a bad patch or in decline) or as part of a strategy designed to move the company into a completely new market. On the other hand a takeover might be organised by a group of investors who believe that a company's stock is currently undervalued due poor management of the available resources. The plan would be to put in a new management team that could realise the full value of the assets. This might result in the break up of a conglomerate company into several parts, each refocusing on its core business.

Probably each of these factors has played some part in the recent merger and acquisition activity, but the strongest factor that underlies recent trends is technological convergence and the need to bring together elements that, while they might once have been separate, in a digital word are now inextricably interconnected. The term "triple play" is usually used and it relates to a one-stop purchase of telephone, television (broadband) Internet connection subscriptions - or as Microsoft terms it "voice, video and data services over IP networks" or "services over IP" for short.

Whereas once Internet access was typically via a dial-up link on a telephone line, now this has been turned on its head with the development of the Voice over the Internet Protocol (enabling telephone calls via the Internet). Cable TV companies can of course offer broadband Internet connections and broadcasters are working on downloadable TV programmes. You can already buy a card to slot into your PC ti enable you to pick up free satellite TV channels (see Tony Smith's article earlier this month on the
RegHardware site. And Microsoft has developed a software platform called IPTV "to deliver broadcast-quality video and new, integrated TV services over broadband networks".

Now an interesting question to ask is whether content should also be created by triple play companies, or whether it is better to leave that to partner organisations. TimeWarner famously purchased AOL in January 2000 to create what was described then as the world's first integated media and communications company. (Or was it a merger - see some comments made at the time.) Was this tie-up just a bit ahead of its time, or a warning that huge conglomerates like this are not the best way forward and that partnerships, where each partner focuses on what they are good at, provide a better way forward?

What do you think?

References

[1] Murdoch ties News future to Internet. Meredith Booth.
The Advertiser, 17th November 2005.
[2] Internet a careful strategy: Murdoch
Herald Sun, 25th November 2005
[3]BSkyB buying its way into broadband future. Dan Milmo and Richard Wray.
The Guardian, 18th October 2005
[4] NewsCorp throws everything but kitchen sink at 'digital home'.
The Register, 13th January 2006 .
[5] Murdoch buys into online lads' mags.
The Register, 8th September 2005.
[6] Rupert Murdoch seeks dysfunctional search engine.
The Register, 16th August 2005
[7] Murdoch buys blogs
The Register, 19th July 2005.
[8] Murdoch tumes into iPod generation.
The Register, 14th March 2006.
[9] Murdoch to bring MySpace to UK
The Register, 24th January 2006.
[10] Murdoch gets EasyNet
The Register, 21st Ocotober 2005.
[11] Sky plans broadband assault
The Register, 13th October, 2005.
[12] Don't be scared of Sky. Alex Cameron
The Register, 17th February, 2006.
[13] Branson to challenge Murdoch's dominance. Jane Martinson.
The Guardian, 5th December 2005.
[14] Europe to embrace triple play
The Register, 25th January 2006.
[15] Virgin Mobile takeover talks with NTL 'ongoing'.
The Register, 1st February 2006.
[16] NTL tipped to up bid for Virgin Mobile.
The Register, 3rd January 2006.

Futurevision

2006-03-15T11:31:00.000Z

Broadcasting, the media, movies and the Internet

This week saw the publication of the UK government White Paper on the future of the BBC [A Public Service for All: the BBC in the Digital Age]. Amongst other things it will guarantee the BBC a revenue stream from the licence fee for another decade. The BBC's Charter will be renewed with a continuing requirement for the BBC to "inform, educate and entertain". The corporation's governance will be completely overhauled. Out goes the BBC Board of Governors, to be replaced by two new bodies: the BBC Trust and the Executive Board.

The BBC has of course always been seen as providing the cornerstone of broadcasting in the UK. But in recent years with the proliferation of satellite and cable channels and with more homes having access to digital television and radio (Tessa Jowell's announcement gave this as "over 70%") the BBC's share of the television audience has shrunk (as indeed has ITV's). And a recent survey for Google has found that British people are spending more time on the Internet than watching TV. Brits prefer the Internet to TV, America's Network - 10 Mar 2006.

Some bloggers and commentators are already forecasting the end of TV broadcasts. Writing in the New York Times last week Dan Mitchell quoted a former media executive, Prince Campbell, writing on the Chartreuse (Beta) blog as saying "Broadcast television is dead. Just like the Internet killed the music industry, it's about to do the same to broadcast TV".

And just a couple of days later, in a speech in London, media giant Rupert Murdoch added a warning for newspaper publishers. He described the Internet as "..a creative, destructive technology that is still in its infancy, yet breaking and remaking everything in its path."

Certainly big changes are afoot and TV broadcasters and newpapers have already responded by making their programmes and stories available via the web. You can catch up with programmes that you missed, download podcasts and even watch live webcasts. The BBC (together with ITV) is also conducting trials of a "multicasting" system which will allow continuous online broadcasting (as opposed to downloading clips or viedo-streaming).

Another story in this week's New York Times by Saul Hansell identifies a further trend - the growth of "slivercasts" aimed at niche audiences. Hansell tells the story of a London based sailing enthusiast called Andy Steward who wanted to create a sailing channel to be broadcast via the Sky satellite TV system. He soon discovered that it would cost him £85,000 to start the channel and around £40,000 a month in production costs. This was too much to take a chance on. But then Steward heard about Narrowstep, an internet TV service on the web using the TelVOS platform. Now sail.tv is one of the many programmes hosted by the service, attracting 70,000 viewers in its first month.

Hansell links this development with Chris Anderson's concept of The Long Tail. Anderson, the editor of Wired magazine observed that the technology and economics of the Internet means that consumers would no longer be limited only to the popular titles at the top end of a "hit list" (this applies to books, music, movies, TV programmes etc.). Niche products lower down the list cost very little to store and distribute in electronic form so the old economics that required substantial revenues to overcome the costs of production and distribution would be undermined.

And soon we might also be able to download movies via the web. This week has also seen stories about plans for both Apple and Amazon to set up systems for digital downloads of movies. Amazon is reportedly in talks with Paramount Pictures, Univeral Studios and Warner Bothers, while Apple already has links with Walt Disney and MTV, amongst others, through its iTunes service. And if viewers want old TV programmes as well as movies, the BBC is well endowed with content in its archives.

References and links
[1] A Public Service for All: the BBC in the Digital Age Official Press Release on the White Paper.
[2] Brits prefer the Internet to TV, America's Network - March 10th, 2006
[3] A Blog writes the obituary of TV Dan Mitchell, New York Times, March 11th, 2006.
[4] Internet means end for media barons, says Murdoch. Owen Gibson, The Guardian March 14th, 2006.
[5] Multicast Technical Trial
[6] As Internet TV aims at niche audiences, the slivercast is born, Saul Hansell, New York Times, March 12th, 2006.
[7] Amazon considering downloads, Richard Siklos, New York Times March 10th, 2006.
[8] Apple may be testing the waters for film downloading service, Gene Koprowski, MacNewsWorld, March 9th, 2006.

