Some economic aspects of the Internet

less of the type of information created, there is a cost ofcreation which can involve one’s time and other resourcesnecessary to formulate ideas all the way to the billions($) spent by the government. There must be incentives toexpend the resources necessary to create the information.Sometimes the mere existence of the Internet justifies orencourages such creation, although information is usuallycreated to share ideas, to promote oneself or an organiza-tion, or for reimbursement (or profit) .

Most use of the Internet is electronic mail, followedby moving data from one computer to another, and, lastly,logging into a computer that is running elsewhere(MacKie-Mason & Varian, 1997). Internet users are of-ten discussed in terms of end-users, yet Internet usersalso include information creators and most informationinfrastructure participants who depend on the Internet toprovide their services. For example, with electronic jour-nals, authors communicate with peers and publishers, edi-tors with referees, publishers with secondary databaseproducers, libraries with libraries, database vendors withintermediary searchers, to name a few of the many typesof communication that take place. The cost charged tousers of the Internet is usually far less than the cost ofacquiring Internet information in terms of their time andother resources. The cost of using the information is ofteneven higher than the cost of acquiring the information.

The Internet communications infrastructure provides ameans for individuals to create information and communi-cate it to others. Sometimes, as with E-mail and journalarticles, the Internet merely provides a way of sendingmessages that can be stored and read when a need arises.It also provides a convenient mechanism for sending re-search data, software, and a host of other kinds of infor-mation from creators to users. The economic role of thecommunications infrastructure is to facilitate communica-tion and add value to the information communicatedthrough rapid transmissions, enhanced accessibility,greater availability, ease of access, low cost, and othersuch favorable attributes.

The Internet communications infrastructure consists ofcommunication technologies such as the network of back-

Some Economic Aspects of the Internet

Donald W. King4915 Gullane Drive, Ann Arbor, MI 48103. E-mail: [email protected]

This article describes a broad framework for examiningeconomic aspects of the Internet. The framework con-sists of four sets of processes, services, and partici-pants, including information creation, use, communica-tion (the Internet communications infrastructure), andvalue-added information processes (the Internet infor-mation infrastructure). Each process (or service) in-volves several economic measures (input cost, output,use, and outcomes) and relationships among these mea-sures (unit cost, price/demand, cost and benefit, etc.) .Examples of economic aspects are given for all four setsof processes which emphasize the environment withwhich ASIS members primarily deal: Electronic publish-ing, secondary information services, and library services.

Most Internet studies have focused on the costs andpricing structures of linked networks. To establish a con-text for the spectrum of economic aspects of the Internet,this article takes a broader, more systems-like view ofthe Internet which includes all the various processes, ser-vices, and participants necessary to communicate infor-mation. As shown in Figure 1, there are four types ofprocesses: (1) Creation of Internet information, (2) end-use of that information, (3) all the information processes,services, and participants ( together called the ‘‘Internetinformation infrastructure’’) , and (4) all the processes,services, and participants involved in actually transmittinginformation (called the ‘‘Internet communications infra-structure’’) . Together they form an Internet system. Allfour types of processes are considered because anychanges in process costs, prices, or attributes can have asignificant ripple effect across all four types of processes.This, in turn, can affect the amount of use, usefulness,and value of Internet information.

Creation of information found on the Internet rangesfrom individuals formulating ideas or opinions, to infor-mal and formal research, to the big science projects spon-sored by government (e.g., the Hubble Space Telescope,the human genome research, LANDSAT, etc.) . Regard-

q 1998 John Wiley & Sons, Inc.

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tent through editing, translation, and so on. Some pro-cesses are designed to describe and synthesize informa-tion to enhance its identification, location, and retrieval.Information is also assessed to help assure its accuracyand quality, or by screening information to filter out un-needed information, ensure privacy, provide security, orprotect children from inappropriate information.

Information is carried on networks in various formatssuch as text, voice, image (still and moving), and data.All formats are frequently transformed into digital formatswhich can be carried by a range of delivery mechanisms.Thus, not only is information transformed from one me-dium to another, but from various formats to a digital(electronic) format. These digitization processes can beexpensive to develop, but will provide further efficienciesas common communications technologies are used. Otherprocesses store, preserve, and provide access whenneeded.

Economic Measures and Other Aspects

As shown in Figure 2, there are four basic economicmeasures of Internet processes. The first involves inputsto processes, that is, the amount of resources applied ($being a common unit) and attributes of the resources.Other economic measures include outputs of processesand their attributes (i.e., quality, timeliness, accessibility,

FIG. 1. Four types of Internet processes.

bone channels or connected ‘‘pipes’’ through which pack-ets of information are transmitted, and the computer‘‘traffic cops’’ that route the packets through the appro-priate network of channels by means of complex protocols(e.g., TCP/IP-transmission control protocol/Internet Pro-tocol and user-defined protocols—UDP). This infrastruc-ture also includes participants that provide the backbone(e.g., MCI, UUNet, Sprint, etc.) and Internet service pro-viders (e.g., America Online, PSI, Netcom, etc.) who con-nect users to the Internet backbone.

The communications infrastructure includes a secondcomponent consisting of organizations that have internalcommunications infrastructures connected to the externalInternet infrastructure. The internal infrastructures in-clude internal extensions of the Internet, local area net-works (LAN), independent dial-up workstations, or com-binations of these. These internal infrastructures haveconsiderable economic implications because of their largecost, and since the technologies that are chosen can eitherenhance or critically impede flow and limit the usefulnessand value of Internet information and services.

The Internet information infrastructure involves pro-cessing information and media. Participants include,among others, libraries, secondary and primary publish-ers, and vendors. Their economic role is to provide value-added processes which make the information more usable,accessible, and relevant. They improve information con-

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tions infrastructure depending on the types of informationinvolved. For example, the information infrastructurecosts of electronic journals are much higher than commu-nication infrastructure costs of transmitting articles. Fi-nally, the total cost to organizations of the internal infra-structure is normally much higher than payment for theexternal infrastructure.

