Virulent Word of Mouse

October 19, 2010

Gateway economics

It has become fashionable among Internet and Web watchers to notice threats on the horizon to the open Web. For example, in garish colors, Wired magazine’s September 2010 issue declared the open-access Web dead. Jonathan Zittrain’s 2008 book, The Future of the Internet and How to Stop It, developed a related thesis in great detail (as well as much more).

Economics tends not to take such an alarmist approach to the future of the web, viewing it with more equanimity or acquiescence, depending on your perspective. Today I want to illustrate that approach by discussing a specific practice, gatekeeping, which is an anathema to many openness advocates.

Gatekeeping encompasses two related activities. In one case, a vendor controls and manages a user’s access to proprietary content, charging a fee for access. Famous recent practitioners include Rupert Murdoch, whose company, News Corp, owns the Wall Street Journal. His company does not allow unrestricted viewing of online articles from the Journal. From time to time Murdoch publicly mutters a threat to block search engines from indexing his site if such blocking could lead to more revenue.

In a second type of gatekeeping, a vendor uses proprietary code to control and manage a user’s, developer’s or advertiser’s experience. The most famous practitioner of this approach was Bill Gates. Recently Steve Jobs, whose rules for iPhone app developers change frequently, has been getting all the attention for restrictive practices.

Let’s take a closer look. (more…)

July 16, 2010

Digitization and Value Creation

Often, the simplest economic questions are the hardest to answer. Consider these: How much economic value did the massive decline in the cost of digitization in the last two decades create? And, would a similar level of decline in the next decade create the same amount of value?

These are surprisingly difficult questions to answer. Do not get me wrong. Obviously, large cost declines create new value. How much value? We can look deeply at the past but still find it hard to answer that question with any precision. Many factors enhance or limit the extent of value created. If we cannot analyze the past, surely predicting the future is fraught with challenges.

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April 27, 2010

Bleeding Edge Mass Market Standards

To have a large impact, bleeding-edge mass market standards must do two things: diffuse widely and provide new functionality. Curiously, however, while these standards often get built from very advanced technologies, they cannot deploy on a wide scale without building upon other widely deployed routines or less-advanced processes.

Successful deployment of a bleeding-edge mass market standard can bring about enormous change. Consider what happened after the design of USB2 became available. Interested parties monitored the upgrade to USB, understanding that their near rivals did the same. All these parties subsequently made products compatible with USB2 and differentiated along the dimensions in which they had competitive advantage. Consequently, a range of innovative products emerged—storage devices, printers, cameras, keyboards, … you name it.

There is something paradoxical about this pattern: A standard at one layer enables more novelty on another. And a change to the standard—upon which many others build—can enable an even wider range of innovative services.

This issue’s column discusses the determination of new standards in mass markets, an event that shapes such paradoxical outcomes and hence market structure and firm strategy. It is worthwhile to take a moment and examine the patterns. (more…)

April 3, 2010

Everyday Items and Induced Innovation: the Winter Tomato

Filed under: Amusing diversions,Capturing and creating value,Essays — Shane Greenstein @ 7:32 pm
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Let’s discuss tomatoes in winter. Not just any tomatoes. Focus on the big juicy ones that seem out of season when they appear at the grocery store in January. Customers that suffer through the short days of winter pay a little bit more for them — it feels good to taste spring a little earlier.

Ever wonder how those tomatoes got there? They could not be grown nearby. The freezing cold would kill them. So how do they get there?

An article in the New York Times explained it for the east coast. Tomatoes grow in greenhouses in Maine. The article is very nicely written, and though it is not advertised as such, it explains many facets of demand-induced innovation.

Such juicy illustrations do not come along every day, so this one is worth some trouble. It is also enjoyable to use an everyday item like tomatoes to illustrate a deep point about innovation.

Many innovation junkies might have missed the article. The Dining and Wine Section featured it. That section aims its articles at at foodies, not techies. Of course, some techies are foodies, but many are not and would just skip the article altogether without a thought.

Ah, but I have a weakness for innovation with everyday items. Perhaps you do too. Let’s see what the article said.

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February 22, 2010

The Facebook traffic juggernaught continues to roll…

Filed under: Capturing and creating value,Short observations — Shane Greenstein @ 6:11 pm
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The two step in “give away” economics is well known. Step 1: Give it away to build a large installed base; Step 2: Turn on the switch and start charging. Which leads me to ask: What does Facebook think it is doing? They seem to have step 1 perfected. As you will see below, their traffic statistics are staggering.

That conclusion is prompted by an observation made on the blog, LostRemote, which tracks new media issues. They picked up on these two facts.

First, Facebook has surpassed Yahoo as the second most popular destination on the Internet. Look at the following graph to see this trend. In the last month Facebook passed up Yahoo, second only to Gooogle.

BTW, this graph comes to us from compete.com, who has a nifty little web-analytic tool on its web page. It allows one to compare any site to any site.

For example, just for fun I compared the traffic at Wikipedia, Ask.com, and YouTube.com. Here is what I got. Cool, isn’t it? According to this, Ask.com is not doing too bad, and YouTube still blows away Wikipedia, at least in terms of unique visitors.

But I digress. Back to Facebook.

Facebook has one other interesting feature. Its visitors spend a lot of time there. According to LostRemote, the fraction of time on Facebook continues to increase. See this graph.

Users spend quite a lot of time at Facebook, once they get there. According to these statistics, it accounts for 12% of the time online of users.

