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Information Business Models & The News: When Free Works and When it Doesn’tWhen Free Works and When it Doesn t
Marshall Van AlstyneVi iti P f MIT Sl S h lVisiting Professor, MIT Sloan SchoolAssociate Professor, Boston UniversityT: 617-358-3571E h ll@ it d @b d
© 2009 MIT Center for Digital Business. All rights Reserved.Proprietary & Confidential
Revenue Sources before the WebRevenue Sources before the Web
Classifieds Advertisements Subscriptions
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
How does this really work?How does this really work?
Consider3
Consider Content Creation vs. Content Consumption
Normal Economic PricingNormal Economic Pricing
• Usually, you lower priceUsually, you lower price until value on the next unit sold makes up for
xxxx Demand xxxxP
losses on sales you would have made at a hi h ihigher price.
• Free pricing gives up all profits on every unit
P
Pprofits on every unit sold.
P
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
A network effect stimulates additional demand as consumption increases.
A “2‐sided” network effect crosses markets from say content consumers to creators or creators to consumers.
This causes demand in an adjacent market to growThis causes demand in an adjacent market to grow.
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Consider profits in two markets
Market One(Acrobat Reader)
Market Two(Acrobat Distiller)(Acrobat Reader) (Acrobat Distiller)
Chargingf t t
Chargingf t tfor content
consumptionfor content
creation
Initially, there are profits to be made in both markets.
6© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Consider profits in two markets
Market One(Acrobat Reader)
Market Two(Acrobat Distiller)(Acrobat Reader) (Acrobat Distiller)
Subsidizingt t
Chargingf t tcontent
consumptionfor content
creation
But subsidizing market one can increase profit in market two more than enough to cover losses in market one.
7
two more than enough to cover losses in market one.
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Consider profits in two markets
Market One(Operating Systems)
Market Two(Developers)(Operating Systems) (Developers)
Chargingf t t
Chargingf t tfor content
consumptionfor content
creation
Initially, there are profits to be made in both markets.
8© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Consider profits in two markets
Market One(Operating System)
Market Two(Applications Developers)(Operating System) (Applications Developers)
Chargingf t t
Subsidizingt tfor content
consumptioncontentcreation
But subsidizing market two can increase profit in market th h t l i k t t
9
one more than enough to cover losses in market two.
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Consider profits in two markets
Market One(Operating System)
Market Two(Applications Developers)(Operating System) (Applications Developers)
Chargingf t t
Subsidizingt tfor content
consumptioncontentcreation
q2 = Q2 + e12q1 −Q2
Vp2q1 = Q1 + e21q2 −
Q1
Vp1
10
V2V1
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Getting Free Pricing RightGetting Free Pricing Right1. Ability to capture cross‐
side effects1. Mistake of Netscape
side effects
2. User sensitivity to price & quality
2. Denver vs. Boston real estate markets
3. Value added
4. Marginal costs
f i id
3. Mistake of Apple
4. Mistake of FreePC5. Interfering same‐side
effects
6. Marquee providers
5. Mistake of Covisint
6 Mistake of Microsoft6. Marquee providers 6. Mistake of Microsoft
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Getting Free Pricing RightGetting Free Pricing Right1. Ability to capture cross‐
side effects1. News needs a complement
side effects
2. User sensitivity to price & quality
2. Sometimes charge readers sometimes writers
3. Value added
4. Marginal costs
f i id
3. Readers can add value
4. Print vs. Digital distribution5. Interfering same‐side
effects
6. Marquee providers
5. Readers can add noise
6 Don’t alienate Mossberg6. Marquee providers 6. Don t alienate Mossberg, Krugman, Dowd…
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Product Category Mkt 1 Product Intermediary Mkt 2 Product
Two‐Sided Platform Markets
Portable Documents Document reader* Adobe Document Writer
Credit Cards Consumer credit* Issuing bank Merchant Processing
Operating Systems Complementary Applications
Microsoft, Apple, Sun Systems Developer Toolkits*
HMOs Patient Treatment * Kaiser, Harvard Pilgrim Doctors’ Expertise
Ladies’ Nights Men’s Admission Bars, Restaurants Women’s Admission*
TV Format Color UHF, VHF, HDTV*
Sony, Phillips, RCA Broadcast EquipmentHDTV
Web Search Web Pages Sought* Google, Yahoo Web Pages Supplied
Computer games Game Engine/ Player Games Publishers Level Editors*
Auctions Buying* E-bay, Christie’s, Sotheby’s
Selling
Real Estate Home buyers* Multiple Listing Service Home Sellers
13
Home buyers
* Indicates which market is discounted, free or subsidized. Source: Parker & Van Alstyne 2002
What Happened to Papers & Magazines?What Happened to Papers & Magazines?
