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

May 12, 2014

University of Milano BicoccaURBEUR-QUASI PhD Programme

The evolution of the Web Part II: The driving forces

Roberto PolilloDepartment of Informatics, Systems and CommunicationsUniversity of Milano Bicocca

www.rpolillo.it

http://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 markets2. Network esternalities3. The new technologies adoption cycle4. The drift to monopolies5. Customer lock-in6. 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 companiesNight clubs

Men Women

Serv

izio

2

Servizio

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

Subscribers

Targeted ads

Online services

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



There is no free lunchThe question is how you are paying itand 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 usersE.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

Serv

ice

2

Service

1

1 2

3

4$1 $2

4 types (each can be positiva or negative)

Positive externalities: consequences17

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 Earlyadopters

EarlyMajority

LateMajority

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


http://bit.ly/VIIoX1

Example


22

http://b.qr.ae/10CAuAB

Instagra

m(approx)



Facebook


23

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

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 productsE.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

Rev

enue

s (B

n U

SD)

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

http://www.savetheinternet.com/

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 trafficUser 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


42


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 ofexpression

Ease of control”

Our opinions can be easily monitoredE.g. E.Snowden case



50

Augmentedsocialization

Social interaction overload300 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

http://www.rpolillo.it/

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

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