van alstyne presentation

Information Business Models & The News: When Free Works and When it Doesn’tWhen Free Works and When it Doesn t

Marshall Van AlstyneVi iti P f MIT Sl S h lVisiting Professor, MIT Sloan SchoolAssociate Professor, Boston UniversityT: 617-358-3571E h ll@ it d @b d

© 2009 MIT Center for Digital Business. All rights Reserved.Proprietary & Confidential

E: [email protected] or [email protected]

Revenue Sources before the WebRevenue Sources before the Web

Classifieds Advertisements Subscriptions

© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

How does this really work?How does this really work?

Consider3

Consider Content Creation vs. Content Consumption

Normal Economic PricingNormal Economic Pricing

• Usually, you lower priceUsually, you lower price until value on the next unit sold makes up for

xxxx Demand xxxxP

losses on sales you would have made at a hi h ihigher price.

• Free pricing gives up all profits on every unit

P

Pprofits on every unit sold.

P


A network effect stimulates additional demand as consumption increases.

A “2‐sided” network effect crosses markets from say content consumers to creators or creators to consumers.

This causes demand in an adjacent market to growThis causes demand in an adjacent market to grow.


Consider profits in two markets

Market One(Acrobat Reader)

Market Two(Acrobat Distiller)(Acrobat Reader) (Acrobat Distiller)

Chargingf t t

Chargingf t tfor content

consumptionfor content

creation

Initially, there are profits to be made in both markets.

6© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved


Market One(Acrobat Reader)

Market Two(Acrobat Distiller)(Acrobat Reader) (Acrobat Distiller)

Subsidizingt t

Chargingf t tcontent


creation

But subsidizing market one can increase profit in market two more than enough to cover losses in market one.

7

two more than enough to cover losses in market one.



Market One(Operating Systems)

Market Two(Developers)(Operating Systems) (Developers)

Chargingf t t

Chargingf t tfor content


creation

Initially, there are profits to be made in both markets.

8© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved


Market One(Operating System)

Market Two(Applications Developers)(Operating System) (Applications Developers)

Chargingf t t

Subsidizingt tfor content

consumptioncontentcreation

But subsidizing market two can increase profit in market th h t l i k t t

9

one more than enough to cover losses in market two.



Market One(Operating System)

Market Two(Applications Developers)(Operating System) (Applications Developers)

Chargingf t t

Subsidizingt tfor content

consumptioncontentcreation

q2 = Q2 + e12q1 −Q2

Vp2q1 = Q1 + e21q2 −

Q1

Vp1

10

V2V1


Getting Free Pricing RightGetting Free Pricing Right1. Ability to capture cross‐

side effects1. Mistake of Netscape

side effects

2. User sensitivity to price & quality

2. Denver vs. Boston real estate markets

3. Value added

4. Marginal costs

f i id

3. Mistake of Apple

4. Mistake of FreePC5. Interfering same‐side

effects

6. Marquee providers

5. Mistake of Covisint

6 Mistake of Microsoft6. Marquee providers 6. Mistake of Microsoft


Getting Free Pricing RightGetting Free Pricing Right1. Ability to capture cross‐

side effects1. News needs a complement

side effects

2. User sensitivity to price & quality

2. Sometimes charge readers sometimes writers

3. Value added

4. Marginal costs

f i id

3. Readers can add value

4. Print vs. Digital distribution5. Interfering same‐side

effects

6. Marquee providers

5. Readers can add noise

6 Don’t alienate Mossberg6. Marquee providers 6. Don t alienate Mossberg, Krugman, Dowd…


Product Category Mkt 1 Product Intermediary Mkt 2 Product

Two‐Sided Platform Markets

Portable Documents Document reader* Adobe Document Writer

Credit Cards Consumer credit* Issuing bank Merchant Processing

Operating Systems Complementary Applications

Microsoft, Apple, Sun Systems Developer Toolkits*

HMOs Patient Treatment * Kaiser, Harvard Pilgrim Doctors’ Expertise

Ladies’ Nights Men’s Admission Bars, Restaurants Women’s Admission*

TV Format Color UHF, VHF, HDTV*

Sony, Phillips, RCA Broadcast EquipmentHDTV

Web Search Web Pages Sought* Google, Yahoo Web Pages Supplied

Computer games Game Engine/ Player Games Publishers Level Editors*

Auctions Buying* E-bay, Christie’s, Sotheby’s

Selling

Real Estate Home buyers* Multiple Listing Service Home Sellers

13

Home buyers

* Indicates which market is discounted, free or subsidized. Source: Parker & Van Alstyne 2002

