Internet Economics [4 ed.] 978-88-6105-232-1

Table of contents :
Foreword to Internet Economicsby Vinton G. CerfVice president and Chief Internet Evangelist, Google......Page 7
Acknowledgements......Page 16
Internet Economics: the evolution of the discipline......Page 19
1. The Internet industry......Page 34
2. Characteristics......Page 214
3. Internet demand......Page 276
4. Internet Supply......Page 332
5. Economic Models of the Internet......Page 485
6. Internet Business Models......Page 555
7. The main Internet markets......Page 601
8. Interplanetary Internet: the Internet in space* This chapter has been written as a suggestion and under the revision of Vint Cerf.......Page 726
9. The Internet is for everyoneby Vinton G. CerfFormer Chairman and President, Internet Society January 2002Copyright (C) The Internet Society (2002) Consent to Publish given by the Author......Page 735
10. Conclusions......Page 746
11APPENDIX – A Taxonomy of Internet products......Page 796
Bibliographical references and insights......Page 920

Citation preview

LUISS UNIVERSITY PRESS

PAOLO CELLINI

Internet Economics Understanding Digital and New Media Markets

© 2015 LUISS University Press - Pola Srl All rights reserved isbn 978-88-6856-058-4 Luiss University Press – Pola s.r.l. Viale Pola, 12 00198 Roma tel. 06 85225485 fax 06 85225236 www.luissuniversitypress.it e-mail [email protected] Graphic design: HaunagDesign Editing: Spell srl Le fotocopie per uso personale del lettore possono essere effettuate nei limiti del 15% di ciascun volume/fascicolo di periodico dietro pagamento alla SIAE del compenso previsto dall’art. 68, commi 4 e 5, della legge 22 aprile 1941 n. 633. Le fotocopie effettuate per finalità di carattere professionale, economico o commerciale o comunque per uso diverso da quello personale possono essere effettuate a seguito di specifica autorizzazione rilasciata da CLEARedi, Centro Licenze e Autorizzazioni per le Riproduzioni Editoriali, Corso di

Porta Romana 108, 20122 Milano, e-mail [email protected] e sito web www.clearedi.org.

Foreword to Internet Economics by Vinton G. Cerf Vice president and Chief Internet Evangelist, Google

Paolo Cellini’s book provides us with a fascinating view of the Internet as an economic phenomenon and as a generalpurpose artifact that is being put to work in an endless variety of ways. It is a vast assembly of technology and institutions, driven by a variety of business models (including non-profit and government cases), and sustained by the collaboration of huge numbers of involved entities. Cellini applies economic and system analytic tools to provide readers with a deeper understanding

of the Internet’s character and its role in our lives. I want to focus on the notion of artifact for a moment. The term means, roughly, ‘made by man’ as opposed to ‘found in nature.’ It seems reasonable to view the progress of our species as the story of the artifacts we have created, applied, evolved and even abandoned in favor of new ones. These are almost always enabling tools that make us more efficient, more effective and more able to overcome human limitations. Artifacts often have economic consequences since they may reduce costs, increase productivity, free time for new endeavors, enable new ways of accomplishing old goals and way to accomplish new goals. It seems important to think broadly about the notion of artifact since we might also include the invention of new institutions and practices that have effects similar to the invention of new tools and technologies.

T h u s , institutional artifacts that include social and institutional practices are usefully included in the broad sweep of this concept. Along side the invention of stone hand axes, adzes and scythes, obsidian-flaked knives, bows and arrows, spears and atlatls1, we may place the invention of tribes and tribal governance, Hammurabi’s Laws, the organization and management of cities, farming practices, the invention of money and the invention of Guilds. All of these are human inventions we choose to call artifacts in this essay. Human progress is the story of our invention and adoption of artifacts. The Internet is simply another, rather large-scale artifact of human invention. What makes it so interesting, as Cellini elaborates in this book, is its scale and the fabric of cooperation, collaboration and coordination that allows it to work. There is no central control. There are hundreds of thousands of

independent networks, each operated independently, collaborating on the basis of bilateral and multi-lateral agreements. Voluntary standards, developed in an open and collaborative fashion in multiple fora, notably the Internet Engineering Task Force (IETF), the World Wide Web Consortium (W3C), the Institute of Electrical and Electronic Engineers (IEEE), among many others. The so-called TCP/IP protocol suite2 binds the vast arrange of networks into the network of networks we call the Internet. A system of institutions manages the Internet’s Domain Name System and Internet Address assignment process: the Internet Corporation for Assigned Names and Numbers (ICANN), the five Regional Internet Registries for numerical addresses3, hundreds of top-level Domain Name Registries and independent Registrars, and the Root Zone Operators who lie at the core of the mechanism for mapping domain

names into Internet Protocol addresses. The global Internet Society with its many chapters, houses the Internet Architecture Board, the IETF, the Internet Research Task Force (IRTF) and many chapters around the world for people interested in the use of the Internet and the governance policies that affect its operation and application. In addition to these administrative mechanisms, there are countless organizations, businesses and individual contributors that provide a wide range of products and services that rely upon or facilitate the operation of the Internet. The design of the Internet is called layered because it is logically structured so as to partition responsibility for various aspects of its operation to independent parties. Some organizations provide backbone transmission and switching support for moving packets of data from source to sink in the system. Some provide access to the Internet by fixed and

mobile transmission systems. Some provide the hardware and software that animates the components of the Internet. Some make application software or provide services relying on huge server farms of computers, sometimes called Data Centers. The general-purpose Internet is largely application agnostic. Anything that can be implemented by the exchange and interpretation of the data in Internet Packets is fair game. As the Internet’s capacity has increased, new applications have become feasible. The casual ability to enable devices to become part of the Internet has led us to the so-called Internet of Things in in which devices become a part of the vast landscape of programmable technology/appliances/tools/machines reachable through the global Internet. This bears some relationship to a road system in which the technology of road building and the actual construction of roads creates

incentive for designing and building vehicles that can use the roads for transport and buildings adjacent to the roads to house residents, support business operations including manufacturing, service the vehicles on the roads and the people in them. The road builders provide general constraints on the design of vehicles that can use the roads and law enforcement tries to assure that the users of the roads follow rules that contribute to safety and efficiency. While all analogs have weaknesses, seeing the Internet as a system of interconnected roads supporting a wide range of vehicles, users and uses and adjacent buildings, is not a bad metaphor for thinking about its implications in the future. Like many other technologies, the Internet changes the costs or speed with which communication of information can be accomplished. In addition, because the information flowing on the Internet is

machinable4 the users of the Internet are able to apply the Internet’s vast computing capacity to find and process an increasingly wide range of information. Barriers to trade are reduced, delivery of digital content is speeded up, discovery of others with common interests is facilitated, ability is maintained, and important business and personal relationships are enhanced. Of course, all neutral technologies also can be abused and the Internet is no different. It is this agnostic aspect of the Internet that forces us to confront the problem of abuse with societal rules, technological protections, legal and moral strictures. Because the Internet is global in scope, these challenges are made all the more difficult to overcome. I hope you will find this book as insightful as I have. It is worthy of your attention if you are going to be a part of the online environment of the 21st Century.

Vinton G. Cerf

Note 1. Atlat or Spear-Thrower. 2 . TCP: Transmission Control Protocol; IP: Internet Protocol. 3 . The five are the American Registry for Internet Numbers (ARIN), Reseau IP Europeene Network Coordination Center (RIPE-NCC), the Latin and Central American Network Information Center (LACNIC), the African Network Information Center (AFRINIC) and the Asia-Pacific Network Information Center (APNIC). 4 . By which I simply mean computer programs can potentially be used to find, interpret, analyze and process information.

Acknowledgements

This book is the result of a long process of reflection, research, reading, revision and discussion with my closest collaborators. Without the passion and critical dedication of my two assistants, Ciro and William, and the revisions and discussions I had with them, the book would never have seen the light of day. Their mindset, as engineers, and tendency to ask critical questions and analyse issues from various perspectives made the creation of this work easier for me. Ciro Spedaliere is a remarkably talented engineer who has worked with me on previous projects to develop innovative Internet products, and is now involved in

Venture Capital. He is brilliant, passionate and an expert analyst of Internet markets, and I had the opportunity to analyse the various theories with him to find the right path to develop the structure and content of the book. He deserves the credit for summarising our arguments and producing an updated text consistent with our initial opinions. William Liani is an engineer ‘on loan’ to management and a very methodical person, unquestionably dedicated to achieving results. He provided valuable feedback while reviewing the book and assessing its structure and contents, based on his constant and remarkable analysis of theoretical literature and its practical implications. I also wish to thank Vinton Cerf, for his extremely valuable contribution to the book, the discussions we had the critical assessment he made. Different chapters

such as Interplanetary Internet has been written exclusively thanks to Vint suggestion and revision. Thanks you all, because without you I would have not succeeded in this venture

Internet Economics: the evolution of the discipline

In this book we attempt a review of the economic literature in order to identify the conceptual models used to represent the Internet and then highlight the nature and extent of its impact on economic systems. Due to the ubiquitous nature of the Internet, modelling and assessing its impacts are matters of great relevance, as well as extremely complex and difficult to analyse. The basic concept of its economic contribution is actually very simple: the Internet facilitates fast and inexpensive sharing of information. This leads to an increase in information efficiency, which promotes the creation of products and

services based on the sharing of information. The consequent rise in production efficiency has ultimately had the positive impact of increasing consumer surplus, with, for instance, more people able to obtain what they want at an affordable price. However, quantifying the importance of the Internet remains a difficult task, due to a number of factors: Consumer surplus is a conceptual phenomenon rather than a measurable entity (it refers to what one would be willing to pay for a product in excess of what is actually paid); The introduction of new technologies creates winners and losers (e.g. physical retailers are losing market shares to virtual retailers); Many products on the Internet are intermediated by nature, in the sense

that it is often difficult to identify who is the ultimate beneficiary of the product (for example, information collected on the Internet could help a law firm to win a civil case, which benefits both the law firm and its clients); There can be a long gestation period between a development on the Internet and its economic consequences. For example, to illustrate a long period of time, many argue that the Internet was very influential in the events of the ‘Arab Spring’. If this is the case, the Internet could ultimately contribute to a significant increase in average incomes in many Arab countries. This in turn could have potential benefits for Italy if their demand for new Italian products increases; The new nature of business activities

on the Internet means that the current economic measurement systems based on statistics are poorly equipped to appraise both the magnitude and the location of the economic activities influenced by the Internet; The development of the Web has coincided with a number of other IT developments that have complex interrelationships with those of the Internet; Finally, the measurement problem does not so much regard the definition of the world with the Internet, which can be easily observed, but rather the definition and measurement of the opposite, namely, the world without the Internet. In addition to the practical difficulties associated with the collection of data, there

are also problems of compatibility between the various studies, since measurements can vary due to differences regarding: the definition of the concept in question (e.g. e-commerce, the Internet itself, broadband, etc.) the period of analysis the economic concept involved (e.g. productivity, employment, GDP, consumer surplus) the extent of the analysis (individuals, companies, regions, countries). Therefore, although the Internet is acquiring ever greater importance, systematic mappings and size estimates of the Internet as a unified industry are lacking, due to the difficulties outlined above and also, in part, to the rate of diffusion of the Internet phenomenon itself. The first structured study involving analysis

of the Internet economy was in the late 1990s (conducted in 1998 by A. Barua of the University of Texas and commissioned by Cisco). It began to organise the main classification categories for the different forms of Internet business, infrastructure management (network and application infrastructure) and the development of economic activities (trade and intermediation) as part of an initial attempt to measure the Internet economy. A very positive aspect of this research was the introduction of a conceptual model representing the Internet industry in superimposed layers, which would inspire future modelling of the Internet in other studies. A second attempt was made in 1999 by Altig and Rupert, who estimated the impact of Internet connectivity on economic growth. Their research led to the creation of a growth model which implied that 100%

Internet usage would have been associated with a four percentage point increase in economic growth in the 25 year period from 1974-1999. The authors themselves conceded that their approach was simplistic, with a high risk of omitted variable bias, and felt their estimate to be implausibly high. In 2001, Litan and Rivlin estimated the cost savings for American firms due to Internet use and concluded that the total savings would be about 1%-2%, which over the observation period from 1995 to 2005 would contribute annually to a GDP growth of 0.2%-0.4%. The difficulties with this research are that its focus was purely on cost savings and it only considered initial adoption of the Internet, without allowing for impacts from the adoption of contemporaneous technologies. In 2002, Freund and Weinhold estimated

the impact of Internet penetration on international trade and found that a 10% increase in Internet penetration was associated with an increase of 1.7% in exports and 1.1% in imports. Also in this case, the focus of the research was quite narrow. In 2002, Varian, Litan, Elder and Shutter estimated the impact of Internet business solutions on productivity. The results of the research revealed that the Internet had increased annual productivity growth in the USA by 0.17% in the period 1996-2000. The analysis focused purely on the impact on productivity, ignoring other repercussions for consumers and social welfare. In 2002, a team from MIT in Boston proposed a new model based on the identification of economic flows between elements or segments of the Internet. Although questionable, the MIT model permitted a series of critical analyses that

paved the way for the introduction of another model by Hamilton in 2007, known as the Internet Ecosystem Model, which was based on the capacity of all the actors involved in the various activities directly and indirectly related to the Internet, whether organised or not, to generate revenue. It is important to mention that this model abandoned analytical description based on functionalising or sizing of the main business drivers of the Internet; focus was shifted to the expansion capacities of the associated economic activities deriving from it. One of the main limitations of this model is its failure to distinguish specific Internet industry activities from cross-cutting activities that seemed only apparently different from those of the old economy, unless viewed in a digital and thus immaterial perspective. In 2006, Gillet, Lehr, Osorio and Sirbu estimated the impact of broadband access

on various economic indicators in different areas of the USA. Broadband appeared to increase employment by 1.0% -1.4% (19982002) and the number of new companies by 0.5% -1.2% (1998-2002), although it is not clear whether the study adequately considered causality factors, in that the areas with the best performance in terms of development and employment were those more likely to have broadband access. In 2009, Choi and Yi estimated the impact of Internet connectivity on economic growth. The conclusion was a growth model implying that Internet usage could be associated with a 5-6 percentage point increase in the economic growth of 207 countries in the tenyear period from 1991-2000. The model, however, is likely to suffer from distortions due to the omission of variable bias, and there is no analysis of causality. In 2009, Czernich, Falck, Kretschmer and

Woessmann assessed the effect of broadband infrastructure on economic growth in a panel of twenty OECD countries during the period 1996-2007. The research showed that a 10 percentage-point increase in broadband penetration corresponded to a 0.9-1.5 percentage point increase in per capita GDP. The research results appear solid and predict broadband penetration independently from the diffusion of contemporaneous technologies such as mobile telephony and computers. In 2011, the McKinsey Global Institute estimated the contribution of the Internet to the GDP of the main global economies in 2009 to be 3.4%, and that the Internet accounted for 21% of the growth in GDP over the previous five years in developed countries. The contribution of the Internet economy to Italy’s GDP in 2009 was estimated by

McKinsey to be 1.7%, and even higher in other economies, ranging from 3.8% in the US to 5.4% in the UK and 6.3% in Sweden. If Internet-related consumption and spending were considered as a single economic sector, in some countries it would be larger than traditional sectors such as energy or agriculture. In recent years, in addition to McKinsey, other leading consulting firms have analysed the Internet, mainly with the aim of studying and assessing the size of the economic structure of the Internet and the impact of this on economic growth. These have included the Boston Consulting Group, A. T. Kerney, Deloitte and IDC, but lack of a common reference model has led to differences in size estimates. Nevertheless, it is interesting to observe the evolution of the literature, which was initially more focused on specific areas of Internet analysis, such as the penetration of

connectivity, while recent years have seen an increase in the production of research to assess the impact of the Internet on the GDP of global economies. The whole world seems to be talking about the Internet, its countless applications and its social and economic implications, with numerous authoritative books and publications addressing the subject from various perspectives. However, what is lacking, in my opinion, is an accessible reference tool that can provide a sufficiently specific overview of the phenomenon, while also allowing non-experts to form a reasonably structured and orderly opinion on the subject. The method we have used is deeply analytical. We began with a careful analysis of the literature, comparing it with everyday facts, in order to develop a general overview of the Internet economy that can allow a systematic and structured study of its

components and dimensions, using economic theories to acquire a greater understanding of the development of the network. Our objective was both to stimulate discussion in the academic world and to provide a working tool for managers and entrepreneurs interested in the world of the Internet as a means to develop their business or create new forms of enterprise. This approach has produced a text that can serve as both a theoretical and practical tool at the same time. The book is theoretical in that it explores and attempts to elaborate on the various main theories concerning the typical features of Internet markets. It is practical to the extent that its numerous examples and comments can be helpful for effective implementation of the theoretical tools mentioned above. It is therefore intended to be sufficiently accessible to readers who are curious and interested in the subject, and

particularly to students who, during the course of their studies, would like to examine Internet-related topics from an entrepreneurial and business development perspective.

1 The Internet industry

In this chapter we seek to shed light on the main descriptive models of the Internet, what is meant by the Internet industry and its characteristics, analysing the main studies that have attempted to define, structure and measure the online economy and showing how it still essentially lacks a reference framework. The first chapter is arranged in a two-part analysis: The first part, entitled General Internet Models, seeks to define and classify the Internet phenomenon in relation to some general drivers,

namely the economy, social relations and technology. Each of these three aspects allows an initial interpretation of the phenomenon, providing a perspective for the relational dynamics that govern the Internet in a context in which we indentify the following: an economic exchange value between various services (the Internet as an economic system), a relational process that manages relationships between individuals (the Internet as a Complex Adaptive System, CAS), a technological tool that cuts across complementary sectors, products and services (General Purpose Technology, GPT), and finally, the social influences that come from the adoption of specific technological systems (Large Technological Systems, LTS). The second part analyses specific models that describe the Internet

industry, focusing in particular on layered models, the first models developed to describe the industry (CREC Model, 1998; Internet Intermediaries Model – OECD, 2010; Internet Economy Model - IDC, 2011; Internet Stack – BCG, 2011), flow models, which were aimed at defining the industry by identifying the economic flows of online industrial sectors (The Internet Money Flows O’Donnell, 2002; The Internet Ecosystem - Hamilton, 2007), and models used to describe the industry through a value chain approach (Internet Value Chain - A.T. Kearney, 2010).

The two-part analysis is followed by the introduction of a framework of analysis, developed with the aim of providing a structured approach to the study of the Internet industry, which we will follow throughout the remaining sections of the book. 1.1

general internet models 1.1.1 The Internet as an economic system Given the close ties between the Internet and economic trends in most countries of the world, particularly in view of the correlation between the network and most productive sectors, this section focuses on the interpretation of the Internet as an economic system, in order to pave the way towards understanding how the Internet can be considered as an economic phenomenon in its own right. When we speak of an economic system, we refer to a system where we can identify a series of actors (individuals or organisations) and their relationships in their attempt to satisfy various types of needs. This is all done through the exchange of goods and services, which, as resources, are scarce and therefore subject to an evaluation and choice of use. An economic system is therefore

recognised as such when it manages an existing scarcity through a decision based on an analysis of needs and the ways in which they can be satisfied. According to these criteria, the satisfaction of needs depends on the interaction of the various components involved in the decision to allocate resources in relation to the needs. In this regard, the Internet appears as a tool that somehow influences the classic interpretation of need satisfaction. The virtualisation of certain services has had the effect of making some of them available to such large numbers of individuals at any given time that it has changed the concept of scarcity for certain types of goods, and therefore creates a need to revise the concepts of evaluation and choice of use. Thus, if we think of the resources required for use of the Internet, they correspond perfectly to those of an economic system and this can be interpreted as such to gain

an understanding of the most efficient and effective choices. This premise is important because, by considering the Internet as an economic system, we can understand the mechanisms that determine its performance, particularly: The sectors concerned The needs that have to be satisfied The main actors The ways in which the actors interact The ways in which needs are satisfied The relations between sectors, individuals and needs The markets for goods and services The production factors Each of these aspects is examined in the following sections and chapters of the book. Viewing the Internet as an economic phenomenon is particularly important for understanding the direct and indirect impact

of the trade and relationships between individuals and organisations through the network. On the one hand, the Internet is indeed an economic phenomenon, as a tool for exchanging information and creating relational value; on the other hand, the Internet can also be considered an economic phenomenon, as a means of developing other forms of value exchange and ways to satisfy needs. The following models will help clarify the various modes of interaction and exchange of goods and services between organisations and individuals from a theoretical perspective. Thus the Internet is a system with which new forms of economic relations can be promoted or developed. 1.1.2 The Internet as a Complex Adaptive System The Internet is now an all-encompassing

presence among populations: governments, terrorists, corporations, individuals, developed nations and developing nations have all adopted it as part of their lives. Individuals are connected to and influence the lives of more people than ever before, leading to the development of the social network theory. The nature of the Internet and its impact on society can be analysed by viewing it as a Complex Adaptive System (CAS). Since the study of CASs only began recently, there is still no universally recognised formal definition. According to Plesk and Greenhalgt (2001), “a complex adaptive system is a collection of individual agents with freedom to act in ways that are not always totally predictable, and whose actions are interconnected so that one agent’s actions change the context for other agents. A complex adaptive system is an open system, formed of several

elements that interact with each other in a non-linear way to constitute a single organised and dynamic entity able to evolve and adapt to its environment. [...] A complex adaptive system is a system of individual agents who have the freedom to act in ways that are not totally predictable and whose actions are interconnected so that one agent’s actions change the complex for other agents. [...] Examples include the immune system, a colony of termites, the financial market and just about any collection of humans (for example a family, a committee or a primary healthcare team.” Murray Gell-Mann, one of the pioneers in the field, offers the characterisation that: “a complex adaptive system acquires information about its environment and its own interaction with that environment, identifying regularities in that information... in a kind of ‘schema’, or model, and acting in the real world on the basis of that schema”

