The Profitability of the Internet

April 30

The rise of the networked economy is changing economic possibilities around the world. From the call centers in India to eBay and the new Internet entrepreneurs, there are many signs that suggest a flatter world fueled by innovative production and marketing strategies. In this session, we will explore the promise and reality of the changing economic tides associated with rising Internet use including those marketing to the long tail and the new oligopolists.

Assignments

Assignment #4 is due before class today. You can upload the assignment here.

Readings

• Wikipedia, Dot-com bubble

• Chris Anderson, The Long Tail (Wired)

• Guy Kawasaki, The Wrong Tail: A Checklist for Long Tail Implementations

• Kevin Kelly, Better than Free

• Eric Von Hippel, Democratizing Innovation (Chapter 8)

• Digital Music News, The Most Infamous Music Infographic, Updated for 2012

• Benjamin Wallace, The Rise and Fall of Bitcoin (Wired)

Optional Readings

• Lee Gomes, Ivy League 2.0 or Just Another Pets.com? (MIT Technology Review)

• The Future of Music Coalition, Artist Revenue Streams (peruse)

Class Discussion

Please remember to sign your postings by adding four tildes (~~~~) to the end of your contribution. This will automatically add your username and the date/time of your post, like so: Asellars 15:29, 21 January 2013 (EST)

While the phrase "irrational exuberance" was mentioned in the readings, I'm surprised more was not made of it. In the 1990s there was most certainly a rush to jump on any investments that involved a company that had a .com extension to it's name with little or no scrutiny of the books or fundamental numbers of that company. While the bubble was partially based on sound fundamental judgment - the advent of the web browser and the world wide web in 1994 which made the Internet accessible for so many more non-technical people around the world and this created a much bigger market for e-commerce. However, the cart was put a bit before the horse and a lot of the growth associated with the explosion of Internet access was over exaggerated and not based on sound fundamentals.

The Long Tail article brought up an even bigger point than it intended. It pointed out how the Internet offers certain opportunities to exploit niche markets in the entertainment industry, but this goes beyond the entertainment industry to all aspects of the economy and even extends outside of commerce.

As far as Bitcoin is concerned, as someone who works in the information security field, I am immediately and significantly skeptical about the protections any digital currencies provide against fraud, especially with regard to duplication. I would absolutely echo some of the concerns relayed in the article - about the security of sharing the Bitcoin architecture with any number of unknown entities (individuals or groups) and relying on them for the integrity of the network as a whole. Although, I will admit that some of the issues discussed in the article - such as not accidentally deleting your Bitcoin wallet - can be prevented via basic data backup technologies and procedures and utilizing a minimal amount of common sense. I think it still has potential and whether Bitcoin is the currency of the future or not, there will be a legitimate virtual currency that catches fire and crosses international boundaries at some point.

CyberRalph 11:10, 28 April 2013 (EDT)

As a risk-averse individual, my emotional reaction to the wikipedia article on the dot-com bubble was, "You irresponsible idiots! Weren't any of you thinking rationally?" However, I understand the fervor of the time. I felt more favorably about the dot-com bubble once the article posited at its end that "Nothing important has ever been built without irrational exuberance" and that the speculative mania of the dot-com bubble allowed the infrastructure we have today. Besides the bankruptcy of companies and a glutted job market for computer programmers, I wonder what lasting negative effects from the dot-com bubble we are still experiencing now.

Prompted by CyberRalph's comment, I tried to think of other niche markets for/in the long tail and thought of online fashion rental services that advertise themselves as Netflix for designer dresses, designer handbags, jewelry, plus-size clothing, etc. Can fashion exist in or take advantage of the long tail? Using the checklist for long tail implementations, I think not, yet online fashion rental services continue to proliferate, seemingly launching every quarter.

"Better than Free" crystallized for me why I'm still willing to pay for entertainment. The article also helped me contextualize the abundance of advertising via social media: "In short, the money in this networked economy does not follow the path of the copies. Rather it follows the path of attention, and attention has its own circuits."

My primary take-away from von Hippel's chapter is that we need to create policy that allows users to create and become involved with manufacturing because current policy is not as conducive to innovation as the original policymakers intended.

My quick thoughts on Bitcoin are that (1) it sounds like a libertarian dream, (2) I consider it a fascinating social experiment, and (3) it seems too unregulated to be a viable long-term currency.

JW 23:47, 29 April 2013 (EDT)

One of the strangest experiences is reading someone else's take on a time one has lived through. Participating in this course has made it clear to me how quickly the past can get distorted in the present's need for a coherent narrative. And brilliant that the final word (as of this reading) on the dot.com bubble belongs to Fred Wilson.