The impact of the Internet on the prices of goods and services

2006-03-08T10:49:00.000Z

In the early years of e-commerce it was predicted by some that the Internet would lead to a "frictionless economy". Lower search costs and better information provided via the Internet were expected to increase competition in retail markets and thus lead to lower price levels. It was also expected that there would be greater price convergence, that is a lower dispersion of prices for online transactions (see Bakos (1997).

"The explosive growth of the Internet promises a new age of perfectly competitive markets. With perfect information about prices and products at their fingertips, consumers can quickly and easily find the best deals. In this brave new world, retailers' profit margins will be competed away, as they are all forced to price at cost." [The Economist (1999)].

Since then a great many empirical studies of the issue have been published, mainly looking at homogeneous products such as books and CDs. Perhaps the best known and most often cited is Brynjolfsson and Smith (2000). They found that book and CD prices were 9 to 16% lower online than offline - depending on whether additional costs (taxes, shipping and shopping costs) were included.

A wide range of product markets have now been examined including videos and DVDs, computer games and software, computers and other electronic products and new cars. Brown and Goolsbee (2000) have also looked at the life insurance industry and Clemons et al. (2002) have examined packaged travel products. There has even been a study of wine bought via the Internet (Lynch and Ariely (2000)). Most studies are based on US data but there have been some using data from other countries; see for example the paper by Ancarani and Shankar (2004) looking at book and CD prices in Italy.

Most studies have found lower price levels online than offline, even when shipping and other costs are included. Some studies distinguish three categories of retailer: pure-play Internet, bricks-and-mortar (traditional shops) and bricks-and-clicks (multi-channel retailers). There has been some suggestion that the gap between online and offline prices has been reducing over time. Ancarani and Shankar remind us that shopping comparison sites provide information not only about product prices but also on product characteristics and independent product reviews, and that this can affect offline prices as well as online.

There is a lot of evidence that consumers research products online even if they subsequently purchase them offline. A survey in the United States - the American Interactive Consumer Survey, conducted by the Dieringer Research Group - found that nearly 15% of the the total US retail spending is influenced by online research, even through the proportion of retail sales that is completed online is much lower [see this report on the iMediaConnection.com web page].

But price dispersion remains as high online as offline. Indeed many of the recent papers have focussed on this issue. Why should a consumer not buy from the cheapest source? How can an online retailer (sometimes called an e-tailer) get away with charging a higher price than its rivals?

Various explanations have been put forward. One approach broadly identifies the phenomenon with the concepts of trust and confidence - with brand loyalty also coming into the picture. The work of Michael Baye and his associates at nash-equilibrium.com is important here - see for example Baye and Morgan (2003). Buying via the Internet carries with it various risks and uncertainties not associated with purchases from a traditional high street retailer. The transaction is not synchronous, that is the exchange of goods and money doesn't take place at the same time. Buyers may have concerns about whether a product purchased over the Internet will be delivered, or at least whether it will arrive within an acceptable period of time. Sometimes goods that are delivered might be faulty or damaged, or may not exactly match the description provided on the website. Essentially we are talking about the after sales policies and practises of the companies concerned. From the customer's point of view there may be a willingness to pay a premium to cover these risks. Effectively by paying such a premium they are taking out insurance to guarantee that that they can be sure of getting what they want. This can help explain the dispersion of prices. Some consumers are less risk averse than others and they may just seek out the lowest price supplier, irrespective of the company's reputation ("name").

Another related issue is whether the customer has confidence in the supplier to provide a secure and confidential transaction, with no risk of his financial or personal information being passed on or falling into the hands of third parties. There may be concerns about whether a company that is advertising a product via the Internet is fraudulent. There have been cases of Internet fraud where payment has been accepted but there has been no intention of providing goods. This occurs most frequently in the area of products that are illegal or where a consumer might be ashamed to admit to buying. In these cases there might be less chance that the fraud will be reported (firearms, drugs, sex products etc.). Of course these points apply to purchases made via other remote retail channels such as those from catalogues or magazine offers, and whether the order is made by post or over the telephone.

Just having a web presence doesn't mean that a consumer will find your site. Haring (2004, 2005) has introduced the notion of a "virtual location". Just as some physical stores are prominently located on the high street or in a shopping mall, in the virtual world some sites are highly visible while others are more difficult to locate. They might have a highly promoted brand name that customers will easily remember (e.g. Amazon) or they might feature high up on search results lists provide by shopping comparison sites such as Kelkoo or Froogle. Baye et al. (2001,2002) call these sites "information gatekeepers". There is evidence that consumers rarely look beyond the first couple of pages of search results ("hits") so it has become vitally important for retailers to make sure that their site is well known. Some sites - not Froogle - accept payments from firms in return for their site appearing high up a hit list. Even if the algorithm for displaying results is based on some other more indirect factor, such as the number of sites that link to the retailer's site, it becomes important for the retailer to advertise and promote their brand.

Pereira (2004) provides a theoretical argument as to why online prices might remained dispersed, based on the assumption that search costs may differ among consumers. In a game theory model where firms may also have differing cost structures he finds two types of equilibrium. In the competing equilibrium case high cost firms will be forced to charge the same price as low cost firms so that competition is effective. In the segmentation equilibrium case high cost firms will sell to high search cost consumers while low cost firms will sell to low search costs consumers. Costly search gives firms market power since it leads consumers to accept prices above the minimum charged in the market. But it depends on the relative importance of what Pereira calls the "volume of sales" effect and the "per consumer profit" effect. Paradoxically in this model a fall in search costs can even lead to higher prices and greater price dispersion. Unless all consumers benefit fully from these low search costs we may find that the market moves from a competing equilibrium to a segmentation equilibrium.

Brynjolfsson, Dick and Smith (2004) consider the following hypothesis relating to price dispersion on the Internet: consumer preferences may differ over price and non-price attributes of the transaction (delivery time, reliability, security). Consumers who search more intensively (i.e. not just comparing prices) are more concerned about trading off price reductions with retailer trust factors.

So we can see a number of reasons why consumers might be willing to pay a price above the lowest one that is advertised on the Internet. They might not find this low price if the hit list from the search tool doesn't place it high up the list. Or they might be wary of dealing with a company that they haven't heard of, or used before. If online retailers can develop customer loyalty they can exploit the market power that this gives by charging higher prices than their less well known competitors. Effectively the more loyal are customers the less price sensitive they are, that is their price elasticities of demand are lower. Retailers can keep their prices high without fear of losing trade.

Another point that comes up in these studies is the degree of transparency (or seeing it from the other side the "obfuscation") that online retailers provide in their price information. The headline price quoted may not always represent the full cost of acquiring an item. Costs that are "hidden" until the final checkout stage of a transaction include the shipping costs (postage and packing), tax or duty that is liable, or for car rentals additional insurance payments that must be made. Efforts have been made in some juristictions to standardise the way that such information appears and indeed the shopping comparison sites have been helpful here in providing full and comprehensive statements about the cost of products purchased online. But there are still some unresolved issues concerning local taxes and import duties that must be paid.

References

ANCARI, F and SHANKAR, V (2004) Price Levels and Price Dispersion within
and across multiple retailer types: Further evidence and extension. Journal of
the Academy of Marketing Science 32(2) 176. Available
online
BAKOS, J Y (1997) Reducing buyer search costs: implications for electronic
market places. Management Science 43(12) 1676-1692. Available
online
BAKOS, J Y (2001) The emerging landscape for retail e-commerce. Journal of
Economic Perspectives 15(1) 69-80.
BAKOS, J Y and BRYNJOLFFSON, E (2000) Bundling and competition on the Internet. Marketing Science 19 (1) 63-82.
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The price of being online

2006-02-27T18:18:00.000Z

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.

