Internet Economics - docenti.luiss.itdocenti.luiss.it/protected-uploads/957/2015/04/... · Board Member @ LVenture Group SPA Previously he had wide ranging, but related experience

Internet Economics – Paolo Cellini www.interneteconomics.it, @cellinip

Internet

Economics

Paolo Cellini LUISS 2015

http://www.companypage.com


INTERNET ECONOMICS

Paolo Cellini

@cellinip

Venture Partner @ Innogest SGR

Board Member @ LVenture Group SPA

Previously he had wide ranging, but related experience in many parts of the world:

• Executive Vice-President of the Internet and Business Sales Divisions of SEAT,

the publisher of the Italian Yellow Pages.

• Vice-President in London of the Disney Internet Group responsible for Europe,

Middle East and Africa

• Vice-President in Paris of the Disney Interactive Group

• CEO in Tel Aviv of AOL/Time Warner’s mobile services

• Program Manager at Microsoft in Seattle

• Senior Advisor, based in London, for Hutchison’s 3G mobile venture in Europe

• Advisor to the European Commission in Brussels and Luxembourg, for its R&D

programme in media and advanced telecommunications



INTERNET ECONOMICS

Ciro Spedaliere

@CiroSpedaliere

Investment Manager @ LVenture Group

Professional Experience: Seat Pagine Gialle, Innogest

Education: Politecnico di Torino, UC Berkeley

Alessandro Angeletti

Investment Analyst @ LVenture Group

Professional Experience: LUISS ENLABS

Education: LUISS, HEC Montreal



INTERNET ECONOMICS

• To understand the reasons and motivations that

make the Internet so important

• To get a complete overview of the phenomenon

• To understand economic specificities of online

markets

Why a book of Internet Economics?



AGENDA

WHY INTERNET IS SO IMPORTANT?

INTERNET IMPACTS

INTERNET AS META-PLATFORM

INTERNET ECONOMICS

LIIF FRAMEWORK






BECAUSE THERE ARE OVER 2 BILLION PEOPLE

ONLINE

2,4

34% 39%

2,8 2,1 1,0

2012 2013*

2010

30%

2005

16%

Billion Billion Billion Billion

% of

Global Pop.

*Estimated



BECAUSE IT CONNECT US SOCIALLY

FACEBOOK

1.26 billion registered users

728 million users connecting each day

4.5 billion each day

10 billion messages sent daily

1 billion registered users

100 million active users every day

500 million messages sent daily

TWITTER the record: 143 thousand tweets per second



BECAUSE WE CREATE AND SHARE CONTENT

8 2

2015*

2011

ZETTABYTE

S *Estimated

ZETTABYTE

S

How much is a Zettabyte?

1.000 Megabytes = 1

GB 1.000 Gigabytes = 1 TB

1.000 Terabytes = 1 PB

1.000 Petabytes = 1 EB

1.000 Exabytes = 1 ZB

1 Zettabyte

250 Billions of DVD =

DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD DVD

Amount of digital information

created and shared



SOME EXAMPLE? VIDEO...

YouTube

6 billions of hours of video watched. ... every

month! almost an hour for every person on

Earth

100 hours of video uploaded ... every

minute!

1 Billion unique users every month



SOME EXAMPLE? PHOTO...

350 Millions

50 Millions

400 Millions

FACEBOOK

Number of photos uploaded and shared on a DAILY BASIS for platform

SNAPCHAT INSTAGRAM



BECAUSE WE ARE ALWAYS CONNECTED

67% of active daily user of Facebook

connects via mobile

More than 1.2 billion people accessing the

web with their mobile device

The data traffic generated by mobile is the

15% of all internet traffic

The 26% of all emails are opened by the

telephone, 10% from a tablet

Mobile searches are the 25% of all online

searches



WHY HAS SPREAD IN A FEW YEARS

Informativ

e

Platform

Searchabl

e Platform

Social

Platform

Mobile

Platform 5.000

4.000

3.000

2.000

1.000

1990 1995 2000 2005 2010 2015

Scientific

Platform

DESKTOP

MOBILE

Inte

rnet

Users

(Millions)

Key Platforms

INT

ER

NE

T O

F T

HIN

GS

Next?

Yahoo Google Facebook Apple, Android Mosaic



BECAUSE IT HAS A BIG ECONOMIC BURDEN

% GDP from Internet 2009 (Source: McKinsey)

• If the Internet was an

economic sector would have

a higher percentage weight

to agriculture

• $ 1,670 Billion GDP

produced by the Internet in

13 countries analysed

€ 29 Billions



BECAUSE IT HAS SO MANY BIG PLAYERS

$ 5,1 Billions of revenue

2012

$ 3,7 Billions in 2011

$ 50 Billions of revenue

2012

$ 38 Billions in 2011


2012

$ 11,7 Billions in 2011


2012

$ 48 Billions in 2011

Acquired: $ 715 Millions

from Facebook - No

Revenues

Denied $ 3 Billions from

Facebook - No Revenues

Acquired: $ 966 Millions

from Google

$ 18 Billions IPO

revenue 2012: $ 317 Millions



AGENDA


INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



INTERNET IMPACTS



WHAT ARE THE ECONOMIC IMPACTS?

For Companies

• Reducing supply costs

• Improved supply chain management

• Better inventory control (Just in time management)

• Development of outsourcing practices

For Consumers

• Reducing information asymmetries

• Increased consumer surplus

For Markets

• Lowering transaction costs

• Pricing mechanisms (e.g. auctions)



WHAT ARE THE IMPACTS ON PRODUCTIVITY?

Ability to reduce transaction cost and time

Ability to simplify procedures

Possibility of working, collaborating and co-ordered remotely

What if:

Online tools, broadband and web processes

were adopted?

+ 10% productivity in the

service sector

+ 5% productivity in the

manufacturing sector

All procurement of Italian PA became

virtual?

Benefit of resources and

time in excess of 50%

Source: European Commission Study

Source: Politecnico di Milano



WHAT ARE THE SOCIAL IMPACTS?

Employment: 2.7 posts created by the new economy for each place destroyed

in old economy (McKinsey )

Social inclusion: digital divide may bring disadvantages to individuals who are

cut off from services

Social behaviour: multiplication of social contacts (social networks); new

opportunities for crime (identity theft, fraud, etc.)

Democracy and involvement: Open Government; l’Open Data; Arab springs;

Risks to personal privacy

Learning and thinking : accessibility for anyone to our knowledge; information

overload

Enviroment: dematerialization; SmartGrids; Cloud Computing



WHAT ARE THE IMPACTS ON INNOVATION?

Creation and dissemination of unprecedented innovation

Collaborative platforms for innovation: knowledge is shared and people

cooperate with each other to experiment, find solutions and share knowledge

Dissemination of knowledge markets for intellectual property rights

APIs and Mash-ups: recombination of content and technologies originating new

innovation

User centric innovation: direct contact of companies with customers using

social platforms to improve its products

Great innovation created by established internet companies like Google,

Facebook, etc.



AGENDA


INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK






EVOLUTION OF THE CONCEPT OF PLATFORM (1/4)

First use of the term in the Product Development in the years ' 90

Wheelwhright and Clark (1992) introduced the term "platform product" meaning the platforms like

products that meet the need for a set of types of customers but that are designed to be easily

modified by adding, replacing, or removing features.

Subsequently the term extends to the Supply Chain

The term comes from productive platform of single company. The platform becomes a set of

subsystems and interfaces that form a common structure from which a group of derivative

products can be efficiently produced and developed by partner companies along the supply chain

(Gawer 2010)




In technology strategy, we find the definition of industry platform

Gawer (2010) defines "industry platform" as products, services or technologies that are

developed by one or more undertakings, and which serve as the Foundation on which other

companies can build products, services or complementary technologies (Windows, the Intel

microprocessors, Apple's iPhone, the Google search engine, Facebook).

The term platform is also used by business economists

Afterwards the platform concept has been adopted by business economists to refer to products,

services, technologies and companies able to mediate transactions between two or more groups

of users (Rochet and Tirole, 2003), highlighting in particular the context of two-sided market and

multi-sided, in which most of the ICT platform fits.




A distinction within the multi-sided platforms is made by Evans (2005)

distinguishing between:

• matchmakers, help the members of one or more sides of the platform in

their search for coupling on the other side of the platform

• audience-makers, make match advertisers with audience

• transaction-based businesses, count and they charge for transactions

that occur between different sides of the market

• shared-input platforms, where participants of a high need access to the

platform to provide value to the participants of another side




Ballon and Van Heesvelde (2010) set a categorization of platforms based on

the concept of control over customers and control over assets,


• neutral platform, where the owner of the platform does not control most of

the assets necessary for the creation of value, and furthermore has no

control over customers(es. Paypal, Google);

• broker platform, where the platform doesn't have the assets to create value

but does have control over customers (es. Facebook, eBay);

• enabler platform, where the platform has the asset but not control

customers (eg. Intel);

• system integrator platform, where the platform has both on asset control,

both on customers (es. Microsoft Windows, Apple iPhone)



THE INTERNET AS A PLATFORM (1/3)

Platform

META

OPEN

UNIVERSAL

NEUTRAL

MULTI-SIDED

MULTI-LAYERED




• Meta: The Internet doesn't look like a single platform, but it appears as a platform on

which are built the other platforms, a meta-platform. In support of this thesis, there are

numerous examples including the basics: Google, Facebook, eBay, Amazon,

Wikipedia, the free encyclopedia.

• Open: The Internet is open in the sense that it is a decentralized, distributed, dynamic

and multi-directional, able to develop and evolve independently, where users from the

users themselves become creators of technology.

• Universal: The Internet is a platform that is "universal" in that it can be accessed from

various devices (PC, mobile, tablet, mp3 players, etc.), by different access platforms

(Windows, Mac, Android, Explorer, Firefox, etc.), from any place and at any time and

giving all those who connect the same capabilities. The Internet is becoming the

standard for the exchange of information.




• Multi-sided: The Internet is by its nature a multi-sided platform because it allows or

facilitates the inter-connectivity between people/things/information otherwise

unconnected or connected but with room for improvement in efficiency.

• Multi-layered: The Internet is a multi-layered platform, that is composed of several

combined layers: we then Internet connection platform, technological platform, access

platform, brokerage platform and content creation platform.

• Neutral: The Internet is a platform "neutral" as it is defined by Ballon and Van

Heesvelde (2008), in the sense that it has no control over their assets and does not

control customers.



MODEL TO IDENTIFY THE STAGES OF THE INTERNET

Defined Internet as meta-platform, we can create a model to track the evolution,

identifying key variables that have characterized the stages.

In particular, we observe that:

• Has increased the speed of the Internet connection bandwidth and at the same time

they declined the cost.

• Has increased the amount of information online, this phenomenon is inversely

proportional to the cost of putting information online

• Has increased the installed base of Internet enabled devices.



EVOLUTIONARY MODEL OF META-INTERNET

PLATFORM



THE PHASES OF META-INTERNET PLATFORM (1/2)

• Scientific Platform: birth of the Internet, very few users logged on, very limited bandwidth

speed, few content, high access costs only sustainable in the search scope. At this stage were

made of the fundamental innovations that have created the foundations on which is then born the

success of Internet and its wide circulation.

• Informative Platform: The Internet began to spread in the corporate scope, begin to appear in

the market of access equipment for the consumer market. Bandwidth speed is still low, this

limited information and usability allows only textual and graphic content. The web is dominated by

portals that organize content and absorb most of the time spent online by users.