(Gell-Mann, 1994). This can be interpreted to mean that CASs are both a product of their environment yet also influence it at the same time. Certain properties seem to be inherent to CASs, such as: emergence, co-evolution with their environment, self-organisation, connectivity/feedback, iteration and nesting (Freyer). The dynamics of the Internet can be analysed through these properties, and the change and influence it has on the physical world can be analysed through the social network theory. Emergence can be described as the property of a collection of independent systems to combine and form a more complex structure, without it being previously designed in such a fashion. A wellknown reference to emergence describes an object as being ‘greater than the sum of its parts’. Emergence is closely related to self-

organisation (which can be considered analogous to a ‘grassroots’ movement), in which a system experiences a reduction in entropy and becomes more organised without external influence (Peak and Frame, 1994). According to Peak and Frame, this can be done without violating the Second Law of Thermodynamics as the reduction in entropy only occurs locally and the system will eventually fall into a disorganised state. Clearly, the Internet exhibits both these traits. The Internet began in the 1960s as a series of government and university computers connected through the use of an architecture based on a new protocol for packet network intercommunication (Cerf, Kahn 1973), enabling host-to-host communication through the system. This architecture, designed to be distributed and scalable, allowed network interconnection to gradually evolve until the World Wide Web

appeared on the ‘info.cern.ch’ server in 1990, marking the birth of the ‘server-client’ Internet we know today (Berners-Lee, 1996). V. Cerf comments that “it was not just a random series of connected computers. ARPANET was a specific experiment in packet switching and the INTERNET was a specific architecture for packet network interconnection and host-to-host communication through the system. It was designed to be distributed and scalable. Considering that the system has grown by a factor of 1-10 million (...). The layered structure provided the basis for the world wide web, streaming audio and video, interactive games, electronic mail, remote access to services, exchange of files...” (Cerf, 2015). Over the next two decades, millions of other servers were added to the network; the connection between a server and a client is simple, but the connection of all servers

and all clients is massively complex. Self-organisation of this ‘schema’, as GellMann might call it, further fuelled the growth of the Internet, resulting in email, search engines, social networking sites, image and video indexing, wikis and all the other entities which now comprise the Internet. The next properties to examine, which are again related, are co-evolution, feedback and iteration. The Internet forms the basis of an entire world which has no corporeal form, but does exist digitally. A computer may physically store little more than a string of zeroes and ones, but this binary information can make up a plethora of objects; it can represent an equation, a bank balance, a text document, or even artificial intelligence. Even though the Internet encapsulates a ‘world’ of its own, it coexists with the rest of the universe. It functionally changes the ‘real’ world, and, therefore, as

the Internet evolves and adapts, the environment it resides in changes, causing a cycle of adaptation. Simply put, the Internet co-evolves with human society. Viewed from another angle, this is simply a feedback loop, which results in more and more iterations of the original system. Therefore, co-evolution, iteration and feedback are inseparable from each other and are different ‘aspects’ of the same process. Google is a prime example of these three properties. As the Internet increased in complexity, a new method of indexing the vast number of websites was required, rather than simply memorising large numbers of URLs. In response, search engines, which function somewhat like an Internet ‘phone book’, were created. The very existence of search engines is a

product of the various characteristics of CASs, and Google soon became the dominant search engine due to its superior algorithms, which efficiently and effectively catalogue the entire Web for the end user (Asadi). As greater numbers of people began using Google, it went through rapid co-evolution; it began to offer other services, such as email, image searches, digital maps and more. The company constantly iterated on its services: its search function was offered in dozens of languages, Gmail increased its storage, image searching expanded to video, digital maps were updated to 3D, and various other services were added (Google). For Google to maintain their status as the world’s foremost information technology company is no small feat. The corporation employs an extremely complex and detailed feedback system to constantly iterate and co-evolve. Google uses every piece of pertinent information

about its searches to provide constantly improved results, such as the user’s IP, the search content, the pages that are visited, the time spent between searches and other aspects. Cerf comments that “Google’s index is of the current Internet. We don’t keep everything forever, we erase or obscure IP addresses after a time and the snapshots are not archived (see Internet Archive for that activity run by Brewster Kahle)” (Cerf, 2015). Google stands as a landmark in the growth of the Internet. Nested systems, the final ‘trait’ to be analysed, essentially consist of systems containing self-similar systems, which contain yet more systems. For example, the World Wide Web is a nested system residing within the Internet. The Web contains top-level domains, encompassing second-level domains (websites) which can either include many

web pages or be further subdivided into tertiary domains, such as ‘mail.google.com’ (Vixie, 2007). Cerf points out, “the domain name system (DNS) is more than the WWW. It is a naming structure for identifying destinations in the Internet and each domain name is associated with an IP address. The WWW uses domain names in its URLs but a URL is more than a domain name. The web page structure is not the same as the domain name structure. They are orthogonal.” (Cerf, 2015). Perhaps the most influential and important nested systems are social networking sites, which have changed the nature of human interaction worldwide. Social network theory views individuals as ‘nodes’ and their relationship to others as ‘links’. It turns out that the same power-law logarithmic relationships which govern fractal

and chaotic behaviour also govern the connection of links to nodes in a social network (Barabasi, 2004). Put another way, a small percentage of nodes are responsible for the majority of links, and those nodes wield more power and have a higher link growth rate. Sites like Facebook, Myspace and Twitter allow an individual to communicate directly and instantly with hundreds of other people, and indirectly to anyone with Internet access. Services like LinkedIn permit social networking between industries and professional workers, allowing widespread access to potential careers and jobs. As these services continue to be used, more nodes appear, new links are created, old links are strengthened and the flow of information speeds up (Barabasi, 2004, Berners-Lee, 2007). In addition, in some cases they have a profound impact on the lives of many. After the devastating

earthquake in Haiti in early 2010, thousands of victims were trapped underneath buildings without food or water. Many people sent Twitter messages, stating their location and physical condition, helping rescue efforts to save them. The Arab Spring, the revolutionary wave that spread through the Middle East and North Africa, occurred through the support of Facebook, which allowed the protesters to organise themselves. The increase of communication through social networking and the Web has undoubtedly improved the quality of life around the world, and even saved lives. The world has changed dramatically in the last twenty years due to the complex adaptive system known as the Internet. The analysis of the Internet viewed as a CAS suggests that it is not a closed or static system but that, iteration by iteration, it continues not only to shape, but to define the world at an ever increasing rate, towards

an unknowable future. 1.1.3 The Internet as a General Purpose Technology The Internet is now widely considered as a General Purpose Technology. There does not seem to be a solid definition of General Purpose Technologies, but perhaps a useful explanation is that they are profound new ideas or technologies with the potential to have a significant impact on various areas of an economy. According to Bresnahan and Trajtenberg (1995), there are technologies with particular characteristics that facilitate the development of many sectors, each with their own distinct characteristics and needs. These technologies are called General Purpose Technologies (GPTs) and due to their particular characteristics their arrival provokes a paradigm shift in society, affecting various sectors of the economy.

Examples of this type of technology in the past have included the steam engine, the advent of electricity and the turbine engine. Each of these technologies brought a corresponding paradigm shift, not only economically but also socially, which led to such substantial forms of change, that the economic system underwent radical transformations in each of these eras. The advent of a GPT triggers a particular process in which the entire system has need of a new conceptual model on which to build a new economic system. This evolution causes a transformation that necessarily requires socio-demographic changes, which are always associated with changes in the relevant markets. A technological innovation brings a corresponding cultural change, which in turn leads to upheaval in certain markets in known sectors, if not the emergence of new markets and new sectors. GPTs are such if they correspond to a

series of requirements, namely: The technology must have a wide range of applications; They must be pervasive technologies: their dissemination must involve various distinct contexts and should not ignore territoriality; Innovation should be incremental: in theory, there should be an opportunity to improve the characteristics and performance of the technology over time, without the occurrence of a paradigm shift (which would mean the discovery of a new GPT); The technology must complement other technologies; The technology must enable the search for new organisational processes: technological change brings with it new organisational needs, such as the reduction of production costs or

new forms of sale and distribution of goods and services; To be defined as such, GPTs should feature a high degree of complementarity with other existing technologies: according to this logic, a GPT complies with various nonexclusive functions of use. Furthermore, GPTs cannot be used directly: the presence of an intermediary commodity is required for the use of a GPT. These defining aspects can be used to determine whether the Internet actually possesses the characteristics of a GPT. In a sense, the variety of applications is the weakest criterion for defining the Internet as a GPT. To simplify greatly, we can say that the Internet is nothing more than a means of communication, used either interactively or unidirectionally.

However, this definition comprises several different features, since the Internet functions as: a simple means for disseminating information (such as information services, pricing information) an interactive network communication system (e.g. dialogue forums, Webbased telephony services) a platform for transactions (e.g. auctions, such as eBay), a market (e.g. the various online platforms that bring together supply and demand), a place for immaterial production (e.g. many engineers working on the same project from different locations), a distribution channel (e.g. for books and music). Given these characteristics, the concept of

GPT can be associated with the Internet to understand whether or not this definition corresponds to the general characteristics of the network. Variety of applications: to return to the question of whether the Internet can be used in many areas, we can affirm that its nature is unquestionably universal. It is used in various sectors, particularly financial and logistics services, industry (e.g. supply-chain management for automobile companies) and the public sector. Pervasiveness: according to this characteristic, there are several indicators that determine the level of Internet penetration in an economic system. Some of these indicators will be introduced in the first and second paragraphs of this chapter. Thus, from the point of view of investments and

expenditure, we can affirm that the Internet corresponds to the first property of GPTs. Incremental innovation: in terms of technological evolution, it can be clearly observed that historically the Internet has so far displayed various forms of technological progress. These include its evolution in terms of transmission speed, infrastructure, services, data security, and other areas in which continuous innovation over time can be seen within the same technological paradigm. Thus the second characteristic is also confirmed. Organisational processes: the possibility that the Internet has given the economic system to review its organisational processes is the underlying concept of this book. Automation, changes in assembly

lines, transport, logistics, cost reduction, payment models and the development of low-cost forms of internationalisation are all forms of business model change that involve interventions in processes and organisational forms within and between companies. Also in this case, the third characteristic is fully recognised. Complementarity of technologies: the fourth characteristic can be explained by a simple example. The development of Internet tools in recent years has taken us from the possibility of connecting online via PC to the arrival of smartphones and now to the latest generation tablets. In this brief evolution of browsing devices, there is also an aspect of technological convergence and particularly of convergence between markets, as in

the case of the publishing industry, with the need to adapt to new demands. Also in this case, the characteristics of the fourth point can be recognised in applications and examples familiar to everyone. Historical observation shows that there is often a considerable delay before GPTs are used. This interval is greater than the adoption period for new technology and refers to the fact that a new GPT is not used for some time in areas where there are possible applications, despite recognition of its latent potential. For example, electric motors began to be used in production processes, allowing a great decentralisation of energy to machines (in contrast to the belt drive of a steam engine), a good 20-30 years after the invention of the electric motor. Similarly, between the invention of the transistor in 1948 and its commercial

use, there was an interim period of between five years (for hearing aids, computers and radios) and several decades (for telecommunication and cars). If the experience of the electric motor or transistor were applied directly to the Internet, a delay of 5-20 years would be expected before the establishment of the Internet as a new GPT. Although it is difficult to determine exactly when the Internet was ‘invented’, if we were to consider the early experiments in the 1960s, to many observers this would seem an inappropriately long period for what is generally perceived as a rapid ongoing structural development. There are arguments suggesting that the Internet could be one of the fastest spreading GPTs. It is based, at least partly, on existing IT infrastructure (PCs, fibre optic networks, etc.). We can therefore say, in terms of hardware, that the Internet integrates rather than replaces. Finally, it

should not be forgotten that the Internet, as a GPT, stands on the shoulders of other similar technologies. The automation and robotisation of production processes, the digisation of data and electronic data processing have paved the way for connection to the Internet. So, if we consider the advent of the Internet as following the stratification of previous technologies and the diffusion of hardware, we could indeed consider the network as one of the fastest GPTs in terms of its dissemination. 1.1.4 The Internet and theories concerning large technical systems The studies by Andrew Davies, although carried out in other fields, provide an important framework for analysing the Internet and the relationship between innovation and growth. According to Davies’ model, the growth and expansion of an innovation process are enhanced if the

process is based on a modular technology where each module has a consistent structure that can facilitate interconnection between various modules in an interactive manner (Davies, 1996). According to this definition, a system is composed of a definite number of components with a capacity to assemble coherently to form the general system. The degree of innovation that develops with the various combinations of components indicates the state of advancement of the degree of innovation of a given technology. Starting with Davies’ framework, we can create a similar example using the Internet as our base. The Internet consists of a series of (mutually complementary) parts or components that make up a technological system in which to calculate the state of innovation. The Internet is therefore composed of a series of tools, each with their own functional attributes, that can be

divided into transmission and reception tools, switching systems and signal distribution components. Each of these parts is connected to form a network of components where the modes of assembly determine the development of the network in different ways, according to the various assembly options available. The evolution of component configuration systems leads to the development of a distinctive technological architecture that can be developed both vertically and horizontally (system innovation or contamination and introduction of new technological paradigms). All technology architecture has an optimising element that directs performance and innovation and represents the heart of the system. In electronic systems, this element is the electric current, on which the functioning of all the systems depends. In the case of the Internet, as an evolved system based on the fundamental

element of the Internet Protocol, which has allowed the activation of numerous autonomous systems, it is difficult to find single comprehensive definition. Cerf remarks that ‘the fundamental element of the Internet is the Internet Protocol layer and the definition of its packet format and addressing structure. The concept of autonomous networks (we called them Autonomous Systems) defines the basic problem of routing across multiple networks leading to the need for the routing protocol (e.g. Border Gateway Protocol, Internal Gateway Protocol, External Gateway Protocol). Layering provides the structure for adding new capabilities/applications. Separation of the IP layer from underlying transmission technology allows the network to absorb new transmission technology (fiber, mobiles, satellites, wifi...). The Domain Name System provides a way to associate names with addresses and the

hierarchical system of design allows for scalable expansion of the domain name space. Internet works without the DNS but it is made easier to use and to program for by the existence of the DNS.’ ( Cerf, 2015). As Davies continued his studies, he adopted some of Hughes’ theories (1987), according to which the development of a given technology or system also depends on the Institutional (social and political) setting in which a specific technology develops. This argument is relevant for framing the Internet, since the social and political impact that certain tools and particular applications have had on international politics in recent years is obvious to everyone. Examples include the censorship of search engines and restricted access to the Internet in China or the consequences of the uprisings in the Middle East and the widespread use of Twitter. However, although it is important to acknowledge the effects that a social,

economic and political context can have on the level of development and innovation of a particular technology, we should avoid the temptation to overemphasise this type of relationship. The internal and external evolution of a technology are in fact separate elements in which external (environmental and contextual) analysis influences growth not in a directly proportional way, but rather as a moderating variable on the main relationship. External analysis of the technological evolution of a technical system is important when switching from an analysis of a local network (formed by a limited number of components) to a long distance network, formed by a series of switches that gather and distribute information from several local networks. By increasing the scale, we arrive at international networks which are exchange and connection systems for several long distance switches and form what we

now all know as the Internet, namely a global interconnected system composed of a subset of other networks which, in turn, serve as catalysts and distributors for local networks. The ways in which each level of analysis is internally connected and how they connect with each other provide significant opportunities for the exchange of information and services between individuals. This environment of exchange provided fertile ground for the development of the economic aspect of the Internet, with some actors successfully making a profit from the right combination of these elements, converted into products or services. The social aspect of the large technological systems theory and the evolutionary dimension of GAS theories can be combined to characterise the Internet. It is thus seen as a system that uses the specific fact of information centralised in particular individuals or groups of individuals and

exploits the distribution systems typical of network models to create packets of information that can be managed simultaneously to form a network of interconnections. No single individual holds all the information but it can be acquired externally. The American researcher Paul Baran was the first to realise the potential of a network information distribution system: networks linked in a mesh increased the probability that all nodes could communicate with all other nodes, even if some or even a large number of them were destroyed. Cerf mentions that “Paul Baran was an American citizen and worked for the RAND corporation, sponsored by the US Air Force(...)He was talking about connectivity not loss of information. Mesh networking increased the probability that all nodes could communicate with all other nodes even if some or even a large number of links were destroyed in a nuclear attack. (...) Actually,

the ARPANET was driven by the need for resource sharing among the universities doing research on artificial intelligence and computer science who were sponsored by ARPA. See Roberts and Wessler, A Resource Sharing Network.” (Cerf, 2015). According to Baran’s theories, when information is centralised and one of the main information distribution channels is lost (as in the case of a nuclear attack), every other node loses access to the information and the entire network is thereby compromised. If, however, the information is distributed across the network and information switching systems are developed so that all information can be distributed through several steps and nodes, the possibility of losing information is much lower than in the first scenario. The loss of information in this way is partial. However, if it is traced as it passes from node to node, the information lost by other nodes can also

be recovered. The example given above provides a clear picture of the relationship that was established when the Internet first evolved. It was due, in part, to historical and social needs (such as during the Cold War) which served to ensure that technological systems developing in those years could be targeted towards certain choices and scenarios rather than others. Social and political needs provide important opportunities for the orientation of technological choices. To summarise, if technology is aimed at reaching certain objectives in terms of needs to satisfy or new demands to meet, then the external environment, particularly its institutional and socio-political aspects, provides the feedback loop system that guides the evolutionary path of specific technologies. Without the needs of some researchers at CERN to distribute information, and without the fear of a

nuclear attack during the Cold War, perhaps today we would not have the Internet but another system. Once we add the economic aspect to the social and technological perspectives, then the model is complete, as seen below. 1.2 Specific Internet Models 1.2.1 Layered models: The Four Layers Internet model (CREC 1998) One of the first major studies on the Internet economy was commissioned by Cisco and conducted by the Center for Research in Electronic Commerce (CREC) at the University of Texas in 1998, with a subsequent revision in 2000. The work was based on data collected from 2,380 American companies. The most original aspect of this study was its innovative subdivision of the Internet economy into four layers. The

conceptual model was divided into two main categories, each split into two layers: Category: infrastructure Layer 1: Internet infrastructure Layer 2: Internet infrastructure applications Category: economic activities Layer 3: Internet intermediaries Layer 4: Internet commerce

Layer 1: the Internet infrastructure layer

This layer includes companies with products and services that help create an IP based network infrastructure. The company categories in this infrastructure layer include: Internet backbone providers (e.g. Qwest, MCI, WorldCom) Internet services providers (e.g. Mindspring, AOL, Earthlink, Tiscali)

IP networking hardware and software companies (e.g. Cisco, Lucent, 3Com) PC and server manufacturers (e.g. Dell, Compaq, HP) Fibre optics makers (e.g. Corning) Line acceleration hardware manufacturers (e.g. Ciena, Tellabs, Pairgain) Layer 2: the Internet application layer This layer includes companies that provide products and services that are based on the network infrastructure and make it technologically feasible to perform business activities online. In addition to this, it also includes the human capital employed for the development of e-commerce and e-business. The company categories in this applications layer include: Internet consultants (e.g. USWeb) Internet commerce application

producers (e.g. Sun, IBM, Magento) Multimedia application manufacturers (e.g. RealNetworks, Macromedia) Web development software companies (e.g. Adobe, Microsoft) Search engine developers (e.g. Autonomy) Online training companies (e.g. Prometric) Manufacturers of web-enabled databases (e.g. Oracle) Companies offering products and services for information security on IP networks (e.g. Avira, McAfee) In short, this layer includes all the companies providing the software products and services needed to facilitate online transactions. Layer 3: the Internet intermediary layer This layer includes companies that increase the efficiency of electronic markets by

facilitating the meeting and interaction of buyers and sellers on the Internet. The companies in this layer are mostly ‘pure Internet players’ that operate exclusively online and generate revenue through advertising, service subscriptions and commissions instead of direct transactions. The CREC study was one of the first to note that, despite frequent discussion of the large-scale disintermediation occurring in the transformation from a physical to a digital economy, the Internet was creating new types of intermediaries. In the physical world, intermediaries are mainly distributors, vendors or shops, whose primary role is to increase the efficiency of distribution and decrease transport costs for the buyer by localising in the vicinity of the customer. On the Internet, the concept of physical proximity is not relevant, but what are important are information, research, communication, evaluation and coordination.

These are the aspects on which the new types of intermediaries who created the Internet are based. The company categories in this layer of the Internet economy include: Online travel agents (e.g. Expedia, eDreams) Content aggregators (e.g. Cnet, ZDnet) Portals and content providers (e.g. Yahoo!) Advertising brokers (e.g. Doubleclick) Other online intermediaries Layer 4: the Internet commerce layer This layer includes companies involved in the sale of products and services to consumers or other businesses using the Internet. The company categories in this layer of the Internet economy include:

E-tailers (e.g. Amazon.com) Manufacturers selling online (e.g. Dell) Fee/subscription-based companies (e.g. WSJ.com) Airlines selling online tickets Online entertainment and professional service companies Having defined the Internet economy as the result of these four layers, CREC then assessed its size by calculating the revenues and the number of jobs for all the layers, thus providing the first ever measurement of the Internet economy. For each company assigned to a layer, only revenues directly associated with Internet business were taken into account, and a percentage reduction of the total was also estimated due to double counting, due to the fact that a single operator could be included on more than one layer. CREC estimated that in 1998 the Internet

economy generated $301 billion in the United States and was responsible for 1.2 million jobs. The CREC study has proved very useful due to its conceptual model and for providing an initial estimate of the Internet economy, albeit limited to the USA. However, the size estimate that it produced, based on total sales, cannot be considered reliable for comparisons with a country’s GDP or GDP growth as this would require a model that excludes all sales between intermediaries. 1.2.2 Layered models: Internet Intermediaries (OECD 2010) The OECD model focuses on the Internet viewed as intermediation technology. OECD defines Internet intermediaries as facilitators of transactions between third parties on the Internet. Intermediaries provide access and reception, transmit and index content,

products and services originating from third parties on the Internet, or provide Internetbased services to third parties.

1.2.3 Layered models (IDC 2011) IDC, a multinational consulting and market research company, conducted a study for FI3P, a consortium created on the initiative of the European Commission DG Information Society for the development of the Internet, on the structure, size and economic impact

of the Internet sector in Europe.

For this purpose, IDC created a conceptual schema in layers to represent the Internet industry, understood as the series of main actors providing technologies, applications and services that make up the infrastructure of the Internet and enable use of the Internet by network providers, such as Alcatel Lucent, and emerging social networking platforms, like Facebook. The bottom layer includes the Internet IT and networks industries, which produce the

key technologies, products and services for the implementation and management of the Internet infrastructure. Therefore, it also includes the provision of dedicated devices, such as iPhones (smart handheld devices). However, this layer refers only to products entirely dedicated to the Internet, and not generic equipment (PCs, for example, are excluded). The next level includes services provided by telecom operators (fixed and mobile ISPs) that provide voice, data and network services to businesses and consumers. The Internet IT and networks industries are the traditional components of the Internet sector. The next layer in the figure comprises companies that provide web-based services and applications, roughly classified into three main groups: social networks and web platforms (Google, Facebook, Yahoo, etc.), which provide content, services and tools; e-

commerce and online service operators, from e-banking to e-learning; and web-based service providers (e.g. Wikipedia). Unlike the models by O’Donnell and Hamilton, the IDC model does not reflect all the interactions between the actors. For example, most of the telecom operators and service and hardware providers deal directly with the end user. However, this classification is useful for estimation of the Internet and analysis of the revenues and strategic positioning of the Internet sector. 1.2.4 Layered models: the Internet stack (BCG 2011)

The last model analysed in this section on layered models is that provided by the consulting firm Boston Consulting Group, which released a report in 2011 featuring an analysis of the economic impact of the Internet and proposing a model with which to understand the Internet and the various forms of business derived from its use. The BCG study offers an interesting view of the Internet industry using a figure borrowed from the IT environment, the stack. The

stack is a layered representation of hardware and software in which each layer communicates with those above and below it. 1. The first level of the stack is composed of infrastructure and includes companies that build and operate infrastructure and optimise the transmission of data, in particular: Web hosting Design and construction of the core network Access services (wholesale ISPs) Core network maintenance Others 2. The second stack involves access, or companies that provide products and services to access the Web, in particular: Computer hardware IT consulting

Mobile and access equipment Access services (ISPs) Software and operating systems Network hardware Other hardware 3. The third level of the stack consists of enablement platforms, i.e. companies that provide basic services to facilitate trust, payments and traffic, in particular: Online payments Network advertising Analytics & metrics Security Web design 4. The fourth level of the stack is composed of content services and platforms, i.e. portals, aggregators, retailers and other businesses that serve users directly or enable the provision of services, in particular:

Search engines Pure player online retail Gambling E-learning Adult content Music, videos, publishing content VoIP Aggregators Cloud computing Gaming Advertising agencies Dating Social networks Other services 5. The fifth level of the stack consists of the community, or users who consume online content and create new content. 1.2.5 Flow Models: The Internet money flows (O’Donnell, 2002) In 2002, Shawn O’Donnell from MIT carried

out a measurement of the Internet economy using a new conceptual model. The peculiar feature of O’Donnell’s model was the shift of attention solely to the economic flows between elements or segments of the Internet.

