COMM570/Class notes

From Driscollwiki

Francois Bar

• BRIE
• Moving from infrastructure, civil engineering
• To Comm, telecomm infrastructure
• Comm policy
• Interested in changes, convergence

Contents 1 Aug 26 1.1 Costs in telecomm 1.1.1 Fixed costs 1.1.2 Marginal costs 1.1.3 E.g. movie industry 1.2 Non excludability 1.3 Transitions in play 1.3.1 Analog, digital 1.3.2 Usage 1.3.3 Trend toward monopolization 1.3.4 Tech / industry limits 1.4 "Perfect market" 1.5 Infrastructure/Social 1.6 Institutions 1.7 Syllabus overview 1.7.1 Part I. Individual sectors of the media industries 1.7.2 Part II. Looking across the industries via econ principles 1.7.3 Assignments 2 Sep 2, overview of terms 2.1 Infrastructure 2.2 Abundance, scarcity 2.2.1 Spectrum auction 2.3 Convergence 2.3.1 Monopolization 2.3.2 Substitutibility 2.3.3 Geography 2.3.4 Barriers to entry 2.4 Vertical, horizontal integration 2.5 Reasons to worry about market structure 2.5.1 Media industries ought to not waste resources 2.5.2 Media industries ought to facilitate free speech and political discourse 2.5.3 Media industries ought to facilitate public order 2.5.4 Media industries ought to Cultural equality, diversity 2.5.5 Media industries ought to innovate 2.5.6 Media industries ought to provide access equitably 2.6 Natural monopoly 2.7 Scale economies 2.8 Intervention 2.8.1 Behavioral 2.8.2 Structural 2.9 What do govts do? 2.9.1 Regulate 2.9.2 Stimulate 2.9.3 Litigate 2.10 Economist survey assignment 2.10.1 Information as a public good 2.10.2 "Free rider" argument 2.10.3 Ubicomp 2.11 Jump offs 2.11.1 Venture communism 3 Sept 9, newspapers 3.1 Imagine a new medium 3.2 Today: overall characteristics 3.2.1 Competition 3.2.2 Substitutes 3.3 Prevalent monopoly 3.4 Ownership concentration 3.5 Geographical concentration 3.6 Why do we have this overall concentration, monopoly? 3.7 Newspaper balance sheet (Picard, 1993, 193) 3.8 Analysis of balance 3.9 Three kinds of competition 3.10 = Direct: demand spiral 3.10.1 Intercity competition, "umbrella competition" 3.10.2 Intermedia competition 3.11 Where did classified ad $ go? 3.12 3 kinds of competition, 3 markets (Lacy & Simon, 1993) 3.13 Hyperlocal news, Sandi 3.13.1 Conference takeaways 3.13.2 What about postal subsidies? 3.13.3 Metrics, analytics 3.13.4 "Why are biz models important?" 3.13.5 Moving on-line 3.13.6 Identity issue 3.14 Investigative journalism question 3.14.1 Tax supports 3.15 Unusual experiments 3.16 Historical question 4 Sept 16 4.1 Why US film dominance? 4.1.1 "Dumping" 4.1.2 Cultural explanations 4.1.3 American trade bullying 4.1.4 Microeconomic "public goods" 4.2 Wildman on film 4.2.1 Non-excludable examples 4.2.2 Rival example 4.3 Christine's movie industry pres 4.3.1 State of affairs 4.3.2 Piracy 4.3.3 Programming, counter-programming 4.3.4 Best predictor of success 4.3.5 Scale economies 4.3.6 Digital tech as democratization 5 Sept 23, TV 5.1 Broadcasting: outline 5.2 History of radio/tv 5.3 Radio 5.4 TV (U.S.) 5.5 Spectrum and licenses 5.6 Experiential goods 5.7 Public goods 5.8 Exploiting a public good 5.9 Paternalism 5.10 Unusual public TV 5.11 Industry structure evolution 5.11.1 Network TV 5.12 Economics of tv networks 5.13 Erosion of network power 5.14 Restructuration (1980s-90s) 5.15 Multichannel TV: the rise of Cable TV 5.16 = MSOs, March 2010 5.17 "Network" confusion 5.18 Deregulation, 1996 5.19 Transformation of TV 5.20 TV-based research 5.21 Mike's history 5.22 FCC 5.23 Why regulate broadcast? 5.23.1 Scarcity rationale 5.23.2 Interference rationale 5.24 What about the free market? 5.25 Broadcast content regulation 6 Oct 7 6.1 Radio 6.2 State of affairs 6.3 Demographics 6.4 NPR 6.5 Increasing concentration 6.6 Consolidation 6.6.1 Clear Channel drastic increase 6.6.2 Measuring revenue concentration 6.6.3 Geographic reach of radio companies 6.6.4 Effect of consolidation on format competition 6.6.5 Average pairwise overlap between stations in the same format 6.7 Future of radio 6.7.1 Satellite radio 6.7.2 HD radio 6.7.3 Online radio 6.7.3.1 Resolution of fees 6.8 Division of radio tech and audio format 6.9 Telecomm 6.9.1 Bell System, 1876-1934 6.9.2 Natural monopoly 6.9.3 Network externalities and interconnection 6.9.4 When and why would government intervene 6.9.5 One policy one system, 1908 6.9.6 AT&T monopoly, 1934-1960s 6.9.7 Communications Act of 1934 6.9.8 AT&T core principles 6.9.9 End to end 6.9.10 Deregulation, 1960s-1984 6.9.11 Connecting terminals 6.9.12 Transmisison and long distance 6.9.13 Computer inquiries 6.10 U.S. Policy structure is complex = 7 Oct 14 7.1 FCC Review of merges in the comm industry 7.1.1 Standard of review 7.1.2 Public interest reviews 7.1.3 Imposition of conditions 7.2 = Potential public benefits 7.2.1 Potential public harms 7.2.2 Jurisdiction? 7.3 Telecomm, part 2 7.3.1 Computer inquiries 7.3.2 70s politics: the Bell coalition cracks 7.3.3 1981-1984: AT&T breakup 7.3.4 Modified Final Judgement (MFJ) 7.3.4.1 Initial RBOCs 7.3.4.2 Billing among RBOCs 7.3.5 Network layout? 7.3.6 Economic regulation pre-1996 7.3.7 Telecommunications Act of 1996 7.3.8 Scope of the act 7.3.9 Main themes 7.3.10 Content provisions 7.3.11 Universal services 7.3.12 Ownership and rates 7.3.13 Competition / entry 7.3.14 2000 Telecom bust? 7.4 = Bankruptcies 7.4.1 Telecom industry restructuring 7.4.2 Post 1996 regulation 7.4.3 Wireless telephone market 7.4.4 Internet alternatives to conventional telephone 7.4.5 New wireline competitors 7.4.6 Is regulation still needed? 7.5 Jump offs 7.6 Global outlook on wireless market 8 Oct 21 8.1 Distinct tech infrastructures 8.2 Common carriage 8.3 Changes to these neat divisions 8.4 Internet crosses all of the boundaries 8.5 Characteristics of net 8.6 Internet 8.6.1 New network paradigm 8.6.2 History in 3 periods 8.6.2.1 Defense, ARPA 8.6.2.2 Research 8.6.2.3 Corporate infrastructure, mass media 8.6.3 Wholesale top backbones 8.6.4 NAPs (Internet exchange points) 8.6.4.1 Peering maps 8.6.4.2 "Meet me room" in One Wilshire 8.6.4.3 NAP of the Americas 8.6.5 Key success factors 8.6.5.1 User-driven experimentation 8.6.5.2 Pricing, contracts 8.6.5.3 Network governance 8.6.5.4 Interconnection arrangements 8.6.5.5 End-to-end 8.6.5.6 Moving from End to End 8.7 Measuring internet industry by its contribution to the performance of an 'information society' 8.7.1 Traditional measurement 8.7.1.1 Infrastructure 8.7.1.2 Revenue 8.7.2 Estimating world communication capacity 8.7.3 Questions 9 Oct 28, Information pricing 9.1 Housekeeping 9.2 "Information" 9.3 Supply: cost structure 9.4 Consumption characteristics 9.5 Is information a public good? 9.6 Implications for market structure 9.6.1 Dominant firm/monopoly 9.6.2 Differentiated product 9.7 Strategy: What to do? 9.7.1 Be the monopoly 9.7.2 Differentiate 9.8 Commodity businesses 9.8.1 Aside: Reuters 9.9 Pricing information 9.9.1 "Bonzai strategy" 9.9.2 Example: Amie Street 9.9.3 Value-based pricing is key 9.10 Differentiation, market segmentation 9.10.1 Quicken demand curve 9.11 Logic of price discrimination 9.12 Forms of differential pricing 9.12.1 Personalized pricing 9.12.1.1 Gone wrong: Amazon 9.12.1.2 Common in traditional industries 9.12.2 Group pricing 9.12.2.1 Price sensitivity 9.12.2.2 Network effects, standardization 9.12.3 Versioning 9.12.3.1 Return to Quicken example 9.12.3.2 Versioning info goods 9.12.3.3 Dimensions to use 9.12.3.4 Value added? 9.12.3.5 Pitfalls 9.12.3.6 Analyze demand 9.12.3.7 Analyze product 9.12.3.8 Goldilocks pricing 9.12.4 Bundling 9.12.4.1 Limitations 9.12.5 Nonlinear pricing: bundling variant 9.12.6 Complementary products pricing 9.13 Conclusion: Pricing info goods 9.14 Google Adsense 9.14.1 More traditional models 9.14.2 Tech 9.14.3 Ad servers and Network 9.14.4 Adsense 9.14.5 Adsense for content 9.14.6 Other Adsense services 9.15 Three groups of people + Adsense 9.15.1 Users 9.15.2 Producers 9.15.3 Advertisers 9.15.4 Adwords 9.15.5 Who gets ads? 9.15.6 Criticism: Users 9.15.7 Criticism: Producers 9.15.8 Criticism from everyone 9.15.9 Criticism: Advertisers 9.15.10 "DHL club" 9.15.11 Adsense certification 9.15.12 SEO arms race 10 Nov 4, visiting Lian Jian 10.1 Introduction of main concepts 10.1.1 Auctions 10.2 Google as monopoly? 10.3 "North" ads on Yahoo 10.3.1 Methodology 10.4 Alternative biz models to advertising 10.5 Jump offs 11 Nov 11 11.1 Network externalities 11.1.1 Examples of media networks 11.2 Interdependence and complementarity 11.3 Sources of network effects 11.4 Key issues 11.4.1 Critical mass 11.4.2 Systems competition 11.4.3 Standards setting 11.4.4 Compatibility and interconnection policy issues 11.5 Path dependence and lock-in 11.5.1 Path dependence 11.5.2 Competing technologies 11.5.3 Is lock-in forever? 11.5.4 Examples of switching costs in media sectors 11.5.5 Six categories of lock-in 11.5.5.1 Durable purchase 11.5.5.2 Specific training 11.5.5.3 Information and routines 11.5.5.4 Search costs 11.5.5.5 Loyalty programs 11.5.5.6 Contractual commitments 11.5.6 Overcoming lock-in 11.6 Lock-in, increasing returns, path dependence 11.7 Two-sided platforms/ markets 12 Nov 18: Blair Levin 12.1 Three spectrum biz models 12.2 Unlicensed 12.3 Whitespaces 12.4 Frequency, format 12.5 Should US have adopted a mobile standard? 12.6 What is slowing down the development of mesh networks? 12.7 Spectrum crunch, spectrum crisis 12.8 Local governments entering the market 12.9 Cable upgrade? 12.10 Network neutrality 12.11 Universal service 12.12 Incentive auction 12.13 Jump offs 13 Nov 18 Bill, Alternate Reality Games (ARG) 13.1 Precedence 13.1.1 Gracie for president 13.1.2 Spinal tap 13.2 The Lost experience 13.3 ARG strategies 13.4 Entertainment 42 13.5 Fourth Wall Studios 13.6 Smith & Tinker 13.7 Studio Cypher 13.8 Edoc laundry 13.9 Xenophile Media 13.10 Serious ARGs 14 Nov 18 Jackie, Internet of things 15 Dec 2, Final presentations 15.1 Sandi 15.2 Mike

Aug 26

Costs in telecomm

• High fixed costs
• Low marginal costs

Fixed costs

• Cost of entry
• First step, required
• Often very high

Marginal costs

• Costs that happen after the fixed cost
• Distribution

E.g. movie industry

• Spend a lot upfront for the first copy of the movie
• Comparatively very little to replicate the movie in a theater

Non excludability

• In economics, excludability is to exclude people who don't pay
  • Unless you buy the car, you can't use the car
  • Hard to enforce for radio, TV
• Central question: "how to charge for info goods?"

