Earlier last week, the CRTC (Canadian Radio-Television and Telecommunications Commitee) dropped a bomb on the Canadian world of Internet: ISPs in Canada will soon be obligated to charge internet users according to their broadband usage, or commonly know as Usage-Based-Billing (UBB). Put simply, the more you download, the more you pay. It’s no surprise this decision raises lots of questions and anger from Internet surfers & programmers alike; everyone wonders if it’s really a good idea. Continue reading
Category Archives: economic theory and internet
Group Buying, The Renaissance of an Old Economic Concept
Because my latest professional article talks about digital economics, I thought it was relevant to post it on my personal website. Continue reading
Supporting Wikipedia, perfect pricing!
Yup, I am among those who show their support to Wikipedia. Funny because it reminds me of a concept I got to learn in school: perfect price discrimination (ppd). PPD happens when the client chooses what price he will pay for a product in particular. Radiohead displayed a wonderful example of this concept with their release of their album “In Rainbows”, where fans could choose the price he or she would “donate” in exchange for the album online. Wikipedia’s fund-raising campaign is basically the same recipe.
I think PPD is an interesting economic model for the web; it’s quite possible the only place where it actually works well. Think about it, would grocery store owners rely on the goodwill of their clients and let them pay whatever price they would like to pay for food? It’s only natural to assume he would not. No, it’s only natural to assume it’s just crazy. Just like any business, he’s got tons of things he needs to pay & tons of things he needs to buy.
Web businesses on the other hand, do have employees, computers and such, but costs are most of the time less of a burden than those of a traditional brick & mortar company. I’m talking about the typical high-value software company where supplies cannot go sour or break (unless people are throwing computers around the office) and profit margins are usually higher. In this case, PPD may sound a lot less scary as you do not have numerous suppliers waiting for you to pay your bills. You rely on the goodwill of people because you somewhat can do that.
Of course there is a downside to that and you’ve probably guessed it already: no cookies for Santa. That’s right, having nobody paying can mean that you’re going to have to lock those doors and say goodbye to the company you’ve been wanting to build so badly. Like Santa, you’ve been working hard to provide something that is amazing, but no one is willing to give something back.
Like I mentioned so many times in my blog, part of the problem comes that divulging information is so cheap on the web. Protecting that information can somehow prevent free riders from getting away with the prize, but there is always a way to get this information for free legally or not.
Relying on the people who understand that businesses & organizations cannot survive without a little financial help is a great way to keep things going. If you use Wikipedia a lot, show some support. I think it’s one of the greatest inventions of the Web.
Our friends Cobb and Douglas
Re-reading my old macroeconomic books the other day, I ran over a familiar equation. Anyone into macroeconomics will recognize this famous formula:
You’re right! It’s the famous Cobb-Douglas function. Quite possibly one of the most common and basic functions in ‘no-so’ modern economics (it is almost 82 years old to this day…). For those who have a more techy background, this function is an aggregate decomposition of a country total production Y, given the quantity of capital K and labor L. The Beta value is the estimated return value attributed to capital. In other words, for every dollar produced in Y, a certain percentage of this production is due to the fact we own machines. The ‘A’ factor measures how efficiently capital and labor are used together to produce Y. It is said that Beta’s value in America is about 0.3, so 30% of the country’s production is caused by machines.
Now here’s my question: in the world of the IT industry, what would the value of Beta actually be? Programmers do most of the work to produce electronic goods (software and applications), but the actual hardware used is necessary for him to work. Not to mention ad networks who let their servers distribute advertisements to their publishers! So who’s working harder in the IT business? The machines themselves or the humans behind them?