The model depicted seven segments: Companies operating in the Backbone Network and Internet Services Provider (ISP) market

Application service providers (ASPs) Content delivery companies Web hosting companies Portals and content sites Advertising companies E-commerce sites The main criticism of O’Donnell’s model is that it provided an incomplete size estimate of the Internet economy. O’Donnell’s numbers for the size of the Internet were much smaller than CREC’s because he excluded the hardware and software supporting the Internet. 1.2.6 Flow Models: The Internet Ecosystem (Hamilton, 2007) In 2007, the consulting firm Hamilton was commissioned by the American Internet Advertising Bureau (IAB) to create a new model to define the Internet economy, based on the work of O’Donnell and updating it in

the light of the new Internet scenario. The model features thirteen segments used to define the Internet ecosystem: Internet service providers and transport: consisting of the Internet access market. This can be of various types: dial-up, fixed broadband, mobile broadband or Wi-Fi. ISPs generally also offer a range of services related to Internet access, such as email, hosting or virus protection. The consumer normally pays a monthly subscription fee for the service, which is often part of a package (landline phone + Internet). The major players in Italy include Telecom, Tiscali and Libero. Hardware providers: manufacturers of the hardware that allows the Internet to function. These include manufacturers of servers, storage

devices, routers, PCs, wireless access devices and fibre optic cables. Over the years there has been a gradual consolidation among hardware suppliers in many areas. For example, Cisco, the largest manufacturer of Internet hardware, has grown in recent years mainly due to acquisitions (about 100 from 1984 to 2004). Other operators in this area include IBM and EMC as storage devices manufacturers, and Dell and HP for PCs and servers. Information technology consulting and solutions companies: this includes advisory and service companies. Many companies have appeared that specialise in the Internet, but most of the market is controlled by IT operators that have been in existence since the 1980s and have expanded their area of expertise, such as Cap

Gemini, IBM, EDS and Accenture. Their main activities consist in the design and creation of networks, Internetbased IT platforms, data centres, and maintenance of IT systems and services. Software companies: companies that produce software for the management of information flows on the Internet. Examples of this software include: Network and ISP management Creation of content, including video Advertising and related services E-commerce E-mail Safety, compliance, risk management, network management and data storage Web hosting and content management companies: companies that offer storage services for web pages on

their servers, located in data centres, and make them available online. There are also related services such as web caching (to speed up webpage loading), backup, security, disaster recovery. The players in the sector include GoDaddy and Akamai. Search engines/portals: these include companies that offer search services, such as Google, or companies that manage portals offering organised content to their users, such as Yahoo! Content sites: sites containing news, sports, entertainment or social networking. These generate revenue from advertising, subscriptions or the sale of products, or are subsidised by individuals or institutions. Players in this area include traditional companies that have expanded online, such as Fox and Time Warner, or pure players such as Facebook.

Software as a service: a rapidly growing segment of companies offering software to businesses and consumers, where the software and all the customers’ input data are stored on the servers of the supplier company, which makes them available to customers and accessible from any location via the Internet. Major players in this industry include Oracle, SunGard and Salesforce. Advertising agencies and support services: this segment includes advertising agencies and support services, such as web design, web statistics and market research companies. This is a very important segment since prior to the arrival of the Internet, advertising already made various kinds of information and content available in newspapers, radio and TV. Now, thanks to advertising,

users can enjoy many free services and content sites. Players in this segment include Omnicom and the WPP group. Ad Networks: companies that aggregate the inventory of content sites and make it available to advertisers or advertising agencies. The most famous players include Advertising.com, 24/7 and Tribal Fusion. Email marketing and support: companies involved in the creation of email marketing campaigns and those involved in the creation of software support. Examples of these operators include Responsys, e-Dialog, EmailLabs and ContactLabs. Enterprise websites (staff involved in Internet advertising, marketing and web design): an increasing number of companies are adding specialists in

on-line marketing to their marketing staff to oversee and improve the company website and interface with online advertising agencies. E-commerce: e-tailing, e-brokerage, ebanking, e-travel, B2B e-commerce and other e-services: e-commerce was not a feature of the original Internet, but has been one of its main success stories. It is the segment that generates the most revenue and employs the most people. The major global players include Amazon and eBay. B2B e-commerce: this segment is distinct from B2C e-commerce because its economic activity is not calculated in the GDP, as the value is already included in the goods and services that are sold to final consumers.

Hamilton’s study then estimates the size of the Internet economy thus defined using the income approach, based on an estimate of the number of people employed in the segments described above and their respective salaries. It quantifies the total

value of the Internet economy for 2008 at about $300 billion, or approximately 2% of GDP, with a total of 1.2 million people employed. The income approach is able to isolate the added value created by the Internet, and is the most conventional method for estimating the economic contribution of an industry. Its main weakness lies in the difficulty of identifying the employment figures associated with the Internet due to the fact that most of this activity represents only a small portion of the employment figures for the entire economy. As a consequence of this, the methodology tends to give underestimated results, but at least, as with Hamilton’s study, they provide a valid lower limit in assessing the economic size of the Internet Another criticism that can be made of Hamilton’s model is the fact of having created a conceptual map aimed at giving

particular weight and importance to online advertising. This industry is certainly critical to the Internet economy but it could have been simplified and aggregated without detracting from the completeness of the model. In fact, in 2011, Deloitte conducted a study on the Australian Internet economy where both expenditure and income approaches were adopted in the methodology. In the income approach, Deloitte drew inspiration from Hamilton’s work, but simplified the conceptual model. The categories of the Internet economy used by Deloitte are the following: ISPs, Web search portals and data processing: ISPs, as we have seen, provide users with a connection to the Internet. This category also includes web hosting companies that store web pages on their servers and make them

accessible to visitors, and search engines, which allow users to find information quickly and easily. Hardware providers: this category includes a proportion of manufacturers and wholesalers of computers and peripherals. IT consulting and software companies: IT consulting firms can offer a wide range of consulting services that include specialised Internet consultants, departments dedicated to the design of Internet-based IT platforms, data centres, IT management and support. The companies also produce software for the management of information flows. Internet publishing and broadcasting: this segment includes news, entertainment, research and information services, but excludes search engines, e-commerce sites, and

corporate and government sites, all of which are included in other segments. Advertising and enterprise sites: this segment includes the development and maintenance of websites and the creation of online advertising by ad agencies and web design firms or internally by the companies. Government: this segment includes Internet-related activities. E-commerce: this segment includes eretailing, e-broking, e-travel, ebanking and other e-services, as well as companies involved in the delivery of online retailing packages. 1.2.7 Value Chain Models: Internet Value Chain (A.T. Kearney 2010)

The consulting firm A.T. Kearney analyses the Internet economy from a value chain perspective by creating a framework divided into five segments: Content Rights

Online Services Enabling Technology/Services Connectivity User Interface 1.3 The Internet as a Platform By its nature, the Internet can be viewed as a platform and analysed as such according to the theory of platforms. We shall first define what a platform is, which is a necessary step as there are various concepts related to this term in the literature. The concept of the platform has been used and discussed in distinct streams of academic literature, such as product development (Meyer and Lehnerd, 1997; Simpson et al., 2005), technology strategy (Gawer and Cusumano, 2002 and 2008, Eisenmann, Parker and Van Alstyne, 2006) and industrial economics (Rochet and Tirole,

2003; Evans, 2003; Armstrong, 2006). An analysis of the literature shows how the concept of the platform has been used for various purposes and with different meanings. The term ‘platform’ was first coined by product development researchers in the 1990s, to describe projects from which a new generation or family of products was created (Baldwin and Woodard, 2008). Wheelwhright and Clark (1992) introduced the term ‘platform product’ meaning platforms as products that meet the needs of a core group of customers but are designed for easy modification by the addition, substitution or removal of features. Gawer (2010) refers to this type of platform as an ‘internal platform’, to emphasise its restricted existence within an individual company. The platform then extends to the supply chain, going beyond the productive confines of the individual company. It becomes a

series of sub-systems and interfaces that form a common structure from which a stream of derivative products can be efficiently developed and produced by partners in a supply chain (Gawer 2010). The purpose of this type of platform is the same as the previous one, to make production more efficient and reduce costs, but differs in the fact that the production process involves several companies. In the field of technology, strategy platforms have been defined as valuable points of control and extraction in an industry (Baldwin and Woodard, 2008). Gawer (2010) defines these platforms as ‘industry platforms’, i.e. products, services or technologies that are developed by one or several firms, and which serve as foundations on which other firms can build complementary products, services or technologies. This definition includes the Windows operating system, Intel

microprocessors, the Apple iPhone, the Google search engine and Facebook. The difference with the supply chain platform is that the firms that develop the components do not necessarily buy or sell from each other, are not part of the supply chain and do not share ownership of the platform. Gawer identifies the Internet itself as an industry platform, a definition which in our opinion is not quite correct. The Internet is more of a ‘container’ for the industry platform rather than an industry platform itself, since, as an enabling infrastructure, it is not part of a competitive scenario and does not serve the purpose of extracting economic value by itself. The concept of the platform was subsequently 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),

emphasising in particular the two-sided and multi-sided market environment, in which most of the ICT platforms are included. This literature mainly highlights the ‘chicken and egg problem’ that needs to be resolved by the platform owner, often through crosssubsidising between user groups or even by offering free products or services (Parker and Van Alstyne, 2005). A distinction within these multi-sided platforms is made by Evans (2005), who distinguishes between: matchmakers, who aid members on one or both sides of the platform in their quest for a match on the other side; audience-makers, who bring advertisers and audiences together; transaction-based businesses, which meter transactions between the two sides of a market; and shared-input platforms, where participants on one side need to obtain access to the platform to provide value to participants on another side (e.g. hardware and software platforms). This

classification by Evans, although appropriate for defining the various platforms that are found online, does not lend itself to depicting the Internet because it has features that cut across the categories identified by Evans. Ballon and Van Heesvelde (2010) developed a platform based on the concept of control over customers and assets, identifying four types. The first type is the ‘neutral platform’ and refers to the case where the platform owner does not control most of the assets necessary for the creation of value, and in addition to this has no control over its customers (e.g. Paypal, Google). The second type is the ‘broker platform’, where the platform does not have assets for the creation of value but does have control over its customers (e.g. Facebook, eBay). The third type is the ‘enabler platform’, where the platform has control of the assets but not of the customers (e.g. Intel). The fourth type

is the ‘system integrator platform’, where the platform has control over both assets and customers (e.g. Microsoft Windows, Apple iPhone). On the basis of this type of categorisation, we can consider the Internet as a neutral platform, but the definition is still restricted since it excludes another series of specific aspects that characterise the Internet viewed as a platform: The Internet does not resemble a single platform, but appears as a meta-platform, i.e. a platform on which other platforms are built. There are numerous examples that support this theory, the main ones being: Google, Facebook, eBay, Amazon and Wikipedia. The Internet is open, in the sense that it is a dynamic, decentralised, distributed and multi-directional platform capable of developing and

evolving independently, where users can go from being consumers to become technology creators in their own right. As an example of this, we could mention that all communication protocols and their implementations used on the Internet must be open, distributed and subject to change. The Internet is a ‘universal’ platform in that it can be accessed from various devices (PCs, phones, tablets, mp3 players, etc.), from various access platforms (Windows, Mac, Android, Explorer, Firefox, etc.), and from any place and at any time, offering the same services to everyone who connects. The Internet is becoming the standard interface for the exchange of information. The Internet is a ‘neutral’ platform, as defined by Ballon and Van Heesvelde (2008), in that it does not have control

over its own assets and does not control its end-customers. The Internet is, by nature, a multisided platform in that it permits or facilitates the interconnection of people/things/information not otherwise connected or connected but with room for improvement in efficiency. The Internet is a multi-layered platform, i.e. composed of various accumulated layers, as we have seen in the layer models used to describe it. Thus we can understand the Internet as a connection platform, a technology platform, an access platform, an intermediation platform or a content creation platform, depending on the layer of the Internet concerned. In the light of these considerations, we can define the Internet as a universal open

meta-platform that is neutral, multi-sided and multi-layered. As for the evolution and success of technology platforms, the academic literature indicates the high degree of innovation created in ecosystems that refer to a platform. Gawer (2012) analyses how industry platforms tend to facilitate and increase the degree of innovation of complementary products and services. The more innovation there is on complements, the greater the value created for the platform and for its users through network effects, creating a cumulative advantage. In fact for industry platforms, the end use of the final product or service is not completely predetermined. This creates unprecedented opportunities for the development of products, services and complementary technologies. At the same time, the situation raises the fundamental question of how interfaces across the

platform must be sufficiently ‘open’ to allow foreign companies to put up services and develop upon these services, thus earning from their investments. This creates iterative cycles of positive feedback that can grow exponentially as the rates of adoption of the platform increase and the services increase. Network effects can be very powerful, especially when they are ‘direct’, i.e. between the platform and the user of the service, and when they are reinforced by technical compatibility or an interface standard that makes the use of multiple platforms (‘multi-homing’) difficult or expensive. For example, Windows applications or applications for the Apple iPhone only work on compatible devices; Facebook users can only view the profiles of friends and relatives in their groups. Network effects can also be ‘indirect’ or ‘cross-side’, which can be just as powerful as direct effects. These occur when, for

example, advertisers are attracted to the Google search engine because of the large number of users conducting searches. Firms can also develop business models and find ways to charge the various sides of the market to generate revenue from their platform or accessories and from different types of transactions or advertising that can have a place in the created ecosystem (Eisenmann, Parker and Van Alstyne, 2006). If all this is true for a single technology platform, then we can say that for the Internet, the issues of the creation of innovation and the strong evolutionary dynamics linked to platforms are amplified exponentially. This is because the Internet is not a single platform, but rather a platform of platforms, or, as mentioned earlier, a meta-platform onto which platforms are grafted in multiple layers. Network effects, which are created around an individual platform, stimulating innovation, spill over

from their own ecosystem and have repercussions on the entire Internet ecosystem. For example, greater accuracy in content research platforms, such as with a technological advancement in Google’s search algorithms, makes online content easier to find for those who need it; this possibility of being read or seen by a greater number of people will further stimulate content creators and thus the use of content creation and dissemination platforms such as Wordpress or YouTube will increase, with the result that in these platforms there will also be an additional boost in innovation driven by the growth of their own ecosystem. Therefore the direct and indirect network effects of platforms in any layer of the Internet have positive repercussions for the platforms in the other layers, as well as directly benefiting the Internet as a whole. In the example we used before, the more content is available and the easier it is to

find, the greater the number of Internet users, either because the Internet becomes easier to use or because there will be a greater number of people interested in online content. The affirmation of the Internet as the leading meta-platform in the exchange of information can be analysed according to the ‘leadership platform’ theory by Gawer and Cusumano (2002), which identifies four levers that a platform can use to gain market leadership. The first lever regards the area of the platform, i.e. the choice of which activities the platform carries out itself and which activities should be left to external operators. The Internet is in itself decentralised and its organisation is left in the hands of non-profit organisations. The organisational activity of the network, understood as protocols and data addressing procedures, is the only activity over which these bodies have control, so we can say

that the Internet has reduced the activities to be performed in-house to the bare minimum, while everything else is done externally, from the creation of network hardware to the laying of fibre optic cables and websites. The second lever is technological design and intellectual property, i.e. which functions and features to include in the platform, how modular it should be and how open the platform interfaces should be to external stakeholders and at what price. The Internet was designed to be open and most of the communication protocols used are free and not covered by copyright that restricts its use or requires the payment of royalties. Cerf notes, “Some IEEE standards may involve patents/licensing, some video encoding standards, some radio designs also require licensing. You are correct for IETF on the whole but there may be some isolated cases in which licensing is needed”. (Cerf,

2015). The third lever regards relations with the actors included on the platform. The creators of the Internet, guided by a vision of evolution for human society and not by profit, shared their vision by creating a vibrant ecosystem of passionate network coauthors, and left the possibility of gaining economic profit from it to external operators. The fourth lever is the internal organisation of the platform, namely what is done and how, in terms of internal processes, to ensure external operators that the platform works for the common good of the ecosystem. As the organisation of the Internet is on a non-profit basis, it guarantees its evolution in terms of equality and neutrality for all operators, in view of the common good. From an analysis of these four levers, we can see how the Internet is open to the creation of an external ecosystem and this allows us to better

understand the enormous success it has had and its rapid diffusion, noting in particular its ability to attract external operators, who have supported, developed and innovated it due to the incentive of generating revenue. 1.3.1 Phases of the Internet Meta-Platform We will now see the dynamics of the model of the Internet as a meta-platform. To identify these phases, we have created a model that allows us to highlight the main stages of evolution of the Internet viewed as a platform. The model shows that since the inception of the Internet there has been an increase in certain key variables with the passage of time: Internet connection bandwidth speed has increased constantly The amount of information online has increased as a factor inversely

proportional to the cost of putting information online It should also be noted that the cost of Internet access, defined as an expense in terms of equipment, devices and connection, has decreased over time. This has led the installed base, viewed not only as the absolute number of users but as the total number of devices connected to the network, and the number of users as a consequence of this, to grow at a very fast rate.

We can identify the distinctive phases of the network from the intersection of these key Internet variables and an analysis of their evolution. We will divide the analysis into six parts: Scientific Platform: when the Internet was born, there were very few users

online, very limited bandwidth speed, little content and high access costs, sustainable only in research environments. The fundamental innovations that occurred in this stage laid the foundation that led to the success of the Internet and its wide dissemination. Informative Platform: the Internet began to spread within the corporate environment and access devices for the consumer market began to appear. Bandwidth speed was still low, the information available was limited and only textual and graphic content could be used. The Web was dominated by portals, which organised the content and absorbed most of the time users spent online. Searchable Platform: the amount of information started to grow considerably, due to a significant

decrease in the cost of content creation, while bandwidth speed increased and access costs were lowered further, enabling a greater expansion of the user base. The explosion of content led to a paradigm shift: the Web was no longer the closed world of the portals, but had become an expanding galaxy in which search engines were the entry point for the network. Social Platform: the reduction of access costs and increase in bandwidth speed brought more and more people online. Together with the new online technology platforms, this created an explosion of content generated by the users themselves, including photos, videos, text and audio. The network became the new media, where everyone could have their say, thanks to social platforms,

heralding a new paradigm shift from the previous stages: information was no longer one-to-many but many-tomany. Mobile Platform: access costs have been greatly reduced, now that the Internet can be accessed from lowcost terminals, and the Internet has also become a requirement while on the move, both to access content and remain connected with one’s social networks. At this stage, we see an explosion of the installed base, due to sales of smartphones, tablets, e-book readers and other online mobile devices. We also see the emergence of mobile platforms, such as Apple’s iOS and Google’s Android. Things Platform: the next evolution of the Internet is the Internet of Things, where the lowering of access costs and high bandwidth speed allow the

Internet to establish itself as the reference infrastructure for the exchange of information. Not just people, but also sensors, objects and things are connected to the Internet to exchange information. This stage will bring a further explosion of devices connected online and content created, as it will no longer be only humans but also objects that create information.

1.3.1.1 The Scientific Platform The origins of the Internet can be found in ARPANET, a computer network established in the USA in September 1969 by ARPA (Advanced Research Projects Agency), a project launched by the US Department of Defence in 1958 to develop technological

research in the aftermath of the first launch of a satellite into orbit in 1957 by the Soviet Union (Sputnik). ARPANET was developed by Bolt Beranek and Newman under contract to ARPA. The Internet was deliberately designed in 1973 by Bob Kahn and Vint Cerf in the context of exploration of packet switching by the participants of the International Network Working Group on the occasion of the public demonstration of ARPANET at the International Conference on Computer Communication. Cerf and Kahn had introduced TCP/IP architecture as the reference model for the ARPANET network. It was named after the two basic protocols used: the Internet Protocol (IP), which ensured the addressing and sending of data packets, and the Transmission Control Protocol (TCP), which controlled their flow and the recovery of lost packets. The protocols developed back then by Kahan and Cerf are still the most

important ones for data packet transmission in the Internet. Thanks to the TCP/IP protocol, the main purpose for the development of the Internet was achieved, namely the sharing of resources. Connecting two resources via a cable and sharing the systems they contained implied significant savings in terms of duplication and transmission costs. The Internet therefore began as an evolution of the ARPANET military network, and emerged as a developed network to provide access to more than one application: from the time of its inception, it was able to support programmes created for file transfers, resource sharing and electronic mail. The Internet took 10 years to develop (protocol design and implementation of several operating systems) and was officially turned on on 1 January 1983. Cerf remarks that “ARPANET gets

developed in 1968-1969 by Bolt Beranek and Newman under contract to ARPA. INTERNET is deliberately and systematically designed in 1973 by Bob Kahn and me in the context of ongoing exploration of packet switching by many involved in the International Network Working Group formed in October 1972 on the occasion of the public demonstration of the ARPANET at the International Conference on Computer Communication. Internet takes 10 years to develop (protocol design, implementation for many operating systems) and is turned on, officially, on January 1, 1983. The WWW comes about 10 years later.” (Cerf, 2015). Three major developments led ARPANET to become what we now know as the Internet. The three changes, which we can define as ‘radical innovations’ or ‘killer applications’, were changes in which the ratio of continuity with previous technologies dropped completely, causing a degree of novelty

great enough to totally change the structure and methods of the management of new technologies. The first, in 1973, was the development of TCP/IP, a protocol that allows different networks to communicate and exchange data packets. Although it was not the only protocol developed at that time, it nevertheless had the advantage of being free and very reliable. It was adopted by ARPANET in 1983, and in 1984 the NSF chose it as the standard for its national university network. In 1990, TCP/IP became the dominant protocol for all networks. The second change was the development of HTML (HyperText Markup Language) and the HTTP protocol by CERN, in Switzerland, in 1991. HTML allowed the introduction

of objects such as pictures and movies in pages that previously only contained text. The HTTP protocol made it extremely easy to link several documents together, facilitating the transmission of graphics between computers and the creation of hypertext links which connected users directly to other HTML documents. Up to this point, the Internet was a means mainly organised for the benefit of the scientific community, and its use by a wider audience was hampered by its lack of simplicity. Then the third major innovation appeared with the introduction of Mosaic, the first ‘browser’ with a graphic interface, which could be used to find, retrieve and display HTML documents. Cerf specifies: “Tim Berners-Lee did write a browser but it was not graphical - Mosaic provided

the first graphical user interface browser.” (Cerf, 2015). Mosaic has been described as ‘the killer application of the 1990s’, because it was the first program to provide a lightweight multimedia navigation tool to offer information services on the Internet, at a time when access to it was expanding rapidly outside of its previous academic and business environments. Mosaic, introduced in 1992, was then rapidly overtaken by Netscape Navigator, which in turn was eclipsed by Microsoft Explorer. Cerf notes in regard to Figure 1-11: “There were at least 50,000 users of ARPANET by 1983, when the Internet was turned on. By the time NSFNET was running in 1986, the numbers were almost certainly greater than 250,000 so by 1992 I think the number was far higher than 225,000”. (Cerf, 2015).