Transitions in play

Analog, digital

Usage

• People once wondered what could fill a fiber pipe
• Uses that do fill the pipe were not yet imagined

Trend toward monopolization

Network of networks

• Architecture(s) for interconnection
• Points of control
• Companies return in different guises
  • e.g. AT&T monopoly, once broken, now reassembling
• Vertical, horizontal integration
• Developing monopolies
• Bundling and lock-in
• Hoarding information

Tech / industry limits

• Limitations tend to be introduced by industry and not tech
  • e.g. roaming and long distance charges
• Circumvention tends to spur change (or lawsuits)

"Perfect market"

• Infinite buyers, sellers
• Perfect info: everyone knows everything there is to know about a good/service
  • Price, quality

Infrastructure/Social

Cycles:

• Tech and culture develop in parallel
• Uses suggest new changes in tech
• New tech creates new barriers, possibilities for users to explore

Institutions

• Policy, industry
• Governance, regulators, FCC
• Tech changes faster than institutions

Syllabus overview

• Basics of technology
• Macroeconomics
• Entertainment industries, movies, tv
• Understanding collective actions
  • How do people come together in action?

Part I. Individual sectors of the media industries

• Newspaper, radio, ..., internet

Part II. Looking across the industries via econ principles

• Pricing
• "Externalities"
  • Value to customer depends on external qualities
  • e.g. Phone value increases w number of other phone users
• Standards, interconnections
• Path-dependence, "history matters"
  • e.g. Paul David

Assignments

• Short presentation leading a class discussion
  • Bar will spend 1st half of class following history, general info
  • Student will spend 2nd half with a case study or studies that bring different look
  • Meet w Bar in advance
• Research paper, something to do with economics and comm industries
  • No length requirement, ~15pp
  • Week 4, 1para topic
  • Week 9, 2page synopsis, "pitch"
  • Week 10-14, presentation of paper
  • Week 15, paper due

Sep 2, overview of terms

Transmitting and processing bits

• "Analog": inducer telephone receiver translates signal
• "Digital": encodes a stream of bits that describe the wave of sound
• "Edges" of network tend not to be digital

Logic

• Routers, switches
• Microprocessors used to direct network traffic
• Replacing human switchboard operator

Bandwidth

• Increasing capacity

Infrastructure

Who invests?

• Governments
• Industries
• Consumers

In some countries, government builds out wired infrastructure

• In the US, industry is incentivized in different ways
  • Local government may need/want network for city services
  • They will resell to local biz

Wireless frequency spectrum is a separate issue

• Licensing is very valuable commercially
• Who should get the space?
• Broadcast TV were unwilling to move until they could benefit from the freed spectrum
• Hard to know how to value these resources

Multiple models for exploiting infrastructure

• Centralized, decentralized, distributed
• P2P, client-server

Abundance, scarcity

Abundance of info

• Digital information need not be rare
• Bottlenecks tend to be artificial

Scarcity in economics

• Doesn't necessarily mean that this is little of something
• But that it is a rival good
  • If I take some, there is less for you

Non-rival goods

• If I take some, it does not reduce availability to others

Are we arriving at an end of scarcity?

• No. "Scarcity is a fleeting concept"
• We multiply bandwidth but new services require greater capacity

Spectrum auction

Some bands are unlicensed

• Wifi 802.11, etc.
• Anyone can use it as long as they limit signal power (10mA) and don't complain about interference
• Many strategies for exploiting the limited frequency
  • Multiplexing
  • Multiple signals, same freq

Other bands are assigned by auction

• Gov't driven

Convergence

• Multiple media channels relying on the same (inter)network
• Bundling
• Lock-in
• Competition? Stifled or spurred?
• Where are the bottlenecks?
  • Obligatory passage points, e.g. a wire to your home
  • Typically things that govt gets involved with regulating
  • old e.g. bridges, railroads

Monopolization

How do you know you have a monopoly?

• What is the relevant market?
• How many suppliers, players are there?
• What is the market share among them?
• What are the barriers to new players to enter?

e.g. Is Microsoft a monopoly?

• Operating Systems? Yes?
• Consumer software? No?

Lawyers need to move the field

• Define the market boundaries and identify competitors

Substitutibility

• Can you substitute one product for another?
  • e.g. MSIE, Firefox, Netscape
  • Are they interchangable products for the end consumer?

Geography

• How far apart are the players?
• e.g. TV stations have local monopoly, only Ch. 5 in the area
• e.g. 14 cable TV companies in LA but only 1 per neighborhood

Barriers to entry

• Obstacles to new competitors
• Players in the market bar new entrants through behavior
  • Lock-in
  • Patent
  • Legal, illegal
• Also, intrinsic characteristics to the business
  • Expensive initial investment

Vertical, horizontal integration

Imagining multiple steps in an industry process:

• Vertical: owning multiple steps in the delivery chain:
  • Content production, packaging, distribution, presentation
• Horizontal: owning multiple players in a single market
  • Concentration within a "step"

How does this develop?

• Sometimes one company grows to encompass a whole chain
• They may also buy their way into a "step"

Should you worry?

• If the products, services are non-essential, then it's hard to make a compelling case for integration
• Economic concern: price
• Political, social concern: access, democratic discourse
• Monopoly on one product/service may enable one player to extend power into another market
  • e.g. controlling the advertising of a single product

Are monopolies bad for innovation?

• Neoclassical view, monopoly is bad for innovation, no incentive
• Might also argue that ...
  • In highly competitive market, cost is driven to marginal cost
  • But monopoly can increase price, profit and spend more on R&D
    • e.g. Bell Labs
• Big, slow-moving monopolies get killed by agile new comers
  • "Serial monopolies"
• Schumpeter, Christiansen, r&d will always be self serving

Reasons to worry about market structure

From Who owns the media?

• http://books.google.com/books?id=edrVnwGPUfEC&pg=PA523&lpg=PA523&dq=%22media+industries+ought+to+facilitate+public+order%22&source=bl&ots=SXTiU9kFNk&sig=H4zREEAmCeo596toGfqbi4oZXrE&hl=en&ei=fSeATNKwAZOasAOp0JifAQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBIQ6AEwAA#v=onepage&q=%22media%20industries%20ought%20to%20facilitate%20public%20order%22&f=false

Media industries ought to not waste resources

• Phone companies building two networks side-by-side to provide same service
• Better to have one stronger network

Media industries ought to facilitate free speech and political discourse

Media industries ought to facilitate public order

• Telecomm are essential strategic resource
• Public safety
• Essential to the rest of the economy

Media industries ought to Cultural equality, diversity

• Monopoly should not stifle diversity

Media industries ought to innovate

Media industries ought to provide access equitably

• Publish and read

Natural monopoly

• Industry in which the market, left to its own devices, yields a monopoly
  • Not an outcome of misbehavior, patent hoarding, etc.

Scale economies

• If you're making many many things, your cost per-item goes down
• Big big players can undercut competitors
• Not limitless, costs + challenges of coordination can overwhelm the advantages of scale economies

Intervention

Behavioral

• Government intervention
• Imposes rules, regulation on how the business may operate
  • e.g. Price caps, disclosure requirements, etc.

Structural

• Rules may provide for sustainability

What do govts do?

Regulate

Stimulate

Subsidize

• e.g. newspaper industry subsidized by postal rates
• e.g. phone co.'s subsidized by govt r&d money

Litigate

• May also be an outcome of regulation
• Lawsuits
• Antitrust
• Different agencies suing each other over jurisdiction

Economist survey assignment

Information as a public good

• Is internet a "public good"?
• Do people think of information as a "public good"?
• Information is a non-rival good

"Free rider" argument

• Carriers (AT&T, etc) argue that Google and others are using the network free of charge
• Yet Google does pay for its dedicated lines
• "Free rider" is traditionally used to describe people who use non-exclusive public goods
• Heart of network neutrality debate

Ubicomp

• What are the economic dimensions of a network of things?

Jump offs

• Schumpeter, J. () Capitalism, socialism, and democracy.

Venture communism

• Venture communism : http://telekommunisten.net/about
• http://www.wired.com/beyond_the_beyond/2007/09/venture-communi/
• http://www.econlib.org/library/Enc/bios/Schumpeter.html

Sept 9, newspapers

Imagine a new medium

• Recent changes in tech: dramatically reduced cost of production
• Production tech is readily scalable from very small to quiet large
• Low cost, scalable tech. Entry free, easy
• Every entrepreneur in the country with a "flair" for mass comm takes a shot
• Result: proliferation of new entrants, ferocious competition
  • Competition leads to wide consumer acceptance

Today: overall characteristics

Size:

• US 59$b, 2005, comparable to textile, lumber
  • Big chunk of overall printing/publishing ($90b)
• Total # of papers is in steady decline
  • Primarily evening papers
  • Morning papers rising somewhat but still following overall decline
• 55m copies sold daily
• 50m weeklies (given away)

Competition

• Economists: referring to market concentration
• Common sense: working hard, struggling
• E.g. monopoly is non-competitive (econ) even if they are working hard (common sense)

Substitutes

First question in antitrust:

• What is the relevant market?
• Can the products substitute for one another?

Is the Chicago Trib competing with the Boston Globe?

• Probably not

Consumer desires, product services

• Seek NYT, USA Today for national communion
• But Milford Daily News is for local communion

Prevalent monopoly

• 90% of newspapers exist as only paper
• JOA, 1970 newspaper preservation act, only 11 cities
  • Joint Operating Agreements
  • Goal: preserve multiple papers in a region

Ownership concentration

• 2001 stats
• Gannett Co., Knight-Ridder, etc.

Geographical concentration

• What is most relevant market?
• Retail Trade Zone
  • Zone where adverts have an impact
  • 2/3 of $ come from ads

Why do we have this overall concentration, monopoly?

Used to have lots of competition

• Economies of scale is one explanation
  • Cheaper to print more papers, massive presses, etc.
• But not the whole story
  • Small scale publishing don't suffer big cost penalty
  • "Holding page count and product quality constant, long-run marginal cost of producing copies is pretty constant across broad ranges of circulation sizes"

Other explanations?

• Economies of scope: buying up different kinds of papers in different locations
  • Owning multiple news outlets across media
  • Fixed costs fall when you can reuse/ repurpose
  • Falling transaction costs with advertising, offer bundles
  • Managing, negotiating all the transactions is v expensive
    • One reason to have a firm with on-going contracts is to lower transaction costs
• First copy costs
• Dual markets, joint production

Newspaper balance sheet (Picard, 1993, 193)

Operating revenues

• 65-80%, advertising (local/retail, classified, national)
• 20-35%, circulation

Operating expenses

• 15-30%, newsprint
• 9-10%, circulation
• 13-15%, mechanical
• 8-12%, administration
• 7-10%, editorial
• 5-6%, advertising
• 1-3%, building
• 1-3%, promotion

Operating margin

• 15-20%

Analysis of balance

• Fixed "first copy" cost is very high
• Collecting, editing, creating the content
  • 35-50% of total cost
  • Common to many info industries
  • Some incremental reproduction cost for newspapers
• Economies of scale tend to affect industries with slower decline in reproduction costs
  • e.g. Auto. Second car still costs quite a bit compared with second newspaper.

Three kinds of competition

= Direct: demand spiral

• Downward sloping "demand" (D) curve
• X-axis: Quantity (Q) or "circulation" (C)
• Y-axis: Price (P)
• Market clearing price, equilibrium between supply, demand
• If one newspaper lowers price, increases circulation, increases revenue and reinvests in quality, their demand shifts positively
• If another newspaper drops price, their circulation decreases, revenue drops, quality drops
• Assumption: zero transition cost from one paper to the next for consumer, advertiser
  • Reality: there is some more inertia
• Assumption: demand is dependent on price and quality
  • Reality: price is not the final determinant

Summary:

• If one newspaper gets ahead, it can drive the others out of business
• "Ahead" is measured above in price but might be triggered by something else
• "Two markets built into the same artifact are compounding ..."

