1. Information Business Models & The News:
When Free Works and When it Doesn’t
Doesn t
Marshall Van Alstyne
Visiting Professor, MIT Sloan School
Vi iti P f Sl S h l
Associate Professor, Boston University
T: 617-358-3571
E:
E marshall@mit.edu or mva@bu.edu
h ll@ it d @b d
Proprietary & Confidential © 2009 MIT Center for Digital Business. All rights Reserved.

2. Revenue Sources before the Web
Revenue Sources before the Web
Classifieds Advertisements Subscriptions
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3. How does this really
How does this really work?
Consider
Content Creation vs. Content Consumption
3

4. Normal Economic Pricing
Normal Economic Pricing
• Usually, you lower price
Usually, you lower price
until value on the next xxxx Demand xxxx
unit sold makes up for P
losses on sales you
would have made at a
higher price.
hi h i P
• Free pricing gives up all
profits on every unit
profits on every unit P
sold.
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5. A network effect stimulates additional demand
as consumption increases.
A “2‐sided” network effect crosses markets from say
content consumers to creators or creators to consumers.
This causes demand in an adjacent market to grow.
This causes demand in an adjacent market to grow
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6. Consider profits in two markets
Market One Market Two
(Acrobat Reader)
(Acrobat Reader) (Acrobat Distiller)
(Acrobat Distiller)
Charging Charging
for
f content
t t for
f content
t t
consumption creation
Initially, there are profits to be made in both markets.
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7. Consider profits in two markets
Market One Market Two
(Acrobat Reader)
(Acrobat Reader) (Acrobat Distiller)
(Acrobat Distiller)
Subsidizing Charging
content
t t for
f content
t t
consumption creation
But subsidizing market one can increase profit in market
two more than enough to cover losses in market one.
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8. Consider profits in two markets
Market One Market Two
(Operating Systems)
(Operating Systems) (Developers)
Charging Charging
for
f content
t t for
f content
t t
consumption creation
Initially, there are profits to be made in both markets.
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9. Consider profits in two markets
Market One Market Two
(Operating System)
(Operating System) (Applications Developers)
(Applications Developers)
Charging Subsidizing
for
f content
t t t t
content
consumption creation
But subsidizing market two can increase profit in market
one more th enough to cover losses in market t
than ht l i k t two.
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10. Consider profits in two markets
Market One Market Two
(Operating System)
(Operating System) (Applications Developers)
(Applications Developers)
Charging Subsidizing
for
f content
t t t t
content
consumption creation
Q1 Q2
q1 = Q1 + e21q2 − p1 q2 = Q2 + e12 q1 − p2
V1 V2
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11. Getting Free Pricing Right
Getting Free Pricing Right
1. Ability to capture cross‐ 1. Mistake of Netscape
side effects
side effects
2. User sensitivity to price & 2. Denver vs. Boston real
quality estate markets
3. Value added 3. Mistake of Apple
4. Marginal costs 4. Mistake of FreePC
5. Interfering same‐side
f i id 5. Mistake of Covisint
effects
6. Marquee providers
Marquee providers 6. Mistake of Microsoft
6 Mistake of Microsoft
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12. Getting Free Pricing Right
Getting Free Pricing Right
1. Ability to capture cross‐ 1. News needs a complement
side effects
side effects
2. User sensitivity to price & 2. Sometimes charge readers
quality sometimes writers
3. Value added 3. Readers can add value
4. Marginal costs 4. Print vs. Digital distribution
5. Interfering same‐side
f i id 5. Readers can add noise
effects
6. Marquee providers
Marquee providers 6. Don t alienate Mossberg,
6 Don’t alienate Mossberg
Krugman, Dowd…
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13. Two‐Sided Platform Markets
Product Category Mkt 1 Product Intermediary Mkt 2 Product
Portable Documents Document reader* Adobe Document Writer
Credit Cards Consumer credit* Issuing bank Merchant Processing
Operating Systems Complementary Microsoft, Apple, Sun Systems Developer
Applications Toolkits*
HMOs Patient Treatment * Kaiser, Harvard Pilgrim Doctors’ Expertise
Ladies’ Nights Men’s Admission Bars, Restaurants Women’s Admission*
TV Format Color UHF, VHF, Sony, Phillips, RCA Broadcast Equipment
HDTV*
Web Search Web Pages Sought* Google, Yahoo Web Pages Supplied
Computer games Game Engine/ Player Games Publishers Level Editors*
Auctions Buying* E-bay, Christie’s, Selling
Sotheby’s
Real Estate Home buyers* Multiple Listing Service Home Sellers
* Indicates which market is discounted, free or subsidized. Source: Parker & Van Alstyne 2002
13