I worked with one of the founders of one of the bigger names mentioned in the article before he founded that company. And went on to work at an investment bank where my role on an unrelated project had me reading the drafts of the funding documents and analyst reports.

I also worked at a dot.com from late 1999 to the summer of 2000. Flying back and forth between New York and LA (once there and back in the same day), meeting with potential investors, negotiating with possible CEO candidates (senior execs from the big three media companies, partners in consulting firms), phone numbers of partners of big NY law firms on my cell phone, but also dealing with the debt. The bills that weren't going to be paid to creditors who were willing, at least at the beginning, to provide services on the ridiculous valuations not even promised by us, but by the media. Angel investors who were the sons and daughters of some big names in the investment world....And how quickly it stopped once the money ran out. But what we were selling - the ideas - are actually being implemented right now. Wild to see what we dreamed about and pitched finally happening, and how ordinary it all seems now and how offbeat, unusual, hard to get people to get their minds around it was back then.

Kozmo.com isn't even mentioned in the Wikipedia article, but it was one of the great things about living through the late 90s in NYC. You logged in, ordered a movie, maybe a pint of Ben and Jerry's and within the hour it was delivered to your door. You dropped the video off with your doorman or en route to work, logged back in, and rented the next night's video. Compared to the fees Blockbuster charged for even a day late video return, Kozmo was insanely cheap and convenient. Eventually they would deliver anything to your door - video players, tv sets.... They weren't covering their costs, everyone knew it, but it was amazing while it lasted.

The point being that it is true that some very rich people lost a lot of money with Kozmo.com and other dot.com companies, but they also taught people what is possible, and allowed people to see how little they were settling for and how much they could have, if these companies could get off the ground. To ask what people were thinking as someone did above, they were thinking "Wow. This is cool. I hope they figure out a way to make it profitable without it costing me personally too much, because this is so much better than it was before. And oh by the way, I think this idea is valuable and worthwhile and I believe if I invest some money with you, I might see a higher return than if I left it in the bank or gave it to somebody else". Also, they were thinking "Can I have a job? because my industry is dying and this one looks like it might have some life in it."

I was wondering if we were going to get to Bitcoin in this class. The recent Cyprus debacle put Bitcoin front and center, and whether it survives, or another currency similar to it appears, how it is regulated, who will accept it and under what terms, the exchange rate questions, how to mine it, how to store it, the money laundering question, all of this is an entire class on it's own. However, with so much having been written on the topic so recently, I wonder why we were assigned something from last fall? Looking forward to tonight's class.Raven 09:35, 30 April 2013 (EDT)

Focusing on the market and Internet profitability unites many of the separate topics we’ve covered this semester. Today, everything is a dot-com business, and as a result: privacy has continuously been questioned; copyright has constantly been battled across diverse frontiers; freedom of speech has taken on new meanings; and peer production has brought unknown products to the forefront. To a certain extent, it's challenging to remember what shopping was like before the dot-com bubble. As I read the Wikipedia article I couldn't help but think about the longevity this definition; it seems much more distant than a decade ago. "[The dot-com bubble] period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms" (Wikipedia dot-com definition). The growth of online business has come a long way in the past 15 years, turning into the norm. What will our Internet shopping experiences look like decades from now?

The final quote in the Long Tail article encapsulates two important points that I’d like to address: "[R]ecommendations are a remarkably efficient form of marketing...the cultural benefit of all of this [online sharing and recommendations] is much more diversity, reversing the blanding effects of a century of distribution scarcity and ending the tyranny of the hit" (Anderson, 2004). First, consumers are the best marketers, because similar to peer production, comments are unfiltered. Word of mouth has taken on new meanings with online shopping—most websites now has a "comments section" and consumers share thoughts with no reservation, whether positive or negative. Our shopping decision criteria have thus changed; our purchasing actions have shifted; and our communication practices have helped sell more products (or the contrary in some scenarios). The new buy-sell model represents countless degrees of separation—when we select a product online, we can view similar recommendations with no end in sight. Does this mean it's easier to sell exclusive products today than in the past, or visa-versa?