If some day, the world truly is regulated by virtual reality like some would acclaim (I’ll get the sources back I promise), my first guess would be that the value of Beta would get closer to 1 right? My second guess would come back to my team at work who have been building a software for more than year now, and it’s a lot of work. While once the technology itself will bring in some revenues and we will just have to sit down and watch them come in (boy would that be nice!), we’ll still need to think about all the hard and long hours the whole team put into building it. Let’s not forget all the maintenance and other supporting costs. So in the end, if all IT companies have to go through all this hard work, the actual value of Beta might be going down below 0.3 as we become more and more digital!
Innovation dilemma
I recently read the book ‘Innovator’s dilemma’ by Clayton M. Christensen. To be honest, it was really great. When I first started reading the book, my expectations were not that high. Going through it, I changed my mind. If you’re into this business, I strongly recommed it if you’re into the web industry or any other IT related stuff.
The book adresses the question as to why big companies with so much ressources fail in developping and entering new markets. As he explains, it’s not always a question of bad management, it’s not always bad employees, it’s not the change resistance as so many people imply. Most of the time, companies are just being rational, they are just following classic microeconomic theory.
In order to survive, companies who build a value chain with their customers must respect it by satisfying their needs. The problem is that value chains change in time. Smaller markets may not appear to be interesting for big companies right away. The big question is, when and how should you invest into emerging markets? Too quickly and you might make a big mistake of falling into a lemon. Too late and you might miss the boat.
Think of Microsoft and Google, this is the best web example I could think of. Google started its business when the web wasn’t so huge and search was, well, not so impressive. Not to mention advertising who was still at an early stage. Back then, Microsoft was into its glory years with Windows 95 still important (I know, I know, I was still using it in 1998) and the Office suite was more popular than ever. Little did they know that a decade later they would be interested in buying Yahoo for over 47G$.
Was Microsoft being stupid? Looking back yes, but that was in 1998 and the company was busy doing other things. Online search wasn’t worth billlions back then; the cost of developping the proper infrastructures wasn’t really worth it back then.
One thing Microsoft did right was acquiring Hotmail in 1997; MSN hotmail is still incredibly popular. Google took some time to catch up, but thanks to its incredible power over the web, it was actually the first one to offer over a gigabyte of space (remember when 1.5 MB was big?). Despite that, MSN hotmail is still very popular today.
There are many things going on the web right now and technology in general. I wonder who will be king in 20 years? If you know, please tell me!
Adspots: inelastic supply curve?
Mike on ads is a website that I really like. Anyone who is interested in knowing more about ad networks and online advertising should check it out.
Online advertising sure is a hot topic these days. While the phenomenon is spreading across the Internet very rapidly, it presents a huge weakness. Publishers seeking to sell their inventory have to keep in mind consumers are actually the producers: visitors create the inventory and are exposed to the advertisements.
Well, it all depends on how you look at it: advertisers are the ones buying the inventory while publishers are the ones selling that same inventory. To the first degree, advertisers are the actual consumers of the advertising space on a website. Ultimately, the users are the ones seeing the ads, hence the ones who ‘consume’ them.
Let’s push the analysis further; as I mentioned, advertising business model is huge nowadays on the Internet. More and more publishers rely on this sort of business model to cover for the ‘free’ services they offer over the web. In the long run, is this efficient? Can all these websites and web projects survive with this kind of business model?
I don’t think so.
The advantage of online over traditional advertising relies on its targeting abilities. Any producer of goods and/or services advertises for marketing purposes. Advertising triggers sells (hopefully!) with a certain cost. Under perfect information, the advertiser knows exactly to whom it should show ads to maximise ROI. Under imperfect information, advertisers spend a lot more of marketing costs because they try to reach broader audiences, most of them who are not potentially customers. Not now, not ever. So advertisers are left paying buffer placements.
Internet is said to be a place where the content adapts to consumers, not the opposite. The more information we possess on users, the less advertisers will pay for buffer placements. All things held equally, in the long run advertiser’s budgets should diminish.
Fortunately, we can never know for sure what consumers want. Let’s not forget the fact people change over time. Personally, I don’t want the same stuff today that I wanted 15 years ago and so do you.