May 12, 2014
University of Milano Bicocca
URBEUR-QUASI PhD Programme
The evolution of the
Web Part II: The driving
forces
...
The paradox of Free
"People are making lots of money charching nothing.
Not nothing for everything, but nothing for enough...
"Lots of money?"
R.Polillo - Maggio 2014
4
(born1975)
Devices,
Apps &
content
(born 1998)
Ads
(born 1975)
Software
(born 1...
What we will try to do today
 Understand some of the driving forces which are
shaping the economics of the Web ecosystem…...
We will do it in 6 steps
1. One, two and multi-sided markets
2. Network esternalities
3. The new technologies adoption cyc...
One, two, multi-sided markets7
R.Polillo - Maggio 2014
One-side market
R.Polillo - Maggio 2014
8
Buyer
Seller
Product /
Service
$
"You pay money,
you see camel"
Anonymous
(proba...
Two-sided market
R.Polillo - Maggio 2014
9
Cliente
(tipo 1)
Cliente
(tipo 2)
Fornitore
Credit-card
companies
Venditori Tit...
Example
R.Polillo - Maggio 2014
10
Audience "pays" with
his/her attention
Audience "pays" with
his/her attention
Large, “s...
Example
R.Polillo - Maggio 2014
11
Product / service
Google,
Facebook, …
Google,
Facebook, …
User info
Subscriber
s
Target...
OTT
subscriber
OTT content /
service
provider
Internet
N-sided market: example
R.Polillo - Maggio 2014
12
Internet
Service...
There is no free lunch
The question is how you are paying it
and if you are willing to do it
Anonymous
13
R.Polillo - Magg...
Network esternalities14
R.Polillo - Maggio 2014
Externalities (network effects)
R.Polillo - Maggio 2014
15
Buyer
Seller
Product /
Service
$
We have an externality when th...
Externalities (network effects)
R.Polillo - Maggio 2014
16
Customer
(type 1)
Customer
(type 2)
Supplier S
ervice
2
S
ervic...
Positive externalities: consequences
17
 The number of subscribers of services based on networks
can grow extremely fast
...
The new technologies adoption cycle18
R.Polillo - Maggio 2014
New technologies adoption curve
R.Polillo - Maggio 2014
19
100
%
50%
0%
S-shaped curve
("logistic function")
Innovators Ea...
Example: penetration of fixed telephony in the USA
20
Wall Street crash (1929)
R.Polillo - Maggio 2014
http://bit.ly/VIIoX1
Product with
positive
externalities
Product
without
externalities
R.Polillo - Maggio 201421
Example
R.Polillo - Maggio 2014
22
http://b.qr.ae/10CAuAB
Instagra
m
(approx)
Facebook
R.Polillo - Maggio 2014
23
http://thinksocialmedia.com/tag/growth/
The drift to monopolies24
R.Polillo - Maggio 2014
Positive feedback
If a product / service with positive externalities gains a larger market
share with respect to its compe...
Consequences
26
 First mover advantage: he who gains market shares before his
competitor has a very large competitive adv...
Example: Facebook vs Myspace
R.Polillo - Maggio 2014
27
Typical market shares…
In traditional markets:
n.1: 60%
n.2: 30%
n.3: 5%.
In markets dominated by network effects:
n.1: 95...
Customer lock-in29
R.Polillo - Maggio 2014
Two product categories
 Non-systemic products
Can be used independently from other products
E.g.:: umbrella; Coca Cola; b...
Example: QWERTY keyboard
R.Polillo - Maggio 2014
31
Christopher Sholes, circa 1870
Other “rational” layout were
never acce...
Example: why all clock hands turn
“clockwise”?
32
Firenze, 1443 (turn anti-
clockwise)
R.Polillo - Maggio 2014
Example: MS-Dos/Office and the Microsoft
growth
Revenues(BnUSD)
33
R.Polillo - Maggio 2014
The problem of the net neutrality34
R.Polillo - Maggio 2014
What is “Net Neutrality” (NN)
 It is the principle by which all data get carried with the
criterium of "best effort”
 I....
Internet protocol hierarchy
R.Polillo - Marzo 2014
36
HOST HOSTROUTER ROUTER
Applicazione
Trasporto
Internet
Network
Inter...
"Net neutrality means an Internet that enables and
protect free speech. It means that Internet service
providers should pr...
ISP positions
 Bandwidth requirements are continuously growing
→ the infrastructure must grow
 This entails large invest...
ISP: some possibilities to increase revenues
CSP tiering:
Commercial agreements between ISP andCSP to
prioritize their tr...
