Information and Communication Technology Policy and Strategy
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03wkict17.pptxICT POLICY AND STRATEGY COURSE
2016
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Structure of Lecture
Introduction
Economics in the digital context
Innovation and competition in ICT industries
Emergent business models and Web 2.0
Policy issues
Conclusions
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1. Introduction
Goal: To make sense of the dynamics of innovation and competition in the ICT sector through an analysis of the economic principles underlying them.
ICTs are pervasive general purpose technologies which affect productivity and employment throughout the remainder of the economy.
This concise statement uses several ‘terms of art’
pervasive = used in many parts of the economy
general purpose technology = useful in a wide variety of applications from smartphones and automobiles to petroleum refining and pharmaceutical research and production
productivity = output per labour hour (the most common of several measures of productivity)
ICTs are a key sector in North American, European and East Asian economies
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ICT Share of Total Value Added 2011
OECD
UK
US
Korea
Japan
Ireland
2009+ (see notes)
Stylised Facts concerning ICT output and employment
(Stylised facts are approximations that are used when more precise statistics are unavailable)
EU 27 employment in ICT is around 7 million (2002-2010) – maybe a bit more now
EU 27 total employment is around 218 million (2009)
Thus ICT employment amounts to 3% of European (EU 27) employment and (independent estimate) about 5% of EU 14
ICT accounts for a bit more than 8% of all value added for OECD countries
From statistics like this we conclude
ICT industry production (including services) plays a very important role in economic growth
The contribution of ICT to national output is significantly greater than its contribution to employment
1. A Framework for Understanding
Software
Wetware
Networks
Hardware
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1. A Framework for Understanding
Context of development, deployment and use
Winner-takes-all competitive dynamics
Adoption shaped by use of others
Skills investment required to fulfil the potential of these technologies: lock in, usability issues
Conditions Affecting the Supply of Technology
Extremely rapid rates of technological change (Moore’s Law)
Adoption externalities (network value increases with number of users)
Economics of information goods: non-excludable and expansible
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1. A Framework for Understanding
ICTs can be seen as an ‘end’ (production, competition and innovation in ICT industries) and as a ‘means’ (ICT impact on ICT-intensive-information/data/content intensive- sectors):
ICT provide SOLUTIONS for human problems
ICTs are also part of the modern world of fashion and style so they also have to do with identity and they support the expression and reproduction of culture
and exchanged between people (using ICTs)
INFORMATION
COMMUNICATION
and
Data, content and knowledge are processed and transformed by ICTs
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The ICT industry supplies platforms for the production and delivery of goods and services: its adoption has ripple effects throughout the rest of the economy (by altering cost structures and value chains).
1. A Framework for Understanding
Processes of disintermediation and re-intermediation
New distribution channels
New value chains (or networks?)
New business models
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Starting points for a deeper analysis:
ICTs offer important advantages to a company or a country
ICT economics differ from those of other goods and services in ways that influence both company and country policies
These differences are influential in competition and often more important than technological superiority alone
1. A Framework for Understanding
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Technological Trajectories
2. Economics in a digital context
Economics of information goods: non-excludable and expansible
Extremely rapid rates of technological change (Moore’s Law and related)
Adoption externalities (network value increases with number of users)
Structural Difference
Complementary
Social Effects
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Implications:
but also
Economics of information goods: non-excludable and expansible
2. Economics in a digital context
Non-excludable: Most information can be consumed by many individuals simultaneously without decreasing its value (there are exceptions- e.g. insider information in the stock exchange). In many cases, collective consumption increases this value!
‘The idea is like a grass. It craves light, likes crowds, thrives on crossbreeding, grows better for being stepped on’ (Ursula K. Le Guin)
Expansible: After producing the first copy of an information good, the costs of reproducing it are small. Making copies of a CD is very cheap compared to recording the master!
Content avalanche: Attention becomes the scarce resource, and filtering for relevant content a key function and source of value.
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The economic meaning of very rapid rate of technological change means that price falls and performance increases much more rapidly than for other goods and services in the economy with several notable effects:
Expectations influence current purchase (if I wait it will be cheaper and better)
New features/capabilities become possible on a regular basis (e.g. quality of graphics improvement)
Fundamentally new properties can be expected (e.g. hand held computers (otherwise known as smartphones), voice recognition (dictate your paper), health monitoring (your blood sugar indicates that you shouldn’t eat that donut))
2. Economics in a digital context
Extremely rapid rates of technological change (Moore’s Law)
2. Economics in a digital context
American Teens
91% post a photo of themselves, up from 79% in 2006.
71% post their school name, up from 49%.
71% post the city/town where they live, up from 61%.
53% post their email address, up from 29%.
20% post their cell phone number, up from 2%.
More and more easy to use cheap or free tools available, and resources (including communities of experts) teaching how to use them.
Community centric innovation: Users have become growingly able to create products, platforms, services and content to address their own needs: Social networking!
Implications: More and more users become able to engage in sophisticated re-configurations of technology, and content creation on a routine basis.