References

[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 .

Internet statistics

2006-02-21T15:52:00.000Z

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. .co.uk).

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.

References
[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.

Links
[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.]

China and the Internet

2006-02-14T12:43:00.000Z

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 ChannelNewsAsia.com 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 google.cn 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.

References
[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|NetNews.com 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.

Teleworking and offshoring

2005-10-10T18:30:00.000+01:00

It was reported in the Business News section of the Radio 4 Today programme last week that there are now nearly two and a half million teleworkers in the UK - this is about 8% of those in employment. The figures come from the Office for National Statistics and the Labour Force Survey. Yolanda Ruiz and Annette Walling have written in more detail about the figures in the latest edition of Labour Market Trends. You might also like to consult an earlier article, also published in Labour Market Trends, by Ulrike Hotopp of the Department of Trade and Industry.

The Labour Force Survey started collecting data on homeworking and teleworking back in 1997 and since then there have been some big increases. For many of them this is only possible because of improvements in ICT and in particular, broadband access to the Internet. Let's look at the numbers and check on the definitions.

Homeworkers are people who work mainly in their own home, or in various places but using their home as base. The number of homeworkers has gone up from about 2.4 million in 1997 to around 3.1 million in 2005. Most of these workers make use of a telephone and a computer in their work (2.4 million, up from less than a million in 1997). These people are described as teleworkers. Those who say that they could not work from home without both a telephone and a computer are labelled TC teleworkers. Their numbers have gone up from just over 700 thousnad in 1997 to nearly 2.1 million this year . Not surprisingly there are large differences between industries and occupations with the majority of teleworkers coming from the service sector and being described as having managerial, professional, associate professional and technical occupations. Two-thirds of teleworkers are men. This can be largely explained by the fact that most teleworkers are self-employed and most self-employed workers are men.

The earlier paper by Hotopp included international comparisons, noting that in 1999 the UK had just above the average proportion of teleworkers for the ten EU countries that have been recently surveyed; Finland had the highest proportion with over 16% of those in employment. There is evidence to show that there is an even higher proportion of workers engaged in teleworking in the US. Hotropp cites a 2001 study by the International Telework Association and Council (ITAC) which reported that there were around 28 million teleworkers in the US (about 21% of the labour force).Some more recent figures, available from The Telework Coalition (Telcoa) puts the number of homeworkers in the US at 44.4 million in 2004 (7.5% up from 2003). The number of teleworkers is reported to be 24.1 million (just over 18% of employed adult Americans).

Whatever the exact numbers right now they are sure to rise in the future as more people have access to broadband connections, laptops and Internet enable mobile phones and as the range of jobs that are compatible with teleworking expands. It is certainly an attractive option both for the workers themselves and for the companies that employ them. The Telcoa web page reports a study of senior executives which shows that allowing telecommuting and flexible working schedules is second only to salary as the biggest attraction for them in seeking new jobs. There is some evidence that teleworking can improve productivity too as people are better motivated and less inclined to take time off or leave the company. Business also benefits by cutting office space and other expenses. According to a study by AT&T in 2003 AT&T saves nearly $150,000,000 a year from teleworking.

In some cases companies have chosen to outsource some of these jobs, which can reduce costs even further. And if such jobs can be undertaken anywhere in the world with telephone and Internet connections jobs may be shifted offshore. A study by McKinsey in 2003 found that about 1.5 million service sector jobs had been moved from the US and other developed countries to countries in the developing world. The projected number for 2008 is 4.1 million. Jobs moved include call centres, help desks and customer services, data entry and billing, software writing and even financial analysis. But the risks may be exaggerated in the public mind. A survey of around 5000 firms in the US conducted by Ventoro in 2004 (reported in Jim Landers recent piece for CRM Buyer) found that 53% of firms felt that they would either lose money or save nothing by moving jobs offshore. Dell says that their strategy is "allshoring" not offshoring. As a global company they require bases in all their main geographical market areas, including Canada as well as the Phillippines.

Sources

Ulrike Hotopp. Teleworking in the UK. Labour Market Trends, Vol 110 No 6, June 2002, 311-318. Available online
Yolanda Ruiz and Annette Walling. Home-based working using communication technologies. Labour Market Trends, Vol 113 No 10, 417-426. Available online
Steve Quinn. Telecommuting: a win-win situation. CRM Buyer 10th July 2005. Available online
Jim Landers. Exodus of jobs overseas may be overstated. CRM Buyer 22nd September 2005. Available online

The Google-Sun Alliance

2005-10-06T17:00:00.000+01:00

This week has seen the announcement of an alliance between Google and Sun Microsystems. Under the agreement Sun will distribute the Google Toolbar with its Java software when it is downloaded from the Sun website. Sun will also add a Google search bar to their OpenOffice software (a free alternative to Microsoft Office). Some analysts had a lukewarm reaction to the announcement, which had been heavily trailed. They had been expecting rather more. But others see it as a very significant development. Stephen Shankland, a CNET News Staff Writer, writing in the New York Times, says “..is there anything in the partnership that isn’t directly aimed at Microsoft?”. The new alliance is geared towards moving the focus for software from the PC desktop to the network and the wider Internet. Instead of having software stored locally on your own computer you would access it from the Internet. That way you could be sure of having the latest up to date version. This idea of a “thin client” environment has been around for a number of years, but maybe this latest partnership will be the one to make it happen. And if it does Microsoft should be very worried. As Jonathan Schwartz said in his weblog this week, the Internet allows us to bypass Microsoft’s distribution system.

Sources

Jonathan Schwartz’s blog, 1st October 2005

Stephen Shankland FAQ: The Sun-Google partnership New York Times 4th October 2005

Associated Press
Google, Sun in Challenge to Microsoft New York Times 5th October 2005

James Brown
Sun partners with Google Yahoo! News 5th October 2005

Jennifer Guevin
Sun and Google underwhelm Yahoo! News 5th October 2005

Controlling spam via e-mail charges

2005-09-26T18:35:00.000+01:00

A number of economists have noted that the problem of spam (or more correctly "Unsolicited Bulk E-mail" or UBE for short) arises because of the imbalance between the costs of sending out bulk e-mails and the benefits that might be derived by the recipients.

Although there are some costs in maintaining an e-mail account and in compiling (or buying) a list of addresses to target for these bulk e-mails, the (marginal) cost of adding an extra address to send to is effectively zero. This means that a spammer can reach literally millions of potential customers for almost nothing. E-mail is the cheapest form of direct marketing (much cheaper than telemarketing or bulk junk mail through the post). Andrew Leung (2003) observed that the response rate to spam is as low as 0.005% - only 50 in every million people respond to UBE. But despite this very low response rate spam can make economic sense because the costs of dealing with it are felt only by those recipients who don't want it. This is an example of negative externalities. Private costs and social costs diverge. Spammers are either unaware or don't care about the costs they impose.

