Internet Economics E-Book

Paolo Cellini

• Herausgeber: LUISS University Press
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2016

Beschreibung

Internet economics is a systematic review about Internet industry and economy. The World Wide Web is analyzed, utilizing an extensive and comprehensive statistical data/literature review, both as medium and as meta-platform giving the basis for a new and original perpesctive about historical evolution and technological trajectories . Internet markets, their perimeters and dimensions, are described in detail by means of the LIIF Model, a new conceptual framework that allows: a systematic mapping of market structure itself; supply and demand dynamics evolution; a taxonomy of product-services; a clearer understanding of the Internet phenomenon.

Leseprobe

luiss university press

paolo cellini

Internet Economics

Understanding Digital and New Media Markets

© 2015 LUISS University Press - Pola Srl All rights reserved isbn 978-88-6856-058-4

Luiss University Press – Pola s.r.l. Viale Pola, 12 00198 Roma tel. [phone] fax [phone] www.luissuniversitypress.it e-mail [email protected]

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Foreword to Internet Economics by Vinton G. CerfVice president and Chief Internet Evangelist, Google

Paolo Cellini’s book provides us with a fascinating view of the Internet as an economic phenomenon and as a general-purpose artifact that is being put to work in an endless variety of ways. It is a vast assembly of technology and institutions, driven by a variety of business models (including non-profit and government cases), and sustained by the collaboration of huge numbers of involved entities. Cellini applies economic and system analytic tools to provide readers with a deeper understanding of the Internet’s character and its role in our lives.

I want to focus on the notion of artifact for a moment. The term means, roughly, ‘made by man’ as opposed to ‘found in nature.’ It seems reasonable to view the progress of our species as the story of the artifacts we have created, applied, evolved and even abandoned in favor of new ones. These are almost always enabling tools that make us more efficient, more effective and more able to overcome human limitations. Artifacts often have economic consequences since they may reduce costs, increase productivity, free time for new endeavors, enable new ways of accomplishing old goals and way to accomplish new goals.

It seems important to think broadly about the notion of artifact since we might also include the invention of new institutions and practices that have effects similar to the invention of new tools and technologies. Thus, institutional artifacts that include social and institutional practices are usefully included in the broad sweep of this concept. Along side the invention of stone hand axes, adzes and scythes, obsidian-flaked knives, bows and arrows, spears and atlatls1, we may place the invention of tribes and tribal governance, Hammurabi’s Laws, the organization and management of cities, farming practices, the invention of money and the invention of Guilds. All of these are human inventions we choose to call artifacts in this essay.

Human progress is the story of our invention and adoption of artifacts. The Internet is simply another, rather large-scale artifact of human invention. What makes it so interesting, as Cellini elaborates in this book, is its scale and the fabric of cooperation, collaboration and coordination that allows it to work. There is no central control. There are hundreds of thousands of independent networks, each operated independently, collaborating on the basis of bilateral and multi-lateral agreements. Voluntary standards, developed in an open and collaborative fashion in multiple fora, notably the Internet Engineering Task Force (IETF), the World Wide Web Consortium (W3C), the Institute of Electrical and Electronic Engineers (IEEE), among many others. The so-called TCP/IP protocol suite2 binds the vast arrange of networks into the network of networks we call the Internet. A system of institutions manages the Internet’s Domain Name System and Internet Address assignment process: the Internet Corporation for Assigned Names and Numbers (ICANN), the five Regional Internet Registries for numerical addresses3, hundreds of top-level Domain Name Registries and independent Registrars, and the Root Zone Operators who lie at the core of the mechanism for mapping domain names into Internet Protocol addresses. The global Internet Society with its many chapters, houses the Internet Architecture Board, the IETF, the Internet Research Task Force (IRTF) and many chapters around the world for people interested in the use of the Internet and the governance policies that affect its operation and application.

In addition to these administrative mechanisms, there are countless organizations, businesses and individual contributors that provide a wide range of products and services that rely upon or facilitate the operation of the Internet. The design of the Internet is called layered because it is logically structured so as to partition responsibility for various aspects of its operation to independent parties. Some organizations provide backbone transmission and switching support for moving packets of data from source to sink in the system. Some provide access to the Internet by fixed and mobile transmission systems. Some provide the hardware and software that animates the components of the Internet. Some make application software or provide services relying on huge server farms of computers, sometimes called Data Centers.