What Happened to Papers & Magazines?What Happened to Papers & Magazines?

Classifieds Advertisements Subscriptions

These are all 2-sided networks © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Info/News Business Models that Can WorkInfo/News Business Models that Can Work

Info as Process Platform Value AddInfo as Process Platform Value Add

Credentialing User Generated Content


Information as ProcessInformation as ProcessWSJ Interactive Features• State‐by‐State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.htmlState by State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.html

• Immigration Slow Down Data:• http://s.wsj.net/public/resources/documents/st_CENSUS0921_20090922.html

• Timeline‐ Two Years in the Credit Crisis:Timeline Two Years in the Credit Crisis:• http://online.wsj.com/public/resources/documents/Two‐Years‐of‐Market‐Turmoil.html

NYT Interactive Features• 2008 Election Results:• http://elections nytimes com/2008/results/president/map htmlhttp://elections.nytimes.com/2008/results/president/map.html

• The Debt Trap• http://www.nytimes.com/interactive/2008/07/20/business/20debt‐trap.html

• Murder – New York City:• Murder New York City:• http://projects.nytimes.com/crime/homicides/map

Research support provided by Bryan Woliner

Old StoryOld Story

Leftover Consumer Value

Price

PProfit

QuantityQ

Cost

© 2009 Van Alstyne © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Marketing Answer: Custom PricingMarketing Answer: Custom Pricing

PricePrices Tailored for Different Segments

P1

P2

P1

Profit

QuantityQ

Cost

© 2009 Van Alstyne © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved

Instead Try Custom InformationInstead Try Custom Information

NEW Consumer ValuePrice

P1

P2

P1

Profit

QuantityQ

Cost

Freebie: Access to Current News

© 2009 Van Alstyne

Paid: Save stories, add comments, interactive content, crosswords, search archives, custom stock updates


FiveThirtyEight rates the errors of polls – and produces quite accurate statistical modelsproduces quite accurate statistical models

FiveThirtyEight.com has 17,800 links whereas NYTimes.com has 12,800

Amazon: Most helpful positive and negative ratings of “Audacity of Hope”

Slashdot: Five star “Funny” and “Insightful” comments on Dam Burst program to get around China’s Green Dam censoring software.

Summary ObservationsSummary Observations

• Use 2‐Sided Networks to understand when freeUse 2 Sided Networks to understand when free works and doesn’t (content creation / consumption)– Can measure tradeoffs and anticipate colliding platforms.

– Follow the implied pricing rules

• News & Information Business Models– Information as process (can own this!)

– Add value to platforms

– Credential & Clear‐the‐clutter

User generated content– User generated content


Van Alstyne Information Economics hResearch

Products & Communications Information & Economics of IP &Products &Network Effects

CommunicationsMarkets (Anti‐Spam)

Information &Productivity

Economics of IP &Open Source


PapersPapers

• “Information Complements, Substitutes & Strategic Product Design”Information Complements, Substitutes & Strategic Product Design Parker & Van Alstyne (2000) http://ssrn.com/abstract=249585

• “Two Sided Networks – A Theory of Information Product Design” Management Science, 51(10) 2005 pp. 1494‐1504. http://ssrn.com/abstract=1177443

• “Strategies for Two Sided Markets” Harvard Business Review, Eisenmann, Parker & Van Alstyne (2006) Oct. pp 92‐101. http://hbr.harvardbusiness.org/2006/10/strategies‐for‐two‐sided‐markets/ar/1

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van alstyne presentation

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