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PRINCIPLES AND MODELS OF
INTERNET AND DIGITAL
ECONOMICS
Prof. Robert G. Picard
Reuters Institute
University of Oxford
The digital world is a parallel world
Copyright © 2013, Robert G. Picard
All Rights Reserved
Normative and organizational differences
in the two parallel worlds
The material world
• structure
• authority
• control
•...
The digital world is not exceptional and
does not undo economic laws and finance
• There is nothing about the digital worl...
How it alters communication
The does not create a new form or social
function of communications
• It is based on pre-exist...
How it alters interactions
Interaction and transaction remain central
• Human relationships are based on interactions and
...
What is it as a technology
The internet and digital communication
are built on integration of ICT
• Combines information a...
The Internet is built on telephony
• Provides means of overcoming time and distance
related to physical communications
• T...

Content
companies,
organizations,
individuals
Search
navigational
aides
Interpersonal
communication
mail
social networks...
What are its economic aspects
Three important economic cost concepts needed
to understand digital and internet impact
• Fi...
• Content production involves high first copy costs, creation
of goods of uncertain quality, and over supply
• Basic thres...
Digital media shift physical media from
variable to fixed cost economics
• Variable cost economies
• Based on physical pro...
Digital distribution effects on media
monopolistic structures
due to production and
distribution barriers
--Cost structure...
Internet economic characteristics differ
from legacy media and telephony
• Fixed cost environment
• Low investment costs
•...
Network economics
• Networks exist for interaction and transaction
• Roads, canals, postal systems, telephones, airlines, ...
Network economies are particularly
important to some Internet functions
• Social media
• The bigger the network, the more ...
Technology is not neutral
• It is created for a purpose and typically provides more
advantages to certain players
• Intern...
The Long Tail
• Most value is be created by a few products, traditionally
there has been a long tail of products that are ...
Catalogs of recordings provide significant
revenue to rights holders
0
10
20
30
40
50
60
70
1940s
and
earlier
1950s 1960s ...
The Long Tail
• Problem: the long tail arguments Ignores business
marking and release cycle strategies
• business strategi...
Fundamental economic quetions
• Who owns the internet?
• How is the internet structured?
• Who pays for the internet?
• Wh...
Fundamental economic questions
Is the market creating economic power?
• Is it a perfectly competitive market or are there
...

Content
companies,
organizations,
individuals
Search
navigational
aides
Interpersonal
communication
mail
social networks...
Summary
Fundamental economic effects of Internet
• Changes the existing organization and cost structures of
interaction an...
Implications for pluralism
• New digital content and distribution players have entered
the market
• Legacy media players h...
robert.picard@politics.ox.ac.uk
www.themediabusiness.blogspot.com
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PRINCIPLES AND MODELS OF INTERNET AND DIGITAL ECONOMICS

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Prof. Robert G. Picard
Reuters Institute
University of Oxford

CMPF Summer School 2013 for Journalists and Media Practitioners
http://cmpf.eui.eu/training/summer-school-2013.aspx