Many of the information-related costs have been do-nated or subsidized, thus creating the illusion (at least tosome end-users) that the Internet is essentially free. Asthe novelty of Internet involvement by services dwindlesand economic realities set in, many service providers mayno longer provide their services without a charge. Theissue of who pays may increasingly involve end-users(or their organizations) and a reexamination of pricingpolicies may be warranted.

Economic Aspects of the CommunicationsInfrastructure

Economic Costs of the Communications Infrastructure

An indicator of the Internet system cost (excludinguse) is the amount of sales of network services; hardwareincluding routers, modems, and computers; software; en-abling services; information content providers; and In-ternet-related expertise ranging from system integratorsto business consultants. A study by Hambrecht and Quistestimated the market to be about $1 billion in 1995 andit is expected to grow to $23 billion by 2000 (cited byWerbach, 1997). A year ago, there were about 3,000Internet access providers based on Boardwatch Directoryof Internet Service Providers (Fall 1996; cited by Wer-bach, 1997).

One major cost of the communications infrastructure

FIG. 2. Economic measures of Internet services.

etc.) , the amount of use of the information and factorsthat affect use (e.g., price, awareness, satisfaction withattributes) , and the outcomes of information use in termsof the effects of information on personal well-being, life-long learning, and performance of work. Economic analy-ses deal with relationships among these economic mea-sures, such as between service costs and outputs ( i.e.,productivity, unit costs, economies of scale, etc.) , priceand demand, cost and use, and cost and benefit compari-sons of alternatives across all measures (see Griffiths,1994). Early Internet economic analysis involved com-munication infrastructure costs and pricing, but more re-cently, an added focus is on information-related services.However, thus far there has been much less analysis onthe other measures, partially because such measures arenot easily defined or obtained.

Two equally important aspects to the economic costsof Internet processes are the amount of resources applied(i.e., $) and who pays for these costs—the service pro-vider (and its investor) , the government, service buyers,advertisers, and so on. Generally, costs of Internet pro-cesses include very large, fixed, one-time (or periodic)costs, and relatively small incremental costs associatedwith service delivery. This is an important economic as-pect because the large fixed costs involve an investmentprior to revenue that must somehow be recovered fromone or more of the sources above.

Even though the literature has focused on communica-tions infrastructure costs, it is useful to consider costs ofall four types of processes because the communicationsinfrastructure probably has the least total cost of the fourcategories. A reasonable ranking of total cost would prob-ably place the total cost of use as having the highest cost,with creation the second highest, and far below would beeither the information infrastructure or the communica-

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maintenance, and support are less understood and notdiscussed much in the literature. The ongoing flow ofinformation through the Internet costs relatively little.Most of the discussions of costs really involve how theinitial investment or expenditures can be recoupedthrough allocation of the use of backbone and serviceproviders.

Internet Traffic/Outputs

There is little doubt that Internet traffic is increasingdramatically, particularly since the introduction of theWorld Wide Web, to the point that rush-hour traffic jamsor congestion have already begun (Varian, 1996b, andothers) . Traffic through the network of networks meansthat messages can traverse a dozen networks, many ofwhich are independently owned. The varied capabilities(e.g., different bandwidths, faster or slower routers, largeror smaller buffers) means that some participants provideand receive poorer service than others. Thus, the weakestlink in the chain of networks will dictate the overall qual-ity and speed of transmission. There is a cost to providersof maintaining routing tables which direct traffic and keeptrack of the paths followed through the network. Yet sincethese costly mechanisms vary among network providers,there can be an attempt to direct traffic to the best ones,thereby placing a burden on them. Varian also pointsout that bit-intensive transmissions involving display ofimages and graphics, and real-time audio or video willrequire broader bandwidths and higher level equity amongparticipating networks. The growth in number of newnetworks has led to backbone outages attributable to com-plexities resulting from the sheer number of networks.

Service attributes of the Internet make it more valuableto an end-user. The large (and increasing) number ofsources of information and individuals with whom onecan communicate (say, by E-mail) makes the Internetincreasingly attractive. Other attributes such as beingavailable 24 hours a day to most users, and providingparticularly ‘‘interesting’’ information when created (e.g.,the landing on Mars) lead to more use and congestionat peak times. Congestion also occurs for transmissionsoverseas (e.g., between the U.S. and Europe where thenormal 8 business-hours coincide only for 3 or less hoursper day). Congestion can occur at several points: At thenetwork backbones, at the public switched telephone net-work (when used to access the Internet) , at the ISP con-nection (e.g., America Online) , and for organizations attheir interface and through local networks. Regardless ofthe location, the congestion can create delays for Internetuse which, in turn, diminishes the amount of use and,consequently, the favorable outcomes of the informationuse. One way to deal with congestion is to build morebackbone and better networks. However, in the extreme,it has been estimated to cost $100 billion to provide highbandwidth fiber to every home or about $1,000 per house-

involves R&D. Certainly there has been considerable gov-ernment participation in the development of the Internetcommunication infrastructure. This federal support hascontributed to the major impact of Internet on our econ-omy, but in recent years, the spur in growth has beenthe significant commercial involvement, particularly bytelephone companies. McKnight and Bailey (1997) claimthat government involvement is not all that great. Theysay that the National Science Foundation (NSF) paid lessthan 10% of the Internet costs and far less when all costsare considered. Varian (1996b) indicates that NSF spentonly about $12 million on the backbone and $8 millionper year on subsidies. Regardless, there is an on-goingissue of what kind and how much future support thereshould be from the federal government. In 1995, NSF, forexample, implemented a privatization plan that stoppedsupport of the NSFNET backbone and support of region-als ( i.e., mid-level networks connected to one or morebackbones) over a 5-year period, but they continued tofund creation of network access points and developmentof a very high-speed network. Three new initiatives wereannounced by Federal agencies and others: (1) The NextGeneration Internet (NGI) involving federal R&D agen-cies and laboratories; (2) the Internet 2 to create a testbed for advanced technology involving about 100 majoruniversities (sponsored by the University Corporation forAdvanced Internet Development); and (3) an initiativeinvolving the Universal Service Fund, as required by theTelecommunications Act of 1995, to help connect schoolsand public libraries to the Internet by year 2000. A fourthrelated involvement is a second round of digital libraryfunding by NSF and other agencies. Hallgren and McA-dams (1997) argue that some benefits yielded by federalsupport will not be achieved through private initiatives,if left to themselves, because of the inherent economicproperties of the Internet.