• Searchable Platform: the amount of information begins to be significant given the decrease in

the cost of creating content, bandwidth speed rises and access costs are lowered further,

allowing further expansion of the user base. The explosion of content leads to a change of

paradigm: the web is no longer the closed world of the portals but becomes an expanding galaxy

in which search engines are the entry point for the network.



THE PHASES OF META-INTERNET PLATFORM (2/2)

• Social Platform: the lower costs and increased speed of bandwidth, online door more and more people. This

combined with the new online technology platforms creates an explosion of users generated content: photos,

video, text, audio. The network becomes the new media, where everyone can say their thanks to social

platforms and we have a new paradigm shift in relation to previous phases: information is no longer one to many

and many to many.

• Mobile Platform: access costs are reduced significantly, now you can access the Internet even with the low

cost terminals, the Internet also has become a need in mobility is to access content for both stay connected

within their social networks. At this stage we see an explosion of installed base data from the sales of

smartphones, tablets, e-book reader and other mobile devices connected. At this stage we see the emergence

of mobile platforms like Apple's iOS and Google's Android.

• Things Platform: is the next evolution of the Internet, the Internet of Things, the lowering cost of access and

speed of the Internet mean that you claim as a reference framework for the exchange of information. Not only

people, but also sensors, objects and things connect to the Internet to exchange information. At this stage there

will be a further explosion of devices connected to the network and content created, as it will no longer be just

humans to create information but also the objects.



EVOLUTION OF THE INTERNET PLATFORM

Informativ

e

Platform

Searchabl

e Platform

Social

Platform

Mobile

Platform 5.000

4.000

3.000

2.000

1.000

1990 1995 2000 2005 2010 2015

Scientific

Platform

DESKTOP

MOBILE

Inte

rnet

Users

(Millions)

Key Platforms

INT

ER

NE

T O

F T

HIN

GS

Next?

Yahoo Google Facebook Apple, Android Mosaic



THE SCIENTIFIC PLATFORM (1/2)

• The origins of the Internet are in ARPANET, a computer network established in 1969

in the United States by the United States Department of Defense

• There were three main radical innovations that led the ARPANET to become what we

know today as the Internet:

• the development of TCP/IP in 1973, a protocol that allows different networks to

communicate and Exchange data packets

• language development of writing HTML and HTTP protocol at CERN in

Switzerland in 1991. HTML has allowed the introduction of items such as

photographs and movies pages within that first contained only text

• the introduction of Mosaic, the first Web browser, "browser", which allowed them

to find, retrieve and display HTML documents, even to those who had no

technical skills



THE SCIENTIFIC PLATFORM (2/2)

1991

HTML

1992

MOSAIC

1973

TCP/IP

1969 1982 1990

334 online

user

255.000

online users



THE INFORMATIVE PLATFORM (1/2)

• The first phase of the Internet originated in function of the founding principle of

allowing anyone to have access to any document type.

• The portals were the key product of this phase, HTML and PHP were the major

technologies, and access to information was the primary use.

• The more information available, the greater the possibility that other individuals may

take a personal and collective benefit from the information that they collect on the

net.

• Originally, the web was structured to promote the dissemination of scientific

information within the different communities of researchers from reference



THE INFORMATIVE PLATFORM (2/2)

• Since the mid-90 's, the portals have formed an essential resource of widespread use

• After the rapid and dramatic spread of browsers in those years, many companies, in order to

control a share of the Internet market, they built or acquired a portal, taking into account the fact

that there are many users who began their voyages from that site

In 1994 two boys of Stanford University, David Filo and Jerry

Yang, created almost for fun, a repository of links can keep

track of their personal interests on the Internet. The list soon

became very long and decided to organize it into categories

and sub-categories. From this hobby is Yahoo!, one of the

main worldwide web portals

Yahoo! for the first time reached one million hits per day in

the autumn of 1994, counting 100 thousand unique visitors.



THE SEARCHABLE PLATFORM (1/2)

• The navigation was very "Wizard" and "targeted" by portals. In the first part of

Internet streams this approach seemed correct, but it was necessary to take into

account two elements:

• The Internet accounted for users a something new; users were at a stage of

exploration of the medium itself and not yet fully aware of the potential available

• The content contained on the Internet grew exponentially: information in and of

itself does not have a cost, what it really does is their research and their

cataloging

• So to increase the content and to proceed user learning faces a significant innovation

in the field of the web: the rise of search engines



THE SEARCHABLE PLATFORM (2/2)

In 1998 Larry Page and Sergey Brin, two brilliant

Stanford University students, having developed the

theory that a search engine based on the

mathematical analysis of the relationships between

websites would produce better results than

empirical techniques used previously established

Google

Google debuted with a minimal design your page to

emphasize only looking



THE SOCIAL PLATFORM (1/3)

• The revolution of the new millennium is the introduction of what everyone knows as

Web 2.0 and which marks a sharp distinction between the Internet as it was

conceived in the years ' 90 and how today we conceive and use the network

• The approach, defined as Web 1.0, requires the user to exploit the network passively

through a one-way (from the network to the user) information sharing.

• Afterwards, thanks to the integration with databases and content management

systems (CMS), the Internet has evolved with dynamic sites (such as forums or

blogs) which greatly mitigated the creation of content and allow users to create

content on sites we visited; This dynamic web was by some referred to as Web 1.5




• Afterwards, thanks to subsequent innovations such as cascading style sheets (CSS)

and scripting languages, it has come to creating full-fledged web applications that

deviate from the old concept of simple Hypertext and pointing to resemble traditional

computer applications

• The mode of receiving information is no longer one-way (from network to user) but

becomes first bidirectional and directly from user to user in the most advanced and

mature stage of Web 2.0




• In the year 2005 is coined the term User-Generated Content or UGC or user-

generated content, to indicate the material available on the web produced by users

rather than from specialized companies

• Hand in hand takes hold even the definition of Social Media that refers to Internet

applications based on ideological assumptions and Web 2.0 technologies that allow

the creation and exchange of user-generated content

• In them there is a fusion between sociology and technology that transforms the

monologue (one to many) into dialogues (many to many) and is a democratization of

information transforms people from content consumers to publishers

• Social Media have become very popular because they allow people to use the web to

establish personal relationships or work, in this case we speak of Social networks



THE MOBILE PLATFORM: TREND

• Analysts estimate that the mobile Internet will be a very impressive trend

• Main trends:

• slowing sales of fixed at the expense of PC laptops

• exponential growth of smartphones and tablet coming to estimate for 2020 ten

billion Internet-connected mobile devices against the installed base of one billion

PCS in 2008.



THE MOBILE PLATFORM: SMARTPHONE ADOPTION

May 2011 Febbruary

2012

May 2013

• By the end of 2013 were expected on Earth, more

mobile devices that people

• Increases the penetration of smartphones

Other Mobile Other Mobile Other Mobile No Mobile No Mobile No Mobile



THE MOBILE PLATFORM: USE OF MOBILE INTERNET

• The 50% of global mobile web users use the mobile internet as their primary or

exclusive tool to go online

• The average consumer uses actively 6.5 app in one month

• 80% of the time consumed on mobile is spent in app

Web Browsing

18%

Games

32%

Facebook

18% Entertainment

8%

Utility

8% Social

Network

6%

News

6% Productivity

2%

Other

2%

TIME SPENT ON IOS AND ANDROID DEVICES



THE MOBILE PLATFORM: NOT ONLY SMARTPHONE

• The devices responsible for the growth of mobile data traffic are different:Notebook, netbook,

tablet, smartphone, e-book reader, …

• Notebooks and netbooks will continue to generate a significant amount of traffic, but categories

for newer devices, such as tablet and M2M (machine to machine) will begin to represent a

significant portion of the traffic by 2016.

Traffic growth per device 2016 forecast Mobile device Traffic

Dispositivo - Dati in MB per mese 2010 2011 2016

Non Smartphone 1,9 4,3 108

E-reader 0,5 0,7 2,8

Smartphone 55 150 2.576

Portable gaming console 244 317 1.055

Tablet 405 517 4.223

Laptop e Netbook 1.460 2.131 6.942

Moduli M2M 35 71 266

Device –MB data per month



THE MOBILE PLATFORM: MOBILE DEVICES

Source: IDC 2013



THE MOBILE PLATFORM: SOFTWARE PLATFORMS

• The sale of non-terminals is driven by hardware features ("what the terminal can do") as above,

but the user interface and applications available ("what can I do with the Terminal").

• The two leading smartphone platforms are iOS and Android, are guided by the demand

economy, where demand is generated (including the number of applications), it has a much

greater effect on sales compared to pure efficiency of the supply chain.

• As iOS and Android platforms are able to attract large financial investments by developers,

investors and brand.

• Taking as an example the IOS, and estimating that an app costs averaged $ 30,000 for the

development, the 500,000 app available for iOS represent an average investment of $ 15 Billion

in iOS ecosystem. This investment directly contributes to sales of iOS devices, estimated to be $

71 billion for the year ended in September 2011.



THE MOBILE PLATFORM: OPERATING SYSTEM



THE MOBILE PLATFORM: FROM PC TO THE APP ERA



THE MOBILE PLATFORM: APP STORE ECOSYSTEM

• The business of the application store is the exact opposite of the content business

telco.

• As such, the application stores as Apple's App Store and Google's Android Market are

not to be confused with profit centres.

• Instead, the store of Apple and Google, are as checkpoints of the ecosystem.

• With over 85% of the downloads coming from free apps in iOS and Android store, the

revenue from the 30% on the price of the paid applications funding operating costs of

acquisition and distribution applications, which is about $ 1.2 billion today in the case

of Apple.



THE MOBILE PLATFORM: APP STORE ECOSYSTEM



THE MOBILE PLATFORM: SIZE OF APP ECONOMY

In the EU28 estimates the App Economy has the following impacts::

• 794.000 jobs in the economy as a whole

• 529.000 jobs in the economic App, 60% of developers

• 22% global production of products and services connection to the app comes from the Europe .

• More than $ 10 Billion in revenue per year



THE MOBILE PLATFORM: APPS DOWNLOAD



THE THINGH PLATFORM

• The characteristics of universal Internet access combined with open protocols, enable a larger

number of devices to connect to the network.

• The Internet is emerging as the primary means of exchanging data between different types of

devices.

• No mention of Internet only of people but also of the Internet of things.

• Internet of things (or IOT IoT, or acronym of English Internet of Things) is a neologism that refers

to the extension of the Internet to world of concrete objects and places.

• Internet of Things, the Internet of things, is a new network revolution.

• The objects are recognizable and acquire intelligence thanks to being able to communicate data

about themselves and access to aggregated information from other.



THE THINGH PLATFORM



AGENDA


INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



INTERNET ECONOMICS



MAIN MODELS OF ECONOMIC LITERATURE

• General Models: definition and

classification of the

phenomenon of the Internet

according to General driver

(economic, social and

technological exchange)

• Specific Models: specific

definition of Internet industry

going to locate the parts that

make up the industry and how

these are related between them

The main models that seek to define and structure the internet industry can be classified into:



INTERNET AS COMPLEX ADAPTIVE SYSTEM (CAS)

• The nature of the Internet can be parsed as a CAS – Complex Adaptive System

• Plesk e Greenhalgt (2001):

• “an Adaptive complex system is a collection of individual agents, who have the

freedom to act in ways that are not always totally predictable and whose actions

are interconnected so that an agent's actions change the context for other agents

• An Adaptive complex system is an open system, which consists of several

elements which interact with each other in non-linearly and that constitute a single

entity organized and dynamic able to evolve and adapt to the environment

• Examples are the immune system, a colony of termites, the financial market, and

practically every group of humans eg. a family, a Committee, or healthcare staff.”