Although technological measures (blockers and filters) and legal action (the 2003 Can-Spam Act in the US and the 2003 UK Privacy and Electronic Communications Regulations Act, as well as litigation by big players such as Microsoft) can help in controlling this unwanted e-mail, perhaps the best approach to the problem is an economic one.

In a recently published paper Sunder et al. (2005) have assessed the potential of e-mail postage charges for dealing with spam. "Charging postage for e-mail causes senders to be more selective and to send fewer messages. However, recipients did not interpret the postage paid by senders as a signal of the importance of the message. These results suggest that markets for attention have the potential for addressing the problem of spam but their design needs further development and testing."

Although the ratio of spam to legitimate e-mail is still very high (reported to be 67% in June 2005) this figure is slightly down on earlier estimates (it was reckoned to stand at 83% in January 2005). However it is believed that although there may be fewer unsolicited bulk e-mails they are now more carefully targeted (spear phishing) and may also carry viruses or spyware. It has been estimated that the number of e-mails carrying viruses rose by 50% in the first half of 2005 and that one in twenty-eight computers is now infected with spyware or keylogging programs. Organised crime has become involved so spam is not only attempting to persuade people to buy products (especially pharmaceutical products, sex aids, counterfeited software and entertainment goods, even jewellery) but it is also implicated in money laundering schemes and identity fraud cases.

Spammers usually purchase lists of e-mail addresses that have been harvested. They use viruses to turn unprotected computers into zombies which then send out millions of spam messages across the world. Sophos estimates that half of all spam comes from zombie machines (computers that have had a program implanted on them surreptitiously making it possible for them to be used by a remote user). A botnet is a network of compromised machines that can be controlled remotely by a spammer or a phisher.

Spamhaus says that 72% of US e-mail is still spam and that a relatively small number of people are behind it they say 7 of the worst 10 offenders are based in the US. The problem is that there are huge potential rewards (some spammers clients pay up to %50 thousand a month for distributing spam). The risk of detection and the penalties are still too small to deter spammers. A Sophos spokesman said it hardly registers).

Research by Javelin suggests that the losses due to phishing in the US in 2004 could be as much as $367 million. Phishing scams contribute to the loss of confidence in using the Internet for e-commerce and e- banking because they are worried about possible identity theft and fraud. Perhaps as many as 13% of consumers in the US and Europe have stopped paying bills online because of these concerns.

A surprising number of people read spam: 23% in the UK and as many as 37% in Brazil (figures from BBC News December 2004). Either they are unaware of the dangers of spyware or are tempted by what they perceive as the bargains on offer.

There have been a number of new developments in the technology approach to filtering spam. A new technology for message verification called Domain Keys Identified Mail (DKIM) has been submitted to the Internet Engineering Task Force by a group of companies that includes Cisco and Yahoo!. Microsoft has proposed its own standard called Sender ID. Useful as these initiatives might be they will not get rid of spam on their own.

There have been a number of high profile legal cases against spammers recently. Scott Richter, who operated the Colorado based OptinRealBig.com, agreed to pay Microsoft $7million in a settlement agreed in August 2005. It is believed that over 38 billion unsolicited messages a year originated from his company pushing mortgages and other loans as well as pornography. Microsoft announced that it will donate $1 million to a New York project that is providing PCs to community centres and a further $5 million to anti-spam projects. (Guardian 11th August 2005). Microsoft has now filed over 100 anti- spam lawsuits in the US winning more than $800 million in judgments against spammers. Why is Microsoft so concerned? Most spam is sent from Windows PCs that have been infected by a trojan that has got in via a spam message or website. Despite regular patches and updates being announced to the operating system people don't always update their machines. The international law firm Pinsent Masons has a web page at www.out-law.com which provides up to date information on spam. Go to web site and enter the word spam in the search box to view the latest stories. An interesting story dating from May 2005 was of a survey by Mirapoint which found that many spam filters block too many legitimate mail messages (too many false positives). This suggests that technical solutions are not a panacea for dealing with spam.

A couple of other recent surveys on spam may be of interest. The Pew Internet and American Life Project last April published the results of a survey which found that, although many users are getting more spam than they did a year earlier, they are less frustrated by it - they have learned to manage it. A survey of UK consumers and SMEs by Checkbridge, also published in April 2005, found that 57% of respondents have no anti-spam filters - they thought it was the responsibility of their ISP to filter out these e-mails. 24% reported that they received over 50 spam e-mails per day. Interestingly 47% of respondents said that they would be willing to pay between £10-30 per year for effective filtering.

Which brings us back to our main point. It's all down to economics in the end!

References

Fallows, D (2005) CAN-SPAM a year later. Pew Internet and American Life Project, April. Available online at http://www.pewinterent.org/pdfs/PIP_Spam_Ap05.pdf
Sunder, S et al. (2005) Pricing Electronic Mail to Solve the Problem of Spam. Human-Computer Interaction 20 195-223. Available online at http://www.some.yale.edu/faculty/Sunder/email/HCI201-2_7.pdf

Other sources

BBC News. Computer Users Ignore Warnings. 10th December 2004
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4084871.stm
BBC News. Net Criminals Customise Attacks. 3rd August 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4739709.stm
BBC News. Software pirates tap into technology. 2nd August 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4729235.stm
BBC News. Bad e-mail habits sustains spam. 23rd March 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4375601.stm
BBC News. Net users learn to live with spam. 11th April 2005.
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4432231.stm
Greene T C Netizens learning to tolerate spam. The Register 12th April 2005.
http//:www.theregister.co.uk/2005/04/12/spam_gaining_acceptance/
Koprowski, G J Phishing Rattles Online Consumers. ECommerce Times 17th July 2005 http://www.ecommercetimes.com/story/44443.html
Leung, A Spam: the current state. Telus Corporation 8th August 2003. http://security.iia.net.au/downloads/spam%20leung%20paper.pdf
Leyden, J Save us from spam. The Register 18th April 2005
http://www.theregister.co.uk/2005/04/18/spam_survey_checkbridge
Leyden, J Spear phishers launch targeted attacks. The Register 27th August 2005
http://www.theregister.co.uk/2005/08/02/ibm_malware_report/
Pinsent Masons. Spam filters block too much work e-mail. 27th April 2005-09-26 http//:www.out-law.com/page-5618
TechNewsWorld 18th July 2005-09-23 http://www.technewsworld.com/story/44750.html

More on bandwagons and network effects

2005-09-19T19:45:00.000+01:00

In lecture 2 I spoke about the ideas of network externalities and complementary bandwagon effects introduced by Jeff Rolhfs, first in his pathbreaking article in the 1974 Bell Journal, and then more recently in his book and his Strategic Policy Research Institute paper Bandwagon effects and the Internet. Both these ideas help to explain the rapid take off of the Internet once the commercial conditions were right.

Of course bandwagons don't always get rolling. Greenstein (2003) "Jumping on bandwagons" recalls the failure of the Picturephone to take off in the 1970s. Greenstein also explains the impact of network externalities in terms of asymmetries above and below the "critical mass". The value to an individual user of a marginal addition to the network is small when the network is small, but can be much larger when the network is big. The positive feedback only kicks in when enough users have joined the network. This is why complementary bandwagon effects from applications can be so important.

