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.

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—every website 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 reality 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, 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)