The innovations described above laid the foundations that enabled the Internet to develop from a simple system for the sharing and dissemination of scientific knowledge to become the multi-purpose mass consumption tool we know today. We can identify four main phases: the initial phase of the Internet, the phase dominated by research, the social phase and the mobile phase. 1.3.1.2 The informative Platform

The first phase of the Internet began with the basic principle of allowing anyone to be able to access any type of document. Portals were the key product of this phase, HTML and PHP were the major technologies, and access to information was the primary use. This phase still applies to present-day Web activities that provide documents and information, driven by a general desire to share and expand knowledge. The more information that is available, the greater the possibility that other individuals can personally and collectively benefit from the knowledge collected online. It should not be forgotten that the Web was originally organised to promote the dissemination of scientific information among the various respective research communities. Portals were originally points of access to the Internet. They were arranged to offer users a selection of content divided into

interests, and also contained a directory that grouped websites according to content type. In 1994, two students from Stanford University, David Filo and Jerry Yang, created a directory of links, almost for fun, that was able to keep track of their personal interests on the Internet. The list quickly became very long, so they decided to organise it into categories and subcategories. From this hobby came Yahoo!, one of the leading Web portals worldwide. Having quickly become the main point of reference for students at Stanford University, and then a benchmark for the Internet community, Yahoo! first reached one million hits per day in autumn 1994, counting 100 thousand individual visitors. Since the mid-1990s, portals have been an essential and widely used resource. After the rapid and conspicuous spread of browsers in those years, many companies built or acquired a portal in order to control a slice of

the Internet market, aware of the fact that many users began browsing from these types of sites. In the late 1990s, Netscape Netcenter was acquired by America Online, the Walt Disney Company launched Go.com, and Excite became part of AT&T, while Lycos was deemed a good target by other media companies, such as CBS. Many of the portals were born as Internet directories (like Yahoo!) and/or search engines (with Excite, Lycos, AltaVista, Infoseek, and HotBot among the first). The services offered were then expanded in order to consolidate the user base and increase the time they spent within the site. Services requiring user registration, such as free email, customisation features and chat rooms, were seen as useful elements to increase the use of the portal. If their loyalty was attained, the possibilities of users remaining on the portal and using all the

available services were then greater. The number of users and their degree of loyalty made a positive impact on the capacity to generate commercial revenue. 1.3.1.3 The Searchable Platform Initially, browsing was closely ‘guided’ and ‘directed’ by portals. This approach seemed the right one in the first period of Internet diffusion, as two factors had to be taken into consideration: The Internet was something new for users, who were in a phase of exploring the medium and not yet fully aware of the possibilities it offered. Internet content grew exponentially: information, in and by itself, has no cost; researching and cataloguing it is where the costs really lie. Thus, as content increased and users became more expert, a significant innovation

appeared in the field of the Web: the arrival of search engines. The first search engines were incorporated into portals, such as WebCrawler, the first search engine on the Web to provide ‘full text searching’, i.e. searches that analyse all the words in the stored documents to find those in the search phrase entered by the user. WebCrawler went live on April 20, 1994, and was bought in 1995 by America Online, which integrated the search service into its portal. Other search engines released in those years include Infoseek, the first to combine advertising with users’ searches, Lycos, Altavista and Excite. In 1998, Larry Page and Sergey Brin, the umpteenth brilliant students from Stanford University, founded Google, after developing a theory that a search engine capable of mathematically analysing the relationships between websites would produce better results than with previous empirical

techniques. Convinced that pages cited with a greater number of links were more important and deserving (Network Theory), they decided to explore their theory as part of their studies and laid the foundation for their search engine. By August 1998, the young men had received a $ 100,000 investment from Andreas Bechtolsheim, the founder of Sun Microsystem, but in early 1999 they decided that Google was taking too much time from their university studies and tried to sell the search engine to Excite for a million dollars (Cerf, 2015). Luckily for them, Excite refused the offer and in June an investment arrived from the major venture capital funds in Silicon Valley for 25 million dollars. We all know the rest of the story: Google quickly established itself as the leading Web search engine, vastly undermining all its main rivals that were established earlier. Google debuted with a page featuring

minimal design, with the intention of emphasising the search alone. Users were now familiar with the Web and no longer needed to be guided, but wanted to actively search for their needs. Thus, searching soon became one of the most frequent activities on the Web, and the company, which believed strongly in the importance of searches and had made technological choices aimed at achieving the best results, gained pre-eminence over all other search engines and portals, becoming the homepage of millions of users around the world and the most frequently visited site of all. Searching has profoundly changed users’ habits, allowing them to find the bits of information they really need in drastically reduced times. This phenomenon can also be seen in the evolution of the ways in which users search: initially, the average query involved a single word; over the years, this

average has risen, indicating an increase in users’ maturity and searches for needs that are increasingly precise and detailed. 1.3.1.4 The Social Platform The foundations of the social web phase were laid between 2000 and 2002, in what was known as ‘Web 2.0’; this was a major turning point, as it allowed anyone to create and distribute their own documents. Examples of this second phase are Blogger and MySpace, followed by Facebook. The introduction of technologies such as AJAX and RSS to a wider audience was one of the factors in the development of this phase. A myriad of software and programs allowed and still allows any type of document or online content to be sent to anyone. This radical innovation made it possible for everyone to ‘participate in the web’, i.e. not merely as passive actors but as active

creators of the network. Blogs, social networks and wikis have become icons of the democratisation of the Internet. Web 2.0 marks the clearest distinction between the Internet as it was conceived in the 1990s and how we conceive of and use the network today. Originally, the Web was seen as a way to display static hypertext documents (created using HTML); in this mode, the user would log on to the network to view and obtain information preloaded by someone else. In the classic mode of Internet use, the user connected to a portal to obtain specific information about a product or a particular fact, using the network as a tool for searching previously uploaded information. This approach, described by scholars as Web 1.0, provided users with passive use of the network, through a unidirectional information sharing system (from the network to the user). Subsequently, thanks to integration

with databases and content management systems (CMS), the Internet evolved with dynamic sites (such as forums or blogs) that greatly simplified the creation of content and allowed users to create content on the sites they visited; this dynamic web was described by some as Web 1.5. After this, thanks to subsequent innovations such as style sheets (CSS) and script languages, we arrived at the creation of true web applications, which moved away from the old concept of simple hypertexts towards resembling traditional computer applications. AJAX, an acronym for Asynchronous JavaScript and XML, was and continues to be one of the main development techniques for creating interactive web applications (Rich Internet Applications). The development of HTML applications with AJAX is based on an exchange of background data between the browser and the web server, which allows dynamic updating of a web page without

explicit user reloads. AJAX is asynchronous, in the sense that the extra data is requested from the server and loaded in the background without interfering with the behaviour of the existing page. This has enabled the creation of numerous web applications that are similar to those for PCs. Web 2.0 was above all a philosophical approach to the network that involved the social dimension of sharing and of authorship rather than mere use: although, from a technological perspective, network tools may have seemed unchanged (such as forums, chats and blogs, which already ‘pre-existed’ in Web 1.0 and 1.5), it was the mode of network use that opened new scenarios, based on the user’s co-presence and the possibility of using and creating/editing multimedia content. The reception of information was no longer unidirectional (from network to user) but first became bidirectional and then directly from user to

user in the most advanced and mature phase of Web 2.0. Although potentially highlighted in the network paradigm, which is based on the concept of sharing resources, it provided a practical implementation of the Web creators’ expectations, which now became an accessible reality thanks to technological evolution. The possibility of access to lowcost services, which made editing accessible even to inexpert users, was an important step towards authentic interaction and sharing in which the user’s role was central. These were the years of sites that have profoundly changed our habits, such as Wikipedia, YouTube, Flickr, Facebook, MySpace, Twitter, Gmail, Wordpress and Trip Advisor, to name just a few. If building a personal web site previously required a mastery of aspects of HTML and programming, now, with blogs, anyone can publish their own content and provide it with

attractive graphics. If multiple computer applications were previously required for managing the information life cycle (from intuition to fruition), now, thanks to wikis, a single technology provides the best support for the entire process, making use of the information in the very environment in which it was created. If content was previously created to be consumed only on the site (stickiness) now, with syndication technologies, people can create content that can be used not only on the site but also on various channels. In 2005, the term User-Generated Content (UGC) was coined to indicate online material produced by users rather than by specialised companies. This step was symptomatic of the democratisation of the production of multimedia content, facilitated by the diffusion of simple, low-cost hardware and software solutions. It marked the consolidation of a massive and

unprecedented content creation phenomenon. At the same time, the term ‘Social Media’ caught on in reference to Internet applications based on ideological assumptions and Web 2.0 technology, which allowed the creation and exchange of usergenerated content. Social Media sites are fundamentally changing the way people learn, read and share information and content. They entail a combination of sociology and technology which transforms monologue (from one to many) into dialogue (from many to many), bringing a democratisation of information that changes people from content consumers into publishers. Social media have become very popular because they allow people to use the Web to establish personal or business relationships, in which case they are called Social Networks. These include Facebook in the personal sphere and LinkedIn in the professional sphere, which

we cannot fail to mention. 1.3.1.5 The Mobile Platform In recent years we have witnessed Web ‘porting’ on mobile devices. The ease with which this transition has occurred is mainly due to the multi-platform characteristics of the Internet and the possibility of using Web services across various software platforms (the same content can be used across different operating systems, such as Windows, Mac and Linux, or from different browsers, such as Explorer, Firefox or Chrome), thereby becoming a multi-device media, i.e. one that allows the use of several devices. The most interesting fact is that mobile Internet consumption has come about particularly through the use of apps that are downloaded and run directly on the operating system of the smartphone. Cerf comments that: “The fact is that mobiles have become a platform for apps

rather than browsers - most usage is not via mobile browser but by application code that is downloaded and run on the mobile OS platform. That is an important distinction because some app creators charge for the downloading of the app and its use different revenue model than use of browser to reach web pages” (Cerf, 2015). These characteristics have led to an increase in the different types of devices connected to the Internet, particularly mobile devices. Mobile Internet is not just a simple transposition of what has already been seen on the desktop. Many of the most sophisticated mobile devices connected to the Web have hardware features that allow a different use of the Web than that available on a desktop. One example are smartphones, mobile phones with operating systems that detect the user’s position through the Internet and GPS systems to allow more specific searches and web services. The integration of these two technologies has introduced the variable of proximity and the

development of communication by groups of people, who convey their position on social networks through check-in processes in the various places they visit. We could also mention the emerging phenomenon of mobile augmented reality, made possible through GPS, a compass, a camera, an accelerometer and an Internet connection, all of which is available on more advanced smartphones: the phone captures reality in real time and superimposes layers of content taken from the Web and geolocated with overlaid 3D elements. With augmented reality, you can obtain information on the place where you happen to be (such as hotels, bars, restaurants or underground stations) as well as view photos from social networks, such as Flickr, or Wikipedia entries overlaid on the reality; find nearby tweets; find your parked car; play at catching ghosts or invisible fairies using the entire city as a playing field; insert tags and comments on places (the Foursquare

platform is the most successful example in the world), and navigate from place to place using road signs overlaid on reality rather than on maps. Analysts estimate that the trend of mobile Internet will have a huge impact. We only have to observe the estimates by Cisco (Figure 1-12), which indicate an ongoing trend in recent years involving a slowdown in desktop PC sales in favour of laptops, to foresee an exponential growth in smartphones and tablets over the coming years. Cisco predicts that there will be ten billion mobile devices connected to the Internet by 2020, compared to a base of one billion PCs online in 2008.

Cisco foresees attainment of the following milestones for mobile data traffic over the next five years: Global mobile data traffic will exceed 15 exabytes per month in 2018. Smartphones will account for 66% of mobile data traffic by 2018.

The number of online mobile devices will exceed the global population by 2014. The average speed of mobile connections will exceed 2 Mbps in 2016. Monthly traffic generated by mobile tablets will exceed 2.5 exabytes per month in 2016. Tablet devices will generate 15 percent of global mobile data traffic by 2016. By the end of 2014, the number of online mobile devices will exceed the number of people on earth, and by 2018 there will be 1.4 mobile devices per capita. There will be over 10 billion mobile devices online by 2018, which is more than the world population estimate for that year (7.3 billion). Overall mobile data traffic is expected to

grow to 15.9 exabytes per month by 2018, an increase of over ten times the figure for 2013. Mobile data traffic will grow at a CAGR of 61 percent from 2013 to 2018.

Global mobile data traffic grew by 81 percent in 2013, a rebound from the slowdown in mobile traffic in 2012. Growth rates vary widely from region to region. All emerging

regions experienced a doubling in mobile data traffic in 2013 (the Middle East and Africa grew by 107 per cent, Latin America grew by 105 percent, and Central and Eastern Europe grew by 99 per cent). Mobile data traffic grew by 86 percent in AsiaPacific, 77 percent in North America and 57 percent in Western Europe. As for the growth forecasts, Asia-Pacific and Western Europe will account for over half of global mobile traffic by 2018, as shown in Figure 1-14. The Middle East and Africa will experience the highest CAGR (70 percent), followed by Central and Eastern Europe, with 68 percent, and Asia-Pacific (including Japan) with 67 percent.

The growing number of wireless devices that access mobile networks throughout world is a major contributor to the global growth in mobile traffic. Several new devices of various types, with greater capacity and intelligence, are introduced into the market each year. Over half a billion (526 million) mobile devices and connections were added in 2013. In the same year, global mobile network connections and mobile devices

reached 7 billion, up from 6.5 billion in 2012. Globally, mobile connections and devices are estimated to reach 10.2 billion by 2018, with a CAGR of 8 per cent (Figures 1-15). By 2018, there will be 8.2 billion mobile-ready devices and 2 billion machine-to-machine connections (e.g. GPS systems in cars, asset tracking systems in shipping and manufacturing sectors, medical applications or records that make it easier to assess a patient’s state of health online, etc.). Regionally, North America and Western Europe will have the fastest growth in mobile devices and connections, with 12 percent and 10 percent CAGR respectively from 2013 to 2018.

The proliferation of high-end handsets, tablets and laptops on mobile networks is an important factor in the generation of traffic, because these devices offer the consumer content and applications not supported by previous generations of mobile devices. As shown in Figure 1-16, a smartphone can generate as much traffic as 49 basic mobile

phones, a tablet as much as 127 basic mobile phones and a laptop as much as 227 basic mobile phones. While there is an overall growth in the number of mobile devices and connections, there is also a visible change in the range of devices. Throughout the forecast period, we see an increasingly intelligent range of devices, with a growing number featuring greater processing resources and network connection capabilities, creating a growing demand for larger and smarter networks. Cisco defines smart connections and devices as those that have advanced IT and multimedia capacities, with a minimum of 3G connectivity. As mentioned earlier, 526 million devices and connections were added in 2013, with smartphones accounting for 77 percent of this growth, i.e. 406 million additional smart devices. The share of smart devices and connections as a percentage of the total will increase from 21 percent in

2013 to over half, at 54 percent, by 2018.

Figure 18-1 shows the impact of smart connections and devices on global traffic growth. Globally, smart traffic will grow from 88 percent of the total for global mobile traffic to 96 percent by 2018. This is much higher than the ratio of the number of smart

devices to non-smart devices (54% by 2018) because, on average, a smart device generates much higher traffic than a nonsmart device.

Traffic growth per device is faster than the growth in the number of devices. As shown

in Table 1-19, the growth in mobile data traffic is between two to five times higher than the growth rate for devices.

The following are some of the main promoters of the growth in average use: Increase in mobile network connection speeds. High-definition video will be more widespread, and the percentage of streaming content is also expected to increase. The shift to video on demand will influence mobile networks, as it did with the fixed Internet network. Traffic can increase dramatically even while the total amount of

time spent watching video remains relatively constant. As the capacity of the mobile network improves and the number of users with multiple devices grows, operators are more likely to offer mobile broadband packages comparable in price and speed to those of fixed broadband. This is encouraging the substitution of fixed broadband with mobile broadband. Mobile devices increase an individual’s time online, and this increase in time will probably lead to an increase in total minutes of use per user, resulting in a growth in traffic volumes. Since mobile video content has a much higher bit rate than other types of mobile content, this will generate much of the growth in mobile traffic until 2018. Mobile video will grow at a CAGR of 69 percent between 2013 and 2018, the highest rate of growth forecast in any mobile application

category. Of the 15.9 exabytes per month that will be carried by the mobile network in 2018, 11 exabytes will be due to video. Figure

Mobile devices have memory and speed limitations that would be a disadvantage with regard to media consumption, were it not for the fact that an emerging cloud-based application and service model is becoming established. Cloud applications and services, such as Netflix, YouTube, Pandora and

Spotify, allow mobile users to exceed the memory capacity and processing power limitations of mobile devices. A user with an 8 GB smartphone consumes more content over the course of two years through streaming video and music than could be stored physically on the device itself. A smartphone user who registers with Netflix, Pandora and Facebook will generate more than twice the volume of traffic generated by a smartphone user who only uses email and web applications. Globally, cloud applications will account for 90 percent of total mobile data traffic in 2018, compared to 82% percent in 2013. Traffic from the cloud will experience 12-fold growth from 2013 to 2018, a compound annual rate of 64 percent (Figure 1-21).

Globally, the average mobile network connection speed in 2013 was 1,387 Kbps. The average speed will grow at a compound annual growth rate of 13 percent, and will exceed 2.5 Mbps by 2018.

The growth forecasts for mobile traffic given above are particularly relevant in light of the fact that only two years ago, smartphones were considered expensive toys for enthusiasts and Apple fans. Smartphones are now capturing a growing proportion of the total sales in mobile devices in markets throughout the world (Figure 1-23). In the first quarter of 2013, the global penetration of smartphone sales surpassed sales in basic function mobile phones, reaching 216.2

million units sold, out of a sales total of 418.6 million phones.

The sale of terminals is not driven by hardware features (‘what the terminal can do’) as was previously the case, but by the user interface and available applications (‘what can I do with the terminal’). The two leading smartphone platforms, iOS and Android, are driven by a demand economy,

where the demand generated (including the number of applications) has a much greater effect on sales than the efficiency of the supply chain. Since October 2011, iOS and Android have been leading the smartphone market, and in July 2014 there were more than 1.2 million and 1.3 million applications, respectively. The other platforms remain far behind, with a lower order of magnitude in terms of their number of applications: BlackBerry has 130,000 applications and Windows Mobile 255,000 applications. Platforms like iOS and Android are able to attract substantial financial investment from developers, investors and brands. Taking IOS as an example, and estimating that the development of an app costs on average $ 15,000, the 1,200,000 apps available for iOS represent an investment of $ 18 billion in the iOS ecosystem. This investment contributes directly to the sales of iOS devices, estimated at $ 105 billion for

the year ending September 2014. The application store business is the exact opposite of the Telco content business. As such, application stores, such as Apple’s App Store and Google’s Android Market, should not be confused with profit centres. The Apple and Google stores serve rather as checkpoints for the ecosystem. With over 85% of the downloads coming from free apps in the iOS and Android stores, the revenue from the 30% on the price of paid applications funds the operating cost of the purchase and distribution of applications, which, for Apple, now amounts to about $ 1.2 billion. In addition to mobile platforms, HTML5 technology is also interesting, with the potential to become a common system in all smartphones. HTML5 is the only technology that is supported by Android, iOS, the new versions of BlackBerry OS and the Windows Phone platforms.

Microsoft, Facebook and mobile operators have very different motivations, but all have their eyes on HTML5 as a technology that could help disintermediate app stores as content distribution silos, reducing the power of Apple’s iOS and Google’s Android platforms. However, in its current state, HTML5 can neither stop nor disturb the major mobile platforms. To become a viable alternative, HTML5 needs to go beyond being just a development tool, and to converge around a dominant Web application solution for searches, monetisation, distribution and retailing. Platforms need apps that generate income, and developers are the growth engine of smartphone ecosystems. At the same time, the developer’s attention is limited; developers are very critical ‘platform consumers’ and they have to make much higher investments when adopting a new platform. It is estimated that the minimum

purchase cost for an application developer is over $ 2,300 in the case of Apple. As such, Apple, Google, Nokia, Microsoft and RIM need to invest billions of dollars to convince developers to create applications for their platforms. In addition, developers are motivated by a complex series of incentives, which includes potential revenues, the number of users within reach, the capacity to find funding, and the usefulness of a platform.

The innovation unleashed by smartphone apps puts traditional telecommunications profit centres under pressure, not only with regard to value-added services, but also to basic messaging and voice services. In 2014, Apple and Google together control more than 1.4 billion users through their iOS and Android platforms. Both are strategically reducing the role of mobile operators as

‘connectivity suppliers’. Internet giants such as Facebook and Amazon use social-centric and retail-centric strategies to profit from mobile connectivity. Startups like Foursquare and Instagram have piloted purely mobilebased services. Communications companies such as Skype, WhatsApp and Viber put pressure on the core business of telecommunications companies, particularly SMS and voice. This means that the telecom companies are under pressure because the basis of competition in the mobile industry has changed fundamentally. It has changed from ‘reliability and network scale’ to ‘choice and flexibility of services’, a change represented by the transition from ‘mobile telephony’ to ‘mobile computing’. The change in the fundamentals of competition is substantial and irreversible. Mobile platform operators do not compete for telecommunications service revenues but for control of the key

points in the digital value chain, with business models that embrace consumer electronics, online advertising, software licenses, e-commerce and more. Thus, competition between mobile platform operators is asymmetric, because unlike Telco, they do not aim at offering a mobile connectivity service. Since iOS and Android have reached critical masses and attained stable positions in the market, telecom operators must find ways to build unique value proposals upon these platforms, rather than compete with them. Telecommunication companies need to shift the focus of their innovation from technologies (HTML5, NFC, M2M...) to ecosystems. This requires a much greater understanding of how ecosystems are designed and how ecosystems, viewed as multi-sided platforms, absorb and amplify innovation. Many telecom operators have evolved as ‘all in one’ businesses, optimised

to compete on the basis of the reliability and scalability of a small set of key services (voice, SMS, data). To adapt to the changing market, Telco operators should be viewed as entities composed of three distinct business layers: access, connectivity and distribution. Distribution plays a key role here, in that ecosystems are new channels in which the partners are retailers that drive the Telco services towards new users, and create new patterns of use and market niches. To succeed in creating an ecosystem, Telco operators have to consider developers as value-added resellers, and should therefore devise an API proposal that allows the developers’ business models to be aligned to the Telco business model. 1.3.1.6 The Things Platform In view of the technological changes associated with the Internet which have impacted our lives in such a short space of

time, we may wonder what the future holds in store for us. It is difficult to predict with certainty, but some main trends can be seen that give an idea of the future possibilities of the Internet and its respective reference and study scenarios. Firstly, the aspect of universal access, which the Internet combines with open protocols, allows a constantly increasing number of devices to be connected to a network. The Internet is emerging as the primary means of data exchange between various types of devices. We no longer talk merely of an Internet of people but also of an Internet of things. The Internet of Things (IoT) is a neologism that refers to the extension of the Internet to the world of objects and physical places. The Internet of Things is a new network revolution. Objects become recognisable and acquire intelligence by communicating information about themselves and accessing information

collected by others. Alarm clocks ring earlier when the traffic is heavy, or later because they are linked to your agenda and know that you have rescheduled your morning meeting; plants communicate with the watering can when they need to be watered; running shoes transmit times, speed and distance to compete in real time with people on the other side of the world; and sensors on medicine bottles alert family members if someone forgets to take their medication. Any object can acquire a proactive role through connection to the Internet. The purpose of the Internet of things is to allow the electronic world to map the real one, giving an electronic identity to things and places in the physical environment. Objects and places equipped with RFID or QR codes communicate information within a network or to mobile devices such as smartphones. In 2008, the number of objects connected

to the Internet already exceeded the number of people on Earth. Cisco forecasts that there will be 50 billion objects connected to the Internet by 2020, which will not only include smartphones and tablets, but also various types of objects and sensors. 1.4 A multidimensional model to represent the Internet 1.4.1 The limitations of the models analysed Analysing the Internet with CAS, GPT or LTS models provides a general overview to determine the main features of the Internet as a whole and allows us to study how this relates to and affects other systems. The disadvantage of these analysis models is their lack of specificity in the analysis of the nature and composition of the Internet, as they do not provide scholars with the necessary tools to break it down and to

understand how its various parts interact. The more specific models of analysis, such as those based on layers, flows or the value chain, have the advantage of looking into the Internet from an industrial perspective, identifying its component parts, and seeing how these relate to each other. However, these specific models only use a single dimension of analysis, aimed at identifying elements of the industry and seeing how they are related, but they are limited in their analysis of these elements, which could be examined in greater depth to identify, for example, the distinctive characteristics, the structure of supply and demand, and so forth, of each one. 1.4.2 The LIIF Framework Aside from the models analysed, there is abundant literature consisting of Internet studies and analyses that examine supply, demand, markets, business models and

more, with very specific studies on individual parts of the Internet. These studies, however, have the disadvantage of not providing the reader with an overview and not relating the individual part examined with the overall picture as a whole. In reality, they lack a framework of analysis that can guide the study of the parts of the Internet, ranging from general views to very specific ones, while remaining within the context of a comprehensive framework. Having therefore noted the limitations of the models for analysis of the Internet, and the lack of general benchmarks in most studies and analyses in the literature on the Internet, we decided to create a multidimensional model based on a specific model for analysis of the Internet industry that could be developed by integrating a dimension composed of elements of economic analysis. The result is a proposed framework called LIIF [1], which allows each

element or group of elements of the specific model representing the Internet industry to be analysed under various economic dimensions, thus not limiting the analysis to a mere identification of the elements and the relationship between them, as is currently the case.