Classifieds Advertisements Subscriptions
These are all 2-sided networks © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Info/News Business Models that Can WorkInfo/News Business Models that Can Work
Info as Process Platform Value AddInfo as Process Platform Value Add
Credentialing User Generated Content
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Information as ProcessInformation as ProcessWSJ Interactive Features• State‐by‐State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.htmlState by State Unemployment Rates: http://online.wsj.com/public/resources/documents/JOBSMAP09.html
• Immigration Slow Down Data:• http://s.wsj.net/public/resources/documents/st_CENSUS0921_20090922.html
• Timeline‐ Two Years in the Credit Crisis:Timeline Two Years in the Credit Crisis:• http://online.wsj.com/public/resources/documents/Two‐Years‐of‐Market‐Turmoil.html
NYT Interactive Features• 2008 Election Results:• http://elections nytimes com/2008/results/president/map htmlhttp://elections.nytimes.com/2008/results/president/map.html
• The Debt Trap• http://www.nytimes.com/interactive/2008/07/20/business/20debt‐trap.html
• Murder – New York City:• Murder New York City:• http://projects.nytimes.com/crime/homicides/map
Research support provided by Bryan Woliner
Info/News Business Models that Can WorkInfo/News Business Models that Can Work
Info as Process Platform Value AddInfo as Process Platform Value Add
Credentialing User Generated Content
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Old StoryOld Story
Leftover Consumer Value
Price
PProfit
QuantityQ
Cost
© 2009 Van Alstyne © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Marketing Answer: Custom PricingMarketing Answer: Custom Pricing
PricePrices Tailored for Different Segments
P1
P2
P1
Profit
QuantityQ
Cost
© 2009 Van Alstyne © 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Instead Try Custom InformationInstead Try Custom Information
NEW Consumer ValuePrice
P1
P2
P1
Profit
QuantityQ
Cost
Freebie: Access to Current News
© 2009 Van Alstyne
Paid: Save stories, add comments, interactive content, crosswords, search archives, custom stock updates
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Info/News Business Models that Can WorkInfo/News Business Models that Can Work
Info as Process Platform Value AddInfo as Process Platform Value Add
Credentialing User Generated Content
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
FiveThirtyEight rates the errors of polls – and produces quite accurate statistical modelsproduces quite accurate statistical models
FiveThirtyEight.com has 17,800 links whereas NYTimes.com has 12,800
Info/News Business Models that Can WorkInfo/News Business Models that Can Work
Info as Process Platform Value AddInfo as Process Platform Value Add
Credentialing User Generated Content
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Amazon: Most helpful positive and negative ratings of “Audacity of Hope”
Slashdot: Five star “Funny” and “Insightful” comments on Dam Burst program to get around China’s Green Dam censoring software.
Summary ObservationsSummary Observations
• Use 2‐Sided Networks to understand when freeUse 2 Sided Networks to understand when free works and doesn’t (content creation / consumption)– Can measure tradeoffs and anticipate colliding platforms.
– Follow the implied pricing rules
• News & Information Business Models– Information as process (can own this!)
– Add value to platforms
– Credential & Clear‐the‐clutter
User generated content– User generated content
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
Van Alstyne Information Economics hResearch
Products & Communications Information & Economics of IP &Products &Network Effects
CommunicationsMarkets (Anti‐Spam)
Information &Productivity
Economics of IP &Open Source
© 2009 Van Alstyne, Permission granted to redistribute so long as this notice preserved
PapersPapers
• “Information Complements, Substitutes & Strategic Product Design”Information Complements, Substitutes & Strategic Product Design Parker & Van Alstyne (2000) http://ssrn.com/abstract=249585
• “Two Sided Networks – A Theory of Information Product Design” Management Science, 51(10) 2005 pp. 1494‐1504. http://ssrn.com/abstract=1177443
• “Strategies for Two Sided Markets” Harvard Business Review, Eisenmann, Parker & Van Alstyne (2006) Oct. pp 92‐101. http://hbr.harvardbusiness.org/2006/10/strategies‐for‐two‐sided‐markets/ar/1