Growing levels of skills and sharing in the user population
Caveat…
Our fondness for thinking positively about multitasking, especially among the young, gets a lot of reinforcement from two other assumptions: that Millennials have a special aptitude for digital media because they’ve grown up digital; and that ubiquitous, seamless connectivity is a positive social force. The first assumption is baloney; the second is fraught with contextual problems. Of the hundreds of liberal arts students I’ve taught, not one in ten has come into my class with the slightest clue about how their digital devices work, how they differ from analogue devices, how big their hard drive is, what Mbps (megabytes per second) measures. In other words, they’re just like people who haven’t grown up digital.
David Ellis, director of communications studies
York University, Toronto
Adoption externalities (network value increases with number of users)
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A consequence is that
many online activities are increasing for all age groups
The interaction between content, adoption, and performance (and accessibility) of networks produces a ‘virtuous’ (growth) cycle.
However, it is a cycle that concentrates ownership and wealth.
2. Economics in a digital context
Abundance of information (data, content and knowledge)
Higher performance hardware and networks
CONSUMED BY
WHO CREATE AND
ORGANISE
TRANSMITTED AND
PROCESSED BY
USED AND
RECONFIGURED BY
BROUGHT TOGETHER BY
Users whose choice affect one another
FILLED WITH
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Context of development, deployment and use
3. The Demand Side
Investment in skills required to fulfil the potential of these technologies: lock in, usability issues
Choices of others affect your choice means
network effects
Winner-takes-all competitive dynamics
ICT markets are not only about supplier competition, but also cooperation, negotiation, management of expectations and timing: a bit like politics!
Why is this so? What are the key aspects?
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Implications: Network markets tend to ‘tip’ for one provider once that provider’s installed base reaches a critical number of users.
3. Innovation and competition in ICT Industries
Used for communication purposes by social groups:
network effects
Metcalfe’s Law: the value of a telecommunications network is proportional to the square of the number of users of the system.
This is an ‘externality’ (when my participation in a transaction creates value outside of the sphere of this transaction). Being the only member of a communication network is not a very attractive proposition!
The tyranny of the installed base: A new entrant in an industry might need to convince large number of incumbent users to move at the same time (this can be aggravated by lock-in). Importance of managing expectations! E.g. Myspace, World of Warcraft, Halo 3.
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3. Innovation and competition in ICT Industries
Complex industry structure with important
winner-takes-all
competitive dynamics
ICT as platforms: The value of other people’s adoption makes it desirable to conform and this can lead to a dominant competitor (e.g. Microsoft) for good and ill
Compatibility: The different parts of a platform need to interact seamlessly: standards for compatibility define the boundaries of a platform, their management is an essential issue.
Standards mediate competition. How do they emerge?
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3. Innovation and competition in ICT Industries
Investment in skills required to fulfil the potential of these technologies: lock in, usability issues
Migrating is difficult because I have already made an investment in these platforms. I am in their hands to the extent to which migrating would imply losing this investment. Imagine the size of the problem in the case of a large corporation migrating its ICT systems!! What if my supplier goes out of business?
Lock in- Situation of dependence on a technology provider brought by the costs associated to migration to a new one. These costs include sunk (irrecoverable) investments, skills, formats and the value of complementary assets.
One of the main reasons for the uptake of Open Source is that it reduces lock-in by giving the source code away: if a program is not working you can fix it yourself without having to wait for the supplier to do it.
Lock-in creates barriers to entrance by new actors. Standardised user interfaces, backwards compatibility and ‘sweetened deals’ might be offered in order to favour migration which follow the network effect/critical mass patterns referred to before.
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3. Innovation and competition in ICT Industries
Console (here PC)
Network
Content
Established through market competition between platforms. E.g. Video, video game consoles, music downloads, DVDs.
Which platform to buy?
For which platform to develop?
Is there a large
installed base?
Is there high
quality content?
Tools
Key issues include expectations, timing, technologic dependencies, exclusivity, leveraging of complementary assets, network effects
DE FACTO STANDARD
Which platform do my friends buy?
Waging a standards war can bring enormous profits for the victor’s owner (e.g. via royalties) but it is risky (e.g. if you lose). Protracted standard wars might create uncertainty in consumers and harm nascent markets (e.g. eBooks, HD DVDs?).
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3. Innovation and competition in ICT Industries
Established through processes of negotiation between key stakeholders in formal standard setting forums (e.g. IETF) or consortia (e.g. W3C).
DE JURE STANDARD
Open standards commoditise the standardised resource and makes it difficult to obtain monopoly rents from its provision. They also favour division of labour, address uncertainty and decrease the perceived risk of supplier lock-in (in which we focus now)
Members
TCP/IP
Internet protocol suite
Etc.
Any devices, services or software complying with those standards can access the internet for free
Open standards promote competition and innovation ‘at the edges’ (Lessig). Compare to the telephone system, or the online walled gardens envisioned by America On Line or Microsoft in the 1990s
Companies sometimes strive for open standards (commoditisation) in complementary assets to increase their supply, and the attractiveness of their platform, although this might mean losing control over it (e.g. Mac vs PC).