Intercity competition, "umbrella competition"

Interactions among different levels

• National daily, metro daily, satellite daily, local daily
• Free weeklies

Key idea:

• Competition within localized market
• Relevant local coverage
• Relevant ad market

New twist on "what is local?" with on-line news

• Local
• Diasporic
• Global news audience (BBC, NYT homepages)

Intermedia competition

• Ad spending, relative constancy hypothesis (McCombs, 1972)
• Ad budgets: allocation decision
• Multiple news media: substitutes or synergy?
• Newspapers are competing with other media for ad $$$

Where did classified ad $ go?

• Monster.com, craigslist
• From 1999-2001, huge drop in spending on job listings

3 kinds of competition, 3 markets (Lacy & Simon, 1993)

	Information	Advertising	News/editorial
Direct	Yes	Yes	Yes
Umbrella	Some	Yes	Yes
Intermedia	No	?	Some

Hyperlocal news, Sandi

• Summer she attended in the summer
• Content models, strategy
• "Scenario Lab"
• Helped with Knight Digital Media Center conference in summer '10

Conference takeaways

• "Non-profit revolution"
• Funding
• Paradigms and funding
  • Investigative is expensive
  • Hyperlocal is cheap
• "Ads getting in the way"
• Didn't feel that subscription model was viable?
• Assumption of online delivery?
• Idealization, nostalgia for a pre-90s period of objectivity
  • Watchdog
  • Doesn't this contradict openness to government support?

What about postal subsidies?

• Not tax
• Successful 1800s model
• McChesney, Free Press argument

Metrics, analytics

• Measurement, assessment
• Difficulty explaining, making sense of data
• Is there a vulnerability in measurement?
  • e.g. we never measured the readership in print

"Why are biz models important?"

Patch.com

• Bought by AOL, $7m
• AOL hopes to corner hyperlocal market, new strategy to self-preservation
• http://www.patch.com/
• Hyperlocal
• Editors for local areas
• One person aggregates, curates news independently
• How much original journalism is going on?

Moving on-line

• Replicating off-line print edition
• Typeface, layout
• Visual branding, trust

Identity issue

• If a "NYT" calls you, you listen
• Not so much for so-and-so blogger
• Legitimacy
• Financial possibility
• Joe Salzburg, journalist in pop media
  • Champions

Investigative journalism question

• Much lower revenue stream
• Hard to support long-term investigative projects
• 22 states don't have a reporter dedicated to their government
• TMZ/"fluff" pays the bills
  • Assumption that something else paid the bills previously?

Tax supports

• Some EU countries have taxes on electronics that go into a fund for journo

Unusual experiments

• Zev Yaroslavsky, LA County Supervisor, http://zev.lacounty.gov/

Historical question

• How does this golden age of journalism compare with other golden age discourses?
  • Back when music was good
  • Back when film was good
• These were times with less rigorous, accurate metrics
• Few people able to participate
• Few areas, populations counted, mattered

Sept 16

Why US film dominance?

"Dumping"

• American film companies sell at a loss

Cultural explanations

• American filmmakers target an int'l audience

American trade bullying

• "Cartels"
• Trade pressure
• American companies own foreign theater chains

Microeconomic "public goods"

• Bigger market: home + away for English-language Hollywood
• Possible to justify investing more up-front, higher "quality"
  • Quality == bigger stars, better fx, more exp directors

Wildman on film

• Huge fixed cost
• Low marginal cost

He uses "Public good" to mean:

• Non-excludable
• Non-rival

But information goods are not necessarily "public goods"

• Public goods must have positive social externalities

Non-excludable examples

• Government initiatives
  • Clean air
  • National defense
• Radio
  • NPR can't stop me from listening

Rival example

• Candy bar
  • I eat it, none left for you

Christine's movie industry pres

State of affairs

• Oligopolistic structure
• Media consolidation
  • Studios == subsidiaries

Piracy

• "Testing" by piracy
  • Will buy DVD, etc if they like the pirate
• Contradictory numbers and reports for impact:
  • MPAA estimates ~$3b

Programming, counter-programming

• Escalating budgets, tech
  • Theater far outstrips homevid
• Big cost in updating theaters for 3-D and IMAX
  • Cost of tickets goes up
  • Possible decline in audience
• Losing the reputation of being cheap entertainment for families
  • Revenues up
  • Attendance down

Best predictor of success

• Day one
• Big event
• "Launch"

Scale economies

• Once the assets (models, sets) exist, cheaper to make sequel

Digital tech as democratization

• More indies getting involved
• Able to afford production and pitch to studios

Sept 23, TV

	Live	Delayed
Interpersonal
Mass	Broadcasting	Movies, newspapers

Broadcasting: outline

• Radio, tv history
• Product characteristics
• Evolution of industry structure
  • Broadcast networks
  • Cable TV
  • Satellite (DBS)
• TV future(s)

History of radio/tv

• 1881, "musical telephone", at International Electrical Exhibition in Paris
  • Live music distribution by telephone, active service until 1932
  • The Compagnie du Théatrophone

Radio

• 1895 Marconi
• 1919 Radio Corp of America, pooled patents (Westinghouse, AT&T, GE)
• 1920 first US commercial radio braodcast, no restrictions
• 1926 RCA forms NBC to encourage receiver sales (later force to divest "Blue Network", which became ABC)
• 1927 CBS formed
• 1927 Radio Act: licensing stations

TV (U.S.)

• 1930 experiments with radio + pictures RCA
• 1940 National TV System Committee (NTSC)
• 1946 TV service starts in US, 12 VHF channels licensed initially
  • Numbers 2-13 because no one could agree on channel 1
• 1950s TV overtakes radio (in the US)
• 1952 channel expansion - additional 70 UHF channels (less desirable)
• 1953 Color
• 1980 83% of households have color TVs
• Since 1990, 98% of households have TVs, cable passes 90% of US homes

Spectrum and licenses

• Channels: artificial structure on ethereal resource
  • AM radio: 10 kHz/channel
  • FM radio: 200 kHz/channel
  • TV: 6 MHz/channel
• Spectrum scarcity leads to govt allocation of licenses
  • Limiting overlap, interference
• Who gets licenses? Powerful players
  • Existing radio stations received TV licenses
  • Existing TV stations receive HDTV spectrum
  • Secondary market for trading licenses
• License renewals: over 100000 in the US since 1950s, only 50 contested, 20 denied
• Alternatives:
  • Spectrum auctions (primary market)
  • Unlicensed spectrum
• Possible to inject some social goals: reserve some spectrum for minority-owned businesses

Experiential goods

• Immaterial, novelty, product innovation, relatively short shelf life (but syndication extends it)
• Consequences
  • Value of program lies in novelty
  • Reputation is key, thus ppl make series
  • Labor intensive
  • High R&D costs: Every product is a prototype with unpredictable demand
    • Each product is high-risk investment
• Distribution is a key position
  • Spread risks across products
  • Reap benefits from hits
  • Scheduling strategies

Public goods

• Non-rival
• Non-excludable (free rider effects)
• Production costs unrelated to number of customers
• Instantaneous, virtually costless reproduction

Exploiting a public good

• Advertising
  • "Selling audience to advertisers"
  • Similar to selling air time
• Donations,
• Taxes, tariffs, fees
• Make it excludable: encryption, cable, etc.
  • Re-transmit fees (cable)

Paternalism

• Positive social good, externalities
• Maximize social benefit
• Finance through taxation

Unusual public TV

• Austria dedicated to reaching all citizens with Ch 1 + 2
• Many residents of the Alps only receive these two channels
• They purchase lots of different content

Industry structure evolution

Network TV

• 3 "golden webs" born from radio
  • 1930s,40s CBS, NBCred, NBCblue (becomes ABC in 1941)
  • Much local programming but over time scale economics drive them to network advantages
• 2000 TV stations
• Major networks own stations in large local markets
  • Ownership caps (~35% of audience), regulation
• Networks contract with ~200 affiliates each to distribution programming
  • Affiliate broadcast the networks' advertising
  • Networks pay affiliate ("compensation")
  • Trends:
    • Stations paying increasing share of programming costs (esp. Sports)
    • Networks efforts to eliminate compensation, get reverse compensation

Economics of tv networks

• Reduce transaction costs
• Lower content costs (Sharing production)
• Sell aggregate audience to advertisers
• Effective scheduling/audience research
• 1970s: NBC, CBS, ABC had 92% of the audience
• Distribution bottleneck / cartel behavior
  • Restrict quantity of commercials, raise prices
  • Coordinate on season length, timing of reruns

Erosion of network power

• 1970s regulations to restrict network power
  • Fin/syn rules: networks could not own or syndicate programs produced by others
  • Prime-time access rule (PTAR): only 3 prime-time hours per evening could be supplied by the nwtworks
  • Both lifted in 1995
• 1970s, 80s, Cable
  • 1980s: networks' share dropped to 75%
  • 1990s: to 50%
• More recently:
  • Direct Broadcast Satellite (DBS)
  • Digital cable

Restructuration (1980s-90s)

• 1980s
  • Cap cities/ abc
  • GE buys RCA/NBC
  • Loews buys CBS then sells to Westinghouse
• 1990s
  • Disney/ABC
  • Viacom buys Westinghouse/CBS
• New entrants
  • 1986: Fox (news corp)
  • 1995: WB Network (Time warner)
  • 1995: UPN (Viacom/Paramount)

Multichannel TV: the rise of Cable TV

• 1950 Community Antenna TV (CATV)
  • 1950 70 systems, 14000 subscribers
  • Tech initially for sharing a nice antenna among several ppl
• 1960 Channel expansion (up to 12)
  • Requires more programming, cable exclusives
  • Broadcasters threatened
  • 1962 800 systems 8500000 subscribers
  • 1966 start of cable regulations
• 1970s Consolidation into MSOs (multiple system operators), increasing clout
  • New competition from satellites
  • 1972 Regulation "must carry", PEG ("public education government") channels
  • Broadcasters putting pressure on govt to reg cable
• 1980s Boom years
  • 1984 deregulation
  • 1980 15m subs
  • 1989 53m subs
• 1990s cable triumphs, avail to 97% of US households (70m subscribers)

= MSOs, March 2010

• http://www.ncta.com/Stats/TopMSOs.aspx
• Comcast, 23.5m, 24.31%
• DirecTV, 18.7m, 19%

"Network" confusion

• Sometimes it's actual wire
• Sometimes it's OTA
• Sometimes it's conceptual, organizational

Deregulation, 1996

• Competitive Television Delivery Technoloies, 1983-2006
• FCC stopped releasing data after 2006
• Open Video Systems (OVS) introduced by Telecomm act 1996 but didn't happen
• Satellite is also not well-suited to internet

Transformation of TV

• TV the "lazy medium", what happend to interactive TV?
• Digital TV/ HDTV
• me-TV, further disaggregation of audiences?
  • Future of the ad-supported model?
• Multi-screen, online-watching
  • Internet TV, sharing, co-watching, time-shifting
  • Referral via SNS

TV-based research

• comScore: TV-only 65%, cross-platform: 29%, online-only: 6%
• Nielsen followed people and observed their screen use: four screens
  • TV
  • Computer
  • Mobile
  • Other screens
  • 65+ spend majority of time with live TV
  • 18-44+ people spend considerably more time on computer screen
  • Noted disparity between self-report and observed practices
• comScore Top US Online Video Content May 2010
  • Google-related 43.1%, Hulu 3.5%, nearly everything else is under 2%

Mike's history

• Radio Act 1912, 1927
  • Expanded fed govt over radio
  • "Wireless" as opposed to the "wires" of telegraph
  • Prime concern: interference
  • Industry actually requested govt intervention
• Communication Act 1934
  • Fed Radio Commission replaced by FCC

FCC

• 5 members, max 3 from one political party
• 5 yr terms
• Adopt administration regulation (law)
• Law enforcement body (judgements)
• Executive body (issue licenses)
  • Can't have more than 2 commissioners meet in a single room

Why regulate broadcast?

Scarcity rationale

• But lots of resources are scarce
• Is this scarce in a special way?
• Scarcity in the digital realm?

Interference rationale

• Interference destroys utility (tech argument)
• Entry-point to government involvement

What about the free market?