In synthesis
R.Polillo - Marzo 2014
40
Source: Net Neutrality - EDRI Papers Issue 08
The risks
CSP tiering:
 Traffic from competitor CSP is degraded →
major CSPs monopoly
 Startups are left out
User tierin...
R.Polillo - Marzo 2014
42
R.Polillo - Marzo 2014
43
"Allowing broadband carriers to control
what people see and do online would
fundamentally underm...
Some conclusions44
R.Polillo - Maggio 2014
Where are we now and where are we
going?
The two sides of the net
R.Polillo - Maggio 2014
45
The two sides of the net - 1
R.Polillo - Maggio 2014
46
Free services
The end of the privacy”
We stop paying in cash, but ...
The two sides of the net - 2
R.Polillo - Maggio 2014
47
Every information
at our fingertips
…. but unreliable”
“The distin...
The two sides of the net - 3
R.Polillo - Maggio 2014
48
Individualized
assistance
The “filter bubble””
The variety of info...
The two sides of the net - 4
R.Polillo - Maggio 2014
49
Freedom of
expression
Ease of control”
Our opinions can be easily ...
The two sides of the net - 5
R.Polillo - Maggio 2014
50
Augmented
socialization
Social interaction overload
300 ml photos ...
The two sides of the net - 6
R.Polillo - Maggio 2014
51
Powerful
cognitive
augmentation
Unknown cognitive reshaping ”
“Is ...
The two sides of the net - 7
R.Polillo - Maggio 2014
52
The quality
of access
The end of the “net neutrality””
What we acc...
The two sides of the net - 8
R.Polillo - Maggio 2014
53
The rapid growth
of technological
innovation
Job loss
“The effect ...
R.Polillo - Maggio 2014
54
It is a difficult world, take care
of it!
R.Polillo - Maggio 201455
Thank you!
www.rpolillo.it
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The evolution of the Web (Part II: The driving forces)

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Slides from two lessons on Evolution of the Internet, given at Urbeur doctorate - University of Milano Bicocca (prof.R.Polillo). May 19,2014

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  • Great Slides! Thank you.
    Just on slides 47 I'm a bit more optimist than you: filters are data and so they can be personalized and even shared. In the future web of data I can imagine a search engine (a semantic search engine) where the ranking algorithm is just an user configurable parameter. The 'filter bubble', IMHO, is a business model, not a net architectural issue.
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  • La distinzione fra prodotti “stand-alone” e prodotti “sistemici” è di Alvin Toffler
  • L’esempio è tratto dal libro di Brian Arthur e Kenneth Arrow, Increasing Returns and Path Dependence in the Economy.
    Rappresenta l’orologio della cattedrale di Firenze, disegnato da Paolo Uccello.
    Presenta un quadrante di 24 ore in senso antiorario.
  • The evolution of the Web (Part II: The driving forces)

    1. 1. May 12, 2014 University of Milano Bicocca URBEUR-QUASI PhD Programme The evolution of the Web Part II: The driving forces Roberto Polillo Department of Informatics, Systems and Communications University of Milano Bicocca www.rpolillo.it
    2. 2. The paradox of Free "People are making lots of money charching nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00. How did this happen and where is it going?" Chris Anderson, Free – The future of a radical price (2009) R.Polillo - Maggio 2014 3
    3. 3. "Lots of money?" R.Polillo - Maggio 2014 4 (born1975) Devices, Apps & content (born 1998) Ads (born 1975) Software (born 1994) e- commerce ( born 2004) Ads ←main business (but things are not so simple…) 12 months ending March 2014, according to WolframAlpha Billion USD 344 83 23 483 174 37 381 60 13 160 8 1,5 157 66 0
    4. 4. What we will try to do today  Understand some of the driving forces which are shaping the economics of the Web ecosystem…  …and their impact on us R.Polillo - Maggio 2014 5
    5. 5. We will do it in 6 steps 1. One, two and multi-sided markets 2. Network esternalities 3. The new technologies adoption cycle 4. The drift to monopolies 5. Customer lock-in 6. The problem of the net neutrality … and will discuss some important consequences R.Polillo - Maggio 2014 6
    6. 6. One, two, multi-sided markets7 R.Polillo - Maggio 2014
    7. 7. One-side market R.Polillo - Maggio 2014 8 Buyer Seller Product / Service $ "You pay money, you see camel" Anonymous (probably from circus)
    8. 8. Two-sided market R.Polillo - Maggio 2014 9 Cliente (tipo 1) Cliente (tipo 2) Fornitore Credit-card companies Venditori Titolari di carta di credito SubscribersAdvertisers Media companies Night clubs Men Women S ervizio 2 S ervizio 1 $1 $2 Not everybody must pay with money