In the lecture I also noted that Clements (2004) has a slightly different form of terminology for these effects. He stresses the difference between what he calls direct network effects and indirect ones. The direct effect is where the utility of an individual user is raised by the addition to the network of another user. The indirect effects occur via complementary (compatible) products. For example a DVD player becomes more valuable as the number of DVDs available to play on them increases (usually these systems have hardware and software elements). Clements explores the extent to which a market will "tip" to a single standard.

Sadly network effects might not always be good for consumers. Recent debates over the spread of viruses and other forms of malware have raised the possibility that the use of RSS feeds to enable blogs to reach a wider audience could be attractive also to virus spreaders. You have been warned!

Don't forget to look at my bibliography file for the full details of papers and books that I mention, and also for quick links to them.

Communication, communication, communication

2005-09-15T22:24:00.000+01:00

Last week eBay, the Internet auction company, paid $2.6 billion (about £1.4 billion) to acquire Skype Technologies, the Luxembourg based Internet telephone company. Indeed if certain performance targets can be met over the next three years eBay will have to pay an additional $1.5 billion to Skype. Several market analysts have questioned the wisdom of the deal, trying hard to figure out the logic of the acquisition and suggesting that eBay may be paying out more than it should have done.

Exactly why did eBay buy Skype? Are they trying to expand their range of services to come into more direct competition with other Internet giants like Google and Microsoft, or can we accept at face value eBay's own explanation that the move was all about improving communication between eBay buyers and sellers?

First, some background. Skype Technologies was launched in 2003 by Niklas Zennström, and Janus Friis, who had already been successful in creating the peer-to-peer (P2P) file-sharing program KaZaA. With their new company they set about providing another P2P system that would permit simple web-based telephone calls built on the Voice over the Internet Protocol (VoIP) technology. With Skype calls made from PC to PC have been completely free. Calls from PCs to ordinary telephones (landlines or mobiles) have to be paid for, but are much cheaper than through the usual telephone companies. Skype has been the market leader in the Internet telephone sector and, according to a BBC News report, it currently has 53 million registered users worldwide. The Seattle Post reports that Skype earned $7 million in revenue in 2004, predicted to rise to $60 million this year and over $200 million in 2006. However Skype as yet has not become profitable.

Two other big digital technology companies have been focusing on Internet telephone services: Microsoft has recently bought Teleo Inc, while Google has developed Google Talk. Perhaps eBay feels that all the big players will have to have an in-house Internet telephone service and it needs to diversify a bit? The official reason being given by eBay executives is that the voice communications technology will make it easier for eBay users (buyers and sellers) to communicate with each other, especially for very highly priced products or services such as cars, houses and valuable paintings and furniture. I think there is probably some truth in both explanations. It will be interesting in future months and years to see exactly how eBay, Amazon, Google, Yahoo!, Microsoft and AOL develop their range of services and compete with each other. I am particularly interested in the Microsoft-Google competition right now. That will be one to watch!

Sources:

BBC News
eBay to buy Skype in $2.6bn deal
12th September 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/4237338.stm

Mark Ward, BBC News
Portal bid drives eBay Skype deal
12th September 2005
http://news.bbc.co.uk/go/pr/fr/-/1/hi/technology/4238258.stm

Yahoo! Finance
Skype Technologies SA Company Profile
http://biz.yahoo.com/ic/133/133264.html
Page accessed 13th September 2005

Seattle Post-Intelligencer
EBay to pay $2.6 billion for Skype Technologies
13th September 2005
http://seattlepi.nwsource.com/business/240394_ebayskype13.html

Ken Belson, New York Times
EBay to buy Skype, Internet Phone Service for $2.6 billion
http://www.nytimes.com/2005/09/13/technology/13phone.html

Andrew Ross Sorkin, New York Times
Are the latest big deals really a big deal?
http://www.nytimes.com/2005/09/13/buisness/13place.html

Skype web page
http://www.skype.com
Page accessed 13th September 2005

Alexandru Macovschi
Google Wanted Dead Or Alive. Better Dead
Softpedia news
4th September 2005
http://news.softpedia.com/news/Microsoft-Google-Wanted-Dead-Or-Alive-Better-Dead-7612.shtml

BBC News
Microsoft-Google battle heats up
4th September 2005
http://news.bbc.co.uk/1/hi/business/4213466.stm

Vacations

2005-07-05T15:43:00.000+01:00

"Most of my friends measure their vacations by the amount of time they spend away from e-mail and the number of messages waiting for them upon return." (Shane Greenstein, in Diamonds Are Forever, Computers Are Not, Imperial College Press, 2004 p31.

I shall read my e-mails while I am away (thanks to webmail) but I shalln't be adding anything to my blog until September.

Has file-sharing software damaged CD music sales?

2005-06-30T16:30:00.000+01:00

Yesterday's Guardian newspaper included a piece by Oliver Burkeman on the fallout from last Monday's decision of the US Supreme Court that Grokster and StreamCast can be held liable for the illegal exchange of copyright material over their networks (Should I buy this? Real lives, Guardian 29th June 2005)
http://www.guardian.co.uk/g2/story/0,,1517037,00.html

It included the question "Is there any evidence that file-sharing has actually damaged CD sales?". The studies that he cites suggest not, but they are far from authoritative. A recent paper by the respected American economist Stan J Liebowitz provides a careful review of the various studies of this question, as well as his own empirical analysis. He concludes that "..file-sharing hurts copyright owners and that it is responsible for most, if not all, of the recent decline in sales".
(Liebowitz's paper can be accessed from his web page at http://www.utdallas.edu/~liebowit/intprop/main.htm).

This doesn't mean of course that I approve of the heavy legal
action taken by music and media companies against individual users of the file-sharing software.

Free lunches - if you choose carefully from the menu!

2005-06-24T19:25:00.000+01:00

The BBC News website recently had a very interesting piece about the entrepreneur Niklas Zennstrom, the man behind both the file-sharing program Kazaa and Skype, which lets users make very cheap or even free phone calls via the Internet based on the Voice over Internet Protocol, VoIP.

Zennstrom discusses the use of a business model where "some users are paying for services, but not everyone". Skype services are free so long as the caller and the person being called are both Skype users. Skype makes its money out of users who buy additonal services and who use Skype to make or receive calls from conventional telephone networks.

But, as Zennstrom comments, it is not unusual to provide services free to some customers while others have to pay. For example web based e-mail services like Yahoo!, or web-site hosting through Lycos are provided free, so long as you don't exceed the (now quite generous) storage limits. You can also view some of the online stories at the New York Times and Economist web sites for no charge, but you will have to pay (either through a subscription or for an individual download) to access other material.

What is the economic logic behind this? Didn't Milton Friedman famously tell us that "There's No Such Thing As a Free Lunch"?

One way of looking at it is that what you are getting is a free taster. Try out a little of it for free, and if you decide that you like it, maybe you will be happy to pay for more of it. Sometimes products are offered free (to everyone) at the beginning when they are being launched, in an effort to build up the customer base (see my earlier post on the importance of network externalities). But that's not what I am talking about here. For example in the case of Yahoo! mail so long as you stick to the "lite" version of the product you can continue to get it for free (although you will be exposed to advertising messages which will earn revenue for Yahoo!). You don't have to pay anything directly unless you want to move to one of the business "versions" of the product. "Versioning", as described by Shapiro and Varian in their book "Information Rules", is a technique for applying price discrimination. Customers select the version of the product that is in line with their willingness to pay. As we see this might be the free version.