There has been much discussion concerning dramaticreduction in costs of communication technologies.Moore’s Law suggests that the maximum power of amicrochip, at a given price, doubles roughly every 18months. This helps in ‘‘speeding’’ traffic through net-works and in eliminating ‘‘hot spots.’’ However, a majorcost, beyond purchasing improved hardware and soft-ware, is in implementing them. Just because the cost ofmicrochips reduces at this rate does not necessarily meanthey all will be replaced every year or two. Thus, theremay be a lag in realizing the economic advantages ofnew technologies, although competition among providerstends to minimize the lag period. Another source of delayis that some suppliers of microchips cannot keep up withthe demand.

Operational costing of Internet communications is ex-tremely complex. Much of the communications infra-structure cost involves one-time fixed costs of laying wire(e.g., optical fiber) , installing computers, and developingsoftware. However, actual recurring costs of operations,


based on number of ports or workstations, and accessto the Internet ( i.e., through the Internet, other internalnetworks, or direct individual terminal access) . Arrange-ments are usually negotiated for the first two and some-times the latter. Once negotiated, the rates are fixed orflat for monthly or annual fees. Anania and Soloman(1997) argue that flat-rate pricing is best because of thetradition with telephone rates, difficulty in counting us-age, convenience to customers, etc. However, MacKie-Mason and Varian (1995) suggest that usage-based pric-ing is inevitable for the Internet, and they present somebenefits of this pricing strategy such as dealing with con-gestion, accommodating price discrimination based onusage, and improving the desirable aspects of service fi-nancing (e.g., guiding investment decisions and expan-sion of capacity) . They also mention some drawbacks aswell, such as the cost of accounting for usage-based pric-ing. They point out that customer usage-based charges ofa phone call consist of three components: An allocationof fixed costs, the incremental cost of a call, and theincremental cost associated with billing (i.e., an itemizedcost per call, a cost per invoice, and an overall mainte-nance cost per month). The itemized billing costs aremore than one-half the total incremental costs of a call,however, these costs (0.7 to 1.2 cents per call) are gener-ally much smaller than the other costs (with a relativelysmall number of calls) . They emphasize that usage-basedpricing on the Internet is much more complex than tele-phone calls because the definition or measurement of us-age is less clear, and it is not established by backboneproviders as to who the end-users are (since servers, notend-users initiate a transaction). Another possibility isthat pricing reflects what users are willing to pay for speedof service. This strategy would use a ‘‘bidding’’ schemein which packets of information are prioritized by speedinstead of ‘‘first in, first out.’’ Shenker, Clark, Estrin, andHerzog (1996) argue that flat pricing and usage-basedpricing are but two ends of a pricing continuum, and thathybrids of the two are likely to prevail in the end.

Part of the problem is that the flow of reimbursementmoney does not come close to matching the flow of infor-mation. This is because there lacks an accurate means ofmeasuring traffic, some networks take a simplistic equityapproach to payment (e.g., disregarding distance and car-rier charges, as well as, inequities in provider capacitiesand capabilities) , and there is substantial disagreementas to adequate pricing and payment mechanisms. Thereare some processes for which there is no current way ofcompensating the providers for their costs. Routing tablesis an example, where the NSF-funded networks involvedgood routing tables, but new private providers are reluc-tant to bother with them because they are not adequatelycompensated for them due to connections that smallerproviders make in order to access the routing tables(Clark & Varian presentations, reported by Oram, 1997).

hold. The question is who might pay for this enormousinvestment? Similarly, a universal packet-switching net-work that optimizes digital transmissions instead of ana-log voice is unlikely to be developed by telephone compa-nies because of the uncertainty of revenue levels.

An issue with the communications infrastructure ishow to measure input costs (e.g., allocation of all theresources involved in development, implementation, andoperations of individual networks, etc.) , output quantities(e.g., defining ‘‘chunks’’ of information), relating out-puts (network flow of information), and revenue (net-work flow of money). There seems to be little informationabout attributes of output other than speed (or lack thereofdue to congestion) and price. Usage is roughly measuredin terms of total use (although not uniformally defined),but there is little information about how factors such aspurposes of use, ease of use, and so on actually affectuse. MacKie-Mason, Murphy, and Murphy (1997) havesuggested incorporating user satisfaction as a measure,not so much for economic assessment but as an opera-tional tool to help control the effectiveness of the Internet.

Internal Communications Infrastructure

Another important (and sometimes the weak) link inthe communication chain involves the internal communi-cations infrastructure. The development (and operational)costs of university, company, or government agency com-munications infrastructure are usually far greater than thecost (i.e., charge) to them of using the external Internet.The cost of external Internet access for a large universityis typically in the low hundreds of thousands ($) per year,or somewhat less than $10 per student. On the other hand,installing lines, developing and operating computer sup-port, maintenance, and other internal communication in-frastructure resources can cost in the tens of millions ($) .Because of the high costs, many organizations operatingunder tight budgets are reluctant to expend the resourcesnecessary to ensure an adequate communication infra-structure. Even library funders are beginning to questionwhether the usefulness and value of Internet services jus-tify the large expenditures, particularly since these expen-ditures are made at the expense of other information re-sources and services. Public libraries, for example, canspend $100,000 on Internet access and internal wiring,equipment, software, staff, space, and so on (McClure,Bertot, & Beachboard, 1995). Some valid measures ofoutput, use and outcomes would help resolve this issue(see, for example, Griffiths & King, 1993).