• Ronald Coase proposes a pricing system for the broadcast industry
• Issues still relevant today?
• Has the public interest been served?
• Last time a station license was NOT renewed
  • 1960s, blatant racial discrimination
• FCC adopts Coase's theory for new areas of spectrum

Broadcast content regulation

• Supervision of licenses includes broadcast content regulation
• License renewals require "serving the public interset"
  • But what does that entail?
  • Conflict w First Amendment?
• Would market forces better "serve the public"?

Oct 7

Coming soon

• Pam Samuelson
• Blair Levin, worked at FCC and in industry, now advising in Obama admin,

Radio

• Ubiquitous in US and in dev world
  • 5 radios per house, ppl listen ave 3 hrs/week
  • Built into cars, clocks, phones, etc.
• Most listening is out of the home (62%) cars+public spaces
  • 38% in home
• Continued success?
  • Cheap, easy to use, portable
  • Lots of choice, can be used as background

State of affairs

• 14,417 stations in US in 2009
• Yet revenue is declining slow + steady
• Format: Increasingly target niche audiences
• Revenue comes from advertising
• Talk radio growth

Demographics

• Tends to skew older
• Noncommercial radio tends to be news, christian

NPR

• Older, more affluent, more educated than the US average
• 54% male, 46% female
• Multiple platforms
  • Web, mobile, hybrid-distribution

Increasing concentration

Ownership limits

• 1953: 7 AM, 7 FM
• 1984: 12 AM, 12 FM
• 1990: 30 AM, 30 FM (local combo not to exceed 25%)
• 1992: 20 AM, 20FM (can own 2 or 3 in each market)
• 1994: 25 AM, 25 FM for minority owners
• 1996: No more national cap
  • In no case can a single entity own more than half

Consolidation

• Doubling of the number of mergers/acquisitions after 1996
• Market share shift
  • 1993, CBS biggest market share 3.8%
  • 2004 Clear Channel, 26.3% revenue, (27.2% listeners)

Clear Channel drastic increase

• 1995, owned 39 stations
• 2005, 1184
• Bundled advertising
• Centralized production
• Local stations are "empty shells"
  • "One guy in a booth"
  • Sprinkling local material into a pile of national recordings, sound-on-disc

Measuring revenue concentration

HHI

• 1700 is where govt antitrust gets interested

Concentration ratios:

• CR10
• CR4
• CR2

Geographic reach of radio companies

• 2005, 121 companies own stations in 10 cities

Effect of consolidation on format competition

• http://futureofmusic.org
• Looks at control of various formats by corporation

Average pairwise overlap between stations in the same format

• Comparing stations of the same format within a single corporation
  • Often as much as 50%+ overlap
  • Future of music suggests that this is outrageous, not diverse

Future of radio

Satellite radio

Launched 2001: Sirius, XM

• 2008 Merger, SiriusXM
• $12/mo average subscription
• 97% of revenue from subscriptio
• 18.8m subscribers at end 2009
• In decline:
  • Lost 230,000 subs since 08
  • Ad revs declining
  • Continuing losses ($441m in 2009)

HD radio

• Some conversion only 2012 of 14417
• Little awareness, interest from consumers
• Probably need bundling in cars

Online radio

• Increasing audience
• Tends to be higher income, educated
• On-line only radio programming
• Non-local stations
  • International
  • Internet-only
• Streaming on phones, Pandora app
• Streaming in cars?

Resolution of fees

• Pay percent of revenue instead of performance fees

Division of radio tech and audio format

• Bluetooth, Wifi, etc.
  • FCC
• Pandora, podcast, streaming
  • Tends to be dealt with by Copyright Office

Telecomm

Bell System, 1876-1934

• 1876, Alexander Graham Bell invents phone
• 1876-1894, Bell has patent monopoly
• Tons of competition following patent expiration in 1894
  • 30000 phone companies by turn of century
  • 1902, 1002 cities in the US have phone service / 451 have two or more companies
  • 1907, non Bell companies served as many phones as Bell
• 1907, Theo Vail leeds consolidation
• 1913, Kingsburg Commitment formalized monopoly
  • http://en.wikipedia.org/wiki/Kingsbury_Commitment
  • Agree to stop buying other companies
  • Agree to interconnect
  • Agree to release shares in Western Union
• By 1920s, ATT becoming "natural monopoly"

Natural monopoly

• Initial investment needs to be matched for any real competitors
• Huge fixed cost, small marginal cost
• Significant network externalities
• Was accepted until ~1960s
  • People started to see alternatives to dominant player, dominant technology
  • "Once natural, tends to become non-natural"
  • "Innovators' dilemma"
  • Only incentive is to invest in tech that will advance/preserve their position

Today's economists would say there is no natural monopoly

• Even though there is consolidation
• Always seeing redefinition of boundaries
• Depends on how the analysis is framed
  • Is it "telephone" service or "information services"?

Network externalities and interconnection

• Smaller independents were limited
• ATT can offer much more long distance
• Incentive to consolidate
• Antitrust concern from the very start

When and why would government intervene

Government often intervenes with natural monopoly when...

• Infrastructure
  • Interstate highway network
• Government investment enables private activity
• Justified often via military: strategic defense
• Speech, democracy at stake

One policy one system, 1908

Universal service

• Vail
• Was initially arg for ATT to provide phones to all
• Now used to describe bringing phone service to all US citizens

AT&T monopoly, 1934-1960s

• "Ma Bell"
• Some amount of "Robin hood", take from rich customers, give to poor customers

Communications Act of 1934

• Creates FCC
• FCC mandate: role out of efficient nationwide wire + radio comm
  • "adequate facilities"
  • "reasonable charges"
• Not to create bands but to regulate within the bands
• Regulation as Social contract with ATT: get monopoly but behave
  • Subsidize poor/rural customers with richer/urban customers

AT&T core principles

• Network is sacred
• Technical excellence
• National responsibility
• Local service

End to end

Looking at examples from advertisements:

• Operation, service
• Research, design
• Manufacturing, tech

Deregulation, 1960s-1984

Three areas:

• Terminals
• Transmission and long distance
• Computer inquiries

Connecting terminals

After Hush-a-phone and Carterfone,

• Phone company anticipates people learning to control the network from third-party devices
  • e.g. Blue box, 2600hz frequency
  • Theoretically, you could create another phone company
• 1968: FCC says anyone can connect devices as long as they don't harm the system

Transmisison and long distance

• 1958: Competition above 890
• 1969: MCI
• 1972: Open skies
• 1976-1981: Resale, shared use
  • Big customers could get leased lines
  • Later exploited by early ISPs
• 1977-1978: Execunet
  • Allows MCI to provide services just for executives
  • Users can dial a few digits and use alternative service

Computer inquiries

• CI 1 (66-71), keep common carriers out of data processing
• CI 2 (72-80), enhanced (vs basic) services thru separate subsidiary
• CI 3 (86), Open Net Architecture (ONA)
  • http://en.wikipedia.org/wiki/Open_network_architecture
  • Preserving competitions
  • What are the basic services?
    • Dial tone?

"How does a regulated monopoly interact with a competitive industry?"

U.S. Policy structure is complex =

Most other countries have more consolidated

In U.S. every level + branch is involved

• Federal:
  • Executive (FCC, NTIA, DoJ, FTC)
  • Congress
  • Courts
• State
  • PUC, PSC
  • State legislature
• Cities
• Three tacks:
  • Stimulate: funding for research, investment in infrastructure
  • Regulate: rules for conducting a business
  • Litigate: Anti-trust, other legal matters

No clear decision making structure

• • Marketplace of ideas
  • Leading to different outcomes
  • France has a single authority: thus Minitel is the future

Oct 14

FCC Review of merges in the comm industry

Standard of review

• Based on the transfer and control of licenses
• Applicants bear the burden
• Balancing public harms v public interest benefits

Public interest reviews

• FCC is informed by - not limited to, trad'l antitrust
• FCC/DOJ have independent authority
• FCC analysis more broad than DOJ (competition)
  • Also diversity + localism

Imposition of conditions

• FCC can impose transaction-specific conditions
• May impose conditions to remedy harms that arise from the transaction
  • But not to remedy pre-existing harms or harms unrelated to transaction

= Potential public benefits

Criteria to determine claimed benefits:

• Transaction-specific
• Benefits must flow to consumers
• Claim must be verifiable
  • Sufficient evidence?
  • Expected to occur in distant future?

e.g. NBC-Comcast

• Innovation in business, marketing
• Reduced costs for consumers
  • Pass on transaction savings

Potential public harms

• Anti-competitive
• Limit new entrants
  • Raise cost of entry
• Reduce information diversity

e.g. NBC-Comcast

• Favor NBC content
• Less diverse, local programming
• Comcast may use ISP services to gain unfair advantage

Jurisdiction?

FCC v. FTC authority?

• FCC concerned more with diversity, localism
• FCC: local news
  • Not a good track record when small cities share services
• FCC: transfer of licenses from NBC affiliates to Comcast

Telecomm, part 2

Computer inquiries

CI 1 (1966-71), keep common carriers out of data processing

• • e.g. Telcos should not be doing data processing work

CI 2 (1972-80), enhanced (vs basic) services thru separate subsidiary

• • e.g. "elegant solution" ideally but the tech is too entangled to divide cleanly
  • switching a basic voice call may actually qualify as "data processing"

CI 3 (1986), Open Net Architecture (ONA)

• • http://en.wikipedia.org/wiki/Open_network_architecture
  • Preserving competitions
  • What are the basic services?
    • Dial tone?
  • Allows people to both do basic + data processing services
  • Anytime the telco goes beyond "basic" services, it needs to mark those so that they can be made competitive
    • e.g. voicemail built-in to the network switches
  • BSAs: Basic Service Agreements

In the end?

• Doesn't work very well...
• Unbundled Network E (UNE)
• Prevailing idea: service-based competition rather than competing via infrastructures

70s politics: the Bell coalition cracks

Economic arg for de-reg:

• Reg failed to guarantee low prices
• Reg removed incentives for innovation
• Biz user pressures

New companies (e.g. MCI)

• Cheaper
• More innovative
• Incentive for biz to defect from Bell

1981-1984: AT&T breakup

Key characters

• Justice Harold H Greene, US District Court for the Dist of Columbia
  • New to telecomm
• Bill F. Baxter, Asst Atty General, Antitrust Div, US DoJ from 1981-1983
  • Market idealogue
  • http://en.wikipedia.org/wiki/William_Baxter_%28law_professor%29
• Charles L. Brown, chair of the board, CEO of ATT 1979-86
  • Hoped to get the best deal for shareholders

Modified Final Judgement (MFJ)

Competitive

• Long distance, manufacturing, Bell Labs, They form the new AT&T.
• AT&T free to compete internationally and in computing
  • Trying to capitalize on UNIX and other Bell Labs projects
    • Projects developed in the 70s finally ready for market in 80s
  • They acquired ACR who made ATMs
  • However, Sun Microsystems and others were able to license UNIX for small fee (~$10,000)
  • What is the future for long-time Bell Labs research?
    • Was treated as a national laboratory prior to breakup
    • Long-view research dried up after the break

Regulated monopolies

• Local services
• "Baby bells": RBOCs, companies barred from Long Distance and Manufacturing
  • RBOC: Regional Bell-operated Company, 7 created
• Not ready for competition: a "natural monopoly"

Initial RBOCs

From: http://en.wikipedia.org/wiki/Baby_bells

• Ameritech — (acquired by SBC in 1999)
• Bell Atlantic — (acquired GTE in 2000 and changed its name to Verizon)
• BellSouth — (acquired by AT&T Inc. in 2006)
• NYNEX — (acquired by Bell Atlantic in 1996)
• Pacific Telesis — (acquired by SBC in 1997)
• Southwestern Bell — (changed its name to SBC in 1995; acquired AT&T Corp. in 2005 and changed its name to AT&T Inc.)
• U S West — (acquired by Qwest in 2000)

Billing among RBOCs

• Local/ long distance not linked to exchanges/area codes
• Nor to distance
• Nor to tech arch (are you calling the same local switch?)
• Local area and transport area (LATA)
  • http://en.wikipedia.org/wiki/Local_access_and_transport_area
  • Based on accounting logic: trying not to lose revenue in switch

Network layout?