Second, we are no longer forced to buy what is on the shelves. Before the Internet, we lived in a finite shopping world limited to geography, but today we can purchase almost anything that comes to mind, in a quick streamlined manner....It is fast fulfillment and an infinite selection (as mentioned in The Wrong Tail article). To that end, the target market has transformed from the 80/20 rule to the 99% rule (another interesting point reflected). "What's really amazing about the Long Tail is the sheer size of it. Combine enough non hits on the Long Tail and you've got a market bigger than the hits. The average Barnes & Noble carries 130,000 titles; yet more than half of Amazon's book sales come from outside its top 130,000 titles. The average Blockbuster carries fewer than 3,000 DVDs; yet a fifth of Netflix rentals are outside its top 3,000 titles....there are niches by the thousands, genre within genre within genre" (Anderson, 2004).

Online competition can be viewed from two distinct perspectives: 1) products that were previously unable to sell due to less publicity can now become profitable (e.g., unknown books or movies). 2) Products that previously generated high margins must now be sold differently (e.g., music selections, as elaborated in the The Most Infamous Music article). It is an ever-evolving cycle, and as we continue to assess the online market (as providers and consumers), the market will continue to transform around us.

In closing, by taking this class virtually afar from Cambridge, it has been a pleasure sharing my thoughts on this wiki site for the past few months and reading everyone’s weekly insights. This course has shed light on valuable analytical tools to examine past and future Internet trends, not only surrounding profitability avenues, but also in relation to societal forces that continuously shape our relationships in cyber space. I look forward to evaluating the Politics of Internet Control, from a unique perspective, for many years to come! Zak Paster 10:09, 30 April 2013 (EDT)

These were great articles this week - the Bitcoin article was great background for what is going on in the industry now. It will be interesting to see how it all shakes out and shows itself in the next year or so.

My main interest this week was something that I have experienced myself and certainly have been a willing participant by voting with my wallet.... Ah Amazon - how I do enjoy those recommendations based on my prior buying history. Smart and savvy but when you think of the database of information it is a bit scary. Someone wanting to profile my life would certainly wonder why I would have such a love of law and technology books yet pepper my purchase history with everything to do with French Vogue....not a standard cluster group by most, but certainly something that makes Amazon try harder to loop me in with shoe purchases on the splash page. : ) I understand this type of marketing, I work with it to advantage one of my clients and I get the philosophy of making a "connection" with someone to make them feel understood .... while of course gently parting them from their hard earned dollars. I come down on the side of advancement but I do often wonder how business intelligence is disseminated through the servers around the globe - I am a very small cog in the group - but it is interesting how quickly the retailers of products have found a way to suck me in to their lair. Caroline 10:16, 30 April 2013 (EDT) Caroline

In his Long Tail article, Chris Anderson discusses how very small niche markets can greatly influence the profit margins of companies like Amazon and Netflix. Thanks to the internet, consumers like me, who are not part of the target demographic for music and movie executives, can now find entertainment that they actually find entertaining. Mr. Anderson had me pegged when he wrote, “You can find everything out there on the Long Tail. There's the back catalog, older albums still fondly remembered by longtime fans…” I am one of the se consumers who recently started contributing to Amazon’s market share. I stopped buying music about 20 years ago because I got tired of not being able to listen to my favorite songs every time a new format was invented. But, I actually started buying music again a few months ago so I can listen to music on my non-mainstream phone. About half the songs I’ve bought from Amazon are those I already own that are melting away in a closet in my parents’ house or decaying amongst the spiders in my basement. Aside from the fact that I still get angry every time I have re-buy a song I already own, I am happy I can listen to them and hope MP3’s never go away. And, as Anderson pointed out, it is true that I’m only buying music now because I’m willing to spend 99 cents to purchase a song I love, even though I already own it, but if it were $1.01, I would refuse to buy it.

I was a bit disappointed that neither Anderson nor Von Hippel mentioned how important niche markets and user innovations have been to education. In the dark ages, before there was such a thing as the internet, I took a couple of women’s studies classes that introduced me to some wonderful female authors from the 1800 and early 1900’s whose work is not widely known. Unfortunately, we were very limited in what we could read because the only books and short stories available were the few that were still being printed or, in the case of one book, had been reprinted because of the new field of Women’s Studies. I’m hoping that this inability to find the works of talented writers, artists, musicians, etc. who are not appreciated during their lifetimes is now truly a thing of the past thanks to the cloud. At the same time, Von Hippel failed to mention how open source books and courseware have been impacting education in Democratizing Innovation. It would have been nice to see some mention of how students have been able to access knowledge for free online and that world citizens can reuse, remix and redistribute open source books. Susan Goldstein 11:14, 30 April 2013 (EDT)

