1. May 12, 2014
University of Milano Bicocca
URBEUR-QUASI PhD Programme
The evolution of the
Web Part II: The driving
forces
Roberto Polillo
Department of Informatics, Systems and Communications
University of Milano Bicocca
www.rpolillo.it
2. The paradox of Free
"People are making lots of money charching nothing.
Not nothing for everything, but nothing for enough
that we have essentially created an economy as big
as a good-sized country around the price of $0.00.
How did this happen and where is it going?"
Chris Anderson,
Free – The future of a radical price (2009)
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3. "Lots of money?"
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4
(born1975)
Devices,
Apps &
content
(born 1998)
Ads
(born 1975)
Software
(born 1994)
e-
commerce
( born 2004)
Ads ←main business
(but things are not so
simple…)
12 months ending
March 2014,
according to
WolframAlpha
Billion
USD
344
83
23
483
174
37
381
60
13
160
8 1,5
157
66
0
4. What we will try to do today
Understand some of the driving forces which are
shaping the economics of the Web ecosystem…
…and their impact on us
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5. We will do it in 6 steps
1. One, two and multi-sided markets
2. Network esternalities
3. The new technologies adoption cycle
4. The drift to monopolies
5. Customer lock-in
6. The problem of the net neutrality
… and will discuss some important consequences
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7. One-side market
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Buyer
Seller
Product /
Service
$
"You pay money,
you see camel"
Anonymous
(probably from circus)
8. Two-sided market
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Cliente
(tipo 1)
Cliente
(tipo 2)
Fornitore
Credit-card
companies
Venditori Titolari di carta di
credito
SubscribersAdvertisers
Media companies
Night clubs
Men Women
S
ervizio
2
S
ervizio
1
$1 $2
Not everybody
must pay with
money
9. Example
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Audience "pays" with
his/her attention
Audience "pays" with
his/her attention
Large, “subsidized”
user base
Large, “subsidized”
user base
Small, profitable
customer base
Small, profitable
customer base
Product / service
, [$]
10. Example
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Product / service
Google,
Facebook, …
Google,
Facebook, …
User info
Subscriber
s
Targeted
ads
Online
service
s
14. Externalities (network effects)
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Buyer
Seller
Product /
Service
$
We have an externality when the value
of a product or service for its user
depends on the number of its users
Positive externality:
when I buy a product or services, I generate
a benefit to the other users
E.g.: telephone, fax, sjype, social network, …
Negative externality:
in this case I generate a damage to the
other users
E.g.: when I connect to an Internet access
point
15. Externalities (network effects)
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Customer
(type 1)
Customer
(type 2)
Supplier S
ervice
2
S
ervice
1
1 2
3
4$1 $2
4 types (each can be positiva or negative)
16. Positive externalities: consequences
17
The number of subscribers of services based on networks
can grow extremely fast
When there are many subscribers, they may accept to pay
an higher price for the service
Typical example: a service is initially free to grow the user
base, then paid
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18. New technologies adoption curve
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100
%
50%
0%
S-shaped curve
("logistic function")
Innovators Early
adopters
Early
Majority
Late
Majority
Laggards
"entusiasts" "visionaries""pragmatists" "conservatives""skeptics"
Bell curve
(incremental growth:
S-curve derivative)
"chasm"
Cfr: G.A.Moore,
Inside the Tornado,
1995
Here the process
may stop
19. Example: penetration of fixed telephony in the USA
20
Wall Street crash (1929)
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23. The drift to monopolies24
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24. Positive feedback
If a product / service with positive externalities gains a larger market
share with respect to its competitor, it will obtain larger and larger
market shares, toward the 100% market share
25
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W.Brian Arthur, “Increasing Returns and
Path
Dependence in the Economy”, 1994
« For whoever has
will be given more,
and they will have an
abundance. Whoever
does not have, even
what they have will
be taken from
them. »
Matthew, 25-
29
Positive feedback,
"Law of increasing
returns",
"Winner takes all"
25. Consequences
26
First mover advantage: he who gains market shares before his
competitor has a very large competitive advantage
Butterfly effect: the success of a technology may depend on
fortuitous facts which afford small advantages at the beginning,
which start an "avalanche effect" which may have nothing to do
with its technical qualities
Standard de facto: computer industry is dominated by de-facto
standards dictated by first movers (de-iure standards aften fail)
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29. Two product categories