Communications Infrastructure Pricing

The Internet communications infrastructure usually in-volves a user charge to recover costs. The charge canrange from monthly charges to individuals (say $20 to$40 per month), to connection charges to organizations


per unit must be equal to or less than the price charged orcosts would not be recovered through sales. Since costsof Internet services tend to be dominated by fixed costs,the cost per unit will be extremely high with little usage,but will approach the very low incremental distributioncosts at very high levels of use. For example, an electronicjournal with a fixed cost of $400,000 would require aminimum subscription price of a little over $800 at 500subscribers in order to recover costs, and at 10,000 sub-scribers, the price would have to be about $40 (bothdepending on transmission costs) . Unfortunately, fewscholarly journals cover disciplines that have a readershipanywhere near the point where price is close to the incre-mental costs of sending on the Internet.

‘‘Free’’ Information on the Internet

Value-added processes are designed to improve infor-mation or access to it, but the economic cost associatedwith them must be borne by individuals, private organiza-tions, or government. To date, the resources involvingmany information-related activities have been donated byindividuals or are supported by academic institutions,companies, or government. However, it is likely that in-centives to provide such ‘‘free’’ services will diminishand user charges will be required more frequently.

Consider, for example, electronic publishing wheresome electronic journals are provided free on the Internet.The incentive for participants to donate or absorb costsrange from altruistic, to obtaining recognition for the par-ticipants in a discipline, to obtaining publicity for an orga-nization. Whether such incentives will continue to warrantsuch free journals over the long run is hard to say. Currentprint publishers, who are considering Internet access totheir entire journals (or separate copies of articles) , arehaving a difficult time deciding whether to do so and, ifso, how much to charge for such services. The problemis that their information infrastructure costs are very high1

and these costs must be recovered, regardless of whetherthe articles are distributed in paper or electronic media(see Tenopir & King, 1997). Since both paper and elec-tronic media have relatively small incremental costs, 2

electronic publishing of equivalent information can re-

1 There is a great deal of variability in reported publishing costs.For example, article costs are reported to be anywhere from $200 perarticle to over $8,000 per article. One problem is in defining what costsare included in these values. For example, publishing costs include fourcomponents: Article processing (editing, refereeing, etc.) , non-articleprocessing (covers, letters, book reviews, etc.) , reproduction and distri-bution (only the latter for electronic journals) , and publishing support(administration, marketing, investment, etc.) .

2 The marginal cost of distributing electronic copies is near zero,but this cost for print copies is about $35 to $40 per year, so thatdistribution by electronic means is to the benefit of publishers andsubscribers from a cost standpoint, but less than $1 per article distrib-uted.

Internet Information Infrastructure

Economic Costs of the Information Infrastructure

The cost of preparing Internet information can rangewidely. For example, the cost to run large company Websites can be substantial. A survey of 104 large companiesby Buck Consultants indicates that they typically spend$200,000 to $300,000 on compensation of staff alone.Only 15 of the companies said they ran the sites to gener-ate revenue. Most indicated they did so to showcase prod-ucts, give financial information to investors, etc. (D. Mer-chant, E-mail communication to UTK School of Informa-tion Sciences, quoting USA Today, 1997).

An important economic aspect of information involvesbig science. Funders of such research tend to direct theirfunding allocations first on the creation or generation ofinformation, then research on or analysis of the informa-tion, and only then, if at all, on its dissemination andapplication. In Europe and the U.S., there has been a greatdeal of controversy about the economic properties of suchinformation (i.e., is it a public, private, or other type ofeconomic good?) and whether value-added informationtransfer processes should be made available through thegovernment or privatized. A recent report (National Re-search Council, 1997) tackled this issue for many largedata-gathering science projects. Rather than polarizinginto an either/or approach, they addressed the problemby identifying conditions that lent themselves to one orthe other economic solutions, for example, whether theinformation should be privatized and what pricing strate-gies should be employed. Suggested questions (i.e., con-ditions) concerning privatization include:

j Can the distribution of data be separated easily fromtheir generation?

j Is the scientific data set used by others beyond theresearch community?

j Is the potential market enough to support several datadistributors?

j Is it easy to discriminate prices or differentiate productsbetween scientific users and other users?

j Is it costly to separate the distribution of data to scien-tists from their distribution to other users, such as com-mercial users?

Answers of yes to these questions suggest that priva-tization should be an option for distribution of the infor-mation (whether by Internet or some other means, al-though Internet access is discussed throughout the re-port) . The report strongly recommends federal fundingof distribution technologies such as those utilized in theInternet communications infrastructure, and processes in-volving the Internet information infrastructure.

The relationship between service input (cost) and out-put (quantities) is an important economic aspect of ser-vices. The cost per unit of output is important because cost


chased on the Internet could be pages, paragraphs, oreven bits. Secondly, customization is possible due to theInternet. Again, with electronic journals, one could obtainearly preprints of articles and later edited versions; thequality of the articles might be rated (by citation countsof authors, by past readers, by referees, etc.) ; sets ofarticles might be made available or automatically sent toreaders based on their profile or specific search and re-trieval terms (like Selective Dissemination of Informa-tion); or sequential levels of information might be avail-able such as titles, abstracts, reviews, entire articles, ac-companying data, or appendices, etc. (Varian, 1996a).The third aspect involves use of Internet information de-fined by how much the information is used (by an individ-ual, group of individuals in an organization, or across allusers) , the depth of use, and the purposes for which theinformation is used (i.e., recreational, work-related, etc.) .The usefulness and value of these readings can vary dra-matically, thereby warranting alternative prices.