While I support how the Long Tail theory encourages the production of specified, diverse material rather than that created for mass consumption, Chris Anderson's article only discusses how corporations may benefit from niche market inclinations, ignoring how corporation's sub-cultural control affects originally specific marketplaces. Both on and offline, niche commerce exists without corporate aggregation. I can indulge in my passion for Mac and Cheese at S'mac in New York, or discover the latest writing utensil technology at JetPens.com. These destinations cater completely and exclusively to a particular interest. However, given the opportunity to order designer mac and cheese and limited edition gel pens at the same time, why would I ever want to fulfill these desires exclusively again? As massively-popular online marketplaces such as eBay and Amazon have the resources to cater to mainstream and fringe consumer passions alike, they inevitably strip these sub-cultural centers of popularity and power. These online epicenters of everything systematically oppress sub-cultural creators, who cannot compete with the low-prices and cultural prominence of the most powerful online distributors. The passion of producers/ collectors of sub-cultural materials is filtered by a dispassionate consumer marketplace. Anderson's analysis of the Long Tail theory emphasizes the role of independent interests within mass market domain, but neglects the sacrifice of autonomony required of the independent markets that originally catered to these interests. Jax 13:39, 30 April 2013 (EDT)

I love Guy Kawasaki, I even subscribe to his Flipboard page. I too am fascinated by the democratization of commerce. I think that in a increasingly global economy, the internet is reshaping the costs of business transactions and creating a new landscape for commerce. I thought his blog post was very intriguing as it adapted basic business principles to an increasingly mutable production process. I found it interesting that he considered "just plain smart" producers as ones who would give stuff away just to build a following. This is just one example of the shift in mentality as the world barrels into the accelerating global economy. The more technical specifics of the changing landscape of economics is highlighted during the dot com boom as Wikipedia even mentions the fact that investors overlooked traditional P/E ratios. As Guy alluded to "giving stuff away for free to build a following," the same mentality seemed to be prevalent in the dot com boom as companies operated at a loss in order to build market share and take advantage of network effects. These principles are only growing in importance today as Facebook has become the king of harnessing network effects. It has now taken over hundreds of seemingly unrelated companies and integrated them into their social media marketing campaign, whether they be Instagram, Foursquare or games like Words With Friends. They now have shares in multiple differing markets. This strategy really has been astounding. This past summer, I was interning for an investment firm PAAMCO in southern California. I was tasked with creating new models for analyzing new tech companies like Amazon, Facebook, Hulu, Netflix, etc. My main obstacle was finding how to place traditional metrics and values on the industry. There were and are no comparable industries to the social media and high tech industry. And despite being ten years removed from the dot com bubble, I feel as if we are entering a new age of dot com bubbles with social media. Mark Zuckerberg became the youngest billionaire ever due to the wild success of Facebook. And the ludicrous part is that these platforms are created on foundations that are built to continue growing and acquiring ulterior companies. I wonder whether or not other companies will be able to succeed in the diagonal integration that Facebook has engaged in, or whether the main strategy for internet startups will be to grow until they are bought out by other larger social media platforms like Facebook, Twitter, and Google. Only time will tell. AaronEttl 15:18, 30 April 2013 (EDT)

It is fitting to conclude the class on the theme of the profitability of the Internet. After all, profit can be traced to the motive behind most of the politics of control we have discussed. Entertainment and music industries seek tighter restrictions on copyright law to preserve their traditional business model. Hackers breach into systems to obtain credit card information, forcing companies to crack down on privacy and security. Internet service providers lobby against network neutrality so they can maintain a monopoly on the market and better control the content they deliver. Virtually all design features on social networks and SEO-optimized headlines on websites aim to earn clicks and ad revenue. The formation of a "filter bubble" as Eli Pariser pointed out, is largely driven by the profitability of relevancy and immediacy. Even peer production can me driven by profits, as we saw from "Minds for Sales" where people will do tasks for nominal fees (or points) without knowing the full extent of the implications to those actions. And as we read for today, Long Tail businesses can sell not only niche products to the right audience; they can also sell the data on that audience to advertisers for a LOT of money.

The commercial side of the Internet seems to be in constant tension with John Perry Barlow's vision of the democratized, utopian Internet. It is in constant tension with the notion of social media, which is built around the idea of interacting with your peers and community, not monetization, even though the two are increasingly linked. As we enter a ubiquitous computing age, I have no doubt that the opportunities for profit will be even stronger - and many of those opportunities on the surface may appear to empower users. It is for that reason I think we as a society need to focus on de-mystifying the Internet to the public and reveal its profit motives so that it doesn’t seem like a fixed entity or something that’s “just the way it is.” Asmith 16:57, 30 April 2013 (EDT)