    9. 9. Example R.Polillo - Maggio 2014 10 Audience "pays" with his/her attention Audience "pays" with his/her attention Large, “subsidized” user base Large, “subsidized” user base Small, profitable customer base Small, profitable customer base Product / service , [$]
    10. 10. Example R.Polillo - Maggio 2014 11 Product / service Google, Facebook, … Google, Facebook, … User info Subscriber s Targeted ads Online service s
    11. 11. OTT subscriber OTT content / service provider Internet N-sided market: example R.Polillo - Maggio 2014 12 Internet Service Provider 1 $1 Internet Service Provider 2 Connectivity service 1 $2 $3 Connectivity service 2 Connectivity service 3
    12. 12. There is no free lunch The question is how you are paying it and if you are willing to do it Anonymous 13 R.Polillo - Maggio 2014
    13. 13. Network esternalities14 R.Polillo - Maggio 2014
    14. 14. Externalities (network effects) R.Polillo - Maggio 2014 15 Buyer Seller Product / Service $ We have an externality when the value of a product or service for its user depends on the number of its users Positive externality: when I buy a product or services, I generate a benefit to the other users E.g.: telephone, fax, sjype, social network, … Negative externality: in this case I generate a damage to the other users E.g.: when I connect to an Internet access point
    15. 15. Externalities (network effects) R.Polillo - Maggio 2014 16 Customer (type 1) Customer (type 2) Supplier S ervice 2 S ervice 1 1 2 3 4$1 $2 4 types (each can be positiva or negative)
    16. 16. Positive externalities: consequences 17  The number of subscribers of services based on networks can grow extremely fast  When there are many subscribers, they may accept to pay an higher price for the service  Typical example: a service is initially free to grow the user base, then paid R.Polillo - Maggio 2014
    17. 17. The new technologies adoption cycle18 R.Polillo - Maggio 2014
    18. 18. New technologies adoption curve R.Polillo - Maggio 2014 19 100 % 50% 0% S-shaped curve ("logistic function") Innovators Early adopters Early Majority Late Majority Laggards "entusiasts" "visionaries""pragmatists" "conservatives""skeptics" Bell curve (incremental growth: S-curve derivative) "chasm" Cfr: G.A.Moore, Inside the Tornado, 1995 Here the process may stop
    19. 19. Example: penetration of fixed telephony in the USA 20 Wall Street crash (1929) R.Polillo - Maggio 2014
    20. 20. http://bit.ly/VIIoX1 Product with positive externalities Product without externalities R.Polillo - Maggio 201421
    21. 21. Example R.Polillo - Maggio 2014 22 http://b.qr.ae/10CAuAB Instagra m (approx)
    22. 22. Facebook R.Polillo - Maggio 2014 23 http://thinksocialmedia.com/tag/growth/
    23. 23. The drift to monopolies24 R.Polillo - Maggio 2014
    24. 24. Positive feedback If a product / service with positive externalities gains a larger market share with respect to its competitor, it will obtain larger and larger market shares, toward the 100% market share 25 R.Polillo - Maggio 2014 W.Brian Arthur, “Increasing Returns and Path Dependence in the Economy”, 1994 « For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them. » Matthew, 25- 29 Positive feedback, "Law of increasing returns", "Winner takes all"
    25. 25. Consequences 26  First mover advantage: he who gains market shares before his competitor has a very large competitive advantage  Butterfly effect: the success of a technology may depend on fortuitous facts which afford small advantages at the beginning, which start an "avalanche effect" which may have nothing to do with its technical qualities  Standard de facto: computer industry is dominated by de-facto standards dictated by first movers (de-iure standards aften fail) R.Polillo - Maggio 2014
    26. 26. Example: Facebook vs Myspace R.Polillo - Maggio 2014 27
    27. 27. Typical market shares… In traditional markets: n.1: 60% n.2: 30% n.3: 5%. In markets dominated by network effects: n.1: 95% n.2: 4% n.3: 1%. 28 R.Polillo - Maggio 2014
    28. 28. Customer lock-in29 R.Polillo - Maggio 2014
    29. 29. Two product categories  Non-systemic products Can be used independently from other products E.g.:: umbrella; Coca Cola; banana “Law of decreasing returns”: negative feedback  Systemic products To be used, they need other products E.g.: Car (needs gas stations, roads, …); Software (needs a complex ecosystem …) “Law of increasing returns”: positive feedback (“winner takes all”) R.Polillo - Maggio 2014 30
    30. 30. Example: QWERTY keyboard R.Polillo - Maggio 2014 31 Christopher Sholes, circa 1870 Other “rational” layout were never accepted
    31. 31. Example: why all clock hands turn “clockwise”? 32 Firenze, 1443 (turn anti- clockwise) R.Polillo - Maggio 2014