It is clear that notion of ‘‘bundling vs. unbundling’’journal titles, groups of individual titles, and articles isbecoming an important issue for electronic publishing onthe Internet (or CD-ROM). For example, examinationof journal bundling leads MacKie-Mason and Jankovich(1997) to the conclusion that future pricing may dependon the value of attributes to user groups, the size of thereader audience, and how often readers use a journal orjournals (see King & Griffiths, 1995). Chuang and Sirbu(1997) suggest that neither pure bundling nor pure un-bundling is best, but mixed bundling is the best strategy(at least under the conditions set forth by them). Kiernan(1997) points out that acceptance of bundled electronicjournals is receiving varied responses by academic librari-ans, partially because there is inconsistency in the wayin which licenses or ‘‘deals’’ are negotiated. An emergingdrawback of licensing is that it is becoming harder toestablish organization use through traditional user IDs orpasswords, thus requiring a formal means of authentifica-tion.

The flexibility of electronic journals implies that arange of economic costs, pricing strategies, and corre-sponding payment mechanisms will emerge to serve allparticipants far better than in the past. The range of pricesshould reflect different units of output ( i.e., amount ofinformation exchanged and customized versions of theinformation) and the needs of various groups of users.There may be a niche market for combinations of amountand customization that will determine the type andamount of use.

Since pricing may depart from flat rates and reflectamount of use by end-users, some form of price discrimi-nation may become prevalent in which prices vary withdifferent units of output and/or with different classes ofbuyers. Different units of output include differentamounts of output (e.g., an article, a page, bits) , deliverymedia (e.g., printed indexes vs. online) , service attributes

duce the journal prices some, but not dramatically so.Other Internet benefits, such as speeding up publication,enhancing peer participation and review, automated as-sessment of, and rapid access to individual copies of arti-cles may be more important than the issue of charges (orreducing prices) .

According to an Ernst & Young report (1997), manymagazines are not financially viable on the Internet. Theirsurvey of magazine publishers shows that only 20% whohave online magazines say they will make a profit fromthem. However, the publishers project revenue to tripleduring the next 2 years and, at which time, a minimalprofit will be made. Currently about 25% of the revenuecomes from subscription or transaction fees. Advertisingdominates revenue.

Another example (described by Stix, 1994, Odlyzko,1995 and others) involves the availability of high energyphysics and other scholarly article preprints made avail-able through the Los Alamos National Laboratory(LANL). This highly acclaimed and heavily used servicedeveloped by Paul Ginsparg is touted as being ‘‘free,’’although Ginsparg developed the system as an employeeof LANL, it is stored and made available through theLANL, and the NSF has funded the project for over $1million. This is not to detract from the considerable meritsof the service, but merely to point out that some day theLANL may decide to charge for costs incurred, or to turnthe system over to an information service organizationthat must charge for it.3

Information Infrastructure Pricing

When the price to end-users involves information orincludes a component to recover information-relatedcosts, the pricing structure and strategies change. A flatsubscription price is a common form of pricing and, un-doubtedly, will be for many information services. How-ever, the potential flexibility provided by the Internetmeans that new strategies make sense. For example, withelectronic publishing, a flat subscription price no longermakes sense nor is necessary. Internet access introducesthree aspects of flexibility which influence pricing strate-gies. The first involves establishing an information prod-uct by the amount of information provided. For example,electronic journals can be sold as a ‘‘database’’ of jour-nals, individual articles can be bought, or the item pur-

3 Referring to the National Research Council report, there were pub-lic vs. privatization questions asked concerning information producedby big science projects to determine desirability or privatization. It wellmay be that high energy physics information does not meet the criterionfor privatization (e.g., the information is created and used by essentiallythe same community) . This condition is not true for many scientificdisciplines in which there is far more reading of scientific articles outsidethe academic community (which creates the information) than within.Chemistry and many life sciences are examples of such disciplines.


institutional prices. Varian argues that small, niche mar-kets—which accurately describe most scholarly publish-ing—are generally not well served if the producer isrequired to charge a uniform, single price. This may wellbe what has happened to contribute to the spiraling pricesof scholarly publications (see Tenopir & King, 1997).Individuals will not pay as much for a journal as a librarywill because, when looked at from a cost per readingstandpoint, it is less expensive for them to use alternativesources (e.g., a library) than pay a high price for aninfrequently read journal. The same holds for small orga-nizations/ libraries where the alternative to purchasing anexpensive and/or infrequently read journal is to either‘‘borrow’’ copies or use a document delivery service.Thus, the amount of reading serves as a useful meansfor identifying classes of subscribers ( i.e., large libraries,small libraries, individuals) . There is certainly evidencethat such price discrimination would have avoided muchof the dramatic price increases of journals in the past,and would have benefitted readers and publishers as well.

The Internet provides a perfect vehicle for extendingthis form of price discrimination to an optimum level inwhich prices are charged on the basis of usage (i.e.,amount of reading) and where most reading is accessedonline by readers. The marginal costs to publishers ofInternet distribution approaches zero, but the unit price(per reading) must be high enough to recover all the highfixed-costs of publishing (mentioned earlier) . Publishersseem to be reluctant to provide journals by electronicmedia because they are afraid they will lose revenue fromtraditional subscriptions, although they also do not seemto realize most reading is done from journals that individ-ual readers do not pay for anyway. Libraries seem reluc-tant because they will lose some of their services, al-though it will also create services and better utilizationof information resources for their clientele. This pricingstrategy has the strong potential of win-win-win-win forthe publishers, libraries, readers, and funders of librariesand readers. Of course, if usage categories are used todiscriminate, it will be necessary to be able to accuratelyand honestly distinguish readership categories amongsome subscribers. This is why, ultimately, Internet accessmay lead to a price per access at some level such asarticle, page, or paragraph.