The LIIF framework is, therefore, quite

distinct from the models that we saw previously: The general models provide a general overview of the Internet, treating it like a black box; these models are useful for understanding aggregate effects and comparing the Internet to other systems. The specific models look inside the Internet, trying to analyse its inner composition and define its industry. The LIIF framework examines the elements that comprise the Internet industry and adds a dimension of economic analysis so that each element of the Internet industry is examined under various economic dimensions. The relationship between the general, specific and LIIF models can be represented

by a globe, in which the analysis of the Internet industry becomes more specific as we move from the outside inwards.

The outer layer of the globe is composed of general models, which are better for obtaining an overall view of the Internet and relating it to other systems. The next layer is composed of specific models that provide a view of the internal nature of the Internet.

The core consists of the LIIF, i.e. the incorporation of each element of the Internet industry broken down into various dimensions of economic analysis. To create this type of framework, a specific model of the Internet industry must be identified, together with the dimensions of analysis to apply to it. With regard to the identification of a specific model of the Internet industry, we decided to use a layered model, appropriately revised in the light of the latest developments in the Internet. The layered model has the very important advantage, in our view, of showing the reader how the existence of the upper layers depends on that of the lower layers, highlighting in particular how the Internet has been established over time in subsequent layers. What was required, initially, was a diffusion and evolution of the infrastructure, which gradually reached the

users and allowed them to access the Internet. The availability of infrastructure then enabled the development of the higher layers, with more applications created, more services and content generated and more users. The layered model that we created for the framework started with an analysis of the models examined and underwent a personal evolution based on criteria of completeness, in an attempt to create an image that is as up-to-date as possible with today’s Internet industry. Figure 1-27 shows the first piece of the LIFF, consisting of a layered model of the Internet industry.

We will now examine its composition in detail. Internet Infrastructure Layer This layer of the model consists of the following sub-layers.

Internet Equipment – this represents all the manufacturers of equipment and materials needed for the Internet infrastructure. It includes: Fibre optic manufacturers Line accelerator hardware producers IP networking hardware manufacturers Server manufacturers Core Network – this represents all the operators involved in the creation and management of the basic Internet infrastructure. It includes: Companies that design and build the core network Core network maintenance companies Internet Access Layer This layer includes the operators that provide access to the Internet infrastructure.

Access Services - this represents all the operators that provide access to the infrastructure: Wired ISP - operators that provide cable Internet access: Telephone operators - classic telephone companies that offer broadband Cable operators - cable TV operators that offer Internet access Power line operators - operators that offer Internet access via electrical cables Wireless ISP - operators that provide Internet access without the use of cables: Mobile operators - classic mobile phone companies that offer Internet access via mobile phone Satellite operators - operators

offering Internet connection via satellite. Wireless ISP operators operators that offer Internet access through hot spots WiMax operators - operators that offer Internet access through the new WiMax technology. Access equipment - manufacturers of devices that can connect to the Internet. Manufacturers of PCs and dedicated Internet hardware (computers, IP cameras...) Manufacturers of smartphones and Internet-enabled phones Manufacturers of other Internetenabled devices (Internet radios, car stereos...) Operating

systems

and

access

software - manufacturers of software through which the Internet can be accessed. Operating system manufacturers classic operating systems on which access software such as browsers circulate (Windows, Mac OS, Linux, Chrome OS...). Browser manufacturers companies that create software for browsing the Internet (Microsoft Explorer, Mozilla Firefox, Apple Safari). Manufacturers of other access software - companies that create specific access software (e.g. Microsoft Outlook for email). Internet IT Layer This layer includes operators that create

software for the Internet or provide services. Internet Software - this represents all operators that produce basic software: Multimedia application manufacturers (e.g. RealNetworks, Macromedia) Web development software companies (e.g. Adobe, Microsoft) Internet commerce application producers (e.g. Sun, IBM, Magento) Content management system manufacturers (e.g. WordPress, Joomla) Search engine developers (e.g. Autonomy) Manufacturers of web-enabled databases (e.g. Oracle, MySQL) Companies offering products and services for information

security on IP networks (e.g. Avira, McAfee) Internet Services - Operators that provide Internet-related services IT and Internet consulting firms Hosting companies Companies that create websites Companies that provide training on Internet-related topics Companies that conduct market research and business intelligence Online communications companies Internet Intermediary Layer This layer includes operators that intermediate technology and/or services on the Internet. Navigation represents

Intermediaries – all intermediaries

this that

handle web browsing: Search engines Portals E-commerce Payment Intermediaries this represents all intermediaries that handle online payments Payment systems based on a credit or bank account to enable e-commerce transactions (e.g. Gestpay from the Banca Sella Group) Payment systems provided by non-banking institutions that operate on the Internet and are only indirectly associated with a bank account (e.g. PayPal) E-Commerce Intermediaries - this represents all operators that provide platforms enabling transactions between buyers and sellers Marketplace - environments

where sellers have their own online shops within the platform (e.g. Alibaba) Auction sites - platforms where sellers auction their products (e.g. eBay) Daily Deals sites - sellers offer products at reduced prices (e.g. Groupon) Advertising Intermediaries - this represents intermediaries that offer advertising spaces Classified - sites that host classified ads Advertising Networks - these acquire spaces from various publishers and make them available to advertisers Advertising Exchange intermediation of advertising spaces in advertising networks

Participatory Network Platforms these are platforms that help create content and intermediate social interaction between users (Facebook, LinkedIn, YouTube). Internet Content Layer In this layer we group operators that interact directly with users, offering them goods, services or content. Content Sites - these are operators that offer users various types of content News sites - topical news, local, national or international news Entertainment - sites with multimedia entertainment content (text, photos, video) Vertical sites - websites with specialised thematic content on a given topic

Content Platform - this represents operators that provide their own or third-party content managed by highly technological platforms Aggregators Comparison shopping sites Geo Platforms E-Commerce - this represents e-tailers that offer products and services sold over the Internet Physical Goods - online stores that sell ‘physical’ products Services - e-shops that sell services, e.g. travel Digital Goods - e-tailers that sell digital content, such as music or videos Online Services - this represents operators that offer online services of various kinds Productivity services

Communication services Entertainment services Creative services Now that the layered model of the Internet industry has been defined, we also need to define the various aspects of the layer of analysis that will be applied to the industrial layer. The layer of analysis was defined empirically by identifying the main topics of analysis found in the literature on the Internet. The following aspects were chosen for the layer of analysis: Characteristics - the literature features numerous studies that analyse the distinctive characteristics of the Internet or parts of the Internet. Application of this dimension of analysis to the layered model of the Internet industry enables close

examination of the distinctive characteristics of a single element, a group of elements, a layer or a set of layers of the Internet industry. Demand - we refer to the study of demand on the Internet, from the installed bases of connected devices to the number of users online. Application of this dimension of analysis to the layered model of the Internet industry facilitates in-depth study of the demand of a single element, a group of elements, a layer or group of layers of the Internet industry. Supply - we refer to the study of supply on the Internet, from the types of operators and services offered to the phenomenon of startups. Application of this dimension of analysis to the layered model of the Internet industry allows in-depth study

of the supply in a single element, a group of elements, a layer or a set of layers of the Internet industry. Economic models - the literature contains numerous studies on economic theories applied to the Internet domain. Application of this dimension of analysis to the layered model of the Internet industry enables in-depth study of economic theories and models concerning a single element, a group of elements, a layer or a set of layers of the Internet industry. Business models - the literature contains abundant discussion on the study of the business models found in the Internet industry. Application of this dimension of analysis to the layered model of the Internet industry allows us to analyse the business models of a single element, a group of

elements, a layer or a set of layers of the Internet industry. Markets - studies on the Internet contain abundant analysis of individual markets in the industry, such as advertising and e-commerce. Application of this dimension of analysis to the layered model of the Internet industry allows us to analyse the markets of a single element, a group of elements, a layer or a set of layers of the Internet industry.

Having defined the layered model of the Internet industry and the layer comprising the aspects of analysis, we can now define the reference framework for the study of the Internet industry as a whole.

The industry model has been combined with the analysis model to produce the multidimensional framework for study of the Internet that will be used as a guide in the following chapters. As seen in Figure 1-29, each element of the LIIF framework cube is actually an element of the industry layer, i.e. the layered model of the Internet industry analysed within a specific dimension of the layer of analysis. The LIIF framework can be represented in a simplified form, as seen in Figure 1-30. To simplify graphic visualisation, we have included the names of the model layers on the front panel and the dimensions of analysis identified earlier from front to back on the top panel.

The framework can be used for highly detailed analysis as well as for a very general overview. For example, we could select the Industry layer for Internet Content and study its characteristics, demand, supply or any other dimension, specifically in regard

to that area of the Internet industry. Likewise, we could also explode the industry layer in greater detail, viewing all its components and analysing them individually. For example, Figure 1-31 shows us how the applied framework works in detail, with an exploded view of the Internet Content Layer. The details in the figure above illustrate the purpose of the framework to provide readers with a tool for studying the Internet. The analyses from the literature can be framed within a type of general map, which allows the reader to move in from an overview to specific views and from specific views out to a general overview. The LIIF multidimensional framework we have created will serve as a guide in our analysis of the Internet in the following chapters. Our analysis will not examine all the layers, but only those that seem most relevant to the Internet economy, i.e. the

layers that we have defined as: Internet Content Layer, Internet Intermediary Layer, and which we refer to as the Internet Web Ecosystem. This choice was motivated by the fact that these layers have more distinctive characteristics and properties than those we refer to as the Internet Network & IT Industry, which retain approaches that correspond more to the ‘old economy’, and the term ‘new economy’ was coined in order to distinguish the type of economics and business found in these layers of the model. Thus each dimension of analysis will be covered in a chapter, in which we will mainly analyse the Internet Web Ecosystem, whereas the Internet & IT Industry Networks will only be mentioned briefly, for the reasons stated above.

2 Characteristics

In the first chapter, after introducing the main definitions of the Internet and examining how it can be discussed from a sociological, technological and economic perspective, we arrived at a definition of the Internet as an industry in its own right. Taking up this last point, we provided a model with five layers representing the main drivers. Each level is connected to the adjacent ones to indicate a continuum between the parts rather than a clear distinction of the models. These layers are then distinguished according to the following scheme:

Internet Internet Internet Internet Internet

Infrastructure Layer Access Layer IT Layer Intermediary Layer Content Layer

In addition to this division into five levels, a second main categorisation can also be added. According to this, the five layers can be divided into two groups. One group is defined as the Internet IT & Network Industry (which includes the infrastructure, access and IT levels), and the other is called t h e Web Ecosystem, which includes the intermediation and content layers. Examining the model in more detail, each level contains a series of sub-levels characterised by their specific products and services, as well as their respective markets. Each individual sub-level represents a market. The sum or combination of the sublevels represents the reference market of

each individual layer. The sum and combination of all five layers provides an overview of the Internet as a complete industry.

2.1 Internet Infrastructure Layer The first layer is Internet infrastructure, which includes all the manufacturers of equipment and materials needed to ensure access to and the functioning of the Internet. Access to and use of Internet services necessarily depend on the use and installation of physical infrastructure that allows connections between various devices. The connections between the various network nodes require the physical connection of each device. This first level in which actors are grouped together is called Internet Equipment and includes all the operators that produce and market products used to build the network. A second group, called Core Network, comprises all the operators involved in the creation and management of the basic Internet infrastructure. The former provide

technologies and products to build the network, while the latter are involved in the design, installation and maintenance of the network. To summarise schematically, the first layer is composed of two sub-sets, one including component and equipment manufacturers, and the other installers and designers. The infrastructure layer has four distinctive characteristics.

2.1.1 Cumulative infrastructure The Internet infrastructure is described as being open because it can potentially expand to infinity, according to two principles. Firstly, its expansion is based on the capacity of the network to integrate other networks and sub-groups of networks; its growth

potential therefore depends on the possibility of creating new networks of connections. The other aspect that enables the growth of the network is its capacity to integrate other infrastructure technologies. For this integration to occur, however, it is important that there are no conflicts between the new technology and the previous one. The most significant example of this second aspect is the great change that the Internet infrastructure has undergone in recent years, namely the integration of ‘wireline’ networks, based on cables, with cable-free ‘wireless’ networks. The integration of the two networks has also allowed the development and integration of diverse types of technological equipment. Thanks to the development of wireless infrastructure, the technologies used by telephone companies can now also be integrated into the Internet, together with an entirely new series of devices, such as

tablets, which had developed previously.

no

reason

to

be

In light of the above, the technologies currently available on the market can be broadly classified into two categories, wireless and wireline (also called wired or fixed). From a technical and engineering perspective, wireless technologies make use of the modulation technologies of radio carriers (2G-3G-4G mobile networks, WiFi, Hiperlan, WiMAX, radio links, satellite, DVB,

etc.), whereas wireline technologies use various forms of technology based on the transmission of information via cable. The main technologies used are coaxial, fibre optic (FTTx) and twisted pair cables (typically all xDSL and Digital SubscriberLine technologies). If we consider the development and investment costs of both network types, the costs are seen to differ greatly, which is a factor that influences the development of infrastructure, especially in areas with low commercial potential. Wireless networks have lower investment costs if measured in relation to territorial coverage. On the other hand, wireline networks are economically more efficient in urban areas with high population densities, but represent one of the major obstacles to the development of Internet infrastructure in areas with low population densities or that are difficult to reach due to the geological features of the

landscape. In terms of speed, wireless networks are a few years behind fixed networks, but offer mobility and allow user activation in real time, with no need for installation of cables.

One of the main characteristics of the Internet is that it is defined as an open system. Its openness is mainly due to the fact that it is dynamic and decentralised. A network is defined as decentralised when there is no single point for gathering and

sorting information. In other words, from a logistic and hierarchical perspective, there is no individual or group of people that form the crucial node for the exchange of information. Being decentralised means using not only the centre but also the periphery of the network as a point of exchange and transmission, without sacrificing the quality or quantity of information transmitted. Because the Internet is decentralised, it is also a dynamic system that evolves autonomously and changes continuously. These two features make the Internet a highly modifiable and scalable structure, in relation to three specific conditions: the network connection architecture is open, decentralised and distributed, with multi-directional interactivity; all communication protocols and their implementations are open, distributed

and subject to change (although some network manufacturers retain exclusive rights over part of their software); government institutions are founded on the principles of openness and cooperation that form the cultural basis of the Internet. Decentralisation and dynamism are encouraged by a high degree of selfregulation. Self-regulation has been one of the key factors in the incredible growth of the Internet and gives it sufficient flexibility to adapt to new future needs. 2.1.2 Programmable Infrastructure Open architecture, as mentioned above, is the key to the success of the Internet. The possibility for any user to become a technology producer and capable of shaping the entire network, according to evolutionary

patterns and methods, is one of the main strategic factors of its success. Programming possibilities depend on the level of difficulty involved in adding pieces to the system. Wherever a backbone is available, any user can add programming nodes. However, this depends on costs and the fact that the programming software should always be open and available, as in the case of the Internet. It was from this type of multiform and multi-stimuli system that the Internet began, as a consequence of a series of unplanned applications and actions. 2.1.3 Infrastructure that eliminates time and space Physical distances do not exist in the Internet, in the sense that they do not affect the distribution of communications. The Internet operates through copper and fibre optic cables, which are 1/3 denser than a vacuum, allowing signals to travel at a speed

close to that of light (200 thousand km/s). The speed of data transmission for a planet the size of Earth is virtually equivalent to real time transmission speed. With a fixed optimal transmission speed, there are only two ways to make the Internet even faster: Increasing the number of bits that travel across the connection Increasing the speed of the connection switches in the links between one connection and another. Routers are becoming increasingly fast, allowing instantaneous switching, while fibre optics and wireless technologies allow networks to send a greater number of bits at a time. 2.2 Internet Access Layer The second layer is called the access layer.

This layer includes all the operators that provide access to the Internet infrastructure. The Internet can now be browsed in various ways; connection to the Internet is no longer a feature exclusive to computers. Now that mobile and tablet connections have become established, we are moving towards increasingly hybrid systems of connection and integration of online services, where even televisions, video cameras and still cameras are beginning to use Internet connections. This is made possible by providing all electronic devices with a program to enable Internet browsing. The browser program is not the only system that allows the online navigation of each device. There are also other support services and components that allow access to the Internet, as described in the second layer. The various services produced are thus summarised as:

Access Services - these represent all operators that provide access to the infrastructure: Wired ISP - operators that provide cable Internet access: Telephone operators - classic telephone companies that offer broadband Cable operators - cable TV operators that offer Internet access Power line operators - operators that offer Internet access via electrical cables Wireless ISP - operators that provide Internet access without the use of cables: Mobile operators - classic mobile phone companies that offer Internet access via mobile phone Satellite operators - operators

offering Internet connection via satellite. Wireless ISP operators operators that offer Internet access through hotspots WiMax operators - operators that offer Internet access through the new WiMax technology. Access equipment Manufacturers of devices that can connect to the Internet Manufacturers of PCs and dedicated Internet hardware (computers, IP cameras...) Manufacturers of smartphones and Internet-enabled phones Manufacturers of other Internetenabled devices (Internet radios, car stereos...) Operating systems and access software

Manufacturers of software through which the Internet can be accessed Manufacturers of operating systems - classic operating systems on which access software such as browsers circulate (Windows, Mac OS, Linux, Chrome OS...). Browser manufacturers companies that create software for browsing the Internet (Microsoft Explorer, Mozilla Firefox, Apple Safari). Manufacturers of other access software - companies that create specific access software (e.g. Microsoft Outlook for email).

The access layer has five characteristics, as described below.

major

2.2.1 Universal Access The Internet provides universal access, giving the same potential to anyone with access to the network, regardless of where they are. Access for all is also ensured by the fact that there is a single standard of

communication by which every person who connects is able to interface and communicate with the entire network. The Internet is based on a common standard, the TCP/IP protocol, which provides the same technical interface and features to all connected computers. These common foundations make all Internet technologies equally available to whoever is connected and allow an exchange of information between all connected systems. Once connected, anyone can disseminate and receive information from the entire network. The logical scheme of Internet architecture is designed to allow the dissemination and distribution of all content freely and potentially without limits. 2.2.2 Mobility Use of the web has evolved from being limited to a physical location with a telephone cable socket to fully mobile use,

thanks to new types of connectivity such as 3G and Wi-Fi. Thus the universality of access described above becomes even simpler, particularly in terms of ease of access. Previously, users had to go to a fixed location, whereas now they can connect freely, wherever there is a WiFi connection.

2.2.3 Multi-platform Wherever there is a universal access standard, there is the possibility for different technologies to adapt to that standard and access the same types of content. Thus the establishment of multi-platform technologies (such as HTML, Flash, etc.) allows the same Internet experience on various different operating systems, such as Windows, Mac and Linux, and on different browsing software, such as Explorer, Firefox, etc.

2.2.4 Multi-Device

Universal access, on the one hand, and the capacity to transmit the same information on different types of platforms, on the other, have allowed use of the Web to go beyond the confines of the traditional PC. Now we can access the Internet through new devices that mainly rely on mobile access, such as mobile phones, smartphones and tablets. The ability to access the Internet on the move, as mentioned above, is important because it allows the development of new content and services that can be accessed online.

2.2.5 Cumulative Access

The second layer, like the first, is also a cumulative layer. Its cumulative capacity depends on the capacity of the number of users to expand. The use of new devices facilitates access by new groups of users. In recent years, it has been proven that the

increase in Internet diffusion is related to the diffusion of broadband and mobile Internet, especially in the consumer segment. 2.3 Internet IT Layer With the third layer, we leave the tangible and physical dimension of Internet products and move to an intangible level of services. While the first two layers feature infrastructure products, with a certain size and tangibility, this aspect diminishes in the third layer. This layer includes all the operators who develop software or services for the Internet. These two groups of operators are distinguished in light of the fact that some operators provide basic software while others develop software dedicated exclusively to the provision of Internet-related services. Internet Software - this represents all

operators that produce basic software: Multimedia application manufacturers (e.g. RealNetworks, Macromedia) Web development software companies (e.g. Adobe, Microsoft) Internet commerce application producers (e.g. Sun, IBM, Magento) Content management system manufacturers (e.g. WordPress, Joomla) Search engine developers (e.g. Autonomy) Manufacturers of web-enabled databases (e.g. Oracle, MySQL) Companies offering products and services for information security on IP networks (e.g. Avira, McAfee) Internet Services - operators that provide Internet-related services IT and Internet consulting firms

Hosting companies Companies that create websites Companies that provide training on Internet-related topics Companies that conduct market research and business intelligence Online communications companies

The third layer has three main distinguishing features, as we can see in the figure below.

2.3.1 Fast Evolving tech-based media Technological evolution in the context of the Internet is communicated to the entire network in real time. Whenever effective technological changes are introduced, they are disseminated and communicated around the world in real time. Thus, the time that elapses between learning by using and producing by using stages has been

remarkably shortened, with the result that all users, both suppliers and users of services, are unwittingly involved in a learning by producing process. This process triggers a virtuous circle between the diffusion of technology and its advancement.

This is the main reason why the Internet has grown and continues to evolve at an unprecedented rate in terms of the quantity

of its networks as well as the scope of its applications. The Internet is growing at a faster rate than any previous technology: if measured in terms of the number of users and the size of data transmission bandwidth, the growth of the Internet is geometric and at times even exponential. Cerf remarks that: “I think mobile has probably penetrated faster but the extent to which its penetration has been driven by mobile apps using Internet resources, perhaps Internet gets some credit in addition to the simple ability to make phone calls and text.” (Cerf, 2015). 2.3.2 Centralised computing and software as a service The term ‘computing’ describes the ability of a computer to process, count and calculate. Internet-based computing allows the sharing of calculations, resources, software and information, which are provided by one

computer to others on request. This facilitates interaction between various users and allows each one to use some of the resources made available by the others. Users do not have to worry about technological details and information. They can access the Internet with their browsers and receive the information and content they need on their devices. This information is exchanged with other computers, which store it, process it and make it available on demand, i.e. when the user accesses a particular website.

The evolution of this feature now makes it possible to offer the use of very complex software online, requiring a great processing effort. This is possible thanks to servers that

provide these services through ‘cloud’ architecture, which exploits the computational power of a series of online computers, without burdening the computer of the individual user, whose only concern is use of the service. 2.3.3 Infinite storage capability Since the introduction of the first disk drive in 1956, the density of information that can be stored has increased from 2 thousand bits to 100 billion bits (gigabits), all within a space of 2.54 cm2. The price of storage has also decreased dramatically from year to year. It has dropped from $ 700 per MB in 1981 to 0.002 cents per MB in 2010.