The general-purpose Internet is largely application agnostic. Anything that can be implemented by the exchange and interpretation of the data in Internet Packets is fair game. As the Internet’s capacity has increased, new applications have become feasible. The casual ability to enable devices to become part of the Internet has led us to the so-called Internet of Things in in which devices become a part of the vast landscape of programmable technology/appliances/tools/machines reachable through the global Internet. This bears some relationship to a road system in which the technology of road building and the actual construction of roads creates incentive for designing and building vehicles that can use the roads for transport and buildings adjacent to the roads to house residents, support business operations including manufacturing, service the vehicles on the roads and the people in them. The road builders provide general constraints on the design of vehicles that can use the roads and law enforcement tries to assure that the users of the roads follow rules that contribute to safety and efficiency. While all analogs have weaknesses, seeing the Internet as a system of interconnected roads supporting a wide range of vehicles, users and uses and adjacent buildings, is not a bad metaphor for thinking about its implications in the future.

Like many other technologies, the Internet changes the costs or speed with which communication of information can be accomplished. In addition, because the information flowing on the Internet is machinable4 the users of the Internet are able to apply the Internet’s vast computing capacity to find and process an increasingly wide range of information. Barriers to trade are reduced, delivery of digital content is speeded up, discovery of others with common interests is facilitated, ability is maintained, and important business and personal relationships are enhanced. Of course, all neutral technologies also can be abused and the Internet is no different. It is this agnostic aspect of the Internet that forces us to confront the problem of abuse with societal rules, technological protections, legal and moral strictures. Because the Internet is global in scope, these challenges are made all the more difficult to overcome.

I hope you will find this book as insightful as I have. It is worthy of your attention if you are going to be a part of the online environment of the 21st Century.

Vinton G. Cerf

Note

1. Atlat or Spear-Thrower.

2 . TCP: Transmission Control Protocol; IP: Internet Protocol.

3 . The five are the American Registry for Internet Numbers (ARIN), Reseau IP Europeene Network Coordination Center (RIPE-NCC), the Latin and Central American Network Information Center (LACNIC), the African Network Information Center (AFRINIC) and the Asia-Pacific Network Information Center (APNIC).

4 . By which I simply mean computer programs can potentially be used to find, interpret, analyze and process information.

Acknowledgements

This book is the result of a long process of reflection, research, reading, revision and discussion with my closest collaborators.

Without the passion and critical dedication of my two assistants, Ciro and William, and the revisions and discussions I had with them, the book would never have seen the light of day.

Their mindset, as engineers, and tendency to ask critical questions and analyse issues from various perspectives made the creation of this work easier for me.

Ciro Spedaliere is a remarkably talented engineer who has worked with me on previous projects to develop innovative Internet products, and is now involved in Venture Capital. He is brilliant, passionate and an expert analyst of Internet markets, and I had the opportunity to analyse the various theories with him to find the right path to develop the structure and content of the book. He deserves the credit for summarising our arguments and producing an updated text consistent with our initial opinions.

William Liani is an engineer ‘on loan’ to management and a very methodical person, unquestionably dedicated to achieving results. He provided valuable feedback while reviewing the book and assessing its structure and contents, based on his constant and remarkable analysis of theoretical literature and its practical implications.

I also wish to thank Vinton Cerf, for his extremely valuable contribution to the book, the discussions we had the critical assessment he made. Different chapters such as Interplanetary Internet has been written exclusively thanks to Vint suggestion and revision.

Thanks you all, because without you I would have not succeeded in this venture

Internet Economics: the evolution of the discipline

In this book we attempt a review of the economic literature in order to identify the conceptual models used to represent the Internet and then highlight the nature and extent of its impact on economic systems.

Due to the ubiquitous nature of the Internet, modelling and assessing its impacts are matters of great relevance, as well as extremely complex and difficult to analyse. The basic concept of its economic contribution is actually very simple: the Internet facilitates fast and inexpensive sharing of information. This leads to an increase in information efficiency, which promotes the creation of products and services based on the sharing of information. The consequent rise in production efficiency has ultimately had the positive impact of increasing consumer surplus, with, for instance, more people able to obtain what they want at an affordable price.

However, quantifying the importance of the Internet remains a difficult task, due to a number of factors:

Consumer surplus is a conceptual phenomenon rather than a measurable entity (it refers to what one would be willing to pay for a product in excess of what is actually paid);The introduction of new technologies creates winners and losers (e.g. physical retailers are losing market shares to virtual retailers);Many products on the Internet are intermediated by nature, in the sense that it is often difficult to identify who is the ultimate beneficiary of the product (for example, information collected on the Internet could help a law firm to win a civil case, which benefits both the law firm and its clients);There can be a long gestation period between a development on the Internet and its economic consequences. For example, to illustrate a long period of time, many argue that the Internet was very influential in the events of the ‘Arab Spring’. If this is the case, the Internet could ultimately contribute to a significant increase in average incomes in many Arab countries. This in turn could have potential benefits for Italy if their demand for new Italian products increases;The new nature of business activities on the Internet means that the current economic measurement systems based on statistics are poorly equipped to appraise both the magnitude and the location of the economic activities influenced by the Internet;The development of the Web has coincided with a number of other IT developments that have complex interrelationships with those of the Internet;Finally, the measurement problem does not so much regard the definition of the world with the Internet, which can be easily observed, but rather the definition and measurement of the opposite, namely, the world without the Internet.