A counter argument is that current journal practicebundles frequently read articles along with infrequentlyread ones. This has the distinct advantage of providing amechanism for distribution and access to high qualityarticles in a discipline that inherently has a small audienceor readership. If electronic journal articles are completelyunbundled, as may ultimately happen, it may be importantto ‘‘overcharge’’ frequently read articles or charge thesame unit price for all articles, even though some will be‘‘profitable’’ due to large inherent readership, and otherswill be unprofitable but, at least, made available. Anothernegative aspect of usage pricing is that it is much riskier

(e.g., ‘‘rush’’ document delivery through priority pro-cessing and rapid transmission such as online, fax, couriervs. regular processing), and customization (e.g., preprintswithout editing vs. edited copies) . Classes of buyers canbe differentiated by ability or willingness to pay (e.g.,faculty vs. students) , by membership in a society ornot, by amount of use of a service or product (e.g., indi-vidual or library subscriptions) , by processing cost neces-sitated by buyer location, etc. (e.g., U.S. vs. non-U.S.subscribers) .

Varian (1996a) gives examples of three types of pricedifferentiation,4 all of which apply somewhat to journalpublishing (whether print or electronic) as follows:

j First-degree price discrimination is where a producersells different units of output for different prices, andthese prices differ from buyer to buyer. Different unitsof output can refer to the amount of information pur-chased and/or degree of customization of journals. Anexample of this is where a multiple journal publishernegotiates with each organization or library on howmany of their journals will be purchased and at whatprice (e.g., a negotiated site license agreement) . Thiskind of arrangement could hold for either print copiesor electronic access (online or CD-ROM). A furtherdesirable refinement of this strategy is to also provideinfrequently read journals by document delivery (i.e.,separate copies of articles on demand). However, li-brarians can minimize how much they pay by knowingthe likely use and cost to use each journal, and the costof alternative sources.

j Second-degree price discrimination is where the pro-ducer sells different units of output for different prices,but everyone who buys the same amount pays the sameprice. Here publishers can set volume discounts for allbuyers (e.g., for purchasing more titles and/or morecopies of titles) . Subscription agents do this all thetime. Obviously, library consortia and other coopera-tives, such as networks, use this pricing strategy to theiradvantage to achieve economies of scale. In a sense,this form of pricing is contrary to usage-based pricingsince large libraries pay less per reading for highly usedjournals, and small libraries pay more per reading fortheir journals because they are relatively infrequentlyused. Thus, with volume discounts, the cost per usewill be much less for large libraries than smaller ones(and individuals) .

j Third-degree price discrimination is when the producersells the same units of output to different (usuallyclasses of) people at different prices. Examples arewhere journal publishers charge a different price fordomestic and foreign subscribers.

The latter type of price discrimination was followedby some print publishers in the past for individual and

4 Varian (1996a) refers to Pigou (1920) who uses the term pricediscrimination vis-a-vis price differentiation, thus suggesting the twoare interchangeable.


model, and a transaction-based model. In the departmentstore model, the provider (server) acquires informationfrom a number of sources (e.g., several publishers, sec-ondary services, document delivery services, etc.) and theserver charges users for all the services used during aspecified period (e.g., monthly, quarterly, etc.) . This per-mits one-stop shopping for users and avoids multiple billsand payments. On the other hand, this mechanism delayspayment to the providers, much the same way credit cardsdo. In fact, credit cards are being implemented for thistype of payment mechanism to make payment from oneor more of them. The boutique model involves a smallinformation provider whose customers do not have muchrepeat use. To avoid relatively costly invoicing for smallaccounts, the provider can rely on bank card companies,recognizing that credit card transaction costs providersabout 20 to 30 cents for each transaction. Thus, the salestransactions must be relatively high compared with thecredit card cost. The third model involves a transaction-based system in which a server and protocols permit iden-tification of an information transaction and, at the sametime, debits the buyers account and credits the providersaccount (both in a banking institution). This mechanismwould be flexible in the amount or type of informationtransferred (e.g., page of an article or entire article, data-base search output, or a software program) and the priceidentified with the information unit and buyer (to allowan array of discrimination pricing much as those describedabove). Charges could involve individual transactions,subscriptions allowing unlimited access, and so on. Infact, ultimately, the Internet may involve ‘‘microcharges’’ for very small ‘‘chunks’’ of information. It isclear that some such payment mechanism is necessary fortransaction pricing to be successful.

Other Economic Aspects

The Internet has been described as the best vehicle,thus far, to disseminate opinion. This creates an economicconcern that information found on the Internet may notbe accurate. Clearly, anyone can claim to be an expertand present his/her information as being factual. Oneonly has to do homework at a grade school level to finddifferent answers on the Internet to questions for whichthere should be no ambiguity. There are those arguingnow that peer review or refereeing of scholarly articlesare too costly and are no longer necessary because, on theone hand, the Internet allows iterative interaction amongpeers, and on the other, the Internet will permit readersto rate articles concerning various attributes which canserve as indicators of their validity, usefulness, and valueon a topic. Regardless of the merits of the arguments, anychanges in current practices for electronic journals on theInternet will affect information attributes and make theinformation more or less useful and valuable.

With so much new information being made available

than journal subscriptions because the potential use ofnew articles is unknown.