    32. 32. Example: MS-Dos/Office and the Microsoft growth Revenues(BnUSD) 33 R.Polillo - Maggio 2014
    33. 33. The problem of the net neutrality34 R.Polillo - Maggio 2014
    34. 34. What is “Net Neutrality” (NN)  It is the principle by which all data get carried with the criterium of "best effort”  I.e. data are all treated equally, and the network does not discriminate on the basis of their origin or destination, of their content, and the platform used  It is (more or less) the basic Internet design principle  This principle is now strongly debated R.Polillo - Marzo 2014 35
    35. 35. Internet protocol hierarchy R.Polillo - Marzo 2014 36 HOST HOSTROUTER ROUTER Applicazione Trasporto Internet Network Internet Network Internet Network Applicazione Trasporto Internet Network The transport network is “stupid” Here all the application intelligence
    36. 36. "Net neutrality means an Internet that enables and protect free speech. It means that Internet service providers should provide us with open networks – and should not touch any apps or content that ride over those networks." www.savetheinternet.com R.Polillo - Marzo 2014 37
    37. 37. ISP positions  Bandwidth requirements are continuously growing → the infrastructure must grow  This entails large investments by ISPs, but now the big money goes only to the CSPs (content service providers)  → we need new pricing mechanims to remunerate these investments  → we need to be free to explore new business models  → avoid restrictive rules, let the free market get its equilibrium R.Polillo - Marzo 2014 38
    38. 38. ISP: some possibilities to increase revenues CSP tiering: Commercial agreements between ISP andCSP to prioritize their traffic User tiering:  "Walled gardens"  Paid “Quality of Service” on specific services R.Polillo - Marzo 2014 39
    39. 39. In synthesis R.Polillo - Marzo 2014 40 Source: Net Neutrality - EDRI Papers Issue 08
    40. 40. The risks CSP tiering:  Traffic from competitor CSP is degraded → major CSPs monopoly  Startups are left out User tiering:  Low quality for non paying users  Walled gardens: access to information and expression is limited  In both cases: large ISP have a large influencing power on our access to information and possibility of expression R.Polillo - Marzo 2014 41
    41. 41. R.Polillo - Marzo 2014 42
    42. 42. R.Polillo - Marzo 2014 43 "Allowing broadband carriers to control what people see and do online would fundamentally undermine the principles that have made the Internet such a success" Vint Cerf
    43. 43. Some conclusions44 R.Polillo - Maggio 2014 Where are we now and where are we going?
    44. 44. The two sides of the net R.Polillo - Maggio 2014 45
    45. 45. The two sides of the net - 1 R.Polillo - Maggio 2014 46 Free services The end of the privacy” We stop paying in cash, but in information about ourselves The citizen as a consumer
    46. 46. The two sides of the net - 2 R.Polillo - Maggio 2014 47 Every information at our fingertips …. but unreliable” “The distinction between trained experts and uninformed amateurs becomes dangerously blurred, truth becomes a commodity to be bought, sold, packaged and reinvented “ (A.Keen)
    47. 47. The two sides of the net - 3 R.Polillo - Maggio 2014 48 Individualized assistance The “filter bubble”” The variety of information is reduced by filtering algorithms, which filter away what we and our social network do not "like” “Imagine a world where you never discover new ideas” (E.Parisier)
    48. 48. The two sides of the net - 4 R.Polillo - Maggio 2014 49 Freedom of expression Ease of control” Our opinions can be easily monitored E.g. E.Snowden case
    49. 49. The two sides of the net - 5 R.Polillo - Maggio 2014 50 Augmented socialization Social interaction overload 300 ml photos shared daily on Facebook The “dictatorship” of notification systems ”
    50. 50. The two sides of the net - 6 R.Polillo - Maggio 2014 51 Powerful cognitive augmentation Unknown cognitive reshaping ” “Is Google making us stupid?” (N.Carr)
    51. 51. The two sides of the net - 7 R.Polillo - Maggio 2014 52 The quality of access The end of the “net neutrality”” What we access online is regulated and filtered by complex, multi-sided market agreements
    52. 52. The two sides of the net - 8 R.Polillo - Maggio 2014 53 The rapid growth of technological innovation Job loss “The effect of today’s technology on tomorrow’s jobs will be immense – and no country is ready for it” (The Economist, Jan 2014)
    53. 53. R.Polillo - Maggio 2014 54 It is a difficult world, take care of it!
    54. 54. R.Polillo - Maggio 201455 Thank you! www.rpolillo.it
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