Of course this doesn't mean that Friedman was wrong. There still isn't such a thing as a free lunch - somebody has to pay. But if you select carefully from the menu you can get what you want for free while those who are willing to pay for the full version, or to pay to advertise, provide the funds to keep the service available to you for nothing.

Internet taxes

2005-06-22T23:26:00.000+01:00

Issues concerning taxation and the Internet have become rather complicated, especially in the United States where there are tensions between the individual states and the Federal authorities. The Internet Tax Freedom Act of 1998 imposed a three year moratorium on new Internet taxes – some states that already had taxes in place were allowed to maintain them – and established the Advisory Commission on Electronic Commerce, which eventually reported in April 2000. [Advisory Commission on Electronic Commerce http://www.ecommercecommission.org/]

The Chair of the ACEC, Virginia Governor James Gilmore III, a strong proponent of an outright ban on Internet taxes, was unable to get the two-thirds support that he needed so the recommendations were limited to
(i) An extension of the moratorium until the end of October 2003
(ii) The end of taxation on Internet access (subscription fees)
(iii) The end of a tax on telephone services (since some Interent access was via telephone lines) – this recommendation was not approved by Congress.

The moratorium has since been extended on several occasions and the Streamlined Sales Tax Project (SSTP) was also launched in July 2003. When at least 10 states accounting for 20% of the population agree to the imposition of a sales tax on Internet transactions then it will take effect across all states. Several companies (e.g. WalMart and Toys-R-Us) have voluntarily introduced online sales tax collection systems but others have steadfastly stuck to the position that if they don’t have a physical presence in a state with an online sales tax they won’t collect it.

In the European Union things are a little clearer. In May 2002 the EU agreed new rules for an online sales tax (VAT). Overseas suppliers were required to register for tax purposes in one of the member countires and to levy the tax at the local rate. This directive came into force in July 2003.

The main arguments in favour of an online sales tax are (i) without it there is not a level playing field – online merchants have a competitive advantage over offline stores and this creates distortionary effects (ii) the individual state budgets are thereby affected since they depend to a large extent on local sales tax revenues. The argument usually deployed by those in favour of a tax ban is that e-commerce is still in its (relative) infancy and applying the tax would inhibit its growth. A similar argument is also used against the imposition of a tax on Internet access. (It would also make it harder to close the "Digital Divide" because it would raise the cost of Internet access.)

For more details on this see my Economics of the Internet lecture notes at http://userweb.port.ac.uk/~judgeg/ENET/ENET8.ppt

A new issue has recently been added to the debate – what some have called the “iPod tax”. Some people have argued that not only should physical goods that are ordered over the Internet but delivered to people's homes offline (for example by mail) be subject to sales tax, but so should information goods that are delivered via the Internet (electronic entertainment - music and film downloads etc.) Last month the Wisconsin Joint Finance Committee considered a proposal for just such a tax, but turned it down on the grounds that it would place at a disadvantage companies trying to operate this kind of business from within the state.
[See “Finance Committee rejects extra tax on Internet buys”, By Katy Williams, Wisconsin Technology Network 25th May 2005 http://wistechnology.com/printarticle.php?id=1870]

In another development a California state appeals court decided that Borders Inc. must collect online sales taxes within the state because their offline stores and their online stores are all part of the same company – their operations are “co-mingled”. [See “Click and Pay a Little More: The Days of Tax-Free Online Shopping May Be Over”, By Bob Tedeschi, New York Times, June 20, 2005. http://www.nytimes.com/2005/06/20/technology/20ecom.html]

What do you think should be done? Please post your comments by clicking on the hotlink below.

What's in a name?

2005-06-21T23:25:00.000+01:00

If you were to type the URL www.iTunes.co.uk into your web browser, what kind of web site do you think you would connect to?

You would probably expect to find a website owned by Apple offering downloads for your iPod. And you would be right - now. In fact you will be automatically re-routed to www.apple.com/uk/itunes/ where you can select from "more than 1.2 million tracks from all four major music labels".

But ownership of the iTunes.co.uk URL is disputed. In November 2000, over three years before Apple itself registered the domain name "itunes.com", Benjamin Cohen registered the "itunes.co.uk" name. Last December Apple disputed Cohen's right to own the name and referred the matter to the UK's domain name registrar, Nominet.

In March Nominet ruled that Cohen must hand over the name to Apple. Although he was forced to comply Cohen did not give up the fight. First he filed a Freedom of Information Request with the DTI questioning whether Nominet has the legal authority to force him to transfer the rights to the URL. The reply was interesting. The DTI said that they were "not aware of any statutory recognition of Nominet". Now Cohen is seeking a judicial review of the case in the High Court. In his view the way that Nominet handled the dispute was unfair and biased towards big business.

Is Cohen guilty of what has come to be known as "cybersquatting" (registering a popular sounding domain name in the hope that a company who would wish to use the name would have to pay you for it)? Or did he quite legitimately come up with a name that he wanted to use for his business, well before Apple decided to adopt the iTunes trademark? In that case Apple would have to pay him to hand over the URL, in the same way that in 1999 the BBC had to buy the address bbc.com from Boston Business Computing.

In the US the 1999 Anti-Cybersquatting Consumer Protection Act gives companies that feel they are the victims of cybersquatting the right to initiate arbitration proceedings through the Internet Corporation of Assigned Names and Numbers (ICANN). But the law here clearly needs tidying up.

What is the economics angle on this issue (I hope) I hear you ask? Partly this takes us into the area of the economics of trademarks. Nicholas Economides has written the entry on this topic in the New Palgrave Dictionary of Economics and Law (see Economides, Nicholas, (1998), "Trademarks," in The New Palgrave Dictionary of Economics and the Law, edited by Peter Newman. You can view a draft version of the paper at http://www.stern.nyu.edu/networks/trademarks.pdf)

Economides notes that trademarks convey non-analytical information to the consumer about goods on offer. Rather like a brand name a trademark offers a symbol through which the consumer can make a judgment about the likely quality of the product. Trademarks date back to the makers of jewellery in the Middle Ages. A craftsman's work could be identified through his trademark so that a buyer could be sure that he was getting the real thing and not a fraudulent imitation. Later trademarks came to be more widely used for all kinds of manufactured goods to signal the quality that a buyer might expect to get.

Economides notes that for a company a trademark is an investment. The reputation that goes with a trademark is built up over time and consequently firms will wish to protect this investment. Although he notes that there may be some distortionary effects of trademarks (through the wastage of resources in advertising designed to create a positive mental image) he concludes that these are likely to be small in relation to the potential benefits (for both producers and consumers).

eBay watch

2005-06-20T21:40:00.000+01:00

According to John Naughton, writing in yesterday's Observer newspaper, [http://observer.guardian,co.uk/print/0,3858,5219049-102271,00.html]
eBay now has 150 million registered users worldwide who trade about $40 billion worth of goods a year, generating revenues for eBay of about $4 billion.

The main thrust of Naughton's story is that eBay got caught out in its reaction to the auctioning of Live8 concert tickets. When Sir Bob Geldof found out he first asked eBay to ban the auctions, then called on people to subvert the auctions by submitting "impossible bids" - of up to £10 million. When some eBay users did this they found themselves blacklisted by eBay, who said that such actions break eBay's rules.