INTERNET AS COMPLEX ADAPTIVE SYSTEM (CAS)

• The CAS are a product of their environment while at the same time the influence.

• CAS properties:

• emergence

• co-evolution with the environment

• self-organization

• connectivity / feedback

• iteration and nesting

• The dynamics of the Internet may be analyzed through these properties, and change

and the influence it has on the physical world can be analyzed using the theory of

social networks.



INTERNET AS GENERAL PURPOSE TECHNOLOGY

Internet is a General Purpose Technology Technologies that affect an

entire economy

The GPT have the potential to drastically alter societies through their impact on

economic and social structures existing

Other GPT

Railway Steam Engine

Electricity Electronic Car PC



INTERNET AS GENERAL PURPOSE TECHNOLOGY

The introduction of a new GPT in an economic system before it can increase

productivity, actually decrease due to:

• The obsolescence of old technologies and skills

• Learning costs

• The time required for the development of new infrastructures

• The adaptation to new industries, causing temporary unemployment



INTERNET AS LARGE TECHNOLOGICAL SYSTEM

• According to Davies ' model, a process of innovation is fostered in her grow and

expand if, the technology on which is based the process, is a modular technology,

where each module has a consistent structure and capable of facilitating the

interconnection between different modules interactively (Davies, 1996)

• The Internet consists of a series of parts or components (complementary with each

other) which are in their entirety the technological facility in which to calculate the

State of innovation

• The Internet is composed of a series of tools with its functional attributes that can be

divided into transmit and receive devices, switching systems, and signal distribution

components



INTERNET AS LARGE TECHNOLOGICAL SYSTEM

• Each of these parts is connected in such a way as to form a network of components

in which the Assembly mode determines the development of the network in different

ways, according to the different assembly options available

• The evolution of configuration of the components determines the development of a

distinctive technological architecture that can grow both vertically and horizontally

(innovation or system contamination and inserting new technological paradigms)

• In the case of the Internet, being itself already an evolved system, composed in turn

from other systems, it is difficult to find a distinctive base element

• This is certainly another reason why until now to give a unique and exhaustive

definition of the Internet meme is complicated.



THE FOUR LAYERS INTERNET MODEL (CREC, 1998)

• One of the first major studies carried out on the economics of the internet was conducted by the

Center for Research in Electronic Commerce (CREC) of the University of Texas, commissioned

by Cisco in 1998

• The most original part of this study was the innovative Internet economy split into four layers

• The conceptual model provided for two categories, each split into two layers



THE INTERNET MONEY FLOWS (O’DONNELL, 2002)

• In 2002 Shawn O'Donnell of M.I.T. performs a new internet economy measurement using a new

conceptual model

• The peculiarity of o'donell is moving the attention purely economic flows that occur between

elements or segments of the Internet

• The model identifies blocks 7:

1. Companies active in the market of Backbone Networks and Internet Services Provider

(ISP)

2. Application services provider (ASP)

3. Content delivery companies

4. Web hosting companies

5. Portals and content sites

6. Advertising companies

7. E-commerce wesites



THE INTERNET MONEY FLOWS (O’DONNELL, 2002)



THE INTERNET ECOSYSTEM (HAMILTON, 2007)

• In 2007 the Hamilton

consulting firm,

commissioned by the us of

the IAB (Internet advertising

bureau), create a new

template to define the

internet economy, starting

as a basis the work of

O'Donnell and updating it in

the light of the new Internet

scenario

• The model sees 13 blocks

that define the internet

ecosystem



INTERNET ECONOMY (IDC, 2011)

• The IDC uses then another conceptual schema to represent the internet industry, understood as

the set of the main actors providing technologies, applications and services that make up the

internet infrastructure and allow its use, from vendors like Alcatel Lucent networks emerging

social networking platforms like Facebook

• Unlike the O'Donnell template or Hamilton, IDC model does not reflect all interactions between

actors



INTERNET ECONOMY (IDC, 2011)



INTERNET INTERMEDIARIES (OECD, 2010)

• On OECD model focuses on Internet seen as brokerage technology

• The OECD defines internet brokers as facilitators of transactions between third

parties over the Internet

• Intermediaries give access, host, transmit and index content, products and services

sourced from third parties on the Internet or provide Internet-based services to third

parties



INTERNET INTERMEDIARIES (OECD, 2010)



INTERNET VALUE CHAIN (A.T. KEARNEY, 2010)

A.T. Kearney analyzes the

Internet economy with the logic of

value chain by creating a

framework divided into 5

segments:

• Content rights,

• Onlines Services,

• Enabling Technology/Services,

• Connectivity,

• User Interface



L’INTERNET “STACK” (BCG, 2011)

• BCG's study offers an

interesting view of the

Internet industry by

using a representation

that takes its cue from

IT, the stack

• The stack is a layered

representation of

hardware and software

where each layer

communicates with the

superior and inferior



AGENDA


INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



IL FRAMEWORK LIIF



THE PROPOSITION OF A NEW FRAMEWORK

• An analysis of the literature shows the lack of a framework of analysis that would guide the

study of Internet parts from General views also very specific views but still embedded in a

general framework

• It was decided therefore to

create a multi-dimensional

model, that starting from a

specific analysis model of the

Internet industry, will evolve

by adding a dimension

composed of elements of

economic analysis

• Result is the framework LIIF



LIIF RELATIONSHIP AND PREVIOUS MODELS

• Wanting to represent the relationship between the three types of models, specific and

General LIIF, we can use a globe, where representation from outside to inside we

have a specificity greater than the Internet industry analysis.

• The outside of the globe is the General models, which, in fact, are the best

models for the overall vision of the Internet and for colluding to other systems.

• The next layer is given by the specific models which give a vision of what is

inside Internet.

• The core consists of the LIIF, i.e. shooting every item in the Internet industry

decomposed according to various dimensions of economic analysis.



LIIF RELATIONSHIP AND PREVIOUS MODELS



LIIF FRAMEWORK COMPOSITION

To achieve this type of framework was necessary to identify a specific pattern Internet industry

friendly and dimensions of analysis to apply.

• Internet industry model

• The layered model has the advantage, very important in our view, highlight the reader as

the upper layers exist thanks to the existence of lower layers, highlighting especially as

Internet has consolidated in time for subsequent layers. Initially it was necessary to spread

and infrastructure developments which gradually reached and users allowed to access the

Internet. The availability of infrastructure has enabled then the development of upper layer:

most applications are created, more services and user-generated content, more users.

• Economic analysis Layer

• The analysis layer has been defined empirically determining major topics of analysis that

we find in the literature on the Internet.



INTERNET INDUSTRY – 5 LAYERS MODEL

• To describe the Internet industry we have developed a layered model consists of 5

levels, where each level is connected to adjacent ones:

• Internet Infrastructure layer, all manufacturers of equipment and materials needed to

ensure the functioning of the Internet.

• Internet Access Layer, all operators that allow access to the infrastructure of the Internet.

• Internet IT Layer, all operators who develop software and Internet services.

• Internet Intermediary Layer, all operators involved in promoting mediation processes

between supply and demand of services, or that they pose as individuals who provide

services that facilitate exchange of other services or products on the Internet.

• Internet Content Layer, all operators that interact directly with users of the Internet, where

direct interaction takes place in an offer of services, goods and consumer content.



INTERNET INDUSTRY – 5 LAYERS MODEL

Internet Access Layer

Internet Infrastructure Layer

Internet IT Layer

Internet Intermediary Layer

Internet Content Layer 5°Layer

4°Layer

3°Layer

2°Layer

1°Layer

Inte

rnet IT

&

Netw

ork

s In

dustry

We

b

Ecosyste

m



DETAIL OF INTERNET INDUSTRY MODEL OF LIIF



INTERNET INFRASTRUCTURE LAYER

The 1° layer of our reference framework consists of the following sub-layers:

• Internet Equipment – Represents all manufacturers of equipment and

materials required for the Internet infrastructure. Inside you will find:

• Manufacturers of optical fiber

• Online hardware accelerator vendors

• IP networking hardware vendors

• Server vendors

• Core Network – Represents all operators involved in the creation and

management of the Internet-based infrastrututra. There you will find:

• Project designers and construction companies of the Core Network

• Core Network maintenance companies



INTERNET ACCESS LAYER (1/2)

In this layer there are operators who allow access to Internet infrastructure

• Access Services – Represents all operators that provide access to the

infrastructure:

• Wired ISP – Operators who provide wired Internet access:

• Telecom operators – traditional phone companies that offer broadband

• Cable operators – cable TV operators that offer access to the Internet

• Power line operators – operators that provide Internet access through electrical cables

• Wireless ISP – Operators who provide access to the Internet without using wiring:

• Mobile operators – the classic mobile phone companies that offer Internet access via

mobile phone

• Satellite operators – operators who offer free Internet via satellite

• Wireless ISP operators – operators who offer Internet access via hotspot

• WiMax operators – operators that provide Internet access through the new technology

of WiMax



INTERNET ACCESS LAYER (2/2)

• […]

• Access equipment – Manufacturers of devices that can connect to the

Internet

• PC manufacturers and Internet dedicated Hardware (computers, IP

camera, etc.)

• Manufacturers of smartphones and mobile internet enabled

• Producers of other internet enabled device (internet radio, car stereo, etc.)

• Operating systems and access software – Producers of software through which you can

access the Internet

• Manufacturers of operating systems – Classic operating systems on which they access

software such as browser (Windows, Mac OS, Linux, Chrome OS, etc.)

• Browser producers – companies that create the navigation software for the Internet

(Microsoft Explorer, Mozilla Firefox, Apple Safari)

• Other manufacturers access software – companies that create specific access software

(eg. Microsoft Outlook for e-mail)



INTERNET IT LAYER

Layer where opera who create software for Internet or forneisci IT services

• Internet Software – Represents all the operators who produce basic software:

• Producers of multimedia applications (eg. RealNetworks, Macromedia)

• Manufacturers of software for web development (eg. Adobe, Microsoft)

• Producers of internet commerce applications (eg. Sun, IBM, Magento)

• Producers of content management system (eg. Wordpress, Joomla)

• Search engine manufacturers (eg. Autonomy)

• Producers of web oriented database (eg. Oracle, MySQL)

• Companies with products and services in the field of computer security on IP networks (Avira,…)

• Internet Services – Operators that provide Internet-related services

• Internet IT consulting companies

• Companies that provide Hosting

• Companies that create web sites

• Companies that make training on Internet issues

• Companies that make market research and business intelligence

• Communications companies on the Internet



INTERNET INTERMEDIARY LAYER (1/2)

In this layer there are operators who allow access to Internet infrastructure

• Navigation Intermediaries – Represents all users who intermediano web

browsing:

• Search Engines

• Portals

• E-commerce Payment Intermediaries – Represents all users who intermediano online

payments

• Payment systems that rely on a credit or bank account to enable e-commerce transactions

(eg. Banca Sella Gestpay)

• Payment systems provided by non-banking institutions that operate on the Internet and

which are only indirectly associated with a bank account (eg. Paypal)



INTERNET INTERMEDIARY LAYER (2/2)

• eCommerce Intermediaries – represents all operators that provide

enabling platforms the transaction between sellers and buyers

• Marketplace – environments in which sellers have their own online

shop within the platform (eg. Alibaba)

• Auction weebsites – auction sellers put their products on the platform (eg. Ebay)

• Daily Deals websites – sellers are selling goods at a discount (e.g. Groupon)

• Advertising Intermediaries – are operators intermediating advertising spaces

• Classified – sites that collect advertisements

• Advertising Networks – aggregate different editors making spaces available to advertisers

• Advertising Exchange – advertising space brokerage between advertising networks

• Partecipative Network Platforms – represent platforms that help create content and

intermediano social interaction between users (Facebook, LinkedIn, YouTube)



INTERNET CONTENT LAYER (1/2)

In this layer we group operators have a direct interaction with customers by

offering their goods, services or content

• Content Sites – Are operators who provide users with various types of

content

• News websites – Thematic News, local news, national or international

• Entertainment – sites with multimedia content (text, photos, video) entertainment

• Verticals – thematic content sites specializing on a particular topic

• Content Platforms – Represents operators who provide their own content or third parties using

managed by highly technological platforms

• Aggregators

• Comparators

• Geo platforms



INTERNET CONTENT LAYER (2/2)

• eCommerce – Represents the eTailers who offer products and services

sold over the Internet

• Physical Goods – online stores that sell physical products

• Services – eshop of services, es. Travel

• Digital Goods – eTailers selling digital content such as songs or

videos

• Online Services – Represents operators who offer various online

services

• Productivity services

• Comunication services

• Entertainment services

• Creative services



LAYER OF ECONOMIC ANALYSIS OF LIIF

The following dimensions were chosen for the economic analysis layer:

• Characteristics – We find in the literature a number of studies that analyze the distinctive

features of the Internet or parts of the Internet.