This has allowed the creation of online storage, with virtually endless possibilities for the storage and use of data at any time

through services such as YouTube, Flickr and Gmail. Furthermore, website owners with hosting space know that it can be also used to store data, files, documents, videos, photos, etc., that are unrelated to the site. It is a genuine virtual hard drive, although unavailable to those without a hosting space. Online data storage has become a form of business in its own right, with a number of organisations offering increasingly advanced services based on multi-platform and multi-device access capabilities. The most famous example is the American startup Dropbox, which provides synchronised storage for PCs, tablets and mobile phones, with clouds of documents and files contained within specific folders. This can all be shared by multiple users, who can edit files and obtain constantly updated versions of documents through an autosynchronisation system. The main services offered include:

1. Sharing of films, photos, music and documents. 2. Restricted or third party access. 3. The option to allow others to edit the documents. 4. Viewing of files, photos, etc. by all or just a few. 5. Classic storage in folders. 2.4 Internet Intermediary Layer The fourth layer, called the Internet Intermediary layer, catalogues all the operators involved in facilitating intermediation between the supply and demand of services, or in the provision of services to facilitate the exchange of other services or products on the Internet. Intermediation between other parties is essential to bring together those who offer services or products and those in need of them. Information is available freely and

openly online. However, if there were no brokerage and mediation tools and services, the information would not be accessible, due to information asymmetries caused by the fact that no one has sufficient resources to know the exact location of all information. Since information represents ‘experience goods’, which only acquire value when consumed, facilitating its use is crucial for releasing most of the value available on the Internet. This layer contains a catalogue of all the operators that provide access to the Internet infrastructure and enable the exchange of information. Navigation Intermediaries – this represents all intermediaries that handle web browsing: Search engines Portals E-commerce Payment Intermediaries -

this represents all intermediaries that handle online payments Payment systems based on credit or bank accounts to enable e-commerce transactions (e.g. Gestpay from the Banca Sella Group) Payment systems provided by non-banking institutions that operate on the Internet and are only indirectly associated with a bank account (e.g. PayPal) E-Commerce Intermediaries - this represents all operators that provide platforms enabling transactions between buyers and sellers Marketplaces - environments where sellers have their own online shops within the platform (e.g. Alibaba) Auction sites - platforms where sellers auction their products

(e.g. eBay) Daily Deals sites - sellers offer products at reduced prices (e.g. Groupon) Advertising Intermediaries - this represents intermediaries that offer advertising spaces Classified - sites that host classified ads Advertising Networks - these acquire spaces from various publishers and make them available to advertisers Advertising Exchange intermediation of advertising spaces in advertising networks Participatory Network Platforms these are platforms that help create content and intermediate social interaction between users (Facebook, LinkedIn, YouTube).

We can also identify three main characteristics in the fourth layer, as shown in Figure 2-19.

2.4.1 Information Asymmetry reducer An asymmetry of information exists when one party in the transaction has information that the other party does not possess and this information is important for the success of the transaction. The Web reduces these information asymmetries as the other party can seek the

missing information on the Internet. The vast majority of participants in the digital communication media are active creators of information, as well as being recipients at the same time. In the past, this type of symmetry was a feature only seen in telephone technology. While this was a means of communication in which only two individuals could interact at one time, online computer applications, such as mailing lists, web conferences, forums and electronic message boards, make the Internet a group media. The transition from the telephone to the Internet has encouraged the development of one-to-one communication systems into many-to-many communication systems. The new communication tools used by computer networks are great levellers and reducers of organisational hierarchies. Each user has access to any other user and an equal opportunity to be heard, at least in theory.

By increasing the level of knowledge and reducing information asymmetries, market inefficiencies are also reduced. This has an important consequence: the reduction of inefficiencies in the market has a positive impact on the prices of goods and services, which are reduced thanks to an efficient level of supply meeting demand. Economically, this has a positive impact on the markets, which become more competitive thanks to an increase in transparency. 2.4.2 Flexible Mediating Technology The Internet is a technology that connects parties that are independent from one other or seek to be so. With the development of the Internet, businesses are now operating in an increasingly competitive market environment, where business relationship models are changing. The ways in which businesses interconnect are the same as

those of the offline world. What changes is the approach to services, based on the characteristics of access and use of products and services on the Internet. Interconnection can be: business to business (B2B) business to consumer (B2C) consumer to consumer (C2C) consumer to business (C2B) Each type of interconnection encourages the development of a market and the potential of new products and services. Various different types of value chains can develop from the interaction of each single interconnection. This is a potential that companies operating on the Internet have exploited wisely, creating spaces for significant growth. This growth has occurred in two important directions. Firstly, there has been a process of vertical integration

upstream or downstream of the individual value chain. Secondly, a system of diversification has been carefully developed, based on more or less composite processes. Various degrees of diversification from the original core business have allowed the development of new forms of interconnection and new market opportunities. 2.4.3 Increasing Management Efficiency The use of the Internet as a management tool improves efficiency in many sectors of the economy, leading to a far-reaching restructuring of business processes. This efficiency is particularly due to the use of Web technologies for better management of the industry value chain and the supply chain within the Internet: companies can now plan with better results, share information within the structure more efficiently and interact more effectively with suppliers and customers. The improvement of logistics and

service management influences the competitiveness of the system. Improved and optimal use of online services facilitates integration between operators. Increasing the efficiency of services on the Internet depends in particular on the capacity of certain operators to improve interconnections, nodes of exchange and any congestion that can negatively affect perception of the effectiveness of Internet use.

2.5 Internet Content Layer The fifth and last layer includes all the operators that interact directly with Internet users. Direct interaction occurs through the

offering of consumer-type services, products and content. The operators in this layer are divided into four main categories, as seen below. Content Sites - these are operators that offer users various types of content News sites - topical news and local, national or international news Entertainment - sites with multimedia entertainment content (text, photos, video) Vertical sites - websites with specialised thematic content on a given topic Content Platform - this represents operators that provide their own or third-party content managed by highly technological platforms Aggregators

Comparison shopping sites Geo Platforms E-Commerce - this represents e-tailers that offer products and services sold over the Internet Physical Goods - online stores that sell ‘physical’ products Services - e-shops that sell services, e.g. travel Digital Goods - e-tailers that sell digital content, such as music or videos Online Services - this represents operators that offer online services of various kinds Productivity services Communication services Entertainment services Creative services

The content layer, in turn, is distinguished by three main characteristics

2.5.1 Transaction cost reducer Transaction costs are related to the search for buyers and sellers, the search for information about products, and the negotiation, drafting and monitoring of contracts. These types of transaction costs are viewed as costs of information impactedness. This definition refers to costs

where information related to a transaction is not available to all the parties involved and is therefore exploited by one party to its own advantage. Transaction costs thus increase, due to the inability of the individual to manage this dichotomy. Intermediaries therefore help to manage information flows, which can be channelled to help individual users assess the costs related to information impactedness. Caution must be exercised, however, since an increase in the number of intermediaries can lead to a rise in costs for the management and use of services. The Internet has been effective in this area. The capacity to reduce the number of intermediaries, or to select online those that are most effective, has allowed the sales price of products and services to be reduced by eliminating wholesalers and retailers from the value chain. This happens because the reduction in transaction costs applies not only to the manufacturers but also to the

intermediaries, because although transaction costs are reduced, the minimum value to which they tend is not fixed but depends on the type of transaction. The activity of the intermediaries is not limited to connecting supply and demand. Intermediaries provide a variety of services, which mean that whenever consumers make a purchase, they are buying a package of services. Most of the services offered to customers involve help in finding and evaluating products, identifying users’ needs, and the assumption of consumer risk, by enabling buyers to obtain a replacement or refund for products with which they are not satisfied. However, intermediaries also offer services to manufacturers, such as the dissemination of information on the products, the provision of consumer information, and the assumption of commercial risk. The Internet thus reduces transaction costs in terms of time and money by reducing the

costs related to seeking information about the market and the definition of agreements. In addition, routine transactions, including the making and tracking of payments, and the processing and communication of financial information, can be managed less expensively thanks to the use of Internet technologies. 2.5.2 Supply of Creative Content The Internet is primarily a knowledge and information network, and as such is an extraordinary source of content. It allows the use of content on demand with a one-tomany approach. If, on the one hand, there is no limit to the creative skills of the users, the unlimited amount of content can also be tracked and archived, due to infinite possibilities for virtual storage. During an initial phase, printed content was digitised, through a process of dematerialisation of information. In a second phase, users

switched from a passive mode of Internet use to one with an evolved role as usercreators. In the so-called 2.0 phase, users themselves created content that they then uploaded to the network. The advent of Web 2.0 brought an explosion of user-generatedcontent, not only created offline and then uploaded to the network, as with pictures or videos, but also content created online, such as threads, blogs, reviews and articles. As this system has evolved, it has enhanced the competitive landscape and market opportunities, both for traditional operators as well as for newcomers. The digitisation of content and its evolution in a different manner to traditional content has provided new business opportunities. This has benefitted organisations that were already involved in the production of media content and has led to the creation of a huge number of new companies in the sector.

2.5.3 Content Unbundling Web searching has changed the way publishing and content marketing are managed. The old publishers’ saying, ‘content is king’, has been replaced by the new Web 2.0 slogan ‘the user is king’. Just as iTunes allows music buyers to acquire an individual song separately from the entire album, so too Google allows any searcher to rapidly identify and download articles of all kinds from thousands of sources. This possibility of obtaining a single item, song or piece of information has wide repercussions for both users and business: Users no longer need to buy or consume more than what they really want Content owners have to pay very serious attention to this disaggregating trend, as it is cannibalising sales of newspapers,

books and CDs

3 Internet demand

In this chapter, we will analyse the Internet from the perspective of demand. Generally, studies on Internet demand focus on infrastructure and the demand for Internet connection. Using our framework, however, it can be seen that demand for the Internet can be analysed from various perspectives, i.e. a demand can be identified for each layer of our model, and thus we have demand for infrastructure, demand for connection, demand for Internet-related IT services, demand for intermediation services and demand for content and products on the Internet. In this chapter we will examine studies on the aggregate demand of the

entire Internet industry based on the analysis on expenditure, conducted by major global consulting firms such as McKinsey Global, BCG and IDC. We will then examine the reference framework in more detail, analysing demand in the context of the layers of the model. Attention will also be paid to analysis of the types of demand that led to the definition of the main phases of the Internet, from its beginnings up to the present. 3.1 Internet demand viewed as analysis of expenditure 3.1.1 The impact of the Internet on growth (McKinsey, 2011) The McKinsey Global Institute recently conducted a study aimed at assessing the impact of the Internet on major global economies5. An expenditure methodology

was used, i.e. once the sectors of the Internet economy had been identified, their expenditure was calculated in terms of the following components: private consumption - the total consumption of goods and services by consumers via the Internet or in order to obtain Internet access, including electronic equipment, turnover of broadband telecom operators on the retail market, the mobile Internet market, hardware and software consumption, and smartphone consumption. public expenditure - this includes Internet spending for consumption and investment by the government (software, hardware, services and telecommunications) at pro rata of Internet. private investment - this is private

sector investment in Internet-related technologies (telecommunications, extranet, intranet, websites, etc.). trade balance - this includes exports of goods, services and Internet equipment, plus B2C and B2B ecommerce, from which all associated imports have been deducted. Electronic equipment was calculated at an estimated pro rata for dedicated Internet use, the goods and services sold on the Internet were recognised at their full value, and subscriptions to broadband and mobile Internet were taken at 100%. McKinsey examines the thirteen countries that together account for over 70% of global GDP and assesses the contribution of the Internet to their economies. The thirteen countries analysed are: The G8 countries (France, Germany,

Italy, Japan, UK, USA, Canada and Russia) The three countries with the highest economic growth (China, India and Brazil) The two countries with the highest Internet penetration (Sweden and South Korea). The economic analysis of the Internet focused on all activities related to Internet networks and services. McKinsey uses the following conceptual framework to organise the Internet economy: 1. Web Activities (operations using the Web as a support) 2. Telecommunication on IP or linked to the Internet 3. Software and service activities linked to the Web 4. Hardware manufacturers or providers of services and maintenance specifically for

the Web The study on consumption and expenditure analyses the contribution of the four main activities in regard to the use made by companies, individuals and governments, and seeks to identify the benefits gained through use of the Internet: Web activities: Internet-related services (e.g. e-commerce and content sold online, such as video on demand) Internet-related telecommunication (e.g. Broadband) Software and services linked to the Web (e.g. IT consulting or custom software development) Hardware manufacturers or providers of services and maintenance specifically for the Web (e.g. computers, smartphones, servers, etc.)

The Internet accounts for 3.4% of the GDP of the countries examined (data for 2009) and if measured as an economic sector, it would have a higher weight in % GDP than agriculture:

It could be said that the contribution of the Internet to the GDP of the thirteen countries has a greater economic weight than the GDP

of Canada or Spain, and it is growing at a rate faster than that of Brazil.

This helps us understand immediately how the Internet can and should be considered globally as an important ‘sector’ in the world’s economies; however, when we specifically analyse the thirteen countries, we will see that the impact the Internet has on each individual country differs, and at

times considerably. This ranges from virtuous Sweden and the United Kingdom, where the Internet has a percentage weight in GDP of 6.3% and 5.4% respectively, to Russia, where the contribution is only 0.8 % of the national GDP.

This helps us to see that the Internet is still in its infancy, although all the conditions are right for it to grow and increase its economic impact. This awareness of a future growth in weight in relation to GDP also comes from analysis of the data for the percentage contribution in the period 2004-2009: Developed countries (Sweden, Germany, UK, France, USA, South Korea, Canada, Italy and Japan) contributed an average of 21% Countries with high economic growth (India, China, Brazil and Russia) contributed an average of 3% The average for the thirteen countries is 11% 3.1.2 Weight of the Internet industry in Europe (IDC, 2011) IDC estimated that the European Internet economy in 2010 was worth around € 498

billion, or 4.1% of European GDP. The components that make up the Internet economy and their weight, according to IDC, are: B2C e-commerce, the most important element, with € 323 billion Consumer Internet spending with € 55 billion Private investments with € 96 billion Public investments with € 24 billion

IDC also estimates the e-commerce business supply chain, which is the value of products and services bought by companies via the Internet and incorporated into their offering.

B2B e-commerce is conceptually part of the Internet economy as it represents an economic impact generated directly by the Internet, but it cannot be added to the value of the Internet economy because its value is already included in the value of the products for the end consumer. 3.2 Consumer Surplus

As we have seen, the impact of the Internet on the economy is calculated as the sum of private consumption and public and private investment. This method of calculation only considers the products and services that people pay for and is not capable of evaluating the non-economic benefits gained by use of the Internet. Each day, millions of people perform searches, find information, communicate with friends and watch videos, all online and with no immediate expense for these services, since most of them are paid for by advertising. In addition, gross domestic product only includes the goods and services for which people pay and is unable to assess the value gained by consumers from economic improvements given to them freely. GDP does not take into account what users gain from exchanging messages on Facebook or finding information on Google or Wikipedia, nor does it consider the time saved by

drivers that use Google Maps or purchasers who buy from online stores. In the words of Hal Varian, chief economist for Google, ‘almost all human beings on the planet will have access to all human knowledge’. This will not be as striking as the technological leap that occurred over the last sixty years, in which people passed from horse-drawn carts to space shuttles, but it is certainly very useful and almost totally overlooked by our measurements of progress. So how can we measure the contribution of the Internet to our lives? A first attempt was made by Austan Goolsbee of the University of Chicago and Peter J. Klenow of Stanford in 2006. They estimated that the value gained by consumers through the Internet is equal to about 2% of their income - a larger amount than that spent on access to the Internet. Their calculation methodology was based not only on assessing how much

money users spent for access, but also on the amount of free time they spent online. The approach has an intuitive sense: the relative value of time increases with economic development, since workers’ incomes grow whereas their allocated time remains fixed. In March 2013, Yan Chen, Grace Young, Joo Jeon and Yong-Mi Kim of the University of Michigan published the results of an experiment which showed that people who had access to a search engine took 15 minutes less to answer a question than those without online access. Hal Varian, assuming an average hourly wage of $ 22 per worker and that people who can answer more questions would ask more, estimated that a search engine could be worth about $ 500 annually for an average worker. This figure, multiplied by the American working population, indicates an annual value of $ 65 billion.

The Internet is not the first technology that offers consumers valuable goods for free. Gross domestic product has always failed to capture many things: from the costs of pollution and traffic jams to the gains of unpaid household work. Notably, it almost inevitably misses some economic gains from new technologies. The missed consumer surplus from the Internet may be no bigger than the unmeasured gains in the production, for example, of electric light. But there is a case to be made that the unmeasured benefits of the Internet deserve more attention. The amount of time users devote to the Internet has doubled in the last five years. Information, encoded in bits, is bound to become a larger and larger share of our economic output. Much of its value will be delivered to each additional consumer at a marginal cost of nearly zero. According to research by McKinsey in 2011, this surplus is worth about € 150 billion a

year. A survey was carried out involving 4,500 web users across Europe and the United States, assessing their willingness to pay for various online activities. Fifty-two percent of the surplus created by the Web is generated by four Internet services: e-mail, searches, social networks and instant messaging.

For web service providers, this is a large value to leave on the table. In fact, the surplus is far more than three times the €30 billion companies pay providers to advertise on their Web sites and is almost as much as the €120 billion consumers pay for wired and wireless broadband access. One reason for this discrepancy may be that once a Web service is created, the cost of distributing it is very low, and most Web companies are satisfied to cover their basic costs with advertising. In the off-line world, things are different, of course: the surplus is more evenly divided between consumers and suppliers, since in many markets (books, movies, or cable TV, for example) consumers pay for content. The Boston Consulting Group also estimated the surplus created online in a recent survey in 2013, arriving at a figure of $ 970 per US connected user per year. This is more than the surplus created by offline

media, estimated by BCG at $ 900 per year.

According to BCG, the consumer surplus generated by online media will continue to grow, driven by the growing presence of high

quality content online and the spread of new access devices that allow consumption in various moments throughout day. The analysis shows that 44% of media consumption by American citizens takes place online, but the percentage is expected to soon rise to 50%. Although the percentage is still below 50%, the surprising thing is that even if the perceived surplus is greater for offline, the revenues generated by online media are less than 15% of total revenues generated by offline media. The surplus consumers derive from each of the seven categories of media examined by BCG (books, radio and music, US newspapers, international newspapers, TV and films, video games, and user generated content and social networks) varies widely. The highest surplus ($ 311), accounting for about one third of the online total, comes from UGC and social networking. An example is the use of Facebook or YouTube and the

value gained from them at no cost in most cases. Books generate the largest offline surplus, even when the rapid growth in ebook sales is taken into account.

The number of devices owned by users is growing quickly. The growth was initially driven only by the need for mobile online access, but subsequent fragmentation of use has led users to use different devices for different purposes throughout the day. For example, laptops are used at work, smartphones to read email while on the move, e-book readers to read books, tablets to read the news, and so on. In 2012, the average American owned 2.9 personal devices, about double the figure for three years previously, and the average was expected to rise to 4.1 over the following three years, increasing the percentage of specific devices for particular uses.

The increase in device ownership comes with a rise in the amount of time spent online: with a second device, online time increases by 50%, and with a third device there is a further increase of 25%. Moreover, the greater number of devices accelerates the

conversion of offline media to its online equivalent (for example, e-book readers), with the result that users spread their time online across a widening array of devices, each for a particular consumption.

More significant than the growing number of devices per consumer is the fact that the more devices American consumers own, the

higher the perceived value of online media. The BCG survey shows that owners of multiple devices report a large increase in value from online media consumption: there is a rise from a surplus of $ 667 for owners of one device to $ 1,721 for owners of 4 or more devices.

As consumer surplus grows, media companies will redouble their efforts to seize their share, focusing on both new and

existing business models: Advertising: advertising is currently the most successful channel for online revenue and will continue to grow at double-digit rates. Publishers and advertisers are shifting from classic static banners to interactive formats with personalised messages, based on the user’s location, interests and/or current activity. Direct payment: the long-standing ethos that everything online should be free has probably been overstated and users seem to be increasingly willing to pay for content, especially if it is unique, rare or of high quality. Data monetisation: users’ online habits are being tracked and analysed with increasing frequency, providing valuable data to advertisers and marketers. The challenge is still that

of accessing data truly personal to the user, which is no small feat as nowadays people use pseudonyms and can access a great deal of content without having to submit their personal data. Content as a driver of other revenue streams: publishers can use their content for online sales as if it were a sort of recommendation or guide for the choice of products. 3.3 Internet demand viewed in the individual layers 3.3.1 Demand in the infrastructure layer In this layer, demand is created by the need for the infrastructure required to supply Internet connectivity. This is a therefore a type of B2B demand, which will not be examined here as we will concentrate on the

most important aspects of the Internet industry concerning the B2C world. In this regard, we can observe the demand for infrastructure indirectly, namely by focusing attention on the demand for data traffic, which requires infrastructure in order to be met. The data traffic handled by Internet infrastructure is constantly growing. Cisco, the world’s leading producer of networking equipment, has confirmed that we are entering the zettabyte era.

A zettabyte is one sextillion (one long scale trilliard) bytes, where a byte is the unit of measurement of memory capacity and

consists of 8 bits. 1 GB, 1TB, 1PB, 1EB and 1ZB represent units of information or data quantity. How exactly are they related? 1000 1000 1000 1000 1000

Megabytes Gigabyte Terabyte Petabyte Exabyte

1 GB (Gigabyte) 1 TB (Terabyte) 1 PB (Petabyte) 1 EB (Exabyte) 1 ZB (Zettabyte)

To understand the size of 1 ZB, we could compare it with 1 GB and say that if 1 GB represents the volume of 300 grams of coffee, 1 ZB would correspond to the total volume of the entire Great Wall of China (6,300 km long, 12 feet high and 10 metres wide: 756,000,000 m3.) Various prospective analyses have been made in an attempt to picture how the Internet will be in the future, based on comparison with data collected since its

inception. Cisco also estimates that global Internet traffic will reach 17 gigabytes per capita in 2017, compared with 7 gigabytes per capita in 2013. Not long ago, in 2008, Internet traffic per capita was 1 gigabyte per month. In 2000, Internet traffic per capita was 10 megabytes per month, thus an increase of over 100-fold in the space of eight years. Figure 3-15 provides an overview of the historical landmarks for Internet traffic per capita.

The forecasts of the Cisco Visual Networking Index estimate that traffic will triple between 2013 and 2018. As shown in Figure 3-16, IP traffic is expected to increase from 51 exabytes per month in 2013 to 132 exabytes per month in 2018 (a CAGR of 21%).

The increase in traffic seen in recent years, and that forecast for the coming years, is mainly due to consumer traffic, i.e. from

private users, whereas in the early stages of the life of the Internet, traffic was due primarily to business customers. Since 2003, consumer traffic has been greater than business traffic and has been increasing at a higher rate. Another interesting observation is the growth of data traffic associated with mobile devices, which, according to Cisco, is growing at an average of 2.4 times faster than fixed broadband data traffic. It is expected to reach 6 EB in 2015, compared to 60 EB of fixed line Internet traffic. This corresponds to heavy investments in infrastructure, which increased by 15% from 2008 to 2009, from $ 64 billion in global expenditure on infrastructure in 2008 to $ 74 billion in 2009.

3.3.2 Demand in the access layer The rapid growth of mobile data traffic has been widely recognised and reported. The trend towards mobility also affects fixed networks as an increasing share of traffic will originate from portable or mobile devices.

Figure 3-19 shows the growth of Wi-Fi and mobile Internet compared to traffic from wired devices. By 2018, traffic from wired devices will account for 39 percent of IP traffic, whereas Wi-Fi and mobile networks will represent 61 percent of IP traffic. In 2013, cable networks represented the majority of IP traffic, at 56 percent, Wi-Fi accounted for 41 percent, and mobile networks or mobile phones accounted for 3 percent of all global IP traffic.