Multiple possible oayouts:

• Do you force competition to connect at the local level?
• Or do the competitors interconnect at their higher-level switches?
  • In the end, the latter is chosen

Economic regulation pre-1996

Ex-ante rules -- rationale grounded in monopoly market structure, can't wait for new companies to be harmed and then redress

• Retail prices:
  • Rate regulation: rate of return, then price caps
    • Regulators would audit the costs on competitors and then fix the prices
    • Problem: rewards inefficiency because high costs will result in higher revenue
    • Problem: no incentive for cost reduction
    • Problem: auditors are limited by telco expertise + numbers
    • Problem: entirely driven by relationship between regulators + individual companies
  • Tariff-filing
• Duty to deal with new entrants: long-distance interconnect for local monopoly, CEI
• Universal services: cross-subsidies
• Limits on monopoly's scope: e.g. CPE, information services
• Despite the goal of the break up: still a considerable amount of market regulation

Telecommunications Act of 1996

• Initial ambition: provide coherent framework for communication policy in the age of convergence
  • Driven in large part by Gore
• Substitute competition for regulation throughout the telecom industry

Scope of the act

• Telephone services (local, long-distance, wireless)
• Broadcast, cable TV
• Some content

Main themes

• Competition/entry
• Ownership and rates
• Univ service
• Content

Content provisions

Communication Decency Act (struck down in 1997)

• Struck down by SCOTUS (Reno v ACLU)
• Unconstitutional restriction on free speech, affirming a lower court decision
• Just a year after the release of netscape

V-chip requirement

• To enable parental control
• Remain in all TVs today, mostly unused

Universal services

• 1996 first act to codify the "universal service" slogan
• Universal Service Fund, subsidizes high cost companies serving rural areas, low-income customers, rural health care providers, schools, libraries
  • Contributed to by all the telcos - local + long distance
• From implicit-to-explicit subsidy
  • Essential to set up competitive market
• Alternative mechanisms?
  • Why should telcos be responsible for a social goal?
  • Levy tariff on end users / consumers (not politically possible)
  • Build competitive structure (auction) for specific areas (Chile)
• Political reveal: rural is the target rather than low-income because of representation in Congress

Ownership and rates

• TV station ownership cap raised to 35% of population
• Allowed the FCC to double the spectrum available to Broadcast TV to promote transition to DTV
  • Expected transition to happen quickly -- didn't occur til 2009
• Broadcasters get more flexibility as to services they may offer (e.g. PPV, wireless phone, paging, data, etc.) but would have to pay fees based on the value of that spectrum if it were to be auctioned
  • Broadcasters could use spectrum for other services but they'd have to pay license fees -- this wasn't widely used
• Cross-ownership phone-CATV OK
  • Creates strong competition to local telco
  • Just a few of these deals: phone companies purchasing cable TV
  • Trying to create environment of strong competition of local telco from cable
• Lifts rate regulation on CATV
  • CATV can charge any price they want

Competition / entry

• Local network open to competition (esp. from Long D and CATV)
  • Lots of regulation to force them to be "friendly"
• RBOCs obligations
  • Interconnection (access charges)
  • Unbundling: unbundled network elements (CI/ONA legacy), TELRIC pricing
    • Total Element Long Run Incremental Cost, price should not be based on cost of building network but on cost of replacing the network with today's tech, much lower!
  • Resale
  • Collocation, most efficient way to interconnect is to be in the same building, needed to provide electricity, security, lighting, etc.
    • Enable service-based competition (as prelude to facilities-based competition)
• Long Distance open to BOCs (once local market is competitive enough)
  • Balancing the burdens above
• Local phone companies can offer video
  • Previous barred from doing this

2000 Telecom bust?

Two distinct events

• Dot-com bust (primarily financial, not so much job loss)
  • http://en.wikipedia.org/wiki/Webvan
• Telecomm collapse

Not demand nor tech bust

• Oversupply bust (1990s investment)
  • New entrants

"Technology successfully met the challenge posed by unrealistic business plans that were forumated in willful disregard of real demand" (odlyzko)

= Bankruptcies

• Worldcom, 2002: $103900m
• Global Crossing Ltd., 2002: $25500m
• Huge supply of fiber optics assets bought by new companies
  • e.g. Google uses leftover fiber to connect data centers

Telecom industry restructuring

• ATT and MCI enter local market but don't build local facilities (UNE-P and DEEEEEP discounts, killing existing local providers)
• 2004: DC circuit court invalidates the UNE-P tariff
• 2004: ATT and MCI both withdraw from local market, focus on biz customers
• 2005: mergers of ATT into SBC and of MCI into Verizon (NYNEX + other east coast RBOCs)
• RBOC's revenge: re-emergence of large, vertically integrated telcos
  • Failure of 1996 Act?
  • Jewels of the ATT crown were supposedly computers/Bell Labs, Long Dist, etc.
    • But the supposedly "boring" local services turned out to be more successful

Post 1996 regulation

• Much still grounded in monopoly regulation
• Interconnection and unbundling requirements on incumbent LECs
• Yet, the telecom market has been profoundly transformed
  • Alteratives: wireless telephones, VoIP, new wireline providers, other competing tech

Wireless telephone market

• 1996: 44m US wireless subscribers, ~125 mins/month
• 2008: 270m, ~700mins/mo, nearly universal
• Increasing substitute for wireline
  • See: http://en.wikipedia.org/wiki/Leap_Wireless
  • ATT has more subscribers, but Verizon makes more money
• Average revenue per user (ARPU) slightly declining to ~47$
  • SMS is comparatively more expensive in US than other areas in the world, thus not that popular until ~2004
    • But nearly zero cost so the 3.55$ ARPU is all profit
• ~21% of adults/children have no wireline service, only cell, ~1.7 have no telephone services

Internet alternatives to conventional telephone

• 2008: 77m high-speed lines, majority using cable (41.5m)
• IM + voice comm
• VoIP
  • Skype, google voice, etc.
  • Vonage
• Comparing with older paradigm:
  • Voice/transport were regulated, apps+TCP/IP unregulated
  • Now: transport is regulated, voice becomes another internet application unregulated
• Vonage grew very fast but is not challenged by cable bundles
  • http://en.wikipedia.org/wiki/Vonage

New wireline competitors

• End user line services by CLEC (competitive local e. c.):
• 2008: 43.7m (~27%) in CLEC/VoIP service

Is regulation still needed?

• Cost structure implies that oligopoly is competitive
  • Sunk costs: competitive facilities would not go away
    • Fairly sustainable source of competition
  • High fixed/ low marginal costs: losing customers is very painful
• Evidence that this limited competition is effective
  • But arg to be made to stop regulating "ex-ante" as though we had a monopoly
  • Might be better to wait "ex-post", wait to see if a problem develops (emerging consensus)
  • Everyone agrees that it's important to regulate un/bundling

Jump offs

• Temin, P. (1987) The fall of the bell system. Cambridge: Cambridge University Press.
• Studying regulated industry has advantage of tons of data disclosure required

Global outlook on wireless market

• In growth, China/India growing considerably faster than any other countries
• Ratio of # of providers to # of customers is highly varied
  • Nigeria has 9; Norway, Iraq have 2
• Most cellphone penetration?
  • Greece has 220%, numerous EU countries have more than 100% penetration
    • e.g. they own more than 1 SIM card
    • Anecdotally, each SIM is connected to diff price structure
  • More prepaid, more penetration
• ARPU is decreasing
  • Tata has begun charging per-second charges
• US users use the most voice (800), HK is second with only (450), Philippines is last (15)

Mobile termination rate

• Operator B charges Operator A for connecting the call
• Two ways:
  • RPP (Receiving Party Pay): only US, Canada, SG, HK
    • Caller + Receiver pay equally
    • Charges are low, talking time is long
  • CPP (Calling Party Pay): everyone else
    • Only the caller pays the charge
    • Call charge high, talking time is short
    • EU attempting to decrease MTR via regulation
• SMS used to subsidize CPP voice

Trend from voice to data

• Philippines: Lowest voice traffic but highest data traffic

Oct 21

Distinct tech infrastructures

	Live	Delayed
Interpersonal	Telephone	Mail
Mass	TV	Newspaper

You could not do 1-1 live phone calls over broadcast TV infrastructure

Common carriage

Different regimes of control

• Mail and phone are common carriage
  • Owner of infrastructure has no control over message contents
• Newspaper is not common carrier
  • Paper owner has complete control over content
• Television channel
  • Once issued a license, TV owner has control over content

Diff business models

• Paper sells content
• Phone/post sells carriage

"Natural monopoly"

• Traditionally, phone was seen as natural monopoly
  • Regulation seemed necessary to ensure fairness
• Newspapers were thought to be competitive because someone could start a new one
  • Not necessarily true

What happens when internet service jumps from telephone to cable provider?

• Telephone company is common carrier
• Cable company is content provider
• From customer POV, they seem similar

Changes to these neat divisions

• Telephone spreads into mail via voicemail, broadcasting
• Television has taped/reruns/delayed

Internet crosses all of the boundaries

• phone:VoIP
• mail:email
• news:listserv/blog/web
• tv:streaming video

New to think about patterns of communication

• One-to-many, many-to-many, et

Still carrying the "regulatory and infrastructural baggage" of the systems on which it was built

• Telephone, broadcast, etc.

Characteristics of net

• Digital
• Packet switched
• Multiple communication patterns
• Interchangeable industry players
• Fuzzy legal boundaries
• Conflicting policies

Internet

New network paradigm

• Digital throughout
• Packets v circuits
• TCP/IP, gateways
  • Decentralized via open protocols
  • Only one gateway computer needed to bridge
• Peering
  • Often a handshake agreement to send traffic across gateways with no tolls
• Bill and keep (no settlements)
  • No "termination rates" as in mobile phones
• End to end architecture
  • "Intelligence is on the edges of the network"
• No centralized control
  • No authority determines who can join or how to manage

History in 3 periods

Defense, ARPA

• 1969: BBN wins ARPA's Req for Proposals
  • Bolt, Baranek, Newman
• Protocol (TCP/IP), Gateways
• Three basic applications: email, FTP, telnet
  • Share computing facilities across geography
  • Connecting diff architectures via IMP
• Primarily connecting universities with mil research contracts
  • UCLA, SRI, UCSB, Utah, BBN, MIT, Lincoln
  • See map 1971

Research

NSFNET, 1980s

• CSNET
• NSF funded backbone linking supercomputer centers
• Contracted lines from MCI (mainly) to link regional research networks
  • BARRnet, Bay Area Research
  • Merit
  • NYSernet, NY area
• Acceptable Use Policy (AUP)
  • Restrictions imposed by fed funding
  • http://www.cybertelecom.org/notes/nsfnet.htm#aup
• "Privatisation" of NSFNet April 30, 1995
  • WWW exceeds FTP traffic for first time

Corporate infrastructure, mass media

• Dozens of nationwide internet backbones
  • "National Service Providers" (NSP)
  • "Tier One" providers
  • Hard to find accurate list of such backbones

Peering networks:

• Tier 1, backbone
• Tier 2, backbone or ISP
• Tier 3, home ISP
• Lowest level are homes, offices, LANs, individual users

Wholesale top backbones

• Increasingly competitive
  • Especially with amble fiber supply
    • 1990s overbuild
    • WDM, DWDM technology (wave division multiplexing)
• Ranked by connectivity
  • http://as-rank.caida.org/
  • LEVEL3
  • AT&T Worldnet
  • MCI Communications (Verizon)
  • Cogent/PSI
  • Global Crossing Ltd.
  • Sprint
  • Qwest Communications
• Alternate list here:
  • http://en.wikipedia.org/wiki/Tier_1_network#List_of_Tier_1_networks

NAPs (Internet exchange points)

• Several hundred locations, some with up to 500 members
• Provide infrastructure, collocation, security
  • Equinix
  • Terremark

Peering maps

• https://ix.equinix.com/peeringstats/public.action?action=participantList

"Meet me room" in One Wilshire

Hundreds of ISPs interconnect in the basement

• http://www.wired.com/techbiz/it/multimedia/2008/03/gallery_one_wilshire

NAP of the Americas

• http://www.terremark.com/technology-platform/nap-of-the-americas.aspx

Key success factors

• Expanding community of users
  • User-led innovation
• Pricing: network's binary logic
  • Once you pay for the connection, you get all you want
  • No long distance, no bit discrimination
  • Revolutionary model
• Decentralized governance