• Demand – We refer to the study of the application over the Internet, from bases set up by

device connected, the number of users online.

• Supply – We refer to the study of the Internet offer, from the types of operators present,

services offered, the phenomenon of startup.

• Economic models – There are many studies in the literature regarding the economic theories

that insist on Internet domain.

• Business models – a topic much debated in the literature is the study of business models that

exist in the Internet industry, as there are many specifics.

• Markets – the studies concerning the Internet abound of analysis on industrial markets such as

advertising or E-Commerce.



THE LIIF FRAMEWORK

• Defined the Internet industry's

layers and layer composed of

dimensions of analysis, we

can now define the framework

of reference for the study of

the Internet industry as a

whole.

• By combining the industrial

model with the analysis model

emerges the multidimensional

LIIF framework for studying

the Internet.



LIIF DETAILS: CONTENT LAYER



AGENDA

THE DISTINCTIVE

CHARACTERISTICS


INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



THE DISTINCTIVE

CHARACTERISTICS



THE DISTINCTIVE CHARACTERISTICS



CHARACTERISTICS INTERNET INFRASTRUCTURE

INTERNET INFRASTRUCTURE

Cumulative

Open

Programmable

Eraser of time and space

CHARACTERISTICS



CHARACTERISTICS 1°LAYER: CUMULATIVE

• The Internet is a cumulative infrastructure because it can grow is by integrating other networks

inside, either extending with other infrastructure technologies which do not conflict with previous

• In fact, in recent years we have seen the development of wireline networks «» IE cable based

and wireless network support

Examples of Internet technologies

Technologies less

used

Obsolete

technologies

Technologies more

used today

Dial-up DSL

Satellite

Broadband

ISDN Fiber to Home

WiFi

Wireless ISP

Cable Modem

Power line

Mobile

Broadband

LAN WiMax

IP over DVB




Evolution of fixed connection technologies Evolution of wireless technologies

• Wireless networks have lower investment costs, if measured in relation to coverage

• Wireline networks are economically more efficient in urban areas with high population density



CHARACTERISTICS 1°LAYER: OPEN

• Networking architecture must be open, decentralized, distributed and multi directional in its

interactivity

• All communication protocols and their implementation must be open, distributed and modificated

(although some manufacturers maintain networks exclusively on part of their software)

• Government institutions must be built according to the principles of openness and cooperation

that are embedded in Internet

INTERNET

Indipendent Managed by no-profit

organizations Open



CHARACTERISTICS 1°LAYER: ERASER OF TIME AND SPACE

• In Internet the physical distances have not any influence on communications

• The Internet operates on copper cables and optical fibre that are 1/3 the densest of emptiness,

so the signals travel at speeds close to that of light (200 thousand km/s)

• On a planet the size of Earth equals practically to the Real Time

• With the optimal transmission rate fixed, are only two ways to make the Internet even faster:

• increase the number of bits traveling on connecting

• increase the switching speed of the connection in the joints between a connection and

another.

• The routers become ever faster allowing instant switch while the fiber optics and wireless

technologies allow you to send a much larger number of bits at a time



CARATTERISTICHE DELL’INTERNET ACCESS

INTERNET ACCESS

Universal Access

Mobility

Multi-platform

Multi-device

Cumulative

CHARACTERISTICS



CHARACTERISTICS 2°LAYER: UNIVERSAL ACCESS

• The Internet provides universal access, giving the same powerful capabilities to anyone with

access to the network regardless of where you are

• The Internet is based on a common standard, TCP/IP, which provides to all computers that

connect to the Internet the same technical interface and functionalities

• These common foundations make all Internet technologies equally available to anyone who is

connected



CHARACTERISTICS 2°LAYER: MOBILITY

Use of the web evolved from working remotely with wired connection to full mobility

usage with 3 g and Wi-Fi

Mobility

Indoor WLAN

Outdoor

Wi-Fi spots

3G

4G

WiMax



CHARACTERISTICS 2°LAYER: MULTI-PLATFORM

The universality of standards and

the establishment of multi-

platform technologies (such as

HTML, Flash, ...) allows the use

of Internet experience even on

different operating systems such

as Windows, Mac or Linux and

other navigation software such as

Explorer, Firefox, etc.

Multi Platform

PC OS

Windows

Mac

Linux

Chrome OS

Mobile OS

Microsoft mobile

Apple

Android

RIM

Linux

Web browser

Firefox

Explorer

Safari

Chrome

Opera



CHARACTERISTICS 2°LAYER: MULTI-DEVICE

The universality of access combined

with the growing importance of the

Internet has allowed the use of the web

do not remain connected to the PC but

that evolve on new devices that can

enrich the enormous content on the

web (like home enterteinement

devices) and also mobility access

Multi-Device

Fixed

PC

Home devices

Mobile

Laptop

Netbook

Tablet

Portable Media Player

Smartphone

Car devices




• This layer is cumulative, since the

user base of the Internet expands

thanks to new internet enabled

device that capture new user

groups

• The increase in the spread of the

Internet is related to the diffusion of

broadband, especially in the

consumer, and to the spread of

mobile internet



CHARACTERISTICS OF INTERNET IT LAYER

INTERNET IT

FAST EVOLVING TECH BASED MEDIA

CENTRALIZED COMPUTING & SOFTWARE AS A SERVICE

INFINITE STORAGE CAPABILITY

CHARACTERISTICS



CHARACTERISTICS 3°LAYER: FAST EVOLVING TECH BASED

MEDIA • The new uses of the technology, as well as actual introduced changes in technology, shall be

communicated from time to time to the whole world, in real time

• The time that elapses between the processes of learning-by-using and producing by using

appears remarkably shortened new paradigm: learning by producing

• For this reason the Internet has grown and continues to evolve at an unprecedented speed, not

only for the number of its networks but also for the range of its applications

Learning by using

Producing by using

Learning by producing



CHARACTERISTICS 3°LAYER: CENTRALIZED COMPUTING &

SAAS • Internet-based computing allows sharing of computing, software, and information resources that

are provided by your computer to other computers upon request

• Users don't have to worry about technical details and information access with their Internet

browser and receive the information and content they need

• You can offer over the net using very

complex software that require a great deal

of processing, which is done by the

servers that provide the service through

so-called "cloud" architectures and not

impact user's computer



CHARACTERISTICS 3°LAYER: INFINITE STORAGE

CAPABILITY • Since the introduction of the first disk drive in 1956, the density of information they can store has

grown from 2 thousand bits to 100 billion bits (gigabits) per inch (2.54 cm2)

• Also the storage price declines

year after year: we go from 700

dollars to a MB of 1981 to 0.002

cents per a MB of 2010

• This allowed the creation of

storage in the web with virtually

infinite storage and use thereof at

any time, such as services like

YouTube or Flickr

The cost per Megabyte in dollars



CHARACTERISTICS OF INTERNET INTERMEDIARY

LAYER

INTERNET INTERMEDIARY

INFORMATION ASYMMETRY REDUCER

FLEXIBLE MEDIATING TECHNOLOGY

INCREASING MANAGEMENT EFFICIENCY

CHARACTERISTICS



CHARACTERISTICS 4°LAYER: INFORMATION ASYMMETRY REDUCER

• The web reduces these asymmetries because the other party can seek information on the

Internet that the missing

• In the media of digital communication, the vast majority of participants are active creators of

information and at the same time, recipients

• Applications for computer networks such as mailing lists, web conferences, forums, social media

makes the internet a media communications group's many-to-many

• The new communication tools used by the computer networks are great levelers and

organizational hierarchies reducers

• Each user has, at least in theory, access to every other user and an equal opportunity to be

heard

• Economically this impact by making the markets more competitive thanks to the transparency

that you create



CHARACTERISTICS 4°LAYER: FLEXIBLE MEDIATING

TECHNOLOGY

• The Internet is a technology that acts as a link connecting parts that are independent of each

other or they want to be

• The interconnection can be:

• business to business (B2B)

• business to consumer (B2C)

• consumer to consumer (C2C)

• consumer to business (C2B)



CHARACTERISTICS 4°LAYER: INCREASING MANAGEMENT

EFFICIENCY

• The use of the Internet as a tool for management, improves efficiency in many sectors of the

economy causing far-reaching restructuring in business processes

• Efficiency derives especially

from the use of web

technologies to better

manage the supply chain, in

particular companies can

plan with better results,

better share the information

within the structure, interact

better with suppliers and

customers



CHARACTERISTICS OF INTERNET CONTENT LAYER

INTERNET CONTENT

TRANSACTION COST REDUCER

SUPPLY OF CREATIVE CONTENT

CONTENT UNBUNDLING

CHARACTERISTICS



CHARACTERISTICS 5°LAYER: TRANSACTION COST

REDUCER

• Transaction costs are looking for sellers and buyers, to find product information, to

negotiating, writing and monitoring contracts

• The Internet reduces transaction costs, in terms of time and money by reducing costs

related to find information about the market and definition of agreements

• In addition routine transactions that include the execution of payments, the track, the

processing and communication of financial information, can be handled in less

expensive with Internet technologies



CHARACTERISTICS 5°LAYER: SUPPLY OF CREATIVE

CONTENT

• The Internet is an extraordinary content collector

• Allows the use of on-demand content with a one-to-many logic, also virtually infinite

storage and immediate access, has meant that were dumped on the Internet

awesome content piers

• The advent of web 2.0 with user generated content has seen the explosion of user-

created content, not only created out from the Internet and then poured on the net as

it can be a picture or video, but also created online as discussions, blogs, reviews,

articles

• This impacts very traditional content creators who see enrich your competitive

scenario such as specialized newspapers which must reckon with amateur bloggers



CHARACTERISTICS 5°LAYER: CONTENT UNBUNDLING

• The web search has changed the publishing and management of content marketing

• The old saying in use among publishers "Content is King" was replaced by the new web 2.0

phrase "The User is King"

• Just like iTunes, allowing music buyers to get a single song broken down from the whole album,

so even Google allows any researcher to identify very quickly and download all kinds of articles

and from thousands of sources

• This ability to get a single article, song or other piece of information has wide repercussions both

for users and for the business

• For users it is no longer necessary to buy or consume more than you really want

• For content owners, this disaggregante trend is obviously worth considering very seriously

as it cannibalizes sales of newspapers, books and CDs



AGENDA

THE DEMAND


INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



THE DEMAND



THE DEMAND



SIZING THE INTERNET INDUSTRY

• Major consultancy companies (BCG, McKinsey, Deloitte, etc.) use this

method to calculate the expenditure weight of Internet economy

• After you've located the internet economy sectors, it is estimated the

expenditure as:

• private consumption – the total consumption of goods and services by consumers via the

internet or that are required in order to gain access to the internet, including electronic

equipment, the turnover of the telecommunications operators to market retail broadband, the

mobile Internet market, consumption of hardware and software, and the consumption of

smartphones.