In addition to the practical difficulties associated with the collection of data, there are also problems of compatibility between the various studies, since measurements can vary due to differences regarding:

the definition of the concept in question (e.g. e-commerce, the Internet itself, broadband, etc.)the period of analysisthe economic concept involved (e.g. productivity, employment, GDP, consumer surplus)the extent of the analysis (individuals, companies, regions, countries).

Therefore, although the Internet is acquiring ever greater importance, systematic mappings and size estimates of the Internet as a unified industry are lacking, due to the difficulties outlined above and also, in part, to the rate of diffusion of the Internet phenomenon itself.

The first structured study involving analysis of the Internet economy was in the late 1990s (conducted in 1998 by A. Barua of the University of Texas and commissioned by Cisco). It began to organise the main classification categories for the different forms of Internet business, infrastructure management (network and application infrastructure) and the development of economic activities (trade and intermediation) as part of an initial attempt to measure the Internet economy.

A very positive aspect of this research was the introduction of a conceptual model representing the Internet industry in superimposed layers, which would inspire future modelling of the Internet in other studies.

A second attempt was made in 1999 by Altig and Rupert, who estimated the impact of Internet connectivity on economic growth.

Their research led to the creation of a growth model which implied that 100% Internet usage would have been associated with a four percentage point increase in economic growth in the 25 year period from 1974-1999.

The authors themselves conceded that their approach was simplistic, with a high risk of omitted variable bias, and felt their estimate to be implausibly high.

In 2001, Litan and Rivlin estimated the cost savings for American firms due to Internet use and concluded that the total savings would be about 1%-2%, which over the observation period from 1995 to 2005 would contribute annually to a GDP growth of 0.2%-0.4%.

The difficulties with this research are that its focus was purely on cost savings and it only considered initial adoption of the Internet, without allowing for impacts from the adoption of contemporaneous technologies.

In 2002, Freund and Weinhold estimated the impact of Internet penetration on international trade and found that a 10% increase in Internet penetration was associated with an increase of 1.7% in exports and 1.1% in imports.

Also in this case, the focus of the research was quite narrow.

In 2002, Varian, Litan, Elder and Shutter estimated the impact of Internet business solutions on productivity. The results of the research revealed that the Internet had increased annual productivity growth in the USA by 0.17% in the period 1996-2000. The analysis focused purely on the impact on productivity, ignoring other repercussions for consumers and social welfare.

In 2002, a team from MIT in Boston proposed a new model based on the identification of economic flows between elements or segments of the Internet. Although questionable, the MIT model permitted a series of critical analyses that paved the way for the introduction of another model by Hamilton in 2007, known as the Internet Ecosystem Model, which was based on the capacity of all the actors involved in the various activities directly and indirectly related to the Internet, whether organised or not, to generate revenue.

It is important to mention that this model abandoned analytical description based on functionalising or sizing of the main business drivers of the Internet; focus was shifted to the expansion capacities of the associated economic activities deriving from it.

One of the main limitations of this model is its failure to distinguish specific Internet industry activities from cross-cutting activities that seemed only apparently different from those of the old economy, unless viewed in a digital and thus immaterial perspective.

In 2006, Gillet, Lehr, Osorio and Sirbu estimated the impact of broadband access on various economic indicators in different areas of the USA. Broadband appeared to increase employment by 1.0% -1.4% (1998-2002) and the number of new companies by 0.5% -1.2% (1998-2002), although it is not clear whether the study adequately considered causality factors, in that the areas with the best performance in terms of development and employment were those more likely to have broadband access.

In 2009, Choi and Yi estimated the impact of Internet connectivity on economic growth. The conclusion was a growth model implying that Internet usage could be associated with a 5-6 percentage point increase in the economic growth of 207 countries in the ten-year period from 1991-2000.

The model, however, is likely to suffer from distortions due to the omission of variable bias, and there is no analysis of causality.

In 2009, Czernich, Falck, Kretschmer and Woessmann assessed the effect of broadband infrastructure on economic growth in a panel of twenty OECD countries during the period 1996-2007.