User-driven experimentation

Not from a lab or official R&D, itch-scratch

• Infrastructure technologies
• Applications and services
• Path dependence

Pricing, contracts

Service and pricing structure

• Best-effort delivery
• Sender keep all / Bill and keep
• Flat fee pricing (binary logic)
• But congestion, different service level requirements

Network governance

• Interconnection and eering
  • Decentralized governance, difference with phone network
  • Incentives for coopration
  • Emerging tensions (1995-1997)
    • UUNet and others started to privilege their own customers' packets
• Standard setting
  • Cooperative, democratic
  • Internet Engineering Task Force (IETF), (IAB)
  • Emerging tensions

Interconnection arrangements

• Interconnection at public NAPs or private bilateral interconnection
• Peering or transit
• Policy: hands-off approach
  • Government investigated and found that it was provisionally working:
  • Decentralized, cooperative approach is good because doesn't require regulation
  • Assess market competition
  • Antitrust remedies if there is a problem
• Seems to be very competitive
  • Partly because so much fiber

End-to-end

• E2E: "up and out"
  • Simpler network core, easier upgrades
  • More generic network supports innovation
  • Applications don't need to rely on good network performace
• Served the internet well
  • Sturdy, generic network model
• Key to user-driven innovation
  • Users control the ends
  • Applications in upper layer keep them away from physical equipment

Moving from End to End

Clark, David D., Blumenthal, Marjorie S., "The end-to-end argument and application design: the role of trust ", TPRC (2007) (PDF)

• http://groups.csail.mit.edu/ana/People/selected_pubs_clark.html
• Untrustworthy world
  • Can you trust the end points? Firewalls, spam
• Demanding applications
  • Limits of best-effort, need throughput guarantees
• ISP service differentiation
  • Enhanced delivery leads to competitive advantage
  • Leads to different tech approaches, balkanization of the net
• Rise of 3rd-party involvement
  • Enforcement (wire-taps)
  • Corporate/Organizations block access to certain sites, or traffic: e.g. napster, torrents, p2p
• Less sophisticated users
  • Sophisticated network makes it easier for unsophisticated users (end-points)

Economic implications?

Measuring internet industry by its contribution to the performance of an 'information society'

• How to measure the amount of information in the world?
  • Counting bits

Traditional measurement

Infrastructure

"Unprecedented catch-up"

• M. Hilbert, P. López y C. Vázquez, "Information societies" or "ICT equipment societies"? Measuring the digital information processing capacity of a society in bits and bytes", The Information Society Journal, 2010.
• Creating ratios of OECD / LAC
• Appears that the "divide is closing"
• Common analysis to governments, ITU
• Does not represent culture, usage, uptime, practices
  • Distribution within population
  • No detail in the type of technologies (is it broadband? dialup? periodic?)

Revenue

• Market share
• Capital
• Old capital replaced with ICT capital
• Does this account for the growth of "information" in that period?

Estimating world communication capacity

World's tech comm capacity = Sum of all technologies included in study(amount of equipment * performance of equipment)

• Considered technologies
  • Fixed internet: dial-up, isdn, dsl, cable, FTTH/B
  • Mobile internet
• Normalize on "pure information"
• Also considering the max compression possible

Compare volume of information to capacity

• 87% of information estimated in mobile
• But 10% of capacity accounted for by mobile

Finding distinction among types of tech in the earlier stats

• Comparing 2G, 2.5G, 3G
• Convergence

Observing ratio of capacity to penetration

• In 1993, ISDN is +60% capacity, 20% penetration
• 2000: Mobile telephony is only 40% capacity despite huge penetration
• 2007: Fiber is 25% capacity, 4% subscribers

Of the capacity growth,

• How much is due to more infrastructure?
• How much due to "better" infrastructure?

Identifying a "turning point" in 2002

• Capacity is not about more infrastructure but better infrastructure

Down/up ratio

• Internet becoming a unidirectional medium?
• Comparing with radio transition from bidirectional to unidirectional
  • From operators to listeners, broadcast
• But capacity is difficult to compare:
  • e.g. if a home user leverages YouTube to repeat a video, 1 million views won't be reflected in the home user's count
• In 2005, upload briefly exceeds download capacity due to fiber

Digital divide measured via ratio of OECD/LAC subscribers and capacity

• Subscriber ratio seems promising
• Capacity suggests that OECD continues to dominate

Red queen effect, Lewis Carroll

• You need to run as fast as you can to stay in place, need to run double to catch up
• Or.. leapfrog (JP with fiber optics)

Questions

• Confusing unit of analysis: the bit
  • Some services constrain applications, thus limiting the potential meanings of their bits
  • Is quality of data captured by quantifying bits?
• How to account for multiple pipes owned by 1 subscriber? 2 SIM cards, ISDN at home, and Fiber at the office
• To whom is Martin responding? What is the definition of this "information society"?
  • Who is saying "digital divide is solving itself"?
• How to map out the subscribers/capacity across a population?
  • How do nation-based statistics obscure important other "divides"?

Oct 28, Information pricing

• http://www.inforules.com/

Housekeeping

• Paper pitches due asap
• New prof guest lecturing next week
  • Online advertising, sponsored search
  • Readings are on blackboard

"Information"

• Anything that can be digitized
• Conduits, distribution, info services,
• Unique features of info economics?
  • Unique supply characteristics: cost, ownership
  • Unique demand characteristics?
• Trad'l economics do apply
  • But with unique characteristics

Supply: cost structure

• Expensive to produce, cheap to reproduce
• Content: first-copy costs dominate
• Conduits: large fixed costs, small marginal cost
  • Until congestion
  • Represented by step function
  • Congestion threshold is not necessarily the same barrier
  • New tech enables higher threshold
    • e.g. variable wave multiplexing on fiber
    • e.g. more intelligent radios in wifi
• Fixed costs are usually sunk costs - not recoverable
  • Esp. in content, e.g. a flop movie is usually sunk
• Small variable costs; no capacity constraints
• Significant economies of scale, economies of scope
  • Marginal costs trend downward in many industries (autos, for example)
  • But only information approaches zero
  • Possible to fold materials from one project into others:
    • Game devs able to reuse code, assets -- advantage to big companies

Consumption characteristics

• Network effects
  • Reinforce scale/ scope effects
  • Value of a good (e.g. PSP) to me depends on externalities (e.g. if other companies decide to produce discs for it)
• Often non-rival, sometimes non-excludable (is that really true?)
  • Leads to market failure
• Experience goods
  • Quality difficult to observe in advance, need to experience/consume to know its worth (e.g. movie)
  • Places premium on reputation, brand identity, on-going relationship
  • Advantage: more established players, new entrants need to overcome the non-experience

Is information a public good?

Benkler says yes but we think of many counter examples

• Non rival
  • If I see the movie, the value is retained for someone else (e.g. movie)
  • Some cultural value comes from exclusivity: "first to know" (insider trading)
  • "Actionable information is rival"
• Non excludable
  • If I see the movie, you can still watch the movie

Implications for market structure

• Market cannot be perfectly competitive (primarily because of cost structure, reinforced by demand characteristics)
• 2 sustainable competitive structures

Dominant firm/monopoly

Monopoly, oligopoly

• Imperfect competition
  • Small number of players control output, prices
• Size is advantage
• Natural monopoly
• Economies of scale, scope

Differentiated product

• These aren't commodity products (which are totally interchangeable)
• Don't keep head-to-head with bigger player
• Define new sub-category, niche
• Monopolize this new space

Strategy: What to do?

Be the monopoly

• Let scale economies lead to consolidation (natural monopoly); AT&T, Microsoft
• First mover
  • Anticipate through massive build up: especially important in industries with big infrastructure costs
    • Amazon imagined what the mature market would look like, built distribution network
    • REALLY hard for competitors to enter
    • Total disaster if you bet wrong!
  • Protect IP
    • Take advantage of government-granted limited-term monopoly
• Limitations?
  • Cultural resistance to very large orgs
  • Anti-trust
  • Regulatory limits

Differentiate

• Carve out monopoly niches
• e.g. Add value to the raw information to distinguish a product from the competition

Commodity businesses

• Commodity: no qualitative differentiation across a market
• The cost leadership is key
• Sell the same thing over and over again
  • Baywatch, Reuters
  • Reduce average cost
• Differentiate product
  • West publishing and page numbers
  • Copyright
• Are there really many information commodities?

Aside: Reuters

• "Selling [80 char] headlines to traders"
• "4 seconds is a trading opportunity"
• Once those 4s are gone, they give 20m lead to TV stations, then it's free

Pricing information

• Basing price on cost (cost-based approaches) doesn't work

How else to think about cost?

• Markup on incremental cost?
  • But marginal cost is zero
• Markup on sunk cost?

"Bonzai strategy"

• Monopoly contains a small competitor to avoid anti-trust
• If the competitor gets out of control? Buy them.

Example: Amie Street

• Dynamic pricing based on demand
• First person to dl a song: 0$
• Max cost 0.98$

Value-based pricing is key

• Info has diff value for diff customers
  • Key is to charge them different prices
  • Not easy to implement

Differentiation, market segmentation

• Personalization, versioning

Quicken demand curve

• 1 million customers will pay $60
  • Revenue: 60 * 1m = 60m$
• 2 million customers will pay $20
  • Revenue: 20 * 3m = 60m$

Create two versions: 60$, 20$ "Lite"

• Revenue: (60 * 1m) + (20 * 2m) = 100m$

Logic of price discrimination

• Logic: discriminate on the basis of willingness to pay
• Problems:
  • How do you know willingness to pay?
  • How do you prevent arbitrage?
    • Buy at a price lower than what you can sell
    • e.g. You don't want the people who bought the product for 20$ to sell it to the 60$ for profit

Forms of differential pricing

Personalized pricing

Each customer is his own market

• Need to know each customer

How to know them?

• • Force/ encourage them to register, self-disclose
  • Reward registrants (e.g. NYT)
  • Or require registration (e.g. Economist)

Watch consumer behavior, data mining

• • Cookies
  • Observe queries
  • Track clickstream (what and how long)

Limitations

• Will they put up with it?
• How do you verify that the person is the same?
  • They could kill cookies
  • Share registration names

Gone wrong: Amazon

• Customers figured out the pricing scheme
• New customers got lower prices
• Older customers got mad

Common in traditional industries

• Airlines
• Hotels
• Direct mail: catalog inserts
• Lexis/Nexis
• Supermarket scanners
• Should be easier on the internet (but isn't always)

Group pricing

Software sales

• Student discount
• OEM sales
• Site licenses

Price sensitivity

• International pricing for textbooks: US edition $70, Indian textbook $5
• Problems raised by internet: localization, tying offers to IP addresses

Network effects, standardization

Compatibility

• Site licensing
• Variety of schemes: per client, per user, per server, etc.
• You want everyone in yr company using the same email

Lock-in

• Group inertia increases switching costs
• Rewards for decision maker:
  • e.g. WSJ gives free subscription to professor that requires WSJ

Versioning

• Offer a product line and let users choose
• First, second, third class in old French trains
  • "Hits the poor, not because it wants to hurt them, but to frighten the rich"
  • "Having refused the poor what is necessary, they give the rich what is superfuous"
  • Jules Dupuit (1849), cited in "Price discrimination..." Robert B. Ekeland, Jr. Quarterly J of Economics, Vol. 84, No. 2. May 1970, p. 275

Return to Quicken example

Different features

• Quicken Basic, $20
• Quicken Deluxe, $60

Versioning info goods

Time is key differentiating factor

• Hardback, paperback
• Printed newspaper, online newspaper

Windowing in movie biz:

• Theater, video, PPV, broadcast

Phone calls:

• Peak time, evening

Mail

• Express, Priority, First class, Media, etc.

Dimensions to use

In some cases, building the extra versions costs money

• Delay (Fed Ex, Reuters, ISP latency pricing)
• UI (Lexis/Nexis)
  • Don't want law firms to outsource printing to law firms (arbitrage)
• Resolution (Images, sound quality)
• Speed of operation (Mathematica, online games)
• Capability (Kurzweil voice recognition, different vocabularies)
• Features (Quicken, tech support)

Value added?