• public spending – These include Internet charges for consumption and investment by the

Government (software, hardware, services and telecommunications) to pro-rata of the Internet.

• private investment – It is private sector investment in internet-related technologies

(telecommunications, extranets, intranets, web sites, etc.)

• Balance of Payments - includes exports of goods, services, equipment and Internet in addition

to B2C and B2B e-commerce, from which were deducted all imports associated with

• Electronic equipment are calculated on a pro-rata for dedicated internet usage

DEMAND



THE WEIGHT OF THE INTERNET IN THE MAJOR ECONOMIES

GDP in% resulting from the Internet in various countries, 2009

• McKinsey stima nel 2009

l’impatto dell’economia

Internet nelle principali

economie globali

• You switch from Sweden

and the United Kingdom

virtuous, where the Internet

has a weight percentage of

the GDP respectively by

6.3% and 5.4%, reaching up

to Russia where the

contribution is equal to 0.8%

of the GDP



ITALIAN INTERNET ECONOMY

• According to BCG Italian Internet economy in 2009 was equal to € 28.8 billion and US $ 31.6

Billion in 2010, with a positive trend of growth compared to the previous year by about 10%.

• We can see that McKinsey estimated a 1.7% in 2009 while BCG the 1.9%.



TRAFFIC GROWTH PER CAPITA • Globally, Internet traffic will reach 9 Gigabytes per capita in 2015,

compared to 2 gigabytes per capita in 2010

• Not long ago, in 2008, for Internet traffic per capita was 1 gigabyte per

month

DEMAND



FORECASTS OF TRAFFIC GROWTH

• Le previsioni del Visual Networking Index di Cisco stimano il traffico

quadruplicherà dal 2010 al 2015

• IP traffic is expected to

grow by 20 exabytes per

month of 2010 up a 81

exabytes per month in 2015

(CAGR of 32 percent)

DEMAND



DEMAND OF INTERNET DATA DEMAND



DEMAND OF INTERNET DATA

• The last years saw a slowdown in sales of fixed at the expense

of PC laptops

• Expected exponential growth of smartphones and tablets

DEMAND



DEMAND OF INTERNET ACCESS

• According to a study commissioned by

Ericsson, the total mobile subscriptions

reached about 6 billion in 2011 and is

expected to reach about 9 billion by the

end of 2017

• The number of mobile broadband

subscriptions reached 1 billion, surpassing

the number of fixed broadband

subscriptions, and is expected to reach 5

billion in 2017

DEMAND



DEMAND OF INTERNET IT SERVICES

Total 1996-2011 web sites

To try to give a dimension to

this question we can take into

account the number of web

sites currently, in that each of

them needs technology and

services in order to exist and

continue to be disbursed

Millions

DEMAND

Domains Active websites



GROWTH OF INTERNET USERS • Users in 2009 were 1.73 billion in 2011 amounted to two billion, with a penetration compared

to the population of the globe amounting to 30%:

• 922 Millions – Asian users

• 272 Millions – users in North America

• 476 Millions – users in Europe

• Cisco estimates that in 2015 the people connected to the web will be 3 billion (> 40% of world population)

DEMAND

RegionP opulation

(2014 E s t.)

Internet

Us er

31/12/2000

Internet

Us er

30/06/2014

P enetration

(%P op.)

Growth

2000-2014

Dis tr ibutio

n of

Internet

Us ersAfrica 1.125.721.038 4.514.400 297.885.898 26,5% 6499% 9,80%

As ia 3.996.408.007 114.304.000 1.386.188.112 34,7% 1113% 45,70%

E uropa 825.824.883 105.096.093 582.441.059 70,5% 454% 19,20%

Medio Oriente 231.588.580 3.284.800 111.809.510 48,3% 3304% 3,70%

Nord Am erica 353.860.227 108.096.800 310.322.257 87,7% 187% 10,20%

Am erica L atina 612.279.181 18.068.919 320.312.562 52,3% 1673% 10,50%

Oceania/Aus tralia 36.724.649 7.620.480 26.789.942 72,9% 252% 0,90%

T OT AL E 7.182.406.565 360.985.492 3.035.749.340 42,3% 741% 100%



AGENDA

THE SUPPLY

WHY INTERNET IS SO

IMPORTANT?

INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



THE SUPPLY



THE SUPPLY



THE SEARCH INDUSTRY

• The search platform are multi-sided platforms arising from Internet meta-

platform and took a key role in the landscape of the Internet economy

Estimated gross value created by Search by country 2009

According to McKinsey study (The

Impact of Internet Technologies:

Search, 2011), about 90% of

global Internet users use search

engines and in 2009, the gross

value created by the search was $

780 Billion globally

SUPPLY



SEARCH-BASED ADVERTISING

• Is the ability for an advertiser to advertise contextually to show the

results of a search engine.

• The "trigger" of (possible) ad exposure is given by "match" between

the keywords (keywords) chosen by the advertiser and that for which

the Alert Viewer on the search engine.

• The advertisement exposed it is generally text-type (a sign and 2 lines of text "promotional" in

the most common version) on which are highlighted words that they done by "trigger" in the

exhibition itself. There may be other forms of graphical displays (banners, multimedia, etc.).

• The most popular systems of management of keyword advertising (typically consist of: creating

ad, budget management, distribution, reporting) are Google-AdSense/AdWords and Microsoft

Bing Ads.

SUPPLY



SEARCH-BASED ADVINNOVATIONS

Keyword bidding system

CTR

• The search advertising platform generally use an auction system, where

advertisers are bidding to win the most visibility slots associated with

looking for certain keyword

• The auction alone does not determine the position of the ads. The search advertising platform to

maximize its profits estimate a quality score of the ad, the click through rate (CTR)

• Combined with straight-line mechanism determine the Cost per Click (CPC) and the slots where

the advertiser. In this way the Search Platform will ensure better allocation of slots

SUPPLY



HOW THE SEARCH CREATE VALUE (1/2)

I modi in cui la search crea valore sono:

• Best match. Helps consumers research, individuals and

organizations find the information that is most relevant to their needs

• Time saving. The search speeds up the process of searching for information, which in turn can

streamline processes, such as decision-making and purchase

• Raising awareness. The research helps all types of people and organizations to raise

awareness about themselves and about their offerings

• Price transparency. Search helps users find the information they need, but in this case, the

focus is on how to get the best price

• Deals on Long Tail. These are objects of niche that relatively few customers might want. With

the help of search, users can search for offers of this kind, that they now have greater potential

profit for suppliers

SUPPLY



HOW THE SEARCH CREATE VALUE (2/2)

• Correspondence of people. This involves the combination of

information, but this time focused on people, whether for social or

business purposes

• Problem solving. Search tools facilitate every type of solution of problems, from how to build a

Chair, to identify if the plant that has just swallowed the child is poisonous, or advanced scientific

research.

• New business models. New businesses and business models are popping up to capitalize on

online research. Without research, many business models recently developed would not exist.

Price comparison sites are a case in point.

• Show. Given the amount of available digital video and music, research creates value by helping

to navigate through content. For a generation of teenagers who spend from watching TV to

watch videos on YouTube, the search has resulted in a completely different way of

entertainment.

SUPPLY



WHO BENEFITS FROM SEARCH (1/2)

Those who benefit from the value created by the search are:

• Advertisers. Having grown rapidly over the past five years, online

advertising now accounts for a significant share of total advertising expenditure, that

is, 18 per cent in the US, 20 percent in Germany, 16 percent in

France, 16 percent in Brazil, and 3 percent in India. Of that online spending, advertisers allocate

about 40 percent to the engine advertising (search advertising), so spending about 6 percent of

their total advertising spending for advertising online search.

• Resellers. Research creates value for resellers: increasing consumer awareness for their

products and stores online and offline; improving the matching of products to customer needs;

creating the possibility to sell better and to a greater number of consumers, long tail articles. In

addition to retailers that compete based on price, price transparency is also a source of value.

SUPPLY



WHO BENEFITS FROM SEARCH (2/2)

• Entrepeneurs. Entrepreneurs are big users of search tools and benefit in

various ways while starting the business. It helps them solve problems

when you try new business ideas, find suppliers, investors and

customers, and to identify key talent

• Content creators. With so much content available on-line, research allows a better match

between consumer demand and the content providers. It also increases awareness of traditional

content creators and directs traffic to them, and makes searchable the contents scattered along

the long tail

• Companies. Firms benefiting from research in a multitude of ways, including: the ability to find

the right information, the supplier or the employee through a better match; the employee save

time using online research; Research also allows collaborative problem solving

• Consumers. Consumers primarily benefit from research through greater price transparency,

better matching, including access to the long tail of products and search for people, and the time

savings

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SEARCH-BASED ADV: ECONOMIC FACTORS

Keyword pricing - The platform that attract few advertisers tend to have

a lower CPC. Even the platform they have auction mechanisms

inefficient or that generate less value, contacts tend to have low CPC.

Indirect Network effect - A greater number of user determines an increased number of

search that attract more advertisers, increasing the likelihood of a profitable match between

the search and ads. The increase of actors in a "side" of the market brings benefits to the

whole system.

Fixed cost - Advertisers incur fixed costs in the use of search-ad platform such as setup costs

(sw installation, learn to use it...), campaign management and monitoring. These costs

discourage advertisers from launching their campaigns on small platforms

• Revenue per search - Several search-ad platform, with the same traffic and keyword bids, can

differentiate themselves on revenue-per-search (RPS). This happens if a platform do best of

the other to extract value from the advertiser, having an auction mechanism more efficient or

better CTR estimating. This allows you to have higher CPC

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MARKET STRUCTURE EVOLUTION

• The search based advertising was born in 1995 with Infoseek, one of the

first web search engine, starting to profile banner advertising based on

keyword typed by the user

• The Cost per Click (CPC) was first introduced in a negotiation of Proctor

and Gamble with Yahoo in 1996

• In 1998 the first introduced GoTo.com ads alongside the search results by charging advertisers

according to the model of CPC.

• Go.To.com was acquired and later became the platform for search of Yahoo

• Other engines followed the pattern of the CPC and in 2000 Google launches Adwords

• Although Infoseek beginning before, there was a leader in the search advertising market until

1999 that saw the emergence of Yahoo that rest leader until 2002

• In 2003 Google, born later than Yahoo, the search leader unseats and begins its unstoppable

ascent

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CONCENTRATION IN SEARCH (1/2)

• A search platform that has reached a scale advantage and an advantage

in extracting value from their research is hard to beat.