Naughton also quoted from a leader in last week's Economist newspaper which, commenting on the spectacular success of eBay in the 10 years since it was formed, noted that on the Internet "the pace of change is rapid, and so is the ferocity of the competition."

Which brings me to another news story that I spotted in today's New York Times. Apparently Google is planning an online payments system to compete with eBay's PayPal. Although a Google spokesman declined to comment on the rumours, the New York Times journalist Saul Hansell noted that back in April Google had "filed documents to establish a new corporation in California called the Google Payments Corporation".

As John Naughton also noted, much of the trading on the eBay site now is by small firms selling their (new) products, rather than by people buying and selling used (second-hand) goods. These firms are not big enough to allocate resources to setting up their own web sites - instead they make use of eBay's infrastructure. Using eBay in this way is seen as a method of breaking into e-Commerce. Such firms are unlikely to have the ability to accept payment by credit or debit card, so the PayPal system has provided a valuable alternative mechanism. Google appears to have noticed this and could link its new system to the localised search facility that it has developed.

Predatory pricing behaviour in network markets

2005-06-17T23:15:00.000+01:00

Any attempts to explain the dramatic growth of the Internet in the last decade, or indeed the equally rapid spread of Internet related products such as e-mail or even peer to peer file sharing software, will need to recognise the importance of network externalities. Network effects mean that the value of the product to any user increases as the number of other users expands. As a result take-off of the product may be slow to begin with when there are relatively few users but, once a critical mass has been reached, more and more people will want to be part of the network. The network is subject to positive feedback, making participation in the market even more valuable as it grows. This feature of network markets was first recognised by Jeff Rohlfs back in the nineteen-seventies when he was working for an American telephone company. [Rohlfs, J (1974) A Theory of Interdependent Demand for a Communication Service, The Bell Journal of Economics and Management Science 5(1) 16-37.] More recently Rohlfs has expanded and updated his ideas in his book "Bandwagon Effects in High Technology Industries, MIT Press, 2000.

One implication of network externalities of this type is that a producer of a new network product, conscious that it might only be profitable to produce once a critical mass has been reached, may feel justified in keeping the price of the product very low at the beginning of the product's life in an attempt to stimulate sufficient demand quickly to reach this mass. Then, having established some degree of control over the market, the producer may attempt to raise the price so that profits can be earned and the revenue foregone during the launch phase can also be recovered. Of course, in this dynamic environment it may be that the technology develops and improvements in the production process mean that costs can be pushed down in turn enabling profits to be made without pushing up the price to much. But it is not uncommon for network goods to be offered very cheaply at an early stage of their development with prices being pushed up later. An extreme case might even see the product being given away for free early on to quickly build up the customer base; then later a fee is charged once customers have become hooked on the product. Web browsers and web-based news and information services come to mind as example.

The justification for this pattern of behaviour would be that (a) without the low price at the beginning the market would not be able to"take-off", (b) without being able to realise the expectation of higher prices later the company's development costs would not be covered - if there is no prospect of profits in the second phase there would be no incentive for the company to develop the market at all. This sounds OK when we are talking about completely new network goods, but what about when it is applied to a new brand of an exisiting product type? Here the new entrant is trying to displace an incumbent and grab sufficient market share to at least become viable. Alternatively an incumbent might keep the price lower a little longer than necessary to build up sales to the threshold level in order to see off any potential competitors attempting to enter the market.

Is this good for consumers? Well clearly it can be so long as the producer does not (a) eventually establish a monopoly position in the market and then also (b) exploit this monopoly power by pushing up prices so as to extract more than "normal profits". Whilst the sequence of low to high prices might be acceptable as a device for ensuring the initial viability of a market, it would be regarded rather differently if it essentially a predatory pricing strategy designed to capture a market from other suppliers.

A new paper by Joseph Farrell and Michael Katz [Farrell, J and Katz, M (2005) Competition or Predation? Consumer Coordination, Strategic Pricing and Price Floors in Network Markets, Journal of Industrial Economics LIII (2) June 203-231] revisits the issue. In considering a two period model to analyze potential policy intervention against predatory pricing behaviour in markets with network effects, they find that the anti-predation rules proposed by others may not always raise consumer welfare and improve efficiency. It all depends on the way that consumer expectations are formed and coordinated.

Blogonomics

2005-06-15T18:41:00.000+01:00

It seems appropriate that at an early stage in the life of this blog, which is devoted to issues concerning the economics of the Internet, we should discuss the economics of blogging - "blogonomics".

Blogs come in a range of shapes and sizes, and are used for a variety of different purposes. Some are private and accessible only by a known group of workers within a company. They might be on the company intranet, or on the web but needing a username and password to get into. Usually the software that is used for this kind of blog is purchased (or perhaps licensed) from a company that specialises in weblog software. Manila, from the company UserLand, is an example of the kind of software that can be used to create these company blogs. [http://manila.userland.com/ ]

Public blogs, available on the web and accessible to anyone who comes across them, are usually paid for by advertising. Or if the blog is provided by a portal or search engine company (like Google) the costs are absorbed into the general overheads of the company (which in turn are usually covered mainly by advertising revenue). Google is reported to have paid PyraLabs nearly US$300 in 2003 to acquire its Blogger software (I read that somewhere in a blog!)

These public blogs can range from those that are put together by enthusiastic individuals (like me!) through to commercial operations like Gawker (http://www.gawker.com/) where a team of contributors is paid to update the content. According to Tom Zeller of the International Herald Tribune big companies like Nike and Audi are advertising on Gawker, which now attracts over one million separate visitors each month. [Source: Zeller, Tom Jr "A Blogging Revolution? 'Give me a break'" TechNewsWorld 22nd May 2005 http://www.technewsworld.com/story/43081.html]

So what exactly is a blog? The word itself is a shortening of 'weblog' and it is essentially an online diary where the author (weblogger or "blogger") jots down his or her daily thoughts - and provides links to other web pages that he or she finds interesting. Amy Harmon, writing in the New York Times in February 2003, described a blog as "a kind of hyperlinked online journal". Blogs differ from ordinary home pages in that they are typically filled with a sequence of relatively brief entries that are updated frequently.

Not only is a blog a special type of web page (in the way that it is structured) but it is also created and published in a way that demands little IT or computing skills, or indeed web design knowledge, from its creator. For example to add new material to this blog I simply call up the blogger.com web page (http://www.blogger.com/), enter my user name and password, type in my "stuff" (or copy and paste from a text editor or word processor) and then click on a button to republish my blog. When I first set up the blog there were just three easy steps that I had to follow: 1) Create an account (you have to provide some information about yourself - such as an e-mail address - and choose a username and password) 2) Name your blog (you may find that the name you want is already in use so be prepared to compromise) and 3) choose a template from a variety of onscreen designs.

Blogs add new postings at the top of the file, old entries getting pushed further down the page. Each entry has a title so that a list of titles can be provided for blog readers to choose from if they don't want to work their way through an entire blog. Readers can also post their own comments about any particular entry (although the blogger can usually edit out a comment if it is offensive or otherwise objectionable).