• Typically: value-subtracted versions
  • May actually cost more to produce low-quality version
• Design products so features can be turned off

Pitfalls

• Resentment
  • Airlines
• Confusion
  • Phone service pricing
• Arbitrage
  • Windows NT workstation/server
  • Customers could change the NT workstation into a server

Analyze demand

• Does the market naturally subdivide into different categories?
• Are customers' behaviors sufficiently different?
• Examples: airlines, movies

Analyze product

• Dimensions to version
• High/low end for each dimension
• Design for high end, reduce to low
• Low end advertises for the high end

Goldilocks pricing

Most things sold at 3 prices

• Extremeness aversion
• Small/large v. small/large/jumbo

Bundling

• Different prices to different customers without knowing them in advanced
• Offer a package
• Microsoft Office
  • 90% market share
• Several products work together
• Discount one product to attract customers who are less willing to pay for it

Example:

	Word	Excel	Together
Customer A	120$	100$	220$
Customer B	100$	120$	220$

By bundling for 220$, you don't need to know who values which the most.

Other kinds of bundling

• Triple(quad)-play: telecomm
• Subscriptions to cable

Unbundling?

• iTunes unbundles CD bundle (good songs + bad songs)

Limitations

Do bundles make sense?

Nonlinear pricing: bundling variant

• Sell first item at high price
• Sell subsequent item at lower price
• E.g. buy 1 element of Office for $120, subsequent elements $100

Complementary products pricing

Give away one product, make money on another

• Razor handle is free, blades cost money
• Use the movie to attract popcorn eaters
• Discount/free phone, sell service(s), contract
• Cheap printers, expensive ink

Relies on system effects and lock-in

Conclusion: Pricing info goods

• Information's cost structure
• Perfect competition is impossible
• Differentiation
• Personalization
• Versioning
• Bundling

Google Adsense

• Advertising is primary source of revenue for Google
• "Closer to an old guard media company"

More traditional models

• Ad Exchange
• Affiliate program
• Direct to Potential Advertisers/Sites

Tech

• Adwords is interface for advertiser
• Adsense is a ad serving software, to
  • Google websites
  • Google Search Network
  • Google Display Network

Ad servers and Network

• Ad Servers provide backend that supply sites with advertising
• Ad Network allows advertisers access to large number of sites
• Provide site owners to have ad revenue
• Tracks clicks or impressions to track ROI, pay site owners
• Methods for calculating payment:
  • PPA, action
  • PPC, click
  • PPI, impression

Adsense

• June 2003
• 16.7% of sites use Adsense (w3b)
• Google owns doubleclick
• Combined ~88% of all network advertising

Adsense for content

Contextual targeting: analyze websites

• Keyword analysis, word freq, font size, determine appropriateness
• Aka "blind"

Placement targeting

• Advertisers select specific sites

Internet-based advertising

• Cookie stored in yr browser contributes to a profile of you
• Based on browsing + youtubes
• Inferred interest, demographic categories

Other Adsense services

Adsense for ...

• Mobile content
• Search
• Video
• Feeds

Three groups of people + Adsense

Users

• Classic "Ads by Google"

Producers

• "Monetize" sites

Advertisers

• Analytic tools for ROI
• Both "blind" and targeted placement

Adwords

• Money
• PPC, PPI
• Advertisers bid for keywords in auction, set frequency cap
  • When you win an auction, yr ads have precedence for that keyword
  • When yr frequency cap is hit, next highest bid takes yr place

Who gets ads?

• Google's sites
• Search network
• Display network (non Google producers)

Criticism: Users

• Privacy

Criticism: Producers

Very little clarity on price of adword

• Only pays out for 100$ or more
• Hurts small producers
• Google "sits on the money"

Payment process is opaque

• Different tiers of "partnership" with Google
  • Smaller publishers get less income than larger
• Is the bidding system "rigged"?
• Manipulation of click fraud security to reduce producer income
  • Two kids of fraud: clicking own ads to get $, clicking other ads to hit cap

Secretive vetting process

• Unclear about who is in + out
• People are dropped/denied without being sure why

Requires cooperation with Google tracking

• "Makes us look bad"

Criticism from everyone

Problems with smarter context

• Some unfortunate or offensive ad placement

Criticism: Advertisers

• Opacity, bad customer service
• Can bid for trademarked keywords
• Click fraud
  • Some big fraud settlements

"DHL club"

• If you hit a certain tier on Google Adwords, they send the check via DHL

Adsense certification

• Creating a population of certified consultants

SEO arms race

• Ppl get kicked out of adwords for SEO

Nov 4, visiting Lian Jian

COMM 620

• Value of crowdsourcing platforms
  • No objective evaluation yet exists
  • Controlled experiments where people do two tasks (control)
  • Online news reporting
    • Interviews with reporters, etc
• Research project based course
• Syllabus up this weekend

Introduction of main concepts

Different classifications of ads

• By medium
  • TV
  • Radio
  • Etc.
• Purpose
  • Leads, seeking a plumber in the "yellow pages"
  • Informative, offering details about available services/products
  • Vague brand-based, a la bank ads that emphasize values
    • Or sponsorship

Two-sided market

• PDF example
  • Acrobat Reader is 0$
  • Acrobat is $$
  • PDFs transmit between the two
• Free side invites widespread adoption
  • Creates demand on non-free side

Advertising 2-sided market

• Content is free (newspapers, videos)
• Advertising is costly
• Free newspaper generates a large audience

Comparison of 2-sided platform to dual sided market?

• Adobe Reader example needs no specific broker, distributed PDF exchanges
• Newspaper example requires the newspaper company to broker

What is being sold?

• Attention, audience
  • Network has statistics: time of day, demographics

What kinds of statistics might be gathered on web?

• Per click cost (CPC)
• Per impression (CPI)
• Per transaction (CPT)
• Time, etc.

Hard to map TV ad economics to the web

• Don't click on TV ads
• Easy to over/under value the "click", "impression"

Once the keywords are sold

• Google posts the ads on various sites, search results, youtubes, etc.
• Google profit maximized by successful clickthrough rate (CTR)
  • Mutually beneficial with advertisers
  • Are these audited?

Revenue per search (RPS)

• Scale to measure how their system is working
• Is the auction yielding optimal value?
• Appears that growth is logarithmic
  • At the start, small increments in traffic can result in considerable jump in revenue
  • Once traffic is high, the RPS growth is much smaller
  • Optimization may help raise revenue possibility but doesn't change overall property

Auctions

First price auction

• Ascending
• "English auction"
• All bids are public
• Winner pays their final bid
• Strategy?
  • Bid slightly less than your value

Second price auction

• Bids are submitted in a batch, privately
• Winners pay the 2nd highest price
• Strategy?
  • Bid your exact value, if you win, you're likely to pay less

Bidding game

• Determine your value of the keyword
• Choose a bid that is less than the value
• Incentive compatible

Why does GOOG use the 2nd price auction?

• Much faster
• Mitigate "buyer's curse"

Market liquidity

• How many buyers + sellers are in a market?
• Thin: small number of buyers/sellers
• If it's a thin market, there's little chance for a new buyer/seller to enter
• Thick market needs buyers AND sellers so they can trade together

Google as monopoly?

Google as monopoly?

• Arguments for:
  • Google keyword market positive feedback from its liquidity
  • One-stop search provider
  • New entrants have to pay a lot to enter the market

Disruption possibilities?

• Different approaches to search
  • Wolfram Alpha, Facebook+Microsoft "social search"
  • Create new keyword opportunities
    • Keywords available to everyone
    • Keywords might be cheaper with smaller/new provider
    • But infrastructure to enable keyword advertising is significant
• Trademark
• Impact of speculative keyword investment?
  • Anticipating value of keywords, terms by mining user data

"North" ads on Yahoo

• http://portal.acm.org/citation.cfm?id=1807390

(as opposed to "east" ads)

• Sponsored results that appear about "organic" results
• Reiley et al found that multiple north ads increased CTR
• Upper bound number of ads?
  • Users might lose faith in engine if there are too many sponsored ads
• Upper bound on quality?
  • If the organic result is perfect, maybe people will never click?

Methodology

• Running "live" field experiments
• Yahoo, Google, Facebook, etc.
• Shifting things around in the UI, etc.
• Field experiments have the highest validity
  • e.g. the lab experiment suffered from weaker validity

Alternative biz models to advertising

• Financial information is easier to sell
  • Niche audience with deep pockets
• Premium advertising

Jump offs

Information asymmetry, 1970

• Akerlof, http://www.jstor.org/stable/1879431
• Seller needs to signal quality to buyers with faith, e.g. 2-year guarantee

Dual, two-sided terms, theory

• Rossi, "dual" market
• Marshall, "2-sided" market
• Evans, "2-sided" market

Revenue equivalence theorem

• 1st and 2nd price auctions should yield comparable revenue

Nov 11

Network externalities

Examples of media networks

One product/user

• Phone, fax, videophone

Complementary products

• HW/SW: intel/ windows/ apps; VCR/ VHS
• Networks/terminals: color TV
• Client/ server: browser/ server
• Systems of networks: internet
• Wi fi mesh networks/ Wifi devices

Externality benefit on two sides:

• Not from linking together but
• From diversity of products available

Interdependence and complementarity

• Diff producers / service providers: collective action
• Strategy for complements as well as competitors
• Compatibility as strategic choice
  • Will you compete at the level of the standard or above it?

Sources of network effects

• Direct consumption: value depends on number of users: Fax (1843), Internet (1980s)
• Indirect: Value depends on diffusion of complements: software, OS
• Experience: Complementary assets
• Expectations: Convince early adopters that there is a network from the beginning
  • Convincing people from the start is the trickiest problem (chicken + egg)

Key issues

• Critical mass
• Systems competition: chicken + egg
• Standard setting
• Interconnection dynamics

Critical mass

Traditional demand curve:

• N customers, ranked by willingness to pay (wtp): v = (N,N − 1,...,2,1)
• At price p, total demand: n = N − p(orp = N − n)

Introducing network externalities

• wtp also depends on number of users w = vn

At price p:

• for marginal (=indifferent) customer, v*: p = v * n
• those whovalue the good more have adopted: n = N − v *
• New demand curve: p = n(N − n) = n * N − n²
  • Parabola. There is a fixed cost for "perfectly elastic supply"
  • If wtp does not rise to meet the fixed cost, you lose money

Three equilibria:

• Failure (stable)
• Optimal network size (stable)
• Critical mass (unstable)

Critical mass:

• Until you get to this network size, you cannot succeed
• How do you overcome the ramp-up period before you hit the CM?

Reaching critical mass:

• Prime the market: Give-away (low price, or no-cost)
  • e.g. Minitel give-away + ceasing printing the phone book
• Create expectations: Convince everyone that success is inevitable:
  • "n" is "expected market size" rather than actual
  • e.g. line around the block for new Apple products

You might give away the product forever

• But develop usage fees, services, etc.

Early adopters:

• Value product in itself (absent network externalities)
• Take a chance based on expectations
• Might desire a "jump" on future other users

Adoption over time:

• Compatible with traditional "S-curve"

Systems competition

Microsoft-Intel: "Wintel"

• Intel commoditize complementary chips
• Microsoft commoditize PCs

Apple

• Integrated solution
• Might work better but lack of competition and scale lead to problems

Gateways, translators

• Bridges between two (or more) systems
• Imporant e.g. you are Apple and 90% of the files going around are .doc

Creating bandwagons

• Generating enthusiasm around/behind the project (recent Apple)
• Can overcome higher prices, comparable services, quality

Standards setting

Examples:

• Books: language (and movies, TV, etc.) (English)
• Railroad gauges: physical characteristics
• AC/DC
• Movies: Motion pictures patent co. - pooled patents
  • Established a standard that lasted for 15 years or so: monopoly!
• Betamax (Sony) v. VHS (Matsushita) - open licenseing
  • VHS was licensed to many companies for making players, recorders, etc.
  • Sony was going to be the only supplier of Beta
  • VHS could record a football game in its entirety
  • VHS could stack better in a video store
• Phones (part 68), cell phones: regulation, gov't intervention
  • Regulation defines shape of plug, voltage, current on the lines
  • Cellphones, multiple standards in US, convergence on GSM in EU

Why does the US have CDMA and GSM?