• This explains how a platform like Google has reached such levels of

market dominance. The market capitalization of Google went from zero to

about 200 billion dollars over a decade.

• Total Google revenues have exceeded 22 billion dollars at the end of 2010 and is expected to

grow to more than $ 36 billion in 2013. The market share of U.S. searches Google is over 66%

in 2010.

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CONCENTRATION IN SEARCH (2/2)

Market share of search engines in USA

Source: ComScore, Explicit Core Search, 2015

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dic -14 J an-15 delta

T otale 100,0% 100,0% 0,0%

Google S ites 65,4% 64,4% -1,0%

Yahoo! S ites 19,7% 19,7% 0,0%

Mic ros oft S ites 11,8% 13,0% 1,2%

As k Networks 2,0% 1,8% -0,2%

AOL Network 1,2% 1,1% -0,1%

C ore S earc h E ntity C ore S earc h S hare



ECONOMICS OF ONLINE PUBLISHING (1/4)

• The explosion of Internet use in the last decade, has led to a huge growth

of online advertising.

• As people spend more time with online content, it is natural that

advertising investment moving online too.

• The intersection of sloping demand curve downward sloping supply curve upwards represents

the equilibrium price that, in a free market, all available supplies would sell.

• In the online ad market, this price is the average CPM, or cost per thousand ad impressions.

• Given this economic paradigm classic, with the increasing demand and the consequent arrival

on the market of advertising larger budget online, you should see an increase of CPM. Actually

this is more moderate than you might expect.

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ECONOMICS OF ONLINE PUBLISHING (2/4) SUPPLY



ECONOMICS OF ONLINE PUBLISHING (3/4)

• In digital media, the marginal cost of adding a new ad space is very low,

and recorded a declining trend for several years, as the cost of computer

processing and data storage have collapsed.

• In this case, the offer could be endless as long as the price exceeds marginal cost per unit. In

this case, an increase in demand, implies a shift of the demand curve to the right, but does not

increase the price, i.e. the price remains constant at any level of demand, and despite efforts to

stimulate demand do not create supply imbalance that leads to rising prices associated with.

• To increase the price of inventory should therefore create digital shortage on the supply side.

• But this is not happening in terms of inventory available. Rather it is shifting attention to the

audience, going to create scarcity on it with two main methods: vertical content creation and

targeting technologies.

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ECONOMICS OF ONLINE PUBLISHING (4/4) SUPPLY



THE PHENOMENON OF STARTUP

The Internet has allowed a lowering of entry barriers to starting a business:

• The Internet provides technologies and services at less cost and with a

low implementation complexity (es. EN, IT-enabled accounting, cloud

computing). Google has estimated, for example, a saving by 50% to 70%

by using its cloud-based applications compared to traditional solutions

• Search engines, portals and social networks allow you to advertise their goods and services to

significantly lower budget compared to traditional promotion channels

• The Internet offers potentially global distribution channels and low running cost (eg. eBay app

store, etsy)

• E-Commerce platforms and the search engines have also allowed the creation of micro-

enterprises (e.g. people selling full-time on eBay)

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COST TO LAUNCH A WEB STARTUP

Cost to launch an Internet startup technology

All this has created the

conditions to ensure

that there was a real

boom of

entrepreneurship and

to create thousands of

those who are called

"startup".

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NEW METHODOLOGIES FOR STARTUPS

• Lean Startup is a business approach coined by Eric Ries, which aims to

change the way in which companies are built and how new products are

launched. The Lean Startup is based on validated learning about

scientific experimentation, on iterative releases of the product in order to

shorten development cycles, on the measurement of progress and about

obtaining customer feedback.

• Customer Development is a technique widely used by web startup to iterate and test quickly

each part of their business model. This methodology was developed by Steve Blank (Four

Steps to the Epiphany. K&S Ranch Press), ex-serial entrepreneur and current Professor in the

heart of Silicon Valley, Stanford University.

• Business Model Innovation is a methodology created by researcher Alex Osterwalder, which

makes it easy to understand the current Business Model of a company but which is also the

means by which make existing Business Model innovation or creation of new ones.

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THE ROLE OF VENTURE CAPITAL

• Venture Capital has played a key role in the creation and development of

web startups

• According to the latest MoneyTree report by PricewaterhouseCoopers

(PwC) and the Naztional Venture Capital Association (NVCA), the 2011

saw the highest level of VC investments in Internet startups over the past

ten years Investments in startup Internet

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VENTURE CAPITAL IN ITALY

• Venture Capital promotes economic growth, managing capital flows in

innovative startups that create jobs and drive the development of industry

• The amount of money spent in one country can be

a rough indicator of the potential for growth of the

economy and its sustainability

• The Italy with a Venture Capital spending of just $ 1

per capita is the last places of comparison, well

below the $ 35 average EU

Venture Capital spending per capita

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AGENDA

THE ECONOMIC MODELS

WHY INTERNET IS SO

IMPORTANT?

INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



THE ECONOMIC MODELS



THE ECONOMIC MODELS



ECONOMIC THEORIES APPLIED TO NEW ECONOMY

• Exist in the world a big debate about whether the New Economy and the

Internet Market cannot be understood, explained, and measured using

the same tools as far to the so-called "old economy", but should be

analyzed through the development of new economic theories or new

paradigms or through the adaptation of existing ones in different areas of

application or new industry.

• In general the Internet Economy did not need new rules but on the contrary there are effects or

forces that in the "old economy" had no relevance but instead in the Internet Economy are of

particular emphasis.

• Here we analyze:

• the elements of traditional economic theories in the analysis of Internet markets acquire an

importance amplified.

• the importance of economic theories on multi-sided markets on the Internet.

• the dynamics and structure of Internet markets referring to the theories of the new markets

and theories about designed markets.

• specific elements of the Internet markets compared to traditional markets.

ECONOMIC MODELS



COST STRUCTURES

• Vengono definite le spese che l'impresa deve prendere in considerazione per la produzione di

un prodotto o per fornire un servizio. I principali “cost structures” includono i costi di transazione,

i costi non recuperabili (o “sunk cost”), i costi marginali ed i costi fissi. La struttura dei costi

dell'azienda è il rapporto tra costi fissi e costi variabili.

• Web farms and also ICT if you consider software development, once the software has been

developed, the cost of electronic distribution via the Internet is virtually null.

• This is an example of how the curve of total costs of production may change on hold and in the

new economy.

Fixed Costs

Variable Costs



NICHE MARKETS

• To niche or Market "Niche Market" we call that small but lucrative segment of a market where

consumer needs that form the niche are distinguished for their specialty.

• Niche markets in general do not exist in absolute but come at a time when needs are identified

and/or desires of potential "customer" who have not been so far faced by competitors, offering

products that meet.

• The Internet by providing a global audience has allowed the creation of many niche markets

focused on very specific needs.

• While mainstream media niche market could be very limited, today with internet niche market

can be large.



NETWORK EFFECTS

• The "Network Effects" (Network Effects) relate to positive effects, for example, data from a

situation where the more people that use an asset, the greater the usefulness for the individual

user.

• When the value of an asset for an individual increases with people who have the same right, the

network externalities is defined directly, if increases with complementary products is called

indirect network externalities.

• For example, Social Networking platforms, these effects are very felt: you choose the platform

according to the number of users or friends who are already on that platform as will a major

plus.



SWITCHING COSTS AND LOCK IN

• The "Switching Cost" or switching costs are those costs associated with the transition to a

different version of the same type as well as for example the change in technology or standard.

• An illustrative example: switching from Windows to Linux on a PC. In this case the switching

cost is the time it takes to learn how to use the new operating system, the cost (economic or

temporal) in search of other compatible software.

• Another example is the passage from Facebook to Google +, in this case the switching cost is

given by the possible loss of positive externalities (my friends are on facebook and not on

google +).

• To "Lock In" means a situation where the "cost" or switching switching costs are so high that a

potential competitor-good used by consumer-is not able to offer a price low enough to convince

the consumer to switch to other goods.



MULTISIDED MARKETS

• Multisided markets are defined as «A double/multiple market areas is based on a

platform that allows interactions and exchanges among different groups of consumers

(or "sides" of the market), whose aim is precisely to keep them connected via an

appropriate price structure».

• More specifically, the Two-sided (or multi-sided) markets are markets with particular

characteristics:

• There are two or more distinct groups of customers;

• There are benefits in putting in contact or coordinate the members of different

groups;

• An intermediary can make each group richer through the coordination of their

application;

• The value of platform is derived from its ability to reduce transaction costs or

asymmetric information between sellers and potential buyers;



MULTISIDED PLATFORMS

• The Multisided Platforms are platforms that are multisided market contexts, they are satisfied

with 2 or more groups of customers and where customers of at least one group need customers

of other group for several reasons.

• The Multisided Platform can generate profits for themselves and for their clients if they manage

to capture and increase indirect network externalities:

• Acting as match makers;

• Building an audience. The Advertising-supported media doing this: using content to attract

"eyeball", i.e. those who abide by the message, and then selling access to these eyeball

advertisers;

• Reducing costs by providing shared facilities for customers of each group;



MULTISIDED PLATFORMS



DISTINCTIONS WITHIN THE MULTI-SIDED PLATFORMS

• A distinction within these multi-sided platforms is made by Evans (2005)


• matchmakers, help the members of one or more sides of the platform in their

search for coupling on the other side of the platform;

• audience-makers, matching advertisers with audience;

• transaction-based businesses, count and they charge for transactions that occur

between different sides of the market;

• shared-input platforms, where on the one hand, participants need access to the

platform to provide value to the participants of another side;



NETWORK EFFECTS IN MULTISIDED PLATFORMS

You define two categories depending on the internal or external influence to the group:

• Cross-Side Network Effects – We talk about these effects when a group shows interest to the

number of members or to the activities of the other group; in this case we can have both positive

and negative effects:

• Example of positive characterization: number of buyers and sellers on eBay;

• Example of negative characterization: consumer reaction to an increase of advertising;

• Same-Side Network Effects – We talk about these effects when what happens in a group does

not influence what happens in the other group; in this case we can have both positive and

negative effects:

• Example of positive characterization: the number of participants to systems Peer-To-Peer

(P2P) systems;

• Example of negative characterization: the presence of more competitors in the same

marketplace.



PRICING IN MULTISIDED PLATFORMS

• In a Single/One Sided Market pricing analysis starts from the marginal cost of the product there

is a close connection between marginality and cost.

• In a Two-Sided Multi Market pricing is very complicated because of the strong network indirect

effects among the distinct groups of customers.

• In a single-sided business there is the principle that those who cause the cost should pay it, for

example, the buyer of a car because the car's production cost and therefore pays the full cost.

• This principle in Two/Multi Sided Market often makes no sense. Often a product cannot exist

unless different customers participate simultaneously. All are responsible for the cost and

benefits.

• To determine the best prices, from the point of view of maximizing profits and social welfare,

keep cooto of the complex relationships between the price sensitivity of each side,

interdependencies between applications (the price for a group not only affects demand for that

group, but also of the other group and vice versa), and the marginal costs.



SIDE TO SUBSIDIZE

• The economy of the Two markets/Multi Sided shows that it makes sense to charge

little or nothing a group (or even remunerarlo) to take the product.