In terms of content blogs can cover pretty much anything, although an important type of blog deals in news, perhaps reporting on topics not covered by conventional news outlets either becuase of their specialist nature, or possibly because they are too controversial or opinionated to be accepted by the established news media. (One complaint that is often made is that blogs are ideologically biased or poorly researched - as if this criticism didn't apply also to some of the tabloid press or TV news channels!).

Some commentators see blogs as a threat to conventional journalism. It certainly provides an unfiltered (unmediated!) outlet for news and views that might not otherwise reach us. Salam Pax, the Baghdad Blogger, provided a daily account of life on the ground in Iraq during the last days of Saddam's regime - http://www.thebaghdadblog.com/home/

Blogs at work
Another use for blogs is for workers contributing to a collaborative project. Rather than keeping in touch by e-mail, members of a project team can post comments on the progress (or lack of it!) to a project blog. Instead of having to sort through a mountain of e-mails a team member only has to search through the single blog. It helps people to keep track of their work - and of course can provide links to longer documents elsewhere on the web or the company intranet. Obviously where coprorate secrets and sensitive information are being shared the blog would have to be private and not accessible by members outside the group. Google is a company that has become a big user of blogs to enhance communication amongst its employees - perhaps this was a factor in it acquiring the blogger software that it now provides for the public to use.

The Economist newspaper (Blogging Goes to Work, 11th March 2004) refers to a slightly different kind of product that can be used for collaborative projects - the wiki. This is a web page that can be edited by any authorized user (apparently "wiki" means "quickly" in Hawaiian). Members of the ISO at the University of Portsmouth make use of wikis to communicate with each other. Like blogs wikis can of course link to regular web pages or intranets where more lengthy and formal documents are stored.

IT Professional make use of public blogs to share ideas and information (that is not of course subject to intellectual property restrictions). For example Tim O'Reilly of weblog.oreilly.com has recently been running a discussion on the question "could the browser function as the interface for all network applications?" (could the web work as an "Internet Operating System"?). Bill Thompson, who contributes regularly to the BBC web pages on IT and technology issues, has his own blog called Billblog[http://bill.verity-networks.com/billblog/].

The blog is seen by marketing people as the perfect device for promoting products, especially as direct marketing by e-mail tends to be viewed as spam.[See "The Blog Marketing Explosion by Richard Ord on the WebProNews.com site - the article is dated 24-10-05 -
http://www.webpronews.com/insiderreports/searchinsider/wpn-49-20041005TheBlogMarketingExplosion.html]

Diet blogs
Amy Harmon (New York Times 25th August 2003) gave an example of a rather different kind of use for blogs - by dieters providing a kind of online weight-watching service, documenting the blogger's weight on a daily basis, giving dieting tips and ideas and linking to other dieter's blogs to provide mutual support.

Freakonomics and podcasting

2005-06-13T16:30:00.000+01:00

Over the weekend I travelled by train rather than car to see my mother, and this gave me the chance to catch up on some reading. (I didn't take my laptop and my mobile phone stayed switched off for the entire length of the journey!). It gave me the chance to catch up on some reading that I have been looking forward to for some weeks. The book I have been itching to read has the eye-catching title "Freakonomics" http://www.freakonomics.com/ by Steven D Levitt and Stephen J Dubner. Levitt is a Professor in the Department of Economics at the University of Chicago http://www.src.uchicago.edu/users/levit/ and Editor of the Journal of Political Economy. Dubner is a journalist who wrties for the New York Times and The New Yorker. The book grew out of the collaboration between the two after they met when Dubner went to interview Levitt, who is one of the most interesting economists of his generation. If you haven't come across him before I recommend that you take a look at some of his work - especially if you think economics is too full of mathematics or is too distant from real world problems.

Why mention this book on my enetstuff blog you may ask? The reason is because there are several references in this informative, entertaining and extremely readable book to issues relating to economics and the internet. For example in chapter two, which is all about the value of information, but which is intriguingly titled "How is the Ku Klux Klan like a group of Sumo wrestlers?", he discusses the dramatic fall in the price of life insurance policies in the late 1990s due to the improved information on the prices of such policies provided by price comparison sites such as Quotesmith.com. Some other forms of insurance where the risk relates to the particular characteristics and circumstances of the individual are more difficult to compare, but thirty-year term life policies for $1 million are homogeneous and this makes price comparisons straightforward. Levitt and Dubner point out that almost overnight customers in the US were paying in total about $1 billion less a year for life insurance. Search costs had been dramatically reduced and so had the power of the insurance companies selling such policies to overcharge.

By the way, Freakonomics has it's own blog at http://www.freakonomics.com/blog.php

I also read The Observer newspaper where I found an interesting snippet about podcasting (http://observer.guardian.co.uk/business/story/0,6903,1504433,00.html - scroll down for the story "Downloads on the up in Radio Pod"). Podcasting is the method of making available audio files via the Internet and it is being taken up by traditional broadcasters such as the BBC, as well as by individuals who don't have access to the usual radio broadcasting outlets. The success of Apple's i-pod means that lots of us out there have the means of listening to MP3 files at the time and place of our choice - so we don't have to tune in just at the set broadcasting time. The BBC has recently been running a trial, making available some of its programmes via the web for downloading onto computers and i-pods. The Observer reporter quotes Simon Nelson, controller of BBC radio and music interactive, as saying "It's surpassing all our expectations. The future is extremely bright. This is the way people expect to get radio in the future."

One of the programmes taking part in the experiment is "In Business" the weekly Radio 4 programme introduced by Peter Day. I particularly recommend that you listen to last week's programme called "Look, no wires" in which Peter Day investigates the growth of wireless networks and the way it is affecting business - http://www.bbc.co.uk/radio4/news/inbusiness/inbusiness_20050602.shtml.

Yahoo auction fees scrapped in the US

2005-06-10T13:00:00.000+01:00

One interesting story this week is that Yahoo! have
announced that the Yahoo auction site (in the US) will be free
to users, with the costs being covered from advertising
revenue rather than subscribers fees. This is obviously a
move designed to take market share from eBay. Last week
eBay announced plans to buy the comparison shopping
search engine Shopping.com This will be an interesting area
to watch.

Welcome

2005-06-08T11:31:00.000+01:00

Hello everyone

I am creating this blog mainly to support two courses that I teach:-

1 The Economics of the Internet (ENET). This is a module available on postgraduate economics programmes at the University of Portsmouth. The web page for the module is
http://userweb.port.ac.uk/~judgeg/ENET/

2 The Internet for Business Economists (IfBE). This is a module on the BSc Business Economics and Computing degree at the University of Surrey. The web page for that module is
http://members.lycos.co.uk/guyjudge/IfBE2003.html

Both courses aim to show the relevance and importance of economic concepts and models in explaining the development and the pattern of growth of the Internet and its impact on economic activity of various types, and to examine a range of other economic issues raised by the development of the Internet.

I often want to alert students to new developments in the technology, or its use, or point them towards new journal articles or books discussing such developments, particularly from an economics point of view. And I want feedback from the students too, either pointing out things they have come across, or debating issues such as "Would a system of e-mail stamps help to get rid of spam (Unsolicited Bulk Emails)?"

But this blog is available to anyone who might stumble across it to contribute. You can be as formal or informal as you like in your postings - but please keep it clean!

Guy