The demand for Internet access is predominantly for consumer access (40,905 PB per month in 2013, compared to 10,263 PB per month for business users) and is expected to remain this way over the coming years. With regard to the various regions, the Asia-Pacific area consumes most traffic

at present and will continue to do so over the coming years. According to a study commissioned by Ericsson, by the end of 2011, the total number of mobile subscriptions had reached approximately 6 billion and is expected to reach 9 billion by the end of 2017. The number of mobile broadband subscriptions was 1 billion and is expected to reach 5 billion in 2017. Mobile subscriptions for PCs and tablets are on the rise and are expected to grow from about 200 million in 2011 and to almost close the gap with the number of fixed broadband subscriptions by 2017, with a total of about 650 million. The number of PSTN voice subscriptions will continue its downward trend as more and more users switch to mobile telephony and VoIP.

The number of fixed broadband users is at least three times the number of fixed broadband connections, due to multiple use in households, businesses and places of public access. The reverse is true for mobile phones, where the number of subscriptions exceeds the number of users. In the final years of the forecast period, the tendency of use for portable PCs will probably be similar

to that of fixed broadband today, with several users per subscription. This will occur especially in the case of developing markets, where mobile access will be the main source of Internet connection.

3.3.3 Demand in the IT layer

Demand in the IT layer consists of the demand for Internet software and Internetrelated IT services. For an assessment of the scale of this aspect, we can evaluate the number of websites currently online, as each of them needs technologies and services in order to exist and continue to be provided. At the end of 2011 there were 555 million registered domains, 300 million of which were created in 2011 alone. The number of active sites at the end of 2011 was over 167 million.

The most widely used domain was .com,

with 98 million registrations, followed by .net and .org, with 14 and 9.6 million registrations respectively. According to WorldWideWebSize.com, the number of indexed web pages in June 2012 was 8.2 billion.

Demand in the intermediary and content layers The last two layers of the model can be analysed together, as they comprise the web ecosystem, and we can therefore define the demand as the number of users who browse the Internet since they use services and sites

that come under these layers of the model. There were 2.03 billion users in 2010; by 2014 they had risen to almost 3 billion, with a penetration rate of 40% of the global population.

The figures for Internet use are truly impressive and growing visibly. As of September 2014, there were 1.35 billion Facebook users, 1.1 billion of whom were active from mobile phones. YouTube, the popular online video site, is visited by more than a billion people each month, and 100 hours of video content are downloaded every minute.

All these users and their activity online generate a staggering amount of information on the network: in 2010, the digital universe broke through the barrier of the zettabyte; in 2011 it was estimated that the amount of information created and replicated had surpassed 1.8 zettabytes (or 1.8 trillion gigabytes, nine times the amount in 2006) and by 2020 the digital universe is expected to reach a size of 35 trillion gigabytes (IDC, Extracting Value from Chaos, 2011). An idea of the amount of data online can be gained from the fact that if the 1,200 exabytes (1.2 zettabytes) reached in 2010 were contained in a stack of DVDs, its height would be twice the distance from Earth to the Moon. This impressive growth of content has without doubt been made possible by the huge decrease in the cost of data storage.

In 2009, $ 4 trillion was spent globally on hardware, software and network and IT services to manage the digital universe. This expenditure is expected to increase slightly between now and 2020, which means that the operating cost for each byte in the digital universe will continue to decrease substantially, thus driving the creation of even more new digital information.

Over 70% of digital information in 2010 was created by users, individuals at home, at work or on the go, amounting to approximately 880 billion gigabytes. At the same time, most of the gigabytes in the digital universe pass through the servers,

networks or routers of an enterprise at some point. When they do, the enterprise is responsible at that moment for managing that content and protecting user privacy and copyright. IDC classifies the user-generated content for which enterprises are responsible as ‘enterprise touch’ and about two thirds of all user-generated content falls into this category. In other words, while enterprisegenerated content accounts for 20% of the digital universe, enterprises are responsible for 80%.

5 McKinsey, Internet matters: the net’s sweeping impact on growth, jobs, and prosperity, 2011

4 Internet Supply

In this chapter we will analyse the Internet from the perspective of supply. In the first part of the chapter, we will focus on the structure of supply in the first three layers of our framework, Infrastructure, Access and IT, in the light of a study by McKinsey. In the second part, we will analyse the phenomenon of the explosion of startups, which are concentrated mainly in the last two layers of the model, i.e. the Intermediary and Content layers. 4.1 Analysis of Internet supply (McKindsey, 2011)

The McKinsey study analyses the weight and importance of various countries in the global Internet supply ecosystem in regard to the following activities: Telecommunications (e.g. Internet Service Providers - ISPs) The offering of web-related software and services (e.g. IT consulting or custom software development) Hardware manufacturers or providers of Web-specific services and maintenance (e.g. computers, smartphones, servers, etc.) The study focused on the industries that have structured and enabled the Internet worldwide. The analysis shows that in terms of GDP produced (in relation to the main location of the company), the weight of the United States in the Internet supply ecosystem is extremely pronounced, and

only Japan manages to attain half of the figure for the USA. Two other parameters to be assessed in relation to the Internet supply ecosystem are: The estimated growth of companies operating in the various countries (India and then China have the greatest growth rate, partly due to their rapidly evolving economies) Preparation for the future, i.e. the number of Internet-related patent applications, the research and development conducted (here Sweden and Japan, followed by the United States, are the top three nations in terms of future planning, according to the parameters defined). The analysis also focuses on deeper aspects, assigning a score to each of the thirteen

countries examined based on the following system indices: Human Capital - represented by the total number of researchers, postgraduate students, doctoral graduates, R&D personnel, university collaborators, engineers and scientists Financial Capital - represented by the value of venture capital investments and the number of venture capital deals, together with the ease of access to financing through VC or Private Equity Infrastructure - procurement of advanced tech products, quality of the infrastructure and electricity supply, and Internet Server security Business Environment - the time required to start a new business, the burden of government regulations, intellectual property protection,

capacity for innovation, payments and bribes, etc.

irregular

4.1.1 Human Capital For this index, the US obtains the highest score, with some of the world’s top universities and a well-structured enterpriseuniversity system. Another factor that contributes to the high score of the United States is the amount of talent and number of people who are suitably trained for the employment market. Sweden, with its human capital investment programme, also obtained a good score.

4.1.2 Financial Capital As stated in the previous paragraph, the enterprise-university system is the best combination if associated with a private/public investment system that can provide capital to sectors such as research and the development of startups, which can help create a profitable environment in economic and development terms. This area includes the index that measures the strength of each country in terms of the

presence or absence of venture capitalists and private equity investors focused on the Internet, the promotion of private investment and the presence of angel investors. In this area, as in the previous one, the index rating of the United States is double that of other nations, of which only virtuous Sweden, where Internet penetration is higher than in almost all the other countries examined, has a well-structured financing system.

4.1.3 Infrastructure This index focuses on investments in Internet infrastructure and the assessment of their quality (e.g. in terms of services such as the electricity supply). Infrastructure is the backbone of the Internet ecosystem as without an efficient structure the system could not support itself.In this case, almost all the developed economies have invested

significantly in the construction of solid and efficient infrastructure. The graph represents the threshold values (the threshold was placed at 60) where increases above the threshold do not confer additional advantages.

4.1.4 Business Environment

The creation of an environment oriented towards business, collaboration with top universities, the employment market and investors, and with government contribution in the form of simplification of the rules, can encourage the development of one or more business areas that drive the creation of new companies. The work of governments through deregulation, the creation of an appropriate legal framework and tax relief or favourable taxation for certain industries can provide a boost for the creation of an environment ready to be colonised by new startups and established companies. Sweden, with its high Internet penetration, exceeds all other developed economies in this case.

4.2 The Search economy Online search technologies have been around for about twenty years and over this period have profoundly changed our personal and working habits. Search platforms are multi-sided platforms developed from the Internet meta-platform and have assumed a key role in the landscape of the Internet economy. Google, the global search

platform, has fully exploited the conditions of the multi-sided market, reaching economies of scale beyond those of the other platforms to ensure itself a position of absolute dominance in the market. Therefore, due to the fundamental role of online searching, we will attempt below to analyse the main aspects of the search economy, with reference to the main studies in the economic literature. 4.2.1 Search size According to the McKinsey study (The Impact of Internet Technologies: Search, 2011), more than one trillion URLs (web addresses) were indexed by Google in 2010. Some 90% of global Internet users use search engines, and search represents 10% of the time spent by users online, totalling about four hours per month. Knowledge workers in enterprises spend on average five hours per week.

People use search in all areas of their lives. In retrospect, it was inevitable that search would become such a huge phenomenon. Firstly, it has become increasingly easier and cheaper to capture, digitise, and store information; secondly the explosive growth in users and usage has led to creation of content on a massive scale; and thirdly, the efficiency of online transactions and the exchange of information and content has attracted commerce and business to the Internet. 4.2.2 What is search? What actually happens inside a search engine? Search engines are like black boxes that allow us to see what goes in and what comes out, but we know nothing else about them or how they work. It is commonly understood that at the heart of a search engine is an algorithm

which relies on a variety of inputs and decision rules to produce outputs. The input is the word or phrase keyed in by the user. The output is what the user sees on the screen, which is usually made up of three types of results: a ranked list of ‘natural’ results in the form of hyperlinks and a short text, a list of adverts (also called ‘sponsored links’), and results which comprise links to other products and services provided by the search engine or its partners (such as maps, video, etc). The first thing to understand about what is going on inside a search engine is that these three different kinds of results are not generated by the same algorithm. On the contrary, each of the different kinds of results is generated by a distinct algorithm

designed for very different purposes, which for the sake of simplicity can be identified as: a search algorithm, a search advertising algorithm A ‘search algorithm’ is not neutral but is intended to produce natural search results which are the best answer to what the user is looking for. And like all algorithms the best natural results are defined by a set of decision rules which are exogenous to the algorithm. The object, therefore, is to find the best result. This is not the same as the most obvious result, since any search engine can find the obvious results. If you type Fiat into a search engine, the first result you would expect to see is a link to the Fiat homepage. However, the really clever aspect of search engines is that they can find results that are

much less frequently searched for. This is often known as the ‘long tail’. The long tail is not easy to capture. It requires not only a large number of users asking a large number of questions, but also constant updates to the search algorithm. The Google search algorithms use hundreds of different signals to pick the top results of any search performed on their engine. These signals range from simple items, such as the words on a webpage, to more complex calculations such as the authoritativeness of other sites linking to any page of the Web. These mechanical indications combined with historical data, as well as trial and error, are the prime drivers of how search engines seek to find the best result. Secondly, there is the search advertising algorithm, which determines which ad, from which advertiser and at what price, should appear in association with any search performed on the engine. This algorithm

takes into account the input data and the price advertisers are willing to pay for their ads to be clicked (cost-per-click, CPC), the historical click-through rate (CTR) of the ad, i.e. the average number of clicks made on the ad, the quality of the ad and the site to which it is linked, and other factors. 4.2.3 How Search creates value Most literature to date has looked at and quantified only three ways in which search creates value: by saving time, increasing price transparency and raising awareness. McKinsey provides a broader analysis in this context, identifying nine areas: Better matching. Search helps customers, individuals, and organisations find information that is more relevant to their needs. Time saved. Search accelerates the process of finding information, which

in turn can streamline processes such as decision making and purchasing. Raised awareness. Search helps all manner of people and organisations raise awareness about themselves and their offerings. Price transparency. Search helps users find the information they need, but here, the focus is on getting the best price. Long-tail offerings. These are niche items that relatively few customers might want. With the help of search, consumers can seek out such offerings, which now have greater profit potential for suppliers. People matching. This again entails the matching of information but this time focusing on people, whether for social or work purposes. Problem solving. Search tools facilitate all manner of problem solving, be it

how to build a chair, identify whether the plant your child has just swallowed is poisonous, or advanced scientific research. New business models. New companies and business models are springing up to take advantage of search. Without search, many recently developed business models would not exist. Price comparison sites are a case in point. Entertainment. Given the quantity of digital music and video available, search creates value by helping to navigate content. For a generation of teenagers who pass on TV to watch videos on YouTube instead, search has also enabled a completely different form of entertainment. 4.2.4 Who benefits from search and how In the study The Impact of Internet Technologies: Search, McKinsey proposes an

analysis of the beneficiaries of the value created by search. The groups identified include: Advertisers. Online advertising has grown rapidly over the past five years and now accounts for a significant portion of total advertising spending, namely 18 percent in the United States, 20 percent in Germany, 16 percent in France, 16 percent in Brazil and 3 percent in India. Of that online spend, advertisers allocated around 40 percent to search advertising, thus spending about 6 percent of their total advertising budget on online search advertising. What are the sources of value that motivate advertisers to spend so much on online search? Firstly, search and search advertising raises product awareness. Search is an influential channel when consumers

are deciding whether to make a purchase and what to buy. Secondly, search has proven to be an extremely effective means of matching relevant information with user needs, helping advertisers target the right audience. Thirdly, search helps consumers find long-tail niche products that they would otherwise be unlikely to discover.

Retailers. Search benefits retailers through raised consumer awareness of their online and offline stores and

products, better matching of products to customer needs, and the ability to sell long-tail articles more easily and to a greater number of consumers. In addition, for retailers who compete on the basis of price, price transparency is also a source of value. For others, however, it can result in surplus for consumers. E-commerce has experienced double-digit growth over the past three years, and search has played a critical role in this growth. Ecommerce was worth $ 252 billion in the US in 2009, representing 7 percent of total retail spending. In Germany, e-commerce totalled 46 billion (10 percent of retail spending), in France, $ 35 billion (7 percent), Brazil, $ 8 billion (2 percent), and India, $ 4 billion (3 percent). In the five countries studied, anywhere between 30 and 70 percent of the population

shopped online. Search plays a more important role in enabling retail sales than that indicated by the figures for e-commerce. That is because search enables what is known as Research Online-Purchase Offline (ROPO): consumers collect information on the Web that informs their purchasing decision, and then they go to a physical store to buy what they have chosen.

Entrepreneurs. Entrepreneurs are heavy users of search tools and benefit from them in various ways while starting up a business. It helps them solve problems when testing new business ideas, find suppliers,

investors, and customers, and identify key talent (an important challenge for small companies, in which every employee can be crucial to success). A Canadian survey found that 96 percent of entrepreneurs used search for general research and that 77 percent used it for competitive analysis. Perhaps the most important thing is that it has fostered the creation of new entrepreneurial business models. So-called micro-multinationals are born global as search gives them instant access to a worldwide audience of potential customers. Niche-market players also depend upon search to find the suppliers and customers they need. Content creators. With so much online content available, search enables better matching of consumer demand to content supply. It also raises

awareness of mainstream content creators and directs traffic to them, while also making more obscure longtail content easier to discover. Enterprises. Enterprises benefit from search in a number of ways, including the ability to find the right information, supplier, or employee through better matching; employee time saved by searching online; and collaborative problem solving. Consumers. Consumers primarily benefit from search through increased price transparency, better matching— including access to long-tail products and finding people—and time saved. 4.2.5 The value of search The McKinsey analysis showed that search activity had a measurable impact in 2009 approaching a gross annual value of 780 billion dollars, equivalent to the GDP of the

Netherlands or Turkey, making each search worth approximately $ 0.50. It should be noted that the estimate is partial and the study is limited to the number of sources examined. Moreover, the rate at which search is growing makes it likely that this figure has already been exceeded.

However, not all this value shows up in GDP.

For example, many consumer benefits, such as lower prices and time saved, are not reflected in these figures. Some of these can have an indirect impact on GDP. Some sources of value in education and health that were not quantified can also boost GDP indirectly. The estimate of the impact on GDP should therefore be considered as a conservative, but still significant, value. The research showed a gross value of $540 billion, or 69 percent of the measurable value, flowed through to GDP. This is roughly the size of the global publishing industry or Switzerland’s GDP in 2010.

4.2.6 Platform leadership in the search market Internet search is a classic two-sided market in which the search engine acts as an intermediary between those searching for information and those placing advertisements. The price which searchers

pay is exposure to advertisements – which may be a cost or a benefit. Clearly, the most popular search engine is likely to earn the largest revenues and deprive its rivals of funds with which to compete. We analyse in detail how the advantage of scale enables the leading platform to gain an advantage that persists over time and is difficult to counter. Search platforms exist in a multi-sided market environment, where they bring together various actors such as advertisers and users. Platforms that attract few advertisers and users tend to have lower returns. Platforms with inefficient auction mechanisms or that generate less valuable contacts also tend to have low returns. There is also the presence of indirect network effects: an increase in actors on one side of the market brings benefits to the entire system. More users attract more advertisers, increasing the likelihood of a

profitable match between search queries and ads. An increase in advertisers generates advertising that is more relevant to users. Different platforms, with the same traffic and keyword price, can differ in terms of revenue-per-match (RPM). This occurs if one platform is more capable of extracting value from advertisers than the others, due to a more efficient auction mechanism or better ad-search query matching mechanisms. This enables higher returns. The positive consequences of indirect network effects are expected to decrease as the platform grows. This is because the value of additional advertisers decreases.

Figure 4-9 shows two platforms that differ in their revenue-per-match capacity. P2 is a platform that is consistently better than P1 at extracting value from advertiser auctions and matching ads. P2 receives a higher RPM than P1 for each unit of traffic volume acquired by the two platforms.

In Figure 4-10 we have two platforms that differ in their quantity of traffic. P2 is a platform that equals P1 in extracting value from advertiser auctions and matching ads. P1 produces larger increases in RPM than P2 with equal traffic increases, but P2 receives greater total traffic volumes. P1 can match its RPM with that of P2 by acquiring traffic and publishers or by improving the platform. Figure 4-11 summarises the competitive

advantage of the market leader platform. P2 is a platform that is uniformly better than P1 in extracting value from advertiser auctions and matching ads. In this case, P1 cannot reach the RPM of P2 by acquiring traffic. Although the smaller platform gains a greater increase in RPM by acquiring the same amount of traffic (from t1 to t2) it faces two substantial disadvantages compared to the larger and more efficient platform: The incremental value of traffic at the new RPM is still lower than the other platform The value of the increase in RPM is applied to a smaller volume of traffic than that of the larger platform.

The conclusion is that a platform that has reached an advantage of scale and of RPM over its competitors is hard to beat. This explains how a platform like Google has reached such levels of market dominance. Google’s market capitalisation grew from zero to about $ 200 billion in the space of a decade. The company’s total revenues in

late 2013 amounted to almost 60 billion. Google’s market share of global searches was over 66% in 2013. 4.3 The publishing economy The explosion in the use of the Internet over the last ten years has led to a huge growth in online advertising. As people spend more time with online content, it is natural that advertising investments also move online. To profit from these advertising investments and increase their own revenue, particularly after the burst of the dot com bubble in 2001-2002, many publishers redesigned their pages and added as much inventory as possible. As the recession bit into ad spending, the new Internet media attracted marketing managers mainly due to two factors: lower prices than those of printed media and television, and measurability, in the form of payment based on clicks (i.e. the

publisher only gets paid if the ad is clicked by a user). This has led publishers to crowd their sites with the greatest possible amount of advertising inventory. If an ad generates income only when clicked, this implies that publishers and customers are not interested in whether the ad is actually seen or not, especially given the fact that an advertising impression served to the user has a negligible cost. For the type of direct advertising that requires rapid sales targeted at specific consumers that respond to an immediate offer, this mechanism is perfect. The main metric used in this context is the yield curve, in other words, the cost of the campaign divided by the sales generated, while the CTR (click-through rate) of the online ad, or how many times the ad is clicked divided by the number of times the ad has been served, is not so important and is acceptable even when very low.

For brand advertising, these mechanisms can even be negative, as many brand advertisers are interested in maintaining the premium price of their products and services and so try to maintain the emotional affinity consumers have with their brands. In view of these objectives, many online advertising techniques are hostile and so brand advertisers turn to premium advertising formats that are normally paid in CPM, i.e. a certain amount per thousand impressions served. However, this entails a risk, namely the fact of whether or not the user actually sees the advertising. This is due to the overcrowding of advertising inventory on webpages. Greater risk generally means a lower price, which is one of the reasons for which premium advertising on the Internet still has lower prices than other media. More than 200 years ago, Adam Smith wrote: ‘Price is regulated by the proportion between the quantity brought to market and

the demand of those who are willing to pay.’ Despite all the new metrics introduced with the advent of digital media since the mid1990s, Smith’s principle still remains valid. In Figure 4-12, the intersection of the downward-sloping demand curve and the upward-sloping supply curve represents the equilibrium price at which all available supply would sell in a free market. In the online ad market, this price is the average CPM, or cost per thousand impressions. Given this classic economic paradigm, as demand grows and so larger budgets become available to the online advertising market, CPMs should be increasing. In reality, this happens in a more moderate way than might be expected. This is largely because the economic law depicted in Figure 4-13 implicitly assumes that supply at a given price is limited, and that the cost of an additional unit of output becomes higher as the total supply expands. A good example of

this phenomenon is the petroleum market. To deliver more quantity, additional drilling is required. The new wells are more expensive to exploit because oil companies have presumably exhausted all the wells that could be operated at a lower cost. Thus, they may have to do more expensive offshore drilling because they have already consumed the less expensive land-based alternatives. In new media markets, however, the economics of industrial production do not apply, at least not perfectly. In digital media, the marginal cost of adding new programming or advertising inventory is very low, and has been trending lower for years, as the costs of computer processing and storage have plummeted. Adding new pages to a printed magazine incurs substantial material, production, and distribution costs, whereas generating new pageviews and attendant ad inventory online costs almost

nothing. In such a case, supply could be infinite as long as the price exceeds the marginal cost per unit. An increase in demand, as implied by a shift of the demand curve to the right, does not increase price. In fact, the price remains constant at any level of demand, and efforts to increase demand do not create a supply imbalance and associated price increase.

Thus to increase the price of the digital inventory, scarcity must be created on the supply side. However, this is not happening in terms of available inventory. Instead, the

focus is shifting towards the audience, creating scarcity for it with two main methodologies: creation of vertical content and targeting technologies. Web sites with vertical content, such as automotive sites, normally have higher CPMs than general sites. This is because the audience interested in cars is limited and not infinite and therefore there is a context of scarcity. With the improvement of targeting technologies, advertisers have the possibility of targeting a very specific consumer audience (age, area of residence, education, interests, etc.). Therefore restricting the target audience is a method to create scarcity and drive up advertising inventory prices.

4.4 The collaborative economy Recent years have seen a proliferation of new companies that exploit the special features of the Internet to offer services at a lower cost than in the past. Some of these

services allow users to share a car, a place to sleep, a bicycle and many other things, by simply connecting the owners of under-used assets with others who are willing to pay to use them. Dozens of companies like Airbnb, which allows people to rent the empty rooms in their homes, or Zipcar, which allows people to rent their cars to others, act as intermediaries, allocating resources where they are needed and taking a small percentage on the transaction in exchange. These peer-to-peer rental schemes provide a comfortable extra income for the owners and can be less expensive and more convenient for renters. In fact, occasional rental is cheaper than buying something outright or renting from a traditional provider, such as a hotel or car rental company. This is possible because the Internet makes it cheaper and easier than ever to aggregate supply and demand.

Online social networks and recommendation systems allow trust to be created and online payment systems are able to handle the billing. All this enables millions of strangers to rent things to each other. The phenomenon is known by various names, including the ‘sharing economy’, ‘collaborative consumption’, ‘collaborative economy’ or ‘peer economy’. However, the variety of names for the phenomenon causes confusion, as they tend to correspond to precise and different meanings. According to Rachel Botsman, one of the first scholars of the phenomenon, the correct definitions of the phenomenon are: Collaborative economy: an economy built on distributed networks of connected individuals and communities versus centralised institutions, transforming how we can produce, consume, finance, and learn.