• For a platform that operates on both sides of the market with cross-sided network

effects, is optimum subsidise the side that generates bigger Externality that is most

valuable:

• Lowering the price on the side it generates more value stimulates demand and

increase sales; but for Cross-Sided Network Effefts, demand on the other side

will grow over-proportionally;

• The lower profits obtained from the side that was "supported" will be offset by

greater profits obtained on the other hand, even with a policy of increasing the

original price.



THE COMPETITION IN THE MULTI-SIDED MARKETS

• Different types of competition experienced by the markets "Two Sided".

• Internal competition occurs between individuals who interact on the same platform; external

competition occurs between 2 or more different platforms.

• The platforms can compete by working on two aspects:

• Platform Differentiation: Platforms "Two-Sided" will offer services that will be perceived

as being different from other consumers;

• Agent Differentiation: In general there are two ways to get a seller to be part of the

platform:

• Low pay Commission if not null or negative (a gain for him);

• A base of potential buyers high enough.

• Other aspects to be considered:

• Multihoming: Customers that belong to at least one side of a Two/Multi Sided Market

often belong to different networks.

• In order to create a market "Two/Multi Sided" you need to solve the long-standing problem

of "chicken and egg".



THE EGG AND THE HEN

• Starting a new business on the internet is particularly difficult when the initiative is based on the

deployment of a multi-sided platform.

• Entrepreneurs must ensure a sufficient number of customers on both sides, and in the right

proportions, to ensure a satisfactory value for both sets of customers and to achieve sustainable

growth of the platform. The inability to reach critical mass quickly causes the implosion of the

platform.

• We must take on board before the customer group A or B? or both at once? How many

customers must have the platform that a customer B revenue value from the participate

platform, by tackling the costs arising therefrom? And the other way around?

• These questions allow you to understand that there is a minimal amount of customers in each

group that, if achieved, provides a market dynamic enough to allow for sustainable growth of the

platform. This amount is referred to as a "critical mass".

• Google Video, for example, failed to reach critical mass because they don't generate enough

content to attract enough visitors, which in turn would stimulate the creation of user generated

content.



CASES Prima di analizzare le principali strategie che le multisided platform start-ups possono adottare, vediamo quali

sono i casi che possono ritrovarsi di fronte:

• Sequential entry – In some cases you can bring a group of customers on board and then make available this

group to another group of customers, later in time. This is the situation that happened with multi-sided

platforms in advertising.

• Admission with significant pre-investment commitment – In other cases, a group of customers needs to

make investments over time in order to participate in the platform. This is the case with software-based

platforms such as operating systems. The platform must convince developers there will be in the future an

appropriate number of clients, or provide them with some financial guarantees that buyers will appear, or self-

publish games until the platform is launched.

• Simultaneous entry – Finally, there are cases in which groups of customers take the decision to join the

platform at the same time and we must participate at the same time that the platform can provide them value.

Some platforms require a simultaneity almost perfect. Straight men would quickly a new nightclub where there

are women and vice versa. Similarly, in an online dating platform men you would form if there were women

already enrolled and vice versa. Other platforms can provide a little more latency. Buyers cannot abandon a

trading platform immediately if there are no sellers, but there is the prospect that they arrive soon.



TRIGGERING (1/2)

The key challenge for the new platforms is to understand how to quickly reach critical

mass. We go now to illustrate the main strategies to achieve the critical mass:

• Zig-Zag – A basic strategy to achieve the critical mass you build participation on both

sides incrementally. The platform begins with a small number of economic agents on

both sides. He convinces then the officials on both sides to join. Due to indirect

network effects, the platform becomes more valuable for each subsequent group of

potential customers.

• Zig-zag with self-supply – The founders may be able to start their platforms,

replacing one of the same parts, at least initially.



TRIGGERING (2/2)

• Pre-commitment on both sides – More commonly the platforms need to have more

members of the two parties to start the process of zig-zag above. They then need to

convince a minimum number of early adopter on both sides so that the platform is

present at the start so believable. This requires getting to believe that on both sides

when the platform opens, there will be also the members of the other party.

• Single or dual strategy influencer – The strategy aims to acquire an influential or

distinguished member on one side. The ad can attract a sufficient number of

members on the other side at the beginning.

• The two phases – The two-step strategy always involves the lead before enough

members of a party aboard the platform, and then bring the other side after members

on board. As mentioned previously this works when the first side is not interested in

the value of the second side.



DRIVER FOR CREATING NEW MARKETS

• The Internet also has mostly created new markets with new player.

• For the birth of a market need at least 2 agents: a Buyer and a Seller and 2 forces or drivers that

interact with each other: Question ("Demand") and offer ("Supply").

• The question is often declined in the following two categories:

• “Inchoate o General Demand” – “Wouldn't it be useful if this "thing" was available?”

• “Articulated o Specific Demand” – “You'd buy that particular well at that price?”

• The offer ("Supply") can be broken down into two different groups of people:

• Scientists and Innovators – those who have actually done the research and have

developed new technology/innovation;

• “Non-Scientists” – those who dwell on the commercial opportunities of new

technology/innovation, organizing others in the development of products and services by

exploiting new technologies and bringing them to the end on the market.



THE TYPES OF NEW MARKETS

• The types of markets that could arise from two drivers are defined:

• Demand Pull Market;

• Supply Push Market.



MARKET CLASSIFICATION

• Market by Evolution – arise through an evolutionary phase that leads in most

cases to the creation of new markets or the development of old.

• Market by Design – although based on the same general theoretical principles,

have a distinctive feature: these markets are "drawn" from scratch or modified in

some specific function.



MARKETS BY EVOLUTION: STAGES OF NEW MARKETS

• In the early years the structure of the new markets in General is very fluid and that this fluidity

showing with respect to two different areas:

• The number of entrants is very high and some of them will tend to exit the market with a

high enough frequency;

• The number of products introduced in the market is high and each of they is notable for the

large number of new features ("Features") offers. Also, as companies, will come and will

come out in the market with high frequency.



MARKETS BY EVOLUTION: COLONIZATION OF NEW

MARKETS The dynamics leading to colonization of new markets or radical markets stems from the

combination of several forces working under the surface for the birth and growth of the market.

These forces are:

• Combination of "Information Cascade" & "Wave of Enthusiasm"; The first new market entrants agree to be part

of why are profitable Business opportunities and why speculate they could effectively manage the risks

associated with the assumption that you are wrong and that the opportunity is there (Wave of Enthusiasm).

The next entrants or Would-be Entrants "await some confirmations because, unlike the first, do not have the

same level of acceptance of the risk and because they want to be sure that there are real opportunities

(information Cascade).

• “Provision of Infrastructure”; New markets can take advantage of the existence of existing infrastructures

adapted and used in different ways provide the breeding ground for her establishment and colonization. Or if

the infrastructure is missing key turns on providers, because it will identify business opportunities.

• “Capture the First Mover Advantages”; The first entrants to win the benefits that derive from their status as

first; this opportunity to have the advantages often pushing some companies to get up-front of the birth of a

market, to try to develop skills and acquire control over essential resources for that market or develop

technological leadership.



MARKETS BY EVOLUTION: CONSOLIDATION OF NEW MARKETS

• With the passage of time and the interest from other consumer groups, the market began to

expand and the choices made by the market (Consumer) and agreements between competitors,

is a "Dominant Design" that will lead to the consolidation of the market and its evolution from

market niche to the mass market.

• Market consolidation will lead to a boost in increased investment in infrastructure for new

products, creating greater appeal to consumers with pre-existing and new.

• The Dominant Design in the consolidation phase of the market tends to be the vehicle that,

through standardization, leads to:

• the costs, for an effective improvement of production processes and network factors;

• economies of scale – other driver that will lead to a reduction in costs and resulting lower

prices



MARKETS BY DESIGN

• The Market Design is the new discipline of the economy that recognizes that the proper

functioning of the markets depends on precise rules.

• The market designers are like engineers, they seek to understand the differences that you have

and the rules that exist, procedures that lead to better or worse to work different types of

markets.

• Their purpose is to know the operation and the needs of particular markets well enough so that

you can "fix" when something starts to not work or have the tools to be able to build new ones

from scratch.

• The framework of market design is based on two key points:

• Game theory (where we study the "game rules" and that is taken as a basis in order to

draw the rules for interaction).

• Strategic behavior that the "rules of the game" excite.



MARKET BY DESIGN: SPONSORED SEARCH AUCTION

• Early Internet Advertising (1994): Before the advent of the Internet the most common pricing

model for advertising was based on "cost-per 1000 impressions (CPM) bidding," where an

"impression" represented a shift of ad. This model was used by traditional media such as

television, newspapers and the newspapers. In early 1994, the "Internet content provider"

began to use the same template.

• Generalized First-Price Auctions (GFP - 1997): In 1997 Overture (later Yahoo! Search

Marketing) introduced a new model for selling Internet advertising:

• Instead of selling large and expensive ad space packages, each keyword or keyword was

sold via his auction (with prices less than $ 1 per slot);

• The payment was determined by the method of Pay-per-Click (PPC) instead of CPM.

• Generalized Second-Price Auctions (GSP - 2002): Google in 2002 introduced "AdWords

Select program" trying to eliminate the problems that were encountered with the previous

model, that is:

• Volatile prices

• Allocative inefficiencies



OTHER SPECIFIC WEB MARKETS • Scalability (intended as incremental returns) – Many Internet platforms operate on very large scales, one

thinks of Facebook that has over 700 million subscribers, or Google that operates on auction search billions

sponsored ("Sponsored search auctions").Most of them has been designed (planned) to be easily scalable,

and at relatively low cost. The high scalability at low cost may lead to high incremental returns.

• Customization (intended as matching between users and opportunities) – User experience can be

personalized. The cost of customizing an Internet Market is paltry compared to what you would have in a

traditional market. An illustrative example can be advertising on TV or on the Internet. On TV is all the same

while on the web can be adapted to individual users.

• Potential for innovation (intended as new products, new B.M. etc) – Internet platforms operate experiments,

often many, throughout the year, because the search cost is minimal and if innovation or product/service does

not have a high rating by users, within seconds you can go back without any cost.

• Measurability – This characteristic is the high degree of control and extending it on the various actions that

can be done on a platform: from the structuring of research for users to control and monitor transactions until

the new testing rules and parameters.



AGENDA

THE BUSINESS MODEL

WHY INTERNET IS SO

IMPORTANT?

INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



THE BUSINESS MODEL



THE BUSINESS MODEL



THE BUSINESS MODEL OF THE INTERNET

• We will try to identify the models used today by companies that do business with the online.

• In 1998 for the first time there was talk of Business Classification Model for electronic commerce

and from there developed a substantial literature in respect of internet business model.

• There is, however, a universally accepted taxonomy of business models, as well as on the

concept of business model there a definition or a universally shared framework.

• To give the reader a good overview of existing templates on the Internet we first analyzed the

existing literature and then on the basis of the conclusions that we came we drafted our

classificatory system.



MAIN INTERNET BM CLASSIFICATIONS



CLASSIFICATION OF INTERNET BUSINESS MODEL It is used as a criterion for classification of the manner in which the Exchange takes place between

supply and demand, going to identify three families of business model:

• Transaction based, the business models that are based on direct transaction between supply

and demand.

• Advertising based, the business models that are based on an indirect transaction between

supply and demand.

• Free based, the models where the exchange between supply and demand is free or at least in

part, or at least for a certain period of time.



TRANSACTION BASED MODELS

Transaction based models supply and demand are interested each other reciprocally and mutually.

Exchanging an asset or a product directly or with the aid of a third item enabler.