Participate in the standard setting process in order to try and shape it according one’s needs. The process can be long and difficult
Hardware, software,
Network, service
providers
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Based on the foregoing points we should conclude:
When looking at ICT and ICT intensive industries it is necessary to put on ‘special glasses’-
Think in terms of:
-Installed user bases and their value
-Systems: What are the complementary assets/dependencies and their provider’s incentives.
-Sources of scarcity (e.g. proprietary and open standards)
-Sources of rigidity (technology lock-in)
3. Innovation and competition in ICT Industries
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4. Emergent business models and Web 2.0
Technology Trajectory
Economics of information goods: non-excludable and expansible
Extremely rapid rates of technological change (Moore’s Law)
Growing levels of skills in the user population
Context of development, deployment and use
Complex industry structure with important winner-takes-all competitive dynamics
Used for communication purposes by social groups: network effects
Investment in skills required to fulfil the potential of these technologies: lock in, usability issues
Relevance and relationship are more scarce than information and bandwidth. Companies attempt to create revenues by innovating and commoditising complementary resources, or by acting as brokers between different stakeholders. Disintermediation and re-intermediation ensue…
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4. Web 1.0 and Web 2.0 Business Models
iTunes: Much of the revenue comes from hardware (e.g. iPhones). However, iTunes has become leading platform for online music sales. A case of dis-intermediation with respect to music stores and re-intermediation with respect to radio stations.
Google play: An ‘end run’ around iTunes dominant position in buy to own – rent music instead through streaming. A case of dis-intermediation with respect to music stores and re-intermediation with respect to radio stations and iTunes.
Google: Brokerage between users looking for relevant resources (identified through a scalable algorithm based on reputation) and advertisers who can target audiences more precisely (i.e. according to their search terms). A case of re-intermediation.
Amazon: Disintermediate book stores and then everything else.
JingDong (京东 –capital East): Largest e-commerce company in China. Very similar to Amazon but electronics rather than books are starting point for online everything.
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4. Emergent business models and Web 2.0
YouTube: Video streaming and personalised video uploading. Revenues from advertising and (potentially) pay-per-video. Important problems with copyright infringement. Re-intermediation and (sometimes illegally) dis-intermediation.
Skype: Provision of Voice over IP (VoIP) services using peer to peer technologies (i.e. free access to bandwidth). Revenues from pay-per-call services to traditional phone numbers. Dis-intermediation (from phone company).
Facebook: Epitomises the Web 2.0 model. Build a network and then monetise it. Over 80% of Facebook’s revenue comes form advertising and much of the remainder comes from developers who wish to access the network Facebook has developed to offer games and other services. Case of re-intermediation.
Class of its own
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Some key principles:
-Create platforms and infrastructures for the provision of services (must be difficult to imitate!) that leverage complementary assets and commoditised resources, and audiences.
-Emphasis on building up communities and filtering content.
-Importance of prime mover advantages and network effects
4. Emergent business models and Web 2.0
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Caveats:
-There is uncertainty about which of these businesses models will be successful.
-Emphasis on building up audiences to raise the awareness of venture capitalists and M&A without clear business models
-Similar pattern to that observed in the dotcom bubble burst. Is Web 2.0 = Bubble 2.0?
Growth attracts malicious users and spam.
Problems monetising advertising-adverse communities.
4. Emergent business models and Web 2.0
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The dynamics described above present important challenges to policy-makers, we sketch some of them below:
Some classics:
-Competition Policy: Entrenched incumbents in one market can extend their domination to adjacent ones (examples: Microsoft Windows and the Browser Wars, Apple and online music distribution).
-Intellectual Property: Conflicts between content owner’s rights and fair use, especially in the context of user-generated repositories (e.g. YouTube). Reverse engineering of proprietary technologies.
5. Policy Issues
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And some (relatively) new policy issues:
User rights: Users have been traditionally forced to accept ‘blanket licenses’ from platform providers, who are allowed to change the terms of service arbitrarily, and are immune to damage claims in cases of data loss etc.
Privacy: The tracking, storage and sale of users’ surfing habits raises important privacy issues. Creation of privacy standards and self-regulation.
Pro-Open Source and open data policies: Governments are growingly supporting Open Source software and open data access as a way of avoiding lock-in and control of software and data
Net Neutrality: Should companies be able to buy priority access for their messages? No = net neutrality and this is the prevailing policy (with some caveats).
5. Policy Issues
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In this constantly changing technological and business environment, some of the key skills required to understand ‘what is going on’ include:
The ability to adopt a systemic view, and identify not only valuable resources, but also their interrelationships with other parts of the infrastructure. Most successful business ventures have been based on the identification of profitable connections!
Awareness of the key economic principles underlying the dynamics of ICT and ICT-intensive sectors. E.g. the difficulties of competing with an incumbent in a networked market.
6. Conclusion
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Slogans worth remembering…
Balance an understanding of technology with a focus on the human needs it addresses.
Healthy scepticism about trends, buzzwords and bandwagons.
A key thing is to remember that a company needs to make more money than it spends!
6. Conclusion
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Software
Ō
Wetware
Õ
Networks
Hardware