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PRINCIPLES AND MODELS OF INTERNET AND DIGITAL ECONOMICS

  1. 1. PRINCIPLES AND MODELS OF INTERNET AND DIGITAL ECONOMICS Prof. Robert G. Picard Reuters Institute University of Oxford
  2. 2. The digital world is a parallel world Copyright © 2013, Robert G. Picard All Rights Reserved
  3. 3. Normative and organizational differences in the two parallel worlds The material world • structure • authority • control • hierarchy • formality The immaterial world • amorphous • collaboration • empowerment • collaboration • informality • latitude Copyright © 2013, Robert G. Picard All Rights Reserved
  4. 4. The digital world is not exceptional and does not undo economic laws and finance • There is nothing about the digital world that negates • economic theory, laws and analysis • political economic theory and analysis • financial and business theory and analysis • It alters the structures and financial arrangements surrounding existing commerce and communication and the existing economic bases of society (means of production; power arrangements) Copyright © 2013, Robert G. Picard All Rights Reserved
  5. 5. How it alters communication The does not create a new form or social function of communications • It is based on pre-existing forms of communication • inter-personal communication, public communication, mediated communication/mass communication • It does not add to the communication ability created by symbols/alphabet, telegraphy/telephone; audio recording; photography/motion pictures, broadcasting • those changed what could be communication and how constraints of space and time could be overcome • What the internet and digital media do is make uses of communications easier, less expensive, and available to a larger number of people • We write, talk, share photographs, recordings and videos • We communicate as before, but can do so faster and more easily with more people and people around the globe • The most revolutionary aspects are new economies of scope and integration that are changing economics of production and distributionCopyright © 2013, Robert G. Picard All Rights Reserved
  6. 6. How it alters interactions Interaction and transaction remain central • Human relationships are based on interactions and transactions • These are the bases of community and society • They are the bases of markets • They are the bases of economies • Issues of reciprocity, trust, and exchange are fundamental to interactions and transactions • Influenced by temporal, spatial, and frequency factors • Economics is fundamentally concerned about interactions and transactions • incentives involved; the costs of engagement; the effects of power/control • Interactions and transactions are facilitated by general purpose technologies • They are central functions of the internet Copyright © 2013, Robert G. Picard All Rights Reserved
  7. 7. What is it as a technology The internet and digital communication are built on integration of ICT • Combines information and communication technologies • Emerged from advances in computers and software • 1970s-1980s integration focused on Industrial processes • 1980s-1990s integration focused on office processes/work, internal communications, word processing, bookkeeping and accounting • 1990-2000 integration focused on service intermediaries such as banks, travel services, retail/private sales • 2000 integration focused on content creation and personal communications • Linked computer technology with telephony systems • Initially by governments, then by industry • Facilitated by privatization of telephony Copyright © 2013, Robert G. Picard All Rights Reserved
  8. 8. The Internet is built on telephony • Provides means of overcoming time and distance related to physical communications • Telephony provides telephone services, fax, data transmission, broadcast distribution, satellite services, and Internet access and operation • Telephony is used to connect computers and servers that make up the Internet • Telephony is used to connect personal computers and related devices to the Internet • Fixed line (dial-up connections) • Broadband (on demand or constant connections) • Mobile (on demand connections) Copyright © 2013, Robert G. Picard All Rights Reserved
  9. 9.  Content companies, organizations, individuals Search navigational aides Interpersonal communication mail social networks Commerce auction sites advertising sites airlines retailers Creative Expression individually created content The internet as a technological system    ISP ISP All the connections are telephony Copyright © 2013, Robert G. Picard All Rights Reserved
  10. 10. What are its economic aspects Three important economic cost concepts needed to understand digital and internet impact • Fixed costs • Cost that are borne regardless of amount of output or use • Variable costs • Costs that increase or decline depending upon amount of output or use • Transaction costs • Costs to interact and transact • Not just monetary cost • time and effort for searching, bargaining, monitoring performance Copyright © 2013, Robert G. Picard All Rights Reserved
  11. 11. • Content production involves high first copy costs, creation of goods of uncertain quality, and over supply • Basic threshold levels of production and distribution costs must be borne regardless whether serving smaller or larger audiences • High fixed costs and low variable costs provide efficiency advantages to media with larger audiences • Supply competition limited by economic, geographic, and regulatory factors • Rivalry among consumers • Ability to exclude those who do not pay Copyright © 2013, Robert G. Picard All Rights Reserved Some economic factors underpinning the legacy media products
  12. 12. Digital media shift physical media from variable to fixed cost economics • Variable cost economies • Based on physical production • Focus on the unit cost of producing single units (efficiency) • Success through economies of scale and low transaction costs • Competition through cost and price competition • Fixed cost economies • Making more digital copies has little cost effect • Competitors tend to have relatively similar costs • Less affected by economies of scale and transaction costs • Competition tends to focus on quality, service, and brand Copyright © 2013, Robert G. Picard All Rights Reserved
