Why Markets Love The Internet (Or the 1 Hour MBA for Experience Designers and Other Layabouts)

Slide 2: Economics impacts Design on the Internet

Slide 5: The Law of Scarcity ! When there are insufficient goods and services to satisfy all the human needs and wants of a society from: An Introduction to the Market System, by Kalman Goldberg

Slide 8: Demand Curve, or How Consumers Think

Slide 9: Supply Curve, or How Companies Think

Slide 10: How Do We Decide?

Slide 11: Markets ! “A market is ... a process by which buyers and sellers are brought together so that they may exchange goods. The process may occur at a particular place or by any number of convenient methods ...” ... like, ahem, the internet from An Introduction to the Market System, by Kalman Goldberg

Slide 12: What is a Good Market? Consumers (buyers) get what they want Companies (sellers) get what they want Nobody gets hurt Win-Win Situation from: Reinventing the Bazaar, A Natural History of Markets; by John McMillan

Slide 13: What Makes a Good Market: Property rights are protected from: Reinventing the Bazaar, A Natural History of Markets; by John McMillan

Slide 14: What Makes a Good Market: Competition is fostered from: Reinventing the Bazaar, A Natural History of Markets; by John McMillan

Slide 15: What Makes a Good Market: People can be trusted to live up to their promises from: Reinventing the Bazaar, A Natural History of Markets; by John McMillan

Slide 16: What Makes a Good Market: Side effects on third parties are curtailed from: Reinventing the Bazaar, A Natural History of Markets; by John McMillan

Slide 17: What Makes a Good Market: Information flows smoothly from: Reinventing the Bazaar, A Natural History of Markets; by John McMillan

Slide 18: Market Transparency ! The more transparent a market is, the easier it is to find out things about it, including what types of products or services are traded, their prices, and where they can be purchased Generally speaking, the more transparent the better

Slide 22: Disintermediation The removal of intermediaries in a supply chain i.e. cutting out the middle-man

Slide 25: Search is the main means of TRANSPARENCY on the internet But data is the source of it.

Slide 26: “Laser focus on search” “We are laser focused on search. We are not doing valuations. We are not creating heat maps. We are doing high-performance search.” Alex Chang, CEO of Roost, a real estate search engine

Slide 27: Before After

Slide 33: The Semantic Web An evolving extension of the World Wide Web in which web content can be expressed not only in natural language, but also in a format that can be read and used by software agents, thus permitting them to find, share and integrate information more easily

Slide 34: Impact on Transparency “Customers would benefit from the higher market transparency [engendered by the semantic web] and could make their buying decisions based on solid, computable information basis. Manufacturers ... are interested in informing as many potential buyers as possible about the existence of their products.” from: On the Move to Meaningful Internet Systems 2003 by R. Meersman, Zahir Tari

Slide 35: one day soon maybe ... Semantic linkages are the main means of TRANSPARENCY on the internet But data is the source of it.

Slide 36: Whatever can be TRANSPARENT DIGITAL will be TRANSPARENT DIGITAL

Slide 37: Search Good Goods or services that you already know the value of examples: iPod, airline flights, etc.

Slide 40: Experience Good Goods that need to be experienced before you know the value examples: wine, doctor’s visit, trip to Antarctica, etc.

Slide 51: Presenting Experience Goods • Rating systems make experiences discrete • Multivariate (more so than search goods) and multi-situational analysis

Slide 52: possible variables: Date movie, chick flick, “mindless fun,” keep the kids busy, viewer age, anchoring biases, etc.

Slide 54: Information Good Goods whose main value is derived from the information it contains, not the means of distribution examples: music, news, photos, etc.

Slide 57: “The internet is just one large copy machine”

Slide 58: Distribution costs are almost nill

Slide 59: Switching Costs Any impediment to a customer's changing of suppliers for example: switching from Verizon to ATT

Slide 66: Commodification The transformation of goods and services into a commodity And a commodity is anything for which there is demand, but which is supplied without qualitative differentiation across a given market

Slide 68: Perfect (Commodity) Markets Assume Cost to Produce Increases with Quantity Supplied

Slide 69: Information Goods and Markets “Markets ... for information goods aren’t viable, since the cost of incremental production is zero, your competition can sell for a lower cost and still make a profit.” from Information Rules by Hal Varian and Carl Shapiro

Slide 70: In Information Markets Consumers Win! Cost to the Producer Does not Increase with Quantity Supplied

Slide 71: The Great, Ongoing Information Good FIRE SALE the price of many information goods will be driven to zero ... or the cost of looking at advertising

Slide 72: The Great, Ongoing Information Good FIRE SALE some caveats: intellectual property rights fixed costs of production complimentary goods fidelity paying for a hard copy no ads etc.

Slide 74: Lock-In Lock-in makes a customer dependent on a vendor for products and services, and unable to use another vendor without substantial switching costs

Slide 83: “The Attention Economy” “The Attention Economy is about the consumer having choice - they get to choose where their attention is 'spent'. Another key ingredient in the attention game is relevancy. As long as the consumer sees relevant content, he/she is going to stick around - and that creates more opportunities to sell.” Alex Iskold (Read Write Web) related concepts: experience economy, surprise economy, expectation economy

Slide 84: The GREAT “Experience-ization” companies want their (information) goods to be valuable

Slide 85: Digital features and functionality ... ... are also information goods ... ... and subject to the same economic rules ... ... namely that someone can do it cheaper.

Slide 89: Network Effect A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter

Slide 95: Network “Effect-scalation” Rapidly building (or attempting to build) network effects by asking users to import their networks from other social networking sites

Slide 98: Matching Problem How can groups of people (e.g. buyers and sellers) be brought together to create the most value

Slide 100: “Long tail” aggregation of desire

Slide 101: Aggregation of buying power

Slide 102: Microsoft And Yahoo Microsoft has “a long way to go, and Yahoo seems to be a way to accelerate that because of the critical mass that’s required to compete.” Steve Ballmer, CEO of Microsoft

Slide 104: “Barriers to Entry” Obstacles in the path of a firm which wants to enter a given market

Slide 107: First Mover Advantage Being the first to enter a market or to introduce an innovation because the firm can erect barriers to entry and discourage potential rivals

Slide 109: Transaction Costs (Risks) ! A cost incurred (or risk faced) in making an economic exchange Includes information costs, and managing risks (i.e. issues of trust, issues of price) The higher these costs (risks), the less likely a transaction will occur

Slide 110: Information Costs The costs of acquiring information on prices, product qualities, and product performance

Slide 116: Asymmetric Information This situation is present when one party to a transaction has more or better information than the other party for example: I know I’m selling a fake, and the buyer does not

Slide 118: Signaling The idea that one party in a transaction conveys some meaningful information about themselves to the other party for example: I tell you my real name

Slide 123: Creative Destruction The process of transformation that accompanies radical innovation (i.e. a lot of people go out of business)

Slide 124: Top 10 Reasons Why Markets Love The Internet 10. Couchville 9. Kozmo 8. Audrey 7. iSmell 6. Flooz.com 5. CueCat 4. CyberRebate.com 3. iLoo 2. FuckedCompany 1. Microsoft ...?

Slide 125: Thank you for attending (and thanks to Wikipedia and The Economist for my MBA). Questions ...?