The evolution of the Web (Part II: The driving forces)

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

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)
R.Polillo - Maggio 2014
3

"Lots of money?"
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

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
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
6

One, two, multi-sided markets7

One-side market
8
Buyer
Seller
Product /
Service
$
"You pay money,
you see camel"
Anonymous
(probably from circus)

Two-sided market
9
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

Example
10
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
, [$]

Example
11
Product / service
Google,
Facebook, …
Google,
Facebook, …
User info
Subscriber
s
Targeted
ads
Online
service
s

OTT
subscriber
OTT content /
service
provider
Internet
N-sided market: example
12
Internet
Service
Provider 1
$1
Internet
Service
Provider 2
Connectivity
service 1
$2
$3
Connectivity
service 2
Connectivity
service 3

There is no free lunch
The question is how you are paying it
and if you are willing to do it
Anonymous
13

Network esternalities14

Externalities (network effects)
15
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

Externalities (network effects)
16
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)

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

The new technologies adoption cycle18

New technologies adoption curve
19
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

Example: penetration of fixed telephony in the USA
20
Wall Street crash (1929)

http://bit.ly/VIIoX1
Product with
positive
externalities
Product
without
externalities

Example
22
http://b.qr.ae/10CAuAB
Instagra
m
(approx)

Facebook
23
http://thinksocialmedia.com/tag/growth/

The drift to monopolies24

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
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"

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)

Example: Facebook vs Myspace
27

Typical market shares…
In traditional markets:
n.1: 60%
n.2: 30%
n.3: 5%.
In markets dominated by network effects:
n.1: 95%
n.2: 4%
n.3: 1%.
28

Customer lock-in29

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”)
30

Example: QWERTY keyboard
31
Christopher Sholes, circa 1870
Other “rational” layout were
never accepted

Example: why all clock hands turn
“clockwise”?
32
Firenze, 1443 (turn anti-
clockwise)

Example: MS-Dos/Office and the Microsoft
growth
Revenues(BnUSD)
33

The problem of the net neutrality34

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
R.Polillo - Marzo 2014
35

Internet protocol hierarchy
36
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

"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
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
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
39

In synthesis
40
Source: Net Neutrality - EDRI Papers Issue 08

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
41

43
"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

Some conclusions44
Where are we now and where are we
going?

The two sides of the net
45

The two sides of the net - 1
46
Free services
The end of the privacy”
We stop paying in cash, but in information about ourselves
The citizen as a consumer

47
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)

48
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)

49
Freedom of
expression
Ease of control”
Our opinions can be easily monitored
E.g. E.Snowden case

50
Augmented
socialization
Social interaction overload
300 ml photos shared daily on Facebook
The “dictatorship” of notification systems
”

51
Powerful
cognitive
augmentation
Unknown cognitive reshaping ”
“Is Google making us stupid?” (N.Carr)

52
The quality
of access
The end of the “net neutrality””
What we access online is regulated and filtered
by complex, multi-sided market agreements

53
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)

54
It is a difficult world, take care
of it!

Thank you!
www.rpolillo.it

The evolution of the Web (Part II: The driving forces)

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