Non-systemic products
Can be used independently from other products
E.g.:: umbrella; Coca Cola; banana
“Law of decreasing returns”: negative feedback
Systemic products
To be used, they need other products
E.g.:
Car (needs gas stations, roads, …);
Software (needs a complex ecosystem …)
“Law of increasing returns”: positive feedback (“winner takes all”)
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33. The problem of the net neutrality34
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34. What is “Net Neutrality” (NN)
It is the principle by which all data get carried with the
criterium of "best effort”
I.e. data are all treated equally, and the network does not
discriminate on the basis of their origin or destination, of
their content, and the platform used
It is (more or less) the basic Internet design principle
This principle is now strongly debated
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35. Internet protocol hierarchy
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HOST HOSTROUTER ROUTER
Applicazione
Trasporto
Internet
Network
Internet
Network
Internet
Network
Applicazione
Trasporto
Internet
Network
The transport network is
“stupid”
Here all the application
intelligence
36. "Net neutrality means an Internet that enables and
protect free speech. It means that Internet service
providers should provide us with open networks –
and should not touch any apps or content that ride
over those networks."
www.savetheinternet.com
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37. ISP positions
Bandwidth requirements are continuously growing
→ the infrastructure must grow
This entails large investments by ISPs, but now the big
money goes only to the CSPs (content service providers)
→ we need new pricing mechanims to remunerate these
investments
→ we need to be free to explore new business models
→ avoid restrictive rules, let the free market get its
equilibrium
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38. ISP: some possibilities to increase revenues
CSP tiering:
Commercial agreements between ISP andCSP to
prioritize their traffic
User tiering:
"Walled gardens"
Paid “Quality of Service” on specific services
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40. The risks
CSP tiering:
Traffic from competitor CSP is degraded →
major CSPs monopoly
Startups are left out
User tiering:
Low quality for non paying users
Walled gardens: access to information and expression is
limited
In both cases: large ISP have a large influencing power on
our access to information and possibility of expression
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42. R.Polillo - Marzo 2014
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"Allowing broadband carriers to control
what people see and do online would
fundamentally undermine the principles
that have made the Internet such a
success"
Vint Cerf
45. The two sides of the net - 1
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Free services
The end of the privacy”
We stop paying in cash, but in information about ourselves
The citizen as a consumer
46. The two sides of the net - 2
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Every information
at our fingertips
…. but unreliable”
“The distinction between trained experts and uninformed amateurs
becomes dangerously blurred, truth becomes a commodity to be bought,
sold, packaged and reinvented “ (A.Keen)
47. The two sides of the net - 3
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Individualized
assistance
The “filter bubble””
The variety of information is reduced by filtering algorithms,
which filter away what we and our social network do not "like”
“Imagine a world where you never discover new ideas” (E.Parisier)
48. The two sides of the net - 4
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Freedom of
expression
Ease of control”
Our opinions can be easily monitored
E.g. E.Snowden case
49. The two sides of the net - 5
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Augmented
socialization
Social interaction overload
300 ml photos shared daily on Facebook
The “dictatorship” of notification systems
”
50. The two sides of the net - 6
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Powerful
cognitive
augmentation
Unknown cognitive reshaping ”
“Is Google making us stupid?” (N.Carr)
51. The two sides of the net - 7
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The quality
of access
The end of the “net neutrality””
What we access online is regulated and filtered
by complex, multi-sided market agreements
52. The two sides of the net - 8
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The rapid growth
of technological
innovation
Job loss
“The effect of today’s technology on tomorrow’s jobs will be immense
– and no country is ready for it” (The Economist, Jan 2014)
La distinzione fra prodotti “stand-alone” e prodotti “sistemici” è di Alvin Toffler
L’esempio è tratto dal libro di Brian Arthur e Kenneth Arrow, Increasing Returns and Path Dependence in the Economy.
Rappresenta l’orologio della cattedrale di Firenze, disegnato da Paolo Uccello.
Presenta un quadrante di 24 ore in senso antiorario.