Quote of the Day:

"Man is still the most extraordinary computer of all"

John F Kennedy - 1963

Synopsis from a Conference at Harvard University

January 23-25, 1997

Prepared by Marc Lee, Information Technology Industry Branch, Industry Canada, Ottawa (lee.marc@ic.gc.ca)

Submitted by John Lorenz, Industry Canada (lorenz.john@ic.gc.ca)

•OPENING PAPERS

•PRICING ISSUES

•STRATEGIC MARKETING AND ADVERTISING

•PERSPECTIVES ON THE FUTURE

The conference addressed the evolution of the Internet as a publishing medium, with an attempt to assess the implications for pricing, markets and strategy development.

OPENING PAPERS

Michael Lesk, Bellcore -- Projections for Making Money on the Web

Lesk noted primarily that the large variance in numbers available to do this type of analysis suggests that no one really knows what is going on. Similarly, whether the Internet will evolve to generate new markets, goods and services, is characterized by a high degree of uncertainty. One estimate is that only 14% of browsers on the Internet have purchased anything. Lesk believes that Internet shopping will not take over the world, because shopping is primarily a social activity in the US

To date, materials on the network generally represent substitutes for existing products and services. Estimates of 1995 Web sales range from US$160 million to US$575 million, with half of sales going to airline tickets. Computer products, books and CDS are also popular. To give an example of potential market size, the mail order catalogue industry in the US in 1995 accounted for about US$50 billion of a US$2 trillion market. Whether IH commerce can exceed this level of penetration is uncertain, though there are other areas to be considered. For example, advertising is a US$25 billion industry, and business printing and publishing amounts to US$80 billion.

On the Web, content has traditionally been free (though this may merely represent the huge volume of papers that could not get published in journals). Charging for content is a challenge, with pay-per-unit pricing likely to give way to subscription-based methods. The latter has the benefit of offering predictable costs and revenues for consumers and producers. Piracy will continue to be a big issue.

Rates for banner advertising on the Web are collapsing, from ten cents per exposure down to two cents. Furthermore, all ad revenue is going to a few top sites. Advertisers want to get more information on the consumer so as to appropriately price discriminate. Interestingly, the needs of law enforcement agencies may break down privacy and anonymity, which would be a boom for marketers.

Michael Frumpkin, University of Miami -- The Next Economy?

The potential of Internet commerce from a consumers' point of view is that software agents can cruise the net on their behalf to get the lowest price, in the process cutting out intermediaries that absorb part of the product's cost. However, the example of one agent, called Bargain Finder, is that stores have deliberately blocked it, implying that they are unwilling to easily share their price information. This may be due to several factors: price gouging behaviour; a desire to compete on quality of service rather than just price; and/or, a strategy to make money on impulse purchases while losing money on "lost litres."

Interestingly, while vital information for consumers would make the Internet behave more like the agents in a typical economic model, this has not happened. New economic information goods break down the assumptions of neoclassical economics in other ways as well. Because they can be so readily copied and distributed, they are difficult to exclude other people from (from the company's point of view) and can be used simultaneously by many users at the same time, in the way that an apple or a car cannot. Consumers also lose "transparency," the ability to look and feel an object to determine its quality before buying it.

Other interesting phenomena include giving away the product for free, as seen in the "browser wars." Similarly, low prices may be given initially, to give the consumer a taste of the product, with money being made on upgrades or consumer help services. Finding an appropriate model to charge for content online remains a challenge.

Policy conclusions: the pricing model has implications for the type of content available (the TV model was based on selling audiences to advertisers, which led to lowest common denominator programming); do not have faith in policy models that apply traditional microeconomic analysis to the study of information goods; monopolies are still bad; and, watch out for the "new protectionism," pressure from content producers from the previous generation to maintain the benefits they have previously enjoyed.

PRICING ISSUES

Yannis Bakos and Erik Brynjolfsson presented a paper on the benefits of bundling information goods. This addresses a problem of economic theory which suggests that while allocative efficiency would require a close to zero price, this would eliminate profits to cover fixed costs. According to their model, bundling information goods together, such as in a site-licencing model, increases profits while increasing overall efficiency, and this improves the more goods there are in the bundle.

John Chung-I Chung presented a variation of the bundling model, concluding that a strategy whereby consumers can buy either a bundle or particular information goods individually is optimal.

Jeff Mackie-Mason presented some real world complexities of bundling being encountered in a trial with 1200 journals online. Products offered include pay per article, traditional subscriptions (a set price for N articles selected by the editor), and generalized subscriptions (also N articles but chosen by the user).

Andrew Odlyzko supported bundling or fixed-fee models for information goods, versus unit-based pricing. He noted that consumers do behave irrationally, and are often willing to pay more for a flat-fee service.

Hal Varian addressed issues in price discrimination and versioning information goods. The best way to do this is for the firm to build in some form of self-selection into the choices offered, providing some kind of basic service, plus a premium service. There are several dimensions that can be adjusted to this end: delay/timing, such as real time stock quotes, rather than an hour old; resolution, such as digital photos, with two levels of quality; personalization, for things like news stories; and, convenience, which might include things like speed of processing, evening vs. business hours rates, or next-day delivery vs. before 10 am. The trick is to design a pricing scheme that ensures that high-end users indeed pay for the high-end. This usually entails some form of quality degradation for the low end product. For example, some printers are designed to be high-end, then are dumbed down to print significantly less pages per minute for the low end market.

Also noted in discussion: there are large search costs that are incurred as bundles get larger, so there is still value in a scheme that offers some editorial choice; user-selected bundles, with price discounts for quantity might be an optimal scheme; the role of some intermediaries is diminishing for some areas, but may be increasing for other types of activities; branding is important because the reader's time is the key area of scarcity; archival services may become a big information business, though a workable business model is required.

STRATEGIC MARKETING AND ADVERTISING

Donna Hoffman presented on advertising models for the Internet. The advertiser-supported site is a business model that is vying for legitimacy on the Web. This model currently supports popular content sites, search engines and entry portal sites (like Netscape), and is based on number of hits, visitors, page view and proportion of people that actually click on the ad, to determine the fee paid by the advertiser. Advertising models hinge on the ability to measure traffic on a Web site, measure the response to advertising and pricing models. Hoffman suggests that more advanced models for advertising will evolve that better take into account these features. One example is an outcomes-based approach, where "associate sites" that mention and link to, say, a book available at Amazon books, get paid a set fee if Amazon actually makes the sale. Another model is fees based on duration of time spent at the site, or fees paid per click.

John du Pre Gauntt noted that content sites require a continual influx of new readers to maintain advertising, otherwise only the same audience views the material. Also, there is a business here for third parties to verify the numbers, just as there is in the print world.

Subsequent discussion noted: there is a link between getting accurate information for advertisers and implications for privacy, particularly when this information can be sold to third parties without the knowledge of the originator; the choice should rest with the consumer to be asked, rather than forcing the consumer to take action to opt out; push models such as PointCast may detract from the ability for lots of people to become producers of content, making the Internet a medium more like TV; push models also eliminate the unexpected, which leaves the viewer without room to grow by coming upon something new and fanciful.

PERSPECTIVES ON THE FUTURE

Brian Kahin noted that developing policy is difficult in the new environment of digitization and networking. Features of this environment include: accelerated product development and marketing; skewing towards the past in policy developing agencies; ill-defined, competing and complementary interests within and between individual companies, industrial sectors, users, nongovernmental organizations and government departments and agencies. The underlying economic conditions reflect economies of scale and scope, network externalities and low transaction costs.

Michael Goldfarber posited that the new economy will be based on attention. Currently, at the end of the mass production era, it is not material goods that drive us, but information, and while information is certainly not scarce, the attention of the viewer is. Money tends to flow to those that can attract the most attention, which may explain the growing income inequalities in today's society.

Poh-Kam Wong spoke on Singapore's strategy to gain competitive advantage from the information society. They are promoting a high quality connectivity infrastructure and the development of high-quality content, with an aim of positioning Singapore as the Asian hub for Internet publishing.

Tell us about your

Governance Consultation Requirements

e-mail
tdc Marketing and Management Consultation

Links To:
tdc Answers to FAQ's
Market Research
Marketing and Management Consultation
tdc Home Page