  13. 13. Digital distribution effects on media monopolistic structures due to production and distribution barriers --Cost structures, temporal constraints, distances mass audiences --Necessary to create revenues to cover costs Digital media cost structures and features overcome those barriers Digital media make smaller niche audiences economically efficient Copyright © 2013, Robert G. Picard All Rights Reserved
  14. 14. Internet economic characteristics differ from legacy media and telephony • Fixed cost environment • Low investment costs • first copy costs (for original content) is somewhat fixed • variable costs are negligible • result: average costs don’t decline with larger audiences • Supply competition is extremely high because economic, geographic, and regulatory limits are removed or limited • No rivalry among consumers • Excludability opportunities are significantly reduced Copyright © 2013, Robert G. Picard All Rights Reserved
  15. 15. Network economics • Networks exist for interaction and transaction • Roads, canals, postal systems, telephones, airlines, buses, computers • Users gain value by making use of the networks • The combination of many users benefits all • Additional value is added and shared by having many users • More connections, interactions and transactions • Economic issues in networks • shortest path/shortest time issues • Capacity limits (maximums) • Minimum cost Copyright © 2013, Robert G. Picard All Rights Reserved
  16. 16. Network economies are particularly important to some Internet functions • Social media • The bigger the network, the more utility from interaction • Mail functions • It is better when there are more persons you want to mail who are online • Creative expression • The more people you want who can view your videos, photos, and blogs, the better • Search • Search is more effective and useful if more content included • Online games, gaming, and other collaborations • More fun to interact with others; always someone available to take part Copyright © 2013, Robert G. Picard All Rights Reserved
  17. 17. Technology is not neutral • It is created for a purpose and typically provides more advantages to certain players • Internet systems and operations increasingly providing advantages to certain commercial players • Search Results • Two-thirds of online advertising is search placement fees • 75% of traffic goes to top 5 results; 90% to top 10 • information society is changing work and social influence over employment • Helps globalize work, allows companies to become smaller in countries with good wages and social benefits, removes companies from much control by national policy makers. Copyright © 2013, Robert G. Picard All Rights Reserved
  18. 18. The Long Tail • Most value is be created by a few products, traditionally there has been a long tail of products that are unprofitable to redistribute and produce little value • New sales and distribution methods made it possible to capture the value in the long tail by aggregating small sales that would not be profitable for traditional distribution channels Copyright © 2013, Robert G. Picard All Rights Reserved
  19. 19. Catalogs of recordings provide significant revenue to rights holders 0 10 20 30 40 50 60 70 1940s and earlier 1950s 1960s 1970s 1980s 1990s 2000s Capturing Long Tail Value 40 percent of total sales Copyright © 2013, Robert G. Picard All Rights Reserved
  20. 20. The Long Tail • Problem: the long tail arguments Ignores business marking and release cycle strategies • business strategies will make some products unavailable at some time Copyright © 2013, Robert G. Picard All Rights Reserved
  21. 21. Fundamental economic quetions • Who owns the internet? • How is the internet structured? • Who pays for the internet? • Who controls the internet?
  22. 22. Fundamental economic questions Is the market creating economic power? • Is it a perfectly competitive market or are there constraints? • Price of internet services • Is market power falling into the hands of a few? • Is the distribution of wealth produced skewed and why? • What are the implications for traditional media and communication concerns • access • pluralism Copyright © 2013, Robert G. Picard All Rights Reserved
  23. 23.  Content companies, organizations, individuals Search navigational aides Interpersonal communication mail social networks Commerce auction sites advertising sites airlines retailers Creative Expression individually created content Current market power indicators    ISP ISP competitive competitive relatively competitive Concentrated in a few powerful players Concentrated in a few powerful players Concentrated in a few powerful players competitive Copyright © 2013, Robert G. Picard All Rights Reserved
  24. 24. Summary Fundamental economic effects of Internet • Changes the existing organization and cost structures of interaction and transaction • These changes produce several important shifts • Economy shifts from industrial to information economy • Speed of exchange shifts to high and continual • Interest and exchange become more measureable • Audiences become consumers and more individualistic • Asymmetric power in relationships reduced by shifting power toward consumers in many segments • Strongly concentrated markets emerging in some segments • Lack of consumer rivalry (because of ability replicate and exchange content) reduces producer ability to exclude consumers of content and shifts emphasis to government copyright protections (criminalization) Copyright © 2013, Robert G. Picard All Rights Reserved
  25. 25. Implications for pluralism • New digital content and distribution players have entered the market • Legacy media players have been weakened • Previous control over ‘who can talk’ through media has been reduced • We all can talk • Infrastructures of communication in the digital age are under control of private companies • Increasingly using it to give advantages to certain speakers • Concerns about pluralism are shifting from ‘share of voice’ (structural and ownership indicators) to ‘share of ear’ (reception and attention indicators) Copyright © 2013, Robert G. Picard All Rights Reserved
  26. 26. robert.picard@politics.ox.ac.uk www.themediabusiness.blogspot.com

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