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

1. PRINCIPLES AND MODELS OF
INTERNET AND DIGITAL
ECONOMICS
Prof. Robert G. Picard
Reuters Institute
University of Oxford

2. The digital world is a parallel world
Copyright © 2013, Robert G. Picard
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Some economic factors underpinning the
legacy media products

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
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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. 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
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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
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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
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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
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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
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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
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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
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21. Fundamental economic quetions
• Who owns the internet?
• How is the internet structured?
• Who pays for the internet?
• Who controls the internet?

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. 
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. 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
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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. robert.picard@politics.ox.ac.uk
www.themediabusiness.blogspot.com