This statistic seems so staggering it seems implausible. If it accurately reflects user orientation towards Facebook, then that site is sitting on a dominant Web hub of information.

Which leads to my last question: Where is step 2? When is Facebook going to turn on its switch and start charging?

Something to think about the next time you log on to Facebook and share with your friends…. Just how does the management expect to make money from so many users who spend so much time on line? And will users like it as much when management finally does begin to try to monetize all that traffic?

January 26, 2010

A few riffs on the cost of a smart phone

Sometimes one simple fact illuminates many others. Here is one about smart phones: They cost less than $200 to manufacturer. You heard that right, less than $200.

This fact comes to us from the Economist, which ran a wonderful article about the art of tear-downs — namely, taking apart products to understand how they work. I recommend the article. The facts about smart phones emerge as the article explains its broad theme.

The table at the left (taken directly from the story) gets the key point across. These pieces of hardware cost very little. Look at it. Somebody took apart phones, analyzing the costs of the components, and could find no more than $170 worth of components and other parts.

Think about it. That is not much money. Let’s riff a bit on this simple fact. I invite you to riff on it as well. (In case you are unfamiliar with the phrase, according to Webster’s online dictionary, a “riff” is an ostinato phrase — as in jazz — typically supporting a solo improvisation. )

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January 18, 2010

Wifi on wings

Ever since the creation of the Web turned the Internet into one very large and rather oversized information bazaar, there has been one surefire way to generate revenue, selling access to the Internet. And there has been one way to grow revenue – find better or different ways to provide access.

In that light I have seen the latest attempts to extend Internet access into new domains. It flies. It is also pathetic.

More concretely, on a recent flight between Chicago and San Francisco I purchased wifi access. I want to talk about this experience.

On one level it was rather cool – actually, very cool, mega-cool, gee-whiz cool, or whatever adjective you want to use for the first experience with a new technology.  Here is what I mean. I sent email from 35K up in the air. I surfed while soaring above the Rockies. My kids in the passenger seats listened to their iPods, and I sent an email to my brother telling him we would be on time for dinner, and he replied that he got it (all this took place while we were more than 90 minutes away from landing). It made me giddy to use something so technically novel.

On another level it was also rather pathetic. The Internet has touched yet one more part of society, the airplane, one of the last quiet corners of the globe. I faced the beast and gave in without a fight. I could not resist the temptation to touch the Internet on an airplane. I could not resist the online addition for even four hours. Like all addicts, I really enjoyed the experience while it lasted, but after it was over it made me wonder about myself. (more…)

December 14, 2009

The evolution of value in smart phones, or “Why does my iPhone drop so many calls?”

Randall Stross writes the Digital Domain in the Sunday New York Times. In a recent column he discusses the quality of iPhones and AT&T’s network. His point is obvious from the title of the column: “AT&T Takes the Blame, Even for the iPhone’s Faults.”

Much to Stross’ credit, he investigated common misconceptions about the quality of AT&T’s network. He concludes that AT&T’s network has done reasonably well with the  growth of traffic generated by the iPhone.

More to the point, Stross concludes that popular perceptions about AT&T’s network miss the mark, as do Verizon’s commercials.

I recommend this piece even though I thought it was incomplete.

Let me say that more sympathetically. Stross gets only 800 words, which allows for only one major point. It is no surprise that Stross does not say many things.

Specifically, he does not say that the iPhone’s success foreshadows a large transformation in the flow of value within the market for mobile handsets. He does not say that this transformation coincides with an irreversible change from old rules and new rules in the structure of the value chain supporting the cellular phone market.

But if he had had more space he could have said it.

So let me be blunt. I think I understand the rules of the old game and the rules of the new. I think I understand what game Apple is playing. If I had to bet, I also would bet against AT&T.

These are the points of this post.

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November 19, 2009

A network of platforms

The Internet has been called a “network of networks.” Although the phrase once had meaning, it is misleading today. It does not reflect how commercial behavior has shaped the Internet’s evolution.

Leading firms and their business partners view the commercial Internet through the same lens they view the rest of computing. To them, the Internet is a market in which to apply their platform strategies.

That is my point. The commercial Internet should be called a “network of platforms.”

This might sound like a philosophical rather than a pragmatic observation, but hear me out. Most firms and users are better off with platforms than without. Yet, if the behavior of prior successful platforms predicts the future, problematic issues will inevitably arise.

This will take some explaining.

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October 25, 2009

After Baby Einstein’s first steps: innovation with ambiguity.

How would most parents react to the following product? If they buy a DVD and show it to their babies, the babies will get smarter, raising their chances of getting into Medical School.

If that seems too good to be true, then perhaps you never have heard of the Baby Einstein Company. I am exaggerating their claims, but their products have attracted attention from consumer protection groups.

Believe it or not, the observation has something to do with high tech.

babyeinstein1Baby Einstein’s tale illustrates how markets quickly develop new opportunities opened by scientific research, even when the research has a flimsy foundation. Market behavior cannot be described as “Steady, aim, fire.” It is more like “Fire, aim, steady.”

More to the point, this episode illustrates a tendency of markets to introduce new innovative products that take advantage of ambiguous scientific discovery. The phenomenon is pervasive in pharmaceuticals, biotech, and genetically modified organisms, not to mention many other medical device markets. Baby Einstein just happens to be easier to understand, so it makes for a great illustration of the process. (more…)

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