• Economic stimulus: jobs to develop dual infrastructure, sales to force people to switch
• Nationalism: Qualcomm developed CDMA in the States
• Favor innovation: government could not decide which standard would be best
• European goal: need scale, not going to have "home grown" industry in every EU nation (too small)

"Home grown" argument

• CDMA was an American IP
• GSM was initially American-centric
  • EU maneuvered to own more GSM

Key competitive aspects

• Control over an installed base
• IP rights
• Control over the ability to innovate
• Manufacturing
• Strength in complements
• Reputation and brand name
• Policy process

Compatibility and interconnection policy issues

Basic dilemma

• Create economic incentives for innovators; let them reap rewards
• Prevent monopoly abuses, maximize network size, and reap network externalities

Policy decisions

• How much control should standard-setters get?
  • How long?
• When to act? "Narrow windows, blind giants, and angry orphans" (David)
  • Can't set the standard too soon
  • Can't wait too long or you lose the chance for policy to have an influence
  • Government is usually "blind", people who chose a different standard are "orphans"
• Different resolutions in different industries: criteria?

Path dependence and lock-in

• Case of competing technologies
• Path dependence and lock-in
• Increasing returns
• "History matters", nothing you can tell about the ultimate outcome from the tech alone

Path dependence

• "West coast" theory (as opposed to Chicago/ East coast)
• What happens at the beginning?
  • Before reaching critical mass

Competing technologies

• Choice between several alternatives
• What determines which technology wins?
  • And, in particular, will the 'best' technology win?)

Arthur, W. B. (1985). "Competing technologies and lock-in by historical events".

• Product A has higher intrinsic value, lower net effects
  • Bigger return at the start, less growth
• Product B has lower intrinsic value, higher net effects
  • Lower returns at the outset, much higher growth
• A will dominate, even though B would be better in long term

Another Arthur example, in which two groups with different preferences will switch sides:

	tech A	tech B
R-agent	aR + rnA	bR + rnB
S-agent	aS + rnA	bS + rnB

We assume:

• r>0 and s> 0 (positive externalities)
• a_r > b_R and b_S > a_s, R prefers A, S prefers B

But:

• S will pick A if n_A − n_B > (b_S − a_S) / S > 0
• R will pick B if n_A − n_B < (b_R − a_R) / R < 0

In graphing this example over time, we assume that the next customer is randomly R or S.

Implications

• Several possible outcomes
• Initial instability, then "tipping"
  • When tip occurs, the slope may be very sharp, extremely difficult to turn the tide
• Outcome not predictable; depends on random historical (small) events.
• Winner takes all, with large profits to winner
• Winning technology not necessarily the best
• Lock-in

Is lock-in forever?

• No ... What is the cost of switching?
• Compare:
  • Ford v GM (very low)
  • Wintel v Mac
  • VHS v Betamax (very high)
  • Cable modem v DSL
• Dural investments in complementary assets
  • Hardware
  • Software
  • Wetware (BRAINS)

Examples of switching costs in media sectors

• Subscription, automatic billing: newspaper, CATV
• Data formats: tape, cd, dvd libraries
• Display, playback technology
• ID portability: phone #, email address, DNS entry
• Activities and habits: Facebook, Google apps
• Bundling: phone, internet, cable
• Setup costs: DBS, broadband access
• Contracts: internet, cell phones

Six categories of lock-in

Durable purchase

• Media appliances: Kindle, iPad, CD deck
• Aftermarket sales (supplies, maintenance)
• Lock-in depends on depreciation
• Usually falls with time
• 'Re-fresh' lock-in with multiple products
  • Supplier staggers vintages (computer peripherals)
    • New mouse, old keyboard
  • Contract renewal ('upgrade your phone for free')
• Technology lock-in v. vendor lock-in

Specific training

• How much is transferable?
  • e.g. driving a car transfers, using photoshop perhaps not
  • QWERTY v Dvorak (controversial among economists)
• Particularly true of software
• Competitors want to lower switching costs
  • Quattro Pro help out Lotus
  • Word / Wordperfect
• Other examples:
  • Habit: Newspaper layout
  • Channels: perception/link: Amazon and online books
• Lock-in rises with time

Information and routines

You are inputting your own information into ...

User-built data files: non-standard formats

• Quicken / Money
• Outlook / Thunderbird
• Mobile phone memory

Relationships

• Moving accounts from one back to another
• Complex subscriptions (see also bundling)

Lock-in rises with time

Search costs

• Transactions cost in finding new supplier
• Awareness of differences matter
  • Experience goods
  • When 'learning by using' is important, e.g. openness, DSL/cable modem
• Hidden costs (can decrease lock-in initially)

Loyalty programs

Multi-purchase pricing, with volume triggers

• Frequent flyer
• Coffee punch card

Personalized pricing

• Amazon prime

Contractual commitments

"Requirements contract"

• Purchase supplies from one supplier (also non-standard parts and supplies - inkjet cartridges)

Book/CD clubs

• Contracts, inertia

Cell phone contracts

Overcoming lock-in

• New and better technology (needs to overcome network effects)
• Gateways
  • Translate files from one format to another
• Standards and interconnection
  • Agreed to by industry assoc, consumer lobby, government

Lock-in, increasing returns, path dependence

Three key mechanisms associated with info goods:

• Up front costs
• Learning effects
• Network effects

Increasing returns:

• Tendency of what's ahead to get further ahead (and vice versa)
• Trad'l scope, scale economies
• Plus: optimum scale beyond market size
  • Huge fixed cost, minimal marginal costs
• Plus: positive feedback (learning + network effects)

Counterpart to neo-classical diminishing returns

Path dependence:

• Ultimate winner may not be long-term optimum

Two-sided platforms/ markets

Theory relatively new:

• (Rochet & Tirole, 2003)
• Even if features were known before

Two-sided platform:

• Two interdependent groups
  • Important to side A that there are many people on side B (and vice versa)
• Strong indirect network externalities
• Transaction costs between A and B too high for arbitrage

Dual market may or may not require a platform

Types:

• Exchanges: NYSE
• Ad-supported: nytimes.com, Facebook, etc.
• Transaction systems: Paypal, Charge cards
• Software platform: OSes

Antitrust takeaway:

• Something that seems anticompetitive/ uncompetitive may be competitive on the other side
• "Monopolies are uncommon in this area" --- do you buy it?
  • Seems anecdotally untrue
  • Influenced by Evans work at LECG?

Many platforms are multi-sided

• Competing on only some sides
• Google apps may be competing with 10 different platforms on only 1 side each
• To assess "market control", need to look at all sides
  • Evans: comprehensive assessment will decrease the market control

Nov 18: Blair Levin

Jobs and infrastructure

• 90s Clinton-era build-out: wired, wireless

Three spectrum biz models

• Licensed
• Unlicensed
• Opportunistic, secondary

One goal:

• Biz models compete with one another
• Need sufficient spectrum for all biz models

Unlicensed

• Ideal for device-based biz model: baby monitors, garage door openers
• Less ideal for services model

Whitespaces

• 6MHz reserved to reduce interference from signal bleed
  • During digital TV transition, GOOG/MSFT sought access to these whitespaces
• FCC now says whitespace can be used for unlicensed
  • Little explanation of the biz models because the stakeholders are competing

Frequency, format

• Analog TV is a single signal in 6Mhz, requires approximately 1Mhz
• Digital TV transmits in MPEG-2 over 6MHz
  • http://en.wikipedia.org/wiki/Digital_terrestrial_television
  • 19.7Mbits of information, std picture requires 2-4Mbits
  • Live sports requires nearly 15Mbits
    • Most stations not doing live sports in HD
• MPEG-4 is considerably better compression but not compatible with many existing devices
  • Difficult to require this transition after requiring the DTV
  • Maybe in 10 years?

Should US have adopted a mobile standard?

Options

• GSM?
  • Perhaps the optimal choice because of market dynamics
• CDMA?
  • Jacobs family out of San Diego
  • Stanford prof said that laws of physics would prevent CDMA from working

Decided not to adopt a standard

What is slowing down the development of mesh networks?

Interest of 5 years ago seems to have declined

• Tropos Networks
  • Never went public
• Some municipalities were interested
  • SF and Philly said they'd blanket the city
• Technology worked

Why didn't it go down?

• Government failure?
• "Wrong idea"?
• Was it obviated by the wireless niche?
• Could muni mesh drive down the price of commercial wireless?

Spectrum crunch, spectrum crisis

• No certain crisis
• Could a compression technology avoid the crisis?
• Only an issue in concentrated urban areas

Local governments entering the market

"Contestibility theory"

• Governments will only enter the market if they're desperate
• Utah "utopia" project, government provides wholesale infrastructure

Cable upgrade?

DOCSIS 3, standard for updating data-over CATV

• http://en.wikipedia.org/wiki/DOCSIS

Could government turn cable into a regulated monopoly?

• Winning == becoming a regulated utility

Network neutrality

Economic analysis

• Can't block, degrade
• "Reasonable management"
  • Reasonableness assessed case-by-case regarding competition
• About maintaining competition

Wireless guess wrt to FCC actions

• FCC will "vaguely" include wireless, not clear if it's enforceable
• Chairman hasn't taken vote on Title II inclusion
  • A Title II approach might be opposed by House legislation
• Moved back publicly from Title II to Title I approach

There exists a need for a "cop" with authority

• Maintaining competition

Universal service

• Last 3% incur huge percentage of the cost
• Decision is made that those folks will have to buy satellite dishes

Incentive auction

FCC could give auction proceeds to someone who currently controls spectrum

• No one objects on principle
• But it has no champion in the government

Jump offs

Brian Roberts

• Want to share "upside" of new services
• Cable won't beat the phone companies
• Desiring "peaceful coexistence"

Seidberg (?)

• Phone company defeating cable?

Madison River

• Incumbent phone company
• Blocked Vonage
• Immediately struck down by FCC (republican)
  • Powell acted without jurisdiction "and it stuck"

Nov 18 Bill, Alternate Reality Games (ARG)

• Viral marketing as a "dead end"
• Awareness of ARG might undermine viral efforts
  • Expectation
  • "Teasing"
• Connection to existing practices: SMS to FB/Twitter to Foursquare?
• ARG as a locus of confusion between marketing, advertising, promo, writing, gaming, branding
• ARG as crossroads of casual games / social networking / LARPing
• Writer's strike and ARG development

ARG players:

• http://www.unfiction.com/

Precedence

• Trantram Shandy
  • http://en.wikipedia.org/wiki/Tristram_Shandy
• Rashomon

Gracie for president

• Gracie Allen ran for president in 1940
• "Surprise Party" ticket
• "Wise fool" vaudeville tradition
• 42,000 votes received
  • One of the top 10
• Fans vote

Spinal tap

• Mockumentary
• Transition from "fake band" into "real band" on tour

"We pretend to be a rock'n'roll band and they pretend to be our fans" -- Michael McKean

• Re: GWAR

The Lost experience

• May 2006
• Ad agency Hi-ReS!
  • Written by Jordan Rosenberg of the Lost team
• http://hi-res.net/

ARG strategies

• Viral marketing
  • "Vanishing point" (Windows Vista)
• Expanded narrative
  • Lost
• Self-sustaining ARG
  • Pay to play (subscription, inital purchase)
  • Majestic, Perplex City, Cathy's Book
    • http://en.wikipedia.org/wiki/Majestic_%28video_game%29
• Grassroots popularly produced ARGs

Entertainment 42

• One of multiple ARG companies devised by alumni of the Beast

Fourth Wall Studios

• Another Beast-alum marketing company
• Founded in 2007
• ARG for Watchmen

Smith & Tinker

Jordan Weisman

• Wrote pen-and-paper RPGs
• 1980: Founded FASA
• Later made games, creative director of The Beast

Especially interested in self-sustaining ARGs

Studio Cypher

• Attempted pay-to-playing 2006
• Now doing social games

Edoc laundry

• 2006
• Elan Lee, Dawn Weisman

Xenophile Media

• Documentary film people
• ReGenesis ARG
• Patrick Crowe, Thomas Wallner

Serious ARGs

• World without oil

Nov 18 Jackie, Internet of things

Nation-state services

• Disease, disaster services
• Movement of goods, peoples
• Public safety

Dec 2, Final presentations

Sandi

Focusing on the FTC conference on future of journo

Mike

Comcast-NBCU Merger

• Analysis of potential public interest harms