Production: design, production and distribution of goods through collaborative networks Consumption: maximum utilisation of assets through efficient models of redistribution and shared access Finance: person-to-person banking and crowd-driven investment models that decentralise finance Education: open education and person-to-person learning models that democratise education Collaborative consumption: an economic model based on sharing, swapping, trading, or renting products and services, enabling access over ownership. It is reinventing not just what we consume but how we consume.

Collaborative lifestyles: nonproduct assets such as space, skills and money are exchanged and traded in new ways Redistribution Markets: unwanted or underused goods are redistributed Product service system: paying to access the benefit of a product versus needing to own it outright There are three distinct models Business-to-consumer: the company owns the inventory and facilitates transactions between users Peer-to-peer: the assets are owned and traded directly from person to person Business-to-business: solutions that enable companies to unlock and monetise the unused

capacity of their existing assets Sharing economy: an economic model based on the sharing of under-used assets, from spaces to skills, for monetary or non-monetary benefits. It is largely centred on the P2P marketplace. Peer economy: person-to-person marketplaces that facilitate the sharing and direct trade of products and services built on peer trust. Having defined the collaborative economy, we can better understand the size of the market. At the moment there are not many organic studies that assess the size of the entire collaborative economy, but there are various analyses of specific segments. For example, the Gartner Group estimates that the market for peer-to-peer financial loans reached $ 5 billion in 2013. Frost & Sullivan predicts that the car-sharing market in North

America alone will reach $ 3.3 billion for 2016. Botsman quantifies the peer-to-peer rental market as a $ 26 billion sector and believes that the sharing economy as a whole amounts to over $ 110 billion. With regard to the investment market, a certain liveliness can be seen, as evidenced by Altimeter (The collaborative Economy, 2013). Of the 200 startups from the collaborative economy examined in the report, they show that over a third were financed by venture capital funds, amounting to a total of about $ 2 billion, with an average of $ 29 million per startup. There is no shortage of high-profile cases, such as Uber, which recently received an investment of $ 280 million from investors including Google, and AirBnB, which received $ 130 million in investments.

4.4.1 Origins Many of these services were created between 2008 and 2010, the years when the global economic downturn was most acutely felt, and collaborative consumption seemed an antidote to the crisis and the excessive use of resources that was having a negative impact on the environment. The term ‘sharing economy’ first appeared in the mid-2000s with the emergence of new business structures enabled by new technologies and inspired by an increasing environmental awareness due to population growth and the depletion of resources. In 2002, the Harvard law professor Yochai Benkler, one of the earliest proponents of open source software, suggested that network technologies could mitigate the issue of depletion of common resources through production organised by ordinary people in an egalitarian manner (commons-

based peer production). The potential of a social and shared economy to face the depletion of global resources and create new models for the development of well-being and social values was popularised in 2010 by Rachel Botsman and Roo Rogers (What’s Mine is Yours). Botsman and Rogers found that Couchsurfing, an online platform where people offer each other a place to sleep, was not the only ‘collaborative’ platform. During their research they came across articles representing all types of exchanges, and found that ‘‘collaboration’ had become the buzzword of the day with economists, philosophers, business analysts, trend spotters, marketers and entrepreneurs’ (Botsman and Rogers 2010, p. XIV-XV). The two became convinced that all the behaviours, personal stories, social theories and business examples they had found were pointing to an emerging socioeconomic trend: old forms of cooperation and sharing

were being reinvented as more appealing and valuable forms of collaboration and community. Botsman and Rogers called this trend ‘collaborative consumption’ and defined it as: ‘traditional sharing, bartering, lending, trading, renting, gifting, and swapping, redefined through technology and peer communities - that is transforming business, consumerism and the way we live’ (Botsman and Rogers 2010, p. Xv). People have greater access to products and services without the need to own them and, at the same time, they can benefit from things they possess but do not always use. This transformation from ownership to use has the advantage of being fully in the interests of consumers and at the same time provides substantial social, economic and environmental benefits (Botsman and Rogers 2010). Due to these benefits, Time magazine acknowledged collaborative consumption as one of the ideas that would

change the world (Time, 2011). Since the research by Botsman and Rogers, the literature has limited itself to certain aspects of collaborative consumption, such as the issue of trust within the community (peer-to-peer trust) (Keetels, 2012; Pick, 2012), or specific examples of the sharing economy. The factors that cause people to participate in collaborative consumption were examined by Khandker with regard to carpooling (Khandker et al., 2011), Hamari and Ukkonen (2013), while research highlighting the reasons why people prefer not to participate in collaborative consumption was commissioned by AirBnB, a platform for sharing homes for short-term accommodation, and conducted by Ipsos Public Affairs (2013). 4.4.2 Market forces that have facilitated the collaborative economy The economic growth of sharing is guided

and enabled by converging market forces. As this confluence accelerates, the collaborative economy grows. According to ‘The Collaborative Economy’, a research report by the Altimeter Group, the sharing economy is driven by three market forces: Social drivers Increasing population density: population density allows sharing to occur with less friction. Lyft, RelayRides, and other car-sharing services thrive in urban areas such as Boston and San Francisco. Access to more people means more points of supply in the collaborative economy. Sustainability: there is growing awareness of the environmental impact of our consumption habits. Freecycle, a gifting

website for used goods, states: ‘It’s all about reuse and keeping good stuff out of landfills.’ Kristin Sverchek of LYFT told us: ‘Our long-term goal is not to disrupt taxis but the notion of individual car ownership’. Reselling, renting, co-owning or gifting maximises usage and reduces the impact of physical goods that were once bought and discarded after limited use. Desire for community: a latent desire to connect with people and communities is resurfacing. Airbnb users prefer the experience of staying in a home. Kickstarter funders get to know the makers, inventors, and entrepreneurs behind projects. Generational altruism: a recent

UCLA poll found that over 75% of incoming freshman believe it is ‘essential or very important’ to help others in difficulty, the highest figure in 36 years. Neal Gorenflo, founder of Shareable Magazine (www.shareable.net), said: ‘the Internet is a persuasive technology that teaches people the power of sharing and collaboration. Once people experience that power, it’s natural for them to apply the same logic to every part of their lives.’ Economic drivers Monetise excess or idle inventory: previously idle resources can now be shared and often monetised. In her speech at a TED conference, Rachel Botsman, author of

What’s Mine Is Yours: The Rise of Collaborative Consumption, stated that the average total use of an electric drill is a mere 12 minutes. Uber enables professional drivers to pick up customers when their cars are not already reserved. David Hornik of August Capital summed it up concisely: ‘Anytime there’s a resource that stays idle for much of its lifetime, there’s an opportunity to take advantage of it.’ Increase financial flexibility: as owners begin to find new uses for idle inventory, the possibility emerges for earning income and gaining greater financial independence. oDesk found that 72% of workers seek to ‘quit their jobs to be independent

and would use online freelancing services as a way to achieve their independence.’ Vivian Wang of Capital Sasson commented: ‘We have entered the new world of the perpetual freelancer and microentrepreneur. Collaborative Economy companies are building new tools and platforms to help them lead the way.’ Access over ownership: consumers also benefit in the collaborative economy. Individuals who cannot afford luxury goods can now rent them; businesses can hire ondemand workers or rent ondemand space. An Airbnbsponsored study found that nearly 6 out of 10 adults agree

that ‘being able to borrow or rent someone’s property or belongings online is a great way to save money.’ Influx of venture capital funding: investors are key to the rise of the collaborative economy. In the Altimeter analysis, 200 start-ups operating in the sharing economy had received a total influx of over $ 2 billion in funding. In other Internetrelated markets, venture capital funding has been a major force in accelerating the growth of the industry. Technology drivers Social Networking: social networking facilitates peer-topeer transactions by matching supply and demand in a way

that was not previously possible. The Altimeter analysis also indicates that among the 30 top sharing startups, nearly three-quarters (74%) have social profile and reputation features and over half (54%) have integrated Facebook Connect. Sites like Airbnb also use Facebook’s open graph so that users can identify ratings and rankings from their Facebook friends. These features help build trust between buyers and sellers. Mobile devices and platforms: many startups in the collaborative economy are mobile-driven. For example, Lyft has a website that directs users to download its mobile app to start using the service. The

growth in the use of smartphones means that customers can increasingly offer or locate goods and services anytime, anywhere. Altimeter’s analysis of the 30 top sharing sites shows that half of them are focused on offerings in the app stores for iOS (53%) and Android (50%). Payment systems: e-commerce and payment platforms are required to broker transactions between buyers and sellers. The Altimeter analysis shows that 27 of the 30 top sharing startups rely on online or mobile payment systems tied to credit cards. Yet there are also examples based on gifting or swapping that do not require monetary exchange, although

the user’s digital reputation becomes a key factor on these platforms. 4.4.3 The disruptive impact of the sharing economy on traditional sectors The sharing economy is disruptive to traditional businesses as they become disintermediated by customers who are empowered to deal directly with each other. The main areas where this disintermediation is occurring are described below: Transportation: many car-sharing startups have appeared, such as Lyft (peer to peer ‘taxis’), RelayRide (peerto-peer car rental), Carpooling.com (rideshare) and Uber (cars for hire as taxis).. A University of California study found that each carsharing vehicle replaces 9-13 vehicles, reducing the number of hours a car sits idle in a

parking lot. Today, Chegg and Bookcrossing allow students to exchange or rent books with each other. Fashionistas can wear the latest trends by renting clothing and accessories through sites like Bag, Borrow or Steal, and Rent the Runway, or swapping clothes on 99dresses. Thanks to sites such as UseSold.com and Toyswap, users can now rent or exchange all types of products, from consumer electronics to toys, instead of having to buy them. Hospitality: users now can ‘monetise their extra space’ by renting out rooms or homes to travellers from around the world, thanks to Airbnb. For the luxury-inclined, onefinestay connects renters with owners of upscale homes in London, and members of HomeExchange swap their homes for a nominal fee. Travellers can now

bypass hotels for more unique, affordable or even convenient travel experiences. Office rental: sites like LiquidSpace, OpenDesks, PivotDesk or Desksurfing all help people easily locate and rent workspace around the world by the month, day, or even the hour, while allowing companies to offset the costs of their long-term leases. Employment: online platforms like oDesk or Elance allow independent workers to find virtual work and enable managers to quickly hire ondemand or temporary staff — sometimes bypassing costly thirdparty staffing solutions while streamlining workflow. TaskRabbit instead allows us to find people to do odd jobs and household chores in our neighbourhood. Banking: peer-to-peer lending sites

like Prosper and LendingClub allow consumers to lend directly to each other at lower rates. Etoro enables traders to share investment strategies, while Kickstarter helps entrepreneurs fund their businesses through crowdfunding. All these services bypass traditional financial services. 4.4.4 The main market forces opposed to the sharing economy The creation of new markets that disrupt the status quo is always fraught with challenges and difficulties that have to be overcome. Some of the challenges faced by the sharing economy can be identified as follows: Government officials oppose the sharing economy as it disrupts existing regulations. Airbnb, and a host of carsharing services, have struggled with regulatory barriers and legal battles.

In May 2013, RelayRides received a cease-and-desist order in the state of New York for violating insurance laws. These struggles will continue to plague collaborative economy startups as regulators contend with a growing market of peer-to-peer transactions that violate existing laws in sectors such as hotel accommodation, transportation, taxation, insurance and so on. Lack of trust between peer-to-peer ‘buyers’ and ‘sellers’. For consumers, lack of trust will remain a serious challenge in the collaborative economy. A study by FlightCar, which offers free airport parking in exchange for renting out cars to other travellers, found that 80% of San Francisco Airport travellers will not try the service. Airbnb famously added insurance coverage to rentals after a

San Francisco resident came home to an apartment ransacked by tenants found through the site. Lack of trust in the quality or reliability of service will be an ongoing challenge that must be tackled. Lack of standard reputation systems. The currency in the collaborative economy is trust. HomeExchange founder Ed Kushins commented: ‘Very few transactions are more personal than sharing your home. You cannot improvise the feeling of trust and reliability without recommendations that come from a history of positive user experience.’ While over half (53%) of the startups analysed in the Altimer report have adopted Facebook Connect, others rely on their own reputation systems, further fragmenting online identity within this larger ecosystem of the sharing

economy. Traditional companies view sharing as a threat to their current business models. Historically, when traditional operators are threatened by new business models, they seek to squash the trend. Microsoft Xbox’s rumoured ‘always-on’ DRM system prevents customers from playing used games. Other companies will likely follow suit. Uncertainty about which startups will stand the test of time. The arrival of a new market always brings an overwhelming number of new players, many of which offer similar solutions, causing market confusion. More than 30 startups were counted in the carsharing and service sector; the fashion area had more than 10 startups. Only a few will survive and the winners will gain the lion’s share of the market.

4.5 The Startup phenomenon The Internet has enabled a lowering of the entry barriers to starting a business: The Internet provides services and technologies at a lower cost and with low implementation complexity (e.g. IT, IT-enabled accounting and cloud computing). For example, Google has made estimated savings of 50% to 70% by using its cloud-based applications instead of traditional solutions. Search engines, portals and social networks allow the advertising of goods and services at considerably lower budgets than traditional advertising channels. The Internet provides distribution channels of global potential at very low costs (e.g. eBay app store, etsy).

E-commerce platforms and search engines have also allowed the creation of micro enterprises (e.g. people who sell on eBay full time). This has created the conditions for a real boom in entrepreneurship and given birth to thousands of businesses described as ‘startups’. But what exactly is a startup? A startup is literally a new business, but certain distinctions have to be made: Small Business Startups: these include most of the new companies that are created every day worldwide. They can be shops, plumbing services or web agencies. This type of new business is not designed to scale. The aim of the entrepreneurs is to manage their businesses and create well-being for themselves and their families. The

only capital available to them is their own money, that which they can borrow from relatives and friends, and small bank loans. These entrepreneurs do not become billionaires, but they comprise the majority of the business community (more than 99% of businesses in Italy are small and medium-sized enterprises) and their enterprises create local jobs. Scalable Startups: these startups are companies that aspire to be like Google, Skype and Facebook. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that will eventually become publicly traded or acquired, generating a multi-million-dollar payoff. Scalable startups need venture capital to

finance their projects, which is normally provided by professional investors – venture capitalists. The main work of this kind of startup is to find a business model that is repeatable and scalable, i.e. that can generate ever greater revenue and thereby reach mass markets. The Internet is a fertile ecosystem for the creation of scalable startups, i.e. new companies that can grow quickly to establish themselves on national and international markets. Startups of this type have made the financial headlines, first in 2001, with the famous dot-com bubble, and now with Facebook attaining a market value of $ 100 billion, thus highlighting the huge number of companies trying to replicate its global success. 4.5.1 Factors behind the explosion in web

entrepreneurship Certain trends have led to an explosion in scalable startups on the Internet, allowing agile and talented teams to create products using market feedback for rapid iteration. The main ones are identified below. 4.5.1.1 Plummeting startup costs The falling cost of hardware and software has been one of the main factors in the proliferation of startups over the last five years. Previously, for example, a server had to be acquired in a data centre in order to launch a tech business, whereas now most startups use the cloud in the early days of life, because it costs very little. It cost less than $0.16 to host one Gigabyte per month using Amazon Web Services in 2011, while hosting costs in 2000 were roughly $19 per Gigabyte, and required additional expenses for purchase and maintenance of the necessary hardware.

Open source software has also made a huge difference. Licences for software used to cost thousands of dollars, whereas similar and often superior software is now available for free. Frameworks for developing the technology of web and mobile services include Ruby on Rails, which was released in 2004-2005, and Django, released in 2005. The real advantage of these tools is not simply their low cost but the community around them, which allows developers to find help and get feedback on their code. Another trend is towards pay-as-you-go

infrastructure. It is possible to pay lower monthly costs rather than having to pay large sums up-front, which can allow founders to try things out before taking the plunge and spending larger amounts. Examples include Mailchimp, which allows startups to manage mailing lists effectively, or project management services such as Basecamp or Huddle, which make systems only previously available to large organisations affordable for small businesses. Other costs have become lower for startups too. There are now more specialised office providers allowing greater flexibility, shorter contracts and even networking events. The archetypal ‘garage’, where companies such as Apple and Google started out, is now the coffee shop or the coworking space. All this means that the major cost of young startups is not technology but people, and often the problem first-time founders face is how to cover their living

costs while they build their first product, get their first customers or attract their first investment.

4.5.1.2 Easier to reach new customers Dave McClure, founder of investment firm and accelerator programme 500 Startups, says that the running costs of startups are

only a part of the story. The more dramatic change is that customer acquisition costs (the cost of advertising and attracting paying customers to your service) have dramatically fallen and the sophistication of the tools available to target particular customers and measure the effectiveness of different approaches has improved markedly. There are now acquisition platforms that give a two-to-three person team access to as many potential customers as only large companies with multibillion dollar advertising budgets had in the past. By setting up Google Adwords or Facebook Adverts, small teams can test how much it will cost to gain new customers using different approaches and refine their messaging and call to action. 4.5.1.3 Easier routes to revenue Along with the sheer numbers of potential customers available to online businesses today compared to a decade ago, there are

also much better routes to monetisation, particularly through direct payments in the form of transactions (e-commerce), app stores and subscription models. Shopping carts – a technology that used to be only available to large retailers, is now easy to install as part of any service. PayPal and other Internet payment platforms remove the hassle of registering for merchant accounts where a trading history and minimum level of turnover is often required. App Stores such as the Apple App Store, the Android Market or Amazon’s Android Appstore offer startups a way of directly monetising their apps with clear submission guidelines. In addition, as the web ecosystem sector has matured, business models have become

better known and understood. There is a great deal more experience available from companies that have become profitable – which perhaps was rarer in the dot-com boom of the late 1990s. These new, more predictable business models and ways of reaching new customers have made it easier for startups to make money from day one than in the past. Previously, the business model was worked out once the startup had become highly successful with users, but this is no longer done. 4.5.2 The Scalable Web Startup approach Thanks to the characteristics we analysed previously, the Internet has created a fertile ecosystem in which scalable startups, or at least attempts at them, have proliferated. Recent years have revealed the inefficiency of the approach used in the creation of scalable startups. Many investors treated

startups as smaller versions of large companies. We now understand that this is not true: while large companies execute known business models, startups are temporary organisations designed to search for a scalable and repeatable business model. This insight has begun to change the way entrepreneurship is taught and how startups are incubated and funded. Below we will analyse the main working methods commonly found in web startups. 4.5.2.1 Lean Startup Methodology Lean Startup is a business approach coined by Eric Ries in his best-selling book (The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses), which is aimed at changing the ways companies are built and new products are launched. Lean Startup is based on validated learning,

scientific experimentation and iterative product releases to shorten development cycles, progress assessment and customer feedback. The method enables companies, and startups in particular, to design their own products or services to meet the needs of their customers without requiring large amounts of initial funding or costly product launches. Originally developed with high-tech companies in mind, the Lean Startup philosophy has since been extended to apply to any individual, team, or company looking to introduce new products or services into the market. Today, the popularity of the Lean Startup methodology has grown outside of its Silicon Valley birthplace and spread throughout the world. It is used above all by web start-ups due to the specific features it offers: measurability, low costs and speed.

Similar to the precepts of Lean Management, and inspired by the Customer Development methods of Steve Banks, Ries’ Lean Startup philosophy seeks to eliminate wasteful practices and increase value producing practices during the product development phase so that startups can have a better chance of success without requiring large amounts of outside funding, elaborate business plans or the perfect product. Ries believes that customer feedback during product development is integral to the Lean Startup process, and ensures that the producer does not invest time designing features or services that consumers do not want. This is done primarily through two processes, the use of key performance indicators and continuous product releases. Because startups typically cannot afford to have their entire investment depend upon the success of one single product launch, Ries maintains that by

releasing a minimum viable product, which is not yet finalised, the company can then make use of customer feedback to help further tailor their product to the specific needs of its customers. The Lean Startup philosophy pushes webbased or tech-related startups away from the ideology of their dot-com era predecessors in order to achieve cost-effective production by building a minimal product and gauging customer feedback. Ries asserts that the ‘lean has nothing to do with how much money a company raises,’ rather it has everything to do with assessing the specific demands of consumers and how to meet that demand using the fewest resources possible. Ries developed his Lean Startup methodology based on some of the fundamental concepts and practices that are now widely followed by web startups worldwide. We shall examine the most

important of these. Minimum Viable Product A minimum viable product (MVP) is the ‘version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort’. The goal of an MVP is to test fundamental business hypotheses and to help entrepreneurs begin the learning process as quickly as possible. As an example, Ries notes that Nick Swinmurn, the founder of Zappos (a successful e-commerce site that sells shoes, later acquired by Amazon), wanted to test the hypothesis that customers were ready and willing to buy shoes online. Instead of building a website and a large database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted the pictures online, bought the shoes from the stores at full price, and sold them directly to customers if

they purchased the shoe through his website. Swinmurn deduced that customer demand was present, and Zappos went on to grow into a billion dollar business. Continuous deployment Continuous deployment is a process ‘whereby all code that is written for an application is immediately deployed into production’, which results in a reduction of cycle times. Ries states that some of the companies he has worked with deploy new code into production as often as 50 times a day. Split testing A split or A/B test is an experiment in which ‘different versions of a product are offered to customers in the same period of time’. The goal of a split test is to observe differences in behaviour between the two groups and to measure the impact of each version on an actionable metric.

A/B testing can also be performed in serial fashion where a group of users one week may see one version of the product while the next week they see another. This works less effectively in circumstances where external events may influence user behaviour in one time period but not in the other. Vanity metrics Vanity metrics are measurements that give ‘the rosiest picture possible’ but do not accurately reflect the key drivers of a business. This is in contrast to ‘actionable’ metrics, which can lead to informed business decisions and subsequent action. A typical example of a vanity metric is the number of new users gained per day. While a high number of users gained per day seems beneficial to any company, if the cost of acquiring each user through expensive advertising campaigns is significantly higher than the revenue gained per user, then

gaining more users could quickly lead to bankruptcy. ‘Vanity’ metrics for one company may be ‘actionable’ metrics for another. For example, a company specialising in creating webbased dashboards for financial markets might view the number of webpage views per person as a vanity metric as their revenue is not based on number of page views. However, an online magazine with advertising would view web page views as an ‘actionable’ metric as page views are directly correlated to revenue. Pivot A pivot is a ‘structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth’. A notable example of a company employing a pivot is Groupon. When the company first started, it was an online activism platform called The Point.

After poor and disappointing results, the founders opened a WordPress blog and launched their first coupon promotion for a pizzeria located in their building. Although only twenty people took the coupon, the founders realised that their idea was significant and developed it. Three years later, Groupon had become a billion-dollar business. 4.5.2.2 Customer Development Customer Development is a technique widely used by web startups to quickly iterate and test every part of their business model. The methodology was developed by Steve Blank (Four Steps to the Epiphany. K & S Ranch Press), a former serial entrepreneur who now teaches at Stanford University, in the heart of Silicon Valley. Customer Development is approached in different ways depending on the type of company, but Blank particularly emphasises

its use in the fields of software and web startups. Blank describes a startup as an organisation built to search for a business model that is repeatable, i.e. sustainable, and scalable.

The task of startup founders is to quickly validate whether the model is accurate by seeing if customers behave as it predicts. Most of the time customers do not behave as predicted.

Customer Development is the process startups use to quickly iterate and test each element of their business model. Agile Development is the way startups quickly iterate their product as they learn. Eric Ries’ Lean Startup methodology is the intersection of Customer Development, