Van Alstyne Presentation

Information Business Models & The News: When Free Works and When it Doesn’t Doesn t Marshall Van Alstyne Visiting Professor, MIT Sloan School Vi iti P f Sl S h l Associate Professor, Boston University T: 617-358-3571 E: E marshall@mit.edu or mva@bu.edu h ll@ it d @b d Proprietary & Confidential © 2009 MIT Center for Digital Business. All rights Reserved.

How does this really How does this really work? Consider Content Creation vs. Content Consumption 3

Normal Economic Pricing Normal Economic Pricing • Usually, you lower price Usually, you lower price until value on the next xxxx Demand xxxx unit sold makes up for P losses on sales you would have made at a higher price. hi h i P • Free pricing gives up all profits on every unit profits on every unit P sold. © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

A network effect stimulates additional demand as consumption increases. A “2‐sided” network effect crosses markets from say content consumers to creators or creators to consumers. This causes demand in an adjacent market to grow. This causes demand in an adjacent market to grow © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Consider profits in two markets Market One Market Two (Acrobat Reader) (Acrobat Reader) (Acrobat Distiller) (Acrobat Distiller) Charging Charging for f content t t for f content t t consumption creation Initially, there are profits to be made in both markets. © 2009 Van Alstyne, Permission granted to 6 redistribute so long as this notice preserved

Consider profits in two markets Market One Market Two (Acrobat Reader) (Acrobat Reader) (Acrobat Distiller) (Acrobat Distiller) Subsidizing Charging content t t for f content t t consumption creation But subsidizing market one can increase profit in market two more than enough to cover losses in market one. © 2009 Van Alstyne, Permission granted to 7 redistribute so long as this notice preserved

Consider profits in two markets Market One Market Two (Operating Systems) (Operating Systems) (Developers) Charging Charging for f content t t for f content t t consumption creation Initially, there are profits to be made in both markets. © 2009 Van Alstyne, Permission granted to 8 redistribute so long as this notice preserved

Consider profits in two markets Market One Market Two (Operating System) (Operating System) (Applications Developers) (Applications Developers) Charging Subsidizing for f content t t t t content consumption creation But subsidizing market two can increase profit in market one more th enough to cover losses in market t than ht l i k t two. © 2009 Van Alstyne, Permission granted to 9 redistribute so long as this notice preserved

Consider profits in two markets Market One Market Two (Operating System) (Operating System) (Applications Developers) (Applications Developers) Charging Subsidizing for f content t t t t content consumption creation Q1 Q2 q1 = Q1 + e21q2 − p1 q2 = Q2 + e12 q1 − p2 V1 V2 © 2009 Van Alstyne, Permission granted to 10 redistribute so long as this notice preserved

Getting Free Pricing Right Getting Free Pricing Right 1. Ability to capture cross‐ 1. Mistake of Netscape side effects side effects 2. User sensitivity to price & 2. Denver vs. Boston real quality estate markets 3. Value added 3. Mistake of Apple 4. Marginal costs 4. Mistake of FreePC 5. Interfering same‐side f i id 5. Mistake of Covisint effects 6. Marquee providers Marquee providers 6. Mistake of Microsoft 6 Mistake of Microsoft © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Getting Free Pricing Right Getting Free Pricing Right 1. Ability to capture cross‐ 1. News needs a complement side effects side effects 2. User sensitivity to price & 2. Sometimes charge readers quality sometimes writers 3. Value added 3. Readers can add value 4. Marginal costs 4. Print vs. Digital distribution 5. Interfering same‐side f i id 5. Readers can add noise effects 6. Marquee providers Marquee providers 6. Don t alienate Mossberg, 6 Don’t alienate Mossberg Krugman, Dowd… © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Two‐Sided Platform Markets Product Category Mkt 1 Product Intermediary Mkt 2 Product Portable Documents Document reader* Adobe Document Writer Credit Cards Consumer credit* Issuing bank Merchant Processing Operating Systems Complementary Microsoft, Apple, Sun Systems Developer Applications Toolkits* HMOs Patient Treatment * Kaiser, Harvard Pilgrim Doctors’ Expertise Ladies’ Nights Men’s Admission Bars, Restaurants Women’s Admission* TV Format Color UHF, VHF, Sony, Phillips, RCA Broadcast Equipment HDTV* Web Search Web Pages Sought* Google, Yahoo Web Pages Supplied Computer games Game Engine/ Player Games Publishers Level Editors* Auctions Buying* E-bay, Christie’s, Selling Sotheby’s Real Estate Home buyers* Multiple Listing Service Home Sellers * Indicates which market is discounted, free or subsidized. Source: Parker & Van Alstyne 2002 13

What Happened to Papers & Magazines? What Happened to Papers & Magazines? Classifieds Advertisements Subscriptions These are all 2-sided networks © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Info/News Business Models that Can Work Info/News Business Models that Can Work Info as Process Platform Value Add Credentialing User Generated Content © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Information as Process Information as Process WSJ Interactive Features • State by State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.html State‐by‐State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.html • Immigration Slow Down Data: • http://s.wsj.net/public/resources/documents/st_CENSUS0921_20090922.html • Timeline Two Years in the Credit Crisis: Timeline‐ Two Years in the Credit Crisis: • http://online.wsj.com/public/resources/documents/Two‐Years‐of‐Market‐Turmoil.html NYT Interactive Features • 2008 Election Results: • http://elections.nytimes.com/2008/results/president/map.html http://elections nytimes com/2008/results/president/map html • The Debt Trap • http://www.nytimes.com/interactive/2008/07/20/business/20debt‐trap.html • Murder New York City: Murder – New York City: • http://projects.nytimes.com/crime/homicides/map Research support provided by Bryan Woliner

Marketing Answer: Custom Pricing Marketing Answer: Custom Pricing Price Prices Tailored for Different Segments P1 P2 Profit Cost Q Quantity © 2009 Van Alstyne © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Instead Try Custom Information Instead Try Custom Information Price NEW Consumer Value P1 P2 Profit Cost Q Quantity Freebie: Access to Current News Paid: Save stories, add comments, interactive content, crosswords, search archives, custom stock updates © 2009 Van Alstyne © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

FiveThirtyEight rates the errors of polls – and produces quite accurate statistical models produces quite accurate statistical models FiveThirtyEight.com has 17,800 links whereas NYTimes.com has 12,800

Amazon: Most helpful positive and negative ratings of “Audacity of Hope” Slashdot: Five star “Funny” and “Insightful” comments on Dam Burst program to get around China’s Green Dam censoring software.

Summary Observations Summary Observations • Use 2‐Sided Networks to understand when free Use 2 Sided Networks to understand when free works and doesn’t (content creation / consumption) – Can measure tradeoffs and anticipate colliding platforms. – Follow the implied pricing rules • News & Information Business Models – Information as process (can own this!) – Add value to platforms – Credential & Clear‐the‐clutter – User generated content User generated content © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Van Alstyne Information Economics Research h Products & Products & Communications Information & Information & Economics of IP & Economics of IP & Network Effects Markets (Anti‐Spam) Productivity Open Source © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Papers • “Information Complements, Substitutes & Strategic Product Design” Information Complements, Substitutes & Strategic Product Design Parker & Van Alstyne (2000) http://ssrn.com/abstract=249585 • “Two Sided Networks – A Theory of Information Product Design” Management Science, 51(10) 2005 pp. 1494‐1504. http://ssrn.com/abstract=1177443 • “Strategies for Two Sided Markets” Harvard Business Review, Eisenmann, Parker & Van Alstyne (2006) Oct. pp 92‐101. http://hbr.harvardbusiness.org/2006/10/strategies‐for‐two‐sided‐markets/ar/1 marshall@mit.edu mva@bu.edu

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