14. What Happened to Papers & Magazines?
What Happened to Papers & Magazines?
Classifieds Advertisements Subscriptions
These are all 2-sided networks © 2009 Van Alstyne, Permission granted to
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15. Info/News Business Models that Can Work
Info/News Business Models that Can Work
Info as Process Platform Value Add
Credentialing User Generated Content
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16. Information as Process
Information as Process
WSJ Interactive Features
• State by State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.html
State‐by‐State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.html
• Immigration Slow Down Data:
• http://s.wsj.net/public/resources/documents/st_CENSUS0921_20090922.html
• Timeline Two Years in the Credit Crisis:
Timeline‐ Two Years in the Credit Crisis:
• http://online.wsj.com/public/resources/documents/Two‐Years‐of‐Market‐Turmoil.html
NYT Interactive Features
• 2008 Election Results:
• http://elections.nytimes.com/2008/results/president/map.html
http://elections nytimes com/2008/results/president/map html
• The Debt Trap
• http://www.nytimes.com/interactive/2008/07/20/business/20debt‐trap.html
• Murder New York City:
Murder – New York City:
• http://projects.nytimes.com/crime/homicides/map
Research support provided by Bryan Woliner

17. Info/News Business Models that Can Work
Info/News Business Models that Can Work
Info as Process Platform Value Add
Credentialing User Generated Content
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18. Old Story
Old Story
Price
Leftover Consumer Value
P
Profit
Cost
Q Quantity
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19. Marketing Answer: Custom Pricing
Marketing Answer: Custom Pricing
Price
Prices Tailored for Different Segments
P1
P2
Profit
Cost
Q Quantity
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20. Instead Try Custom Information
Instead Try Custom Information
Price NEW Consumer Value
P1
P2
Profit
Cost
Q Quantity
Freebie: Access to Current News
Paid: Save stories, add comments, interactive content, crosswords, search archives,
custom stock updates
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21. Info/News Business Models that Can Work
Info/News Business Models that Can Work
Info as Process Platform Value Add
Credentialing User Generated Content
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22. FiveThirtyEight rates the errors of polls – and
produces quite accurate statistical models
produces quite accurate statistical models
FiveThirtyEight.com has 17,800 links whereas NYTimes.com has 12,800

23. Info/News Business Models that Can Work
Info/News Business Models that Can Work
Info as Process Platform Value Add
Credentialing User Generated Content
© 2009 Van Alstyne, Permission granted to
redistribute so long as this notice preserved

24. Amazon: Most helpful positive and negative ratings of “Audacity of Hope”
Slashdot: Five star “Funny” and “Insightful” comments on Dam Burst
program to get around China’s Green Dam censoring software.

25. Summary Observations
Summary Observations
• Use 2‐Sided Networks to understand when free
Use 2 Sided Networks to understand when free
works and doesn’t (content creation / consumption)
– Can measure tradeoffs and anticipate colliding platforms.
– Follow the implied pricing rules
• News & Information Business Models
– Information as process (can own this!)
– Add value to platforms
– Credential & Clear‐the‐clutter
– User generated content
User generated content
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26. Van Alstyne Information Economics
Research
h
Products &
Products & Communications Information &
Information & Economics of IP &
Economics of IP &
Network Effects Markets (Anti‐Spam) Productivity Open Source
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27. Papers
• “Information Complements, Substitutes & Strategic Product Design”
Information Complements, Substitutes & Strategic Product Design
Parker & Van Alstyne (2000)
http://ssrn.com/abstract=249585
• “Two Sided Networks – A Theory of Information Product Design”
Management Science, 51(10) 2005 pp. 1494‐1504.
http://ssrn.com/abstract=1177443
• “Strategies for Two Sided Markets” Harvard Business Review,
Eisenmann, Parker & Van Alstyne (2006) Oct. pp 92‐101.
http://hbr.harvardbusiness.org/2006/10/strategies‐for‐two‐sided‐markets/ar/1
marshall@mit.edu mva@bu.edu