When government provides its information on the In-ternet, there is a real question of how much of the costsshould be covered by government and buyers. The possi-ble levels of cost recovery include just the cost of repro-duction (not applicable for Internet) and distribution (orincremental use) , plus the total service cost, plus the costof creation or generation. Generally, the policy is tocharge for the cost to make the information available tousers, but not the cost of obtaining and maintaining theinformation for government use. Since government infor-mation—such as scientific data—is monopolistic, thereis merit in using a Ramsey pricing strategy (see NationalResearch Council, 1997). This strategy suggests that,when total costs are not likely to be recovered, differentialprices should be employed where high prices should becharged to buyers whose purchases are relatively insensi-tive to price (e.g., library journal subscriptions) , andlower prices to buyers whose purchases are relativelysensitive to price (e.g., individual subscribers) . In a sense,the Internet system can facilitate such a strategy for gov-ernment-produced information.

As more and more information and services requirepayment, and the variety of pricing schemes increase,there must be complementary payment mechanisms de-veloped. Sirbu (1995) suggests several features of pay-ment mechanisms that help make them successful, andhe also describes types of payment mechanisms. The de-sirable features of payment mechanisms are that:

1) They should be widely accepted;2) the costs of processing a transaction must be low,

otherwise information providers will require larger‘‘chunks’’ of information (e.g., if the cost of re-cording and billing for a single article is too high, sayas high as the cost of obtaining the article, publisherswould require purchases of the entire ‘‘bundle’’ ofarticles in a journal) ;

3) information delivery must be limited to paying cus-tomers only, thus requiring some form of securitysuch as encryption for payment and information deliv-ery;

4) there should be a one-for-one adherence of the chargefor the information and the delivery of the information(i.e., no under- or overcharge).

Another feature not mentioned is the speed of ‘‘bill-ing’’ and ‘‘payment’’ which encourages information pro-viders to put their information for sale on the Internet.One reason that journal publishers have been reluctant todepart from traditional subscription pricing is because theprint revenue precedes much of the costs, thus ensuringa more favorable cash flow than, for example, book saleswhere nearly all costs precede the sales revenue.

Sirbu (1995) describes three kinds of payment modelsthat he calls the department store model, the boutique


bibliographic data. As Griffiths, 1998 suggests the Webis not a library.

Archiving and preservation of information found onthe Internet is becoming a problem. One issue involvesinformation that is frequently modified or changed. Forexample, some researchers are constantly updating andmodifying the formal documentation of their researchand, as a result, sometimes no permanent record of theprocess is maintained. A second issue is that no one as-sumes responsibility of archiving some important types ofinformation. For example, traditional print journal articlescan be obtained from the publishers and large libraries,but there may be no such source for some future electronicjournals. Another aspect of preservation is that informa-tion stored in a digital format has a limited life. Finally,some information is lost because it has been input andstored using outdated technologies that limits retrievalwith current technologies.

Some of the major preservation and digital library ini-tiatives are focusing on these issues, but the solutionscan be very expensive. For example, digitizing is veryexpensive because human intervention is still required.Because of the enormous costs, retrospective input oftext should not be duplicated by competing initiatives orcountries, and the digital structure of retrospective textshould be coordinated and made compatible with newlycreated digital text.

The Internet changes the basic concept of the wayinformation is stored because information found on theInternet is stored on 16 million host computers (NetworkWizards Internet Domain Survey, 1997; cited in Werbach,1997). These computers are found almost anywhere inthe world and access is extremely simple, fast (with theexception of potential congestion delays) , and availableat any time. While some such information is stored onsupercomputers, there is less need for central storagesince an information creator can locally store informationto be used at the discretion of end-users. This distributedstorage capability made possible by the Internet has cer-tainly resulted in new sources of information, but on theother hand, it has made identification and access morechaotic.

The extensive number of computer hosts and end-useaccess provided by the Internet has created a need to filteraccess in some instances. Privacy of personal informationsuch as medical records, personal finances and tax infor-mation, and personnel records are all now potentially sub-ject to access on the Internet resulting from that informa-tion being stored on computers also used for other net-work access. Also, companies are concerned aboutsecurity of proprietary research, financial, and marketinginformation that can be harmful in the hands of competi-tors or others. Finally, governments have classified otherinformation that should not be accessible on the Internet.To provide Internet exchange of appropriate information,but deny access to inappropriate information, several

on the Internet, and with a substantial amount of it beingsent to individuals at the discretion of creators, end-usersare beginning to feel swamped with unwanted and un-needed information. Also, searches for very specific infor-mation often result in hundreds of identified hits when,perhaps, only a few are needed. Such lack of precisionin the dissemination and retrieval of information can costusers substantially in time that they are less and less will-ing to spend. It is puzzling that there has not been greaterinvolvement and entrepreneurship exhibited by the infor-mation science community to attack these issues.

The growth of electronic publishing and digital li-brary initiatives both mean that traditional abstractingand indexing services and databases may not be suffi-cient for searching large text databases. New searchengines are certainly necessary and, perhaps, a revisitto full-text associative retrieval systems of the 1960s iswarranted ( if they are scalable in today’s environment) .Even the traditional bibliographic database services maynot include electronic-only publications and sites whereauthors choose to publish exclusively on their ownhome pages. Finally, some electronic journals by-passbibliographic database producers and traditional onlinevendors which makes their materials less accessible andcreates a false sense of comprehensiveness of the biblio-graphic databases.

There are two kinds of information retrieval on theInternet: Those that identify and locate information foundon Internet hosts and are accessed through the Internet,and those that identify and locate information fromsources external to the Internet as well (represented bylibrary catalogs and bibliographic databases) . The accu-racy and precision of the former generally are not asgood as the latter, partially because of the nature of theinformation described, the ad hoc way in which somesystems are developed, and because not enough attentionhas been paid to standardization of terminology, etc. Wil-liams (1994) points out that traditional bibliographicdatabase vendors (e.g., Dialog, NLM, MDC, and West)encourage access through the Internet. This has the advan-tage of saving telecommunication expenditures, or about3% of the out-of-pocket costs of searching online (de-pending on transmission speeds, etc.) .

Some in the library and information science commu-nity have lamented their future in light of the Internetsystem. Yet the initial chaotic nature of searching theInternet means the end-users must rely a great deal onintermediaries to navigate through the maze of sourcesof information and, also, to build a knowledge of thestrengths and weaknesses of information and informationsources (i.e., what sources can you trust?) . Just as end-users tend to rely on intermediaries to perform traditionalsearches in companies, etc., they may find it even morenecessary to do so because of the necessary competenceand the increasing time (and cost) required to search


j The number of users in 2000 is estimated to be about500 million (Taylor, 1996).

For those who cannot or do not wish to use their ownterminals or modified TV, nearly all public, school, andother libraries are expected to provide access services totheir users by the year 2000. It is emphasized that growthin users and use has accelerated much more rapidly sinceimplementation of the World Wide Web. That growth to1996 may not be indicative of reality today. In late 1997IntelliQuest (1997) reported that at least 56 million adultshave been online sometime in the last 5 days and 16million more Americans plan to get on the Internet byJune 1998.

Of course, much of this use is recreational or at leastnon-work related. However, there is little question thatthe Internet is heavily used in the workplace as well.Bishop (1994) found widespread use by engineers forprofessional and administrative tasks (with little social /recreational use) . King Research studies in industry in1994/1995 showed that professionals spent an averageof 120 hours per year receiving online messages frominternal and Internet sources (and 40 hours inputting in-formation online) . However, at that time very few read-ings (fewer than five readings per year per professional)were found to involve substantive electronic documents(e.g., E-journals, listservs, etc.) . However, two small1998 studies conducted in European and U.S. organiza-tions show that 5 to 10% of serial readings come fromthe Internet.

A similar 1993/1994 study performed by library staffand the author at the University of Tennessee showedthat 84% of faculty and staff use networks for electronicmail (more than once per day—56.3%, 1 to 5 times perweek—34.3%, less than once per week—9.4%). Theyaverage spending about 2 hours per week (or about 100hours per year) preparing, sending, receiving, and readingelectronic mail messages, and an additional 45 minutesper week are spent by someone performing these activitieson their behalf. In addition, 72% of the faculty use thenetwork for accessing databases and purposes other thanE-mail (more than once a day—26.8%, 1 to 5 times perweek—45.0%, and less than once a week—28.2%). Theamount of time spent by them, and others for them, isabout 1 hour and 5 minutes per week, respectively. Thus,they spend a total of about 200 hours per year both send-ing and receiving information in these ways.

Similar university results are reported by others. Forexample, Lazinger, Bar-IIan, and Peritz (1997) report that80.3% of faculty at Hebrew University of Jerusalem wereInternet users in 1995, ranging from 59.3% for those inLaw, Social Work, and Library to 90.7% for Science,Dental, and Medical faculty. Estimated hours per weekfor E-mail use were: 0–1 hour (44%), ú1 to õ5 hours(41%), ú5 hours (15%). These numbers could roughlybe converted to about 100 to 150 hours per year, per

technologies and software are designed to build ‘‘fire-walls’’ to limit inappropriate access. All of these meansare expensive to implement and maintain.

Limited access can be achieved through encryptionwhich was developed for the intelligence community. En-cryption uses a key or key process to transform informa-tion into a code so that only the recipient(s) of the infor-mation who has the key can read the information. Thebasic encryption algorithms are short and simple and canbe used by companies and others. According to Varian(1996b), there is an attempt to regulate or ban the exportof algorithms to deny their use to criminals and terroristswho could then communicate without detection and futureprosecution. He and others feel that it is useless to tryand that the U.S. government will abandon the idea.

One very controversial issue involves pornographicand other materials on the Internet that are deemed inap-propriate for children. One attempt to deal with this prob-lem was made in the now-defunct U.S. CommunicationsDecency Act of 1995. This Act would have made it un-lawful for an interactive computer service to display suchinformation to a person under 18 years of age. Anotherapproach is a system called Platform for Internet ContentSelection (PICS) which permits users to designate agen-cies which rate the information found at different Internetsites. The system selection protocol provides ratingswhich allow users to configure browsers to display onlyinformation that is appropriately rated. Varian (1996b)points out that this system can also be used by groupssuch as Consumers Union or local libraries to filter infor-mation by rating information sources. Using Group Lens,for example, readers can also rate materials (by variousattributes) so that subsequent readers can screen articles,books, etc., by what others think about the material. Fur-thermore, one can further weight a person’s rating by howmuch one has agreed with the person in the past.

Use of Information Provided by the Internet

Liebscher, Abels, and Denman (1997) reported thatthe number of Internet users nearly doubled from Novem-ber 1993 to November 1994, traffic doubled in bytes, andnumber of Internet hosts more than doubled the followingyear. The enormous growth of Internet use is well docu-mented as presented by Werbach (1997) below:

j In the U.S., 47 million subscribers (Intellquest Survey,1997);

j In the U.S. and Canada, 50.6 million adults accessed theInternet at least once during December 1996 (NielsenMedia Research) compared with 18.7 million in thespring of 1996;

j About 100,000 business accounts in 1995, projected toabout 2.5 million in 2000 (Yankee Group, 1996);

j About 9 million consumer households in 1995, pro-jected to over 40 million in 2000 (Yankee Group,1996);


mental as well. For example, some information is inappro-priate for children. Just as television viewing by childrencan detract from reading, over-use of the Internet forrecreational purposes could have a detrimental effect aswell. Misleading or inaccurate information found on theInternet can lead to wrong decisions or invalid applica-tion. Unanticipated transmission delays due to congestioncan be extremely detrimental for work-related uses, re-search, or resolution of personal problems. Finally, theInternet opens the door to potential violation and use ofprivate information. Thus, the Internet poses both tremen-dous opportunity as well as a serious threat.

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Documents

Some economic aspects of the Internet