Inside transaction based models we distinguish:

• Brokerage Model – Model that involves bringing

together sellers and buyers, or facilitate

transactions.

• Merchant Model – Direct meeting between seller

and buyer.

• Subscription model – The exchange between

seller and buyer through recurring fee to get into the

good/service.

• Utility model – The exchange between seller and

buyer with payment of effective use by the buyer of

the goods/services in question.



ADVERTISING BASED MODELS

Advertising-based models are multisided models — are present and involved more than two

operators, and the exchange between supply and demand cannot take place without a third

operator that serves as an enabling entity.

Inside advertising based models we distinguish:

• Advertising Models - Supply of content and services in free mode but with the inclusion of

advertising content.

• Advertising Intermediary Models - Model based on advertising, or brokerage on the

aggregation of property and audience.

Advertising based

Advertising Model

Adv Intermediary Model



FREE-BASED MODELS

Free-based models are models that are based on the provision of a product or service for free or at

least in part.

Within the free-based models distinguish:

• Community model – Model based on the loyalty of people who invest time and emotion in the

development of good/service.

• Free model - Model based on the benevolence of good/service, initial or permanent.

Free based

Community Model

Free Model



AGENDA

THE MARKETS

WHY INTERNET IS SO

IMPORTANT?

INTERNET IMPACTS


INTERNET ECONOMICS

LIIF FRAMEWORK



THE MARKETS



THE MARKETS



ADVERTISING • The online advertising market began as a transposition of the concept of offline advertising.

• Advertising allows the advertiser to convey a message to other people (the "eyeballs"). The attraction between

advertiser and eyeball is asymmetric because advertisers want to reach potential customers (direct attraction)

while users are attracted by content and not by the advertisement (indirect attraction).

• Although the advertising has as goal the generation of sales of goods and services it can be done in different

ways:

• A type of advertising is designed to generate sales directly by creating contacts, "leads". Advertising

in the yellow pages is one example. Advertising listing in the yellow pages is designed to create

strong sales prospects for the advertiser.

• Another type of advertising is informative, providing description of products and prices. Informative

advertising of supermarkets with their products and their offerings is an example of this type of

advertising.

• Still another kind of advertising is branding, in order to alter the perception of the people about a

product or service. Television advertising of Mastercard ("there are things that you can't buy, for

everything else there's Mastercard") is an example of this.

Online advertising has made innovative technologies primarily for publicity-generating leads



THE MEDIA FOR GENERATING LEADS

• Advertising, as the main commercial tool to connect suppliers with potential customers

(business or consumer), has the media as main channels.

• The profitability of the business in the market of media depends on the ability to

balance and enhance the two offering features: average sale to end users (readers,

viewers, users) and the sale of advertisers (traders).

• Content, Distribution and technology are instruments with which the Media trigger

potential contacts between Advertiser and Customers.



ADVERTISING ONLINE

• The web advertising model is based on a website (publisher) that provides content (usually, but not necessarily,

free) and services, combined with advertising.

• The ads may be the main or only source of income. The publisher may be a content creator or a distributor of

content created elsewhere.

• The advertising model works best when the volume of visitor traffic is very broad or extremely specialized.

• Online advertising is similar to offline regarding the use of the ads because it allows you to display text (like

ads), graphics (such as magazines) and video (TV).

Technology Distribution Content Users

Advertisers

Platform Clienti



ONLINE ADVERTISING RADICAL INNOVATIONS

• The Internet provides a highly efficient mechanism for delivering ads to individual

users and to gather information for targetizzare the ads.

• The Internet allows a more efficient advertising market brokerage, think of the auction

mechanism for the keyword.

• Economies of specialization: the Publisher online are increasingly selling the

advertising space through specialized platforms.



ONLINE ADVERTISING FORMATS AND PRICING



ONLINE ADVERTISING SEGMENTS

• Search Advertising - The market of keyword advertising

on search engines

• Display Advertising - Tabular advertising market

• Advertising Network – Advertising intermediation market

through technological platforms

• Classified Advertising – Classified advertising market

(ads, directory)

• Email Marketing – Advertising market based on sending

email

• Lead Generation – Advertising market based on

generation of contacts

• Affiliation Marketing – Advertising market based on

affiliations for the good/service that promotes itself



MARKET SIZE USA

• Online advertisng market as a whole grows very quickly, as you can see from the evolution of

the American market in the last decade.

Annual US revenues from 1999 to 2011 • We note that the 2009 had a

slight decline, this due to the

global economic crisis, but that

since 2010 there was shooting.

• In general we can say that the

online advertising market is

what has ruled the recession

better than any other type of

advertising.



CONCENTRATION OF U.S. MARKET

• The American market is affected by phenomena of concentration around the main ten

operators, which together cover 71% of the market value in the fourth quarter of 2011.

Annual u.s. revenues from 1999 to 2011

• The next fifteen operators

raise the 11% of the total

market, while the following

25 operators 8%.

• In total we have 90% of the

American market of online

advertising in the hands of

the top 50 companies.



TOP 5 ONLINE ADV OPERATORS

• According to research by eMarketer, in the coming years we will see an increase in

concentration in both search and display.

• Since the two segments are worth a total of more than 65% of the total online

advertising market, it can be said that the entire market will see a greater

concentration.

2011-2014 projections internet advertising market USA

2011 2012 2013 2014

Google 41,0% 44,9% 46,6% 47,4%

Yahoo! 9,5% 7,4% 6,2% 5,6%

Facebook 5,4% 6,5% 7,1% 7,1%

Microsoft 5,7% 5,7% 6,0% 6,5%

AOL 2,8% 2,4% 2,2% 2,1%

Total top 5 64,4% 66,9% 68,1% 68,7%

Total internet adv (Miliardi) 32,0$ 39,5$ 46,5$ 52,8$



MARKET SHARE OF THE ONLINE MARKET ADV USES

• In 2011, the online advertising in the United States, advertising revenue has surpassed cable

TV, positioning itself as a second media advertising investment size.

• From 2005 to 2011 only two forms of

media have had on American

advertising market, a compound

annual growth rate (CAGR) positive:

cable television to Internet to 4.0% and

16.7%.

• In every year since 2005, the growth

rate of online advertising has

exceeded that of any other advertising

medium.

2011 U.S. advertising market-Market share for Media Data in billions of $



ADV FORMAT SHARE US ONLINE ADV MARKET

Advertising format share online US advertising market

• The most important market segments for economic clout are the search and display,

that weigh in the u.s. market, respectively, the 46% and 22%.

• Declining in recent years,

however, classified, mainly

due to erosion of revenue

online yellow pages by

search engines due to the

increase of local searches by

users.



MARKET SIZE ITALY

In Italy the internet advertising market is still behind in terms of development compared

to other countries, but the online advertising still showed growth rates even in times of

crisis, and from 2005 to 2011 the market grew at a CAGR of 21 percent.

Italian market of online advertising



MAJOR ONLINE ADV MARKET SEGMENTS, ITALY

Italy Search and Display market 2010-2011 Weight of Search and Display advertising market

of the total Italian online

• The Italian market sees the prevalence of two market segments: the search and

display

Millions



THE MARKET OF E-COMMERCE

• The origins of e-commerce dates back to the early seventies in Electronic Data Interchange

(EDI) system that permits the transfer of information and commercial documents in an electronic

format.

• With the advent of the Internet everything changes: the Internet is everything that is not EDI, it is

convenient, it's easy to use, is everywhere and anyone can use it.

• Before the era of the Web, e-commerce was a task almost unknown in the business-to-

business, main followed the dotcom gold rush brought e-commerce to the limelight.

• A press release of February 19, 1996 Olivetti Telemedia announced the opening of

Cybermercato, the first Italian virtual store and one of the first in Europe.

• Certainly the first generation of companies that are venturing into the world of Commerce moved

to attempts: with virtually non-existent, sought to obtain profits and above all as quickly as

possible, so as to gain more advantageous positions.



TYPES OF E-COMMERCE

• Electronic commerce occurs in modes and different environments according to subjects that

take part, citizens, companies, institutions, etc.

• Here are the most common:

• E-commerce business to business (B2B)

• E-commerce business to consumer (B2C)

• E-commerce business to employee (B2E)

• E-commerce business to administration (B2A)

• E-commerce consumer to business (C2B)

• E-commerce consumer to consumer (C2C)

• E-commerce pear-to-pear (P2P)



BENEFITS OF E-COMMERCE

The main benefits and advantages arising from e-commerce are:

• Greater breadth of choice – The Internet allows for interplanetary shopping, we can buy not just digital

products but also primary needs products, niche products and unique products hardly available on the local

market.

• Improvement of the quality level of the services – E-commerce technologies allow you to extend the range

of services before and after the sale.

• Cost reduction – The development of e-commerce extends the benefits of automation of the production and

distribution of goods and services, with significant cost savings both to production and distribution, resulting in

a lowering of prices paid by the final purchaser.

• Knowing own clients directly – The development of the information economy makes possible the acquisition

of more detailed information on the needs, characteristics, and behaviors of individual customers.

• Reduction of market access barriers – The costs of setting up an online business are considerably lower

compared to a traditional activity, also the global communications networks also allows businesses to limited

dimensions to access wider markets.



E-COMMERCE MARKET SIZE

European Market size of E-Commerce

• According to the Institute of ECommerce research Europe, the European market of E-Commerce products and

services in 2012 is expected to reach $ 305 Billion shares, an increase of 20% from €254 billion in 2011.

• The United States follows with $ 280 Billion estimated

for 2012.

• Then there is the Asia-Pacific market with revenues of

€216 Billion.

• In Latin America, on the other hand, the E-Commerce

market is expected to grow in 2012 of 25-30%, driven

mainly by Brazil, reaching a total of about $ 43 Billion.

• As regards the region MEA (Middle East and Africa) is

expected to reach $ 12 billion in 2012.

• The global market of E-Commerce is expected to grow

over 20% of 2012.

Billions



THE E-COMMERCE MARKET VS. RETAIL SALES

EUROPE

The penetration rate of the total Retail sales

rose from 2.2% in 2011 to 2.6% in 2012

thanks to the excellent performance of the

online channel operators and negative

economic context of offline channels, being

higher for services (7%) than for products

(1.2%) but still lag behind in UK (14

percent), Germany (9%) or France (6

percent).

E-commerce fee on total estimated retail for 2012



CONCENTRATION OF THE ECOMMERCE MARKET ITALY

The E-Commerce market Italian is a

phenomenon of concentration around

the main player. In 2011 the 70% of the

market was generated by the top 20

player, declining share compared with

past years but still consistent.

E-commerce fee on total estimated retail for 2012



MAJOR MARKET PLAYERS ITALIAN ECOMMERCE

• In the top 20 in the Italian market operators are operators in services 16 and 4 in part products.

• Attendants in there services are:

• 9 in tourism (Alitalia, eDreams, Expedia, Lastminute, Meridiana, Trenitalia, Venus,

Volagratis, Windjet);

• 4 in Insurance (Directline, Genertel, Genialloyd, Linear);

• 1 in Mobile Recharge(Vodafone);

• 1 in Couponing (Groupon);

• 1 in Ticketing (TicketOne);

• Operators in the field of products we:

• eBay;

• Amazon;

• Yoox in Apparel;

• Esselunga in Grocery;


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Internet Economics - docenti.luiss.itdocenti.luiss.it/protected-uploads/957/2015/04/... · Board Member @ LVenture Group SPA Previously he had wide ranging, but related experience