The research showed that a 10 percentage-point increase in broadband penetration corresponded to a 0.9-1.5 percentage point increase in per capita GDP. The research results appear solid and predict broadband penetration independently from the diffusion of contemporaneous technologies such as mobile telephony and computers.

In 2011, the McKinsey Global Institute estimated the contribution of the Internet to the GDP of the main global economies in 2009 to be 3.4%, and that the Internet accounted for 21% of the growth in GDP over the previous five years in developed countries.

The contribution of the Internet economy to Italy’s GDP in 2009 was estimated by McKinsey to be 1.7%, and even higher in other economies, ranging from 3.8% in the US to 5.4% in the UK and 6.3% in Sweden.

If Internet-related consumption and spending were considered as a single economic sector, in some countries it would be larger than traditional sectors such as energy or agriculture.

In recent years, in addition to McKinsey, other leading consulting firms have analysed the Internet, mainly with the aim of studying and assessing the size of the economic structure of the Internet and the impact of this on economic growth. These have included the Boston Consulting Group, A. T. Kerney, Deloitte and IDC, but lack of a common reference model has led to differences in size estimates.

Nevertheless, it is interesting to observe the evolution of the literature, which was initially more focused on specific areas of Internet analysis, such as the penetration of connectivity, while recent years have seen an increase in the production of research to assess the impact of the Internet on the GDP of global economies.

The whole world seems to be talking about the Internet, its countless applications and its social and economic implications, with numerous authoritative books and publications addressing the subject from various perspectives. However, what is lacking, in my opinion, is an accessible reference tool that can provide a sufficiently specific overview of the phenomenon, while also allowing non-experts to form a reasonably structured and orderly opinion on the subject.

The method we have used is deeply analytical. We began with a careful analysis of the literature, comparing it with everyday facts, in order to develop a general overview of the Internet economy that can allow a systematic and structured study of its components and dimensions, using economic theories to acquire a greater understanding of the development of the network.

Our objective was both to stimulate discussion in the academic world and to provide a working tool for managers and entrepreneurs interested in the world of the Internet as a means to develop their business or create new forms of enterprise.

This approach has produced a text that can serve as both a theoretical and practical tool at the same time.

The book is theoretical in that it explores and attempts to elaborate on the various main theories concerning the typical features of Internet markets. It is practical to the extent that its numerous examples and comments can be helpful for effective implementation of the theoretical tools mentioned above. It is therefore intended to be sufficiently accessible to readers who are curious and interested in the subject, and particularly to students who, during the course of their studies, would like to examine Internet-related topics from an entrepreneurial and business development perspective.

1 The Internet industry

In this chapter we seek to shed light on the main descriptive models of the Internet, what is meant by the Internet industry and its characteristics, analysing the main studies that have attempted to define, structure and measure the online economy and showing how it still essentially lacks a reference framework.

The first chapter is arranged in a two-part analysis:

The first part, entitled General Internet Models, seeks to define and classify the Internet phenomenon in relation to some general drivers, namely the economy, social relations and technology. Each of these three aspects allows an initial interpretation of the phenomenon, providing a perspective for the relational dynamics that govern the Internet in a context in which we indentify the following: an economic exchange value between various services (the Internet as an economic system), a relational process that manages relationships between individuals (the Internet as a Complex Adaptive System, CAS), a technological tool that cuts across complementary sectors, products and services (General Purpose Technology, GPT), and finally, the social influences that come from the adoption of specific technological systems (Large Technological Systems, LTS).The second part analyses specific models that describe the Internet industry, focusing in particular on layered models, the first models developed to describe the industry (CREC Model, 1998; Internet Intermediaries Model – OECD, 2010; Internet Economy Model - IDC, 2011; Internet Stack – BCG, 2011), flow models, which were aimed at defining the industry by identifying the economic flows of online industrial sectors (The Internet Money Flows - O’Donnell, 2002; The Internet Ecosystem - Hamilton, 2007), and models used to describe the industry through a value chain approach (Internet Value Chain - A.T. Kearney, 2010).

The two-part analysis is followed by the introduction of a framework of analysis, developed with the aim of providing a structured approach to the study of the Internet industry, which we will follow throughout the remaining sections of the book.

1.1 general internet models

1.1.1 The Internet as an economic system

Given the close ties between the Internet and economic trends in most countries of the world, particularly in view of the correlation between the network and most productive sectors, this section focuses on the interpretation of the Internet as an economic system, in order to pave the way towards understanding how the Internet can be considered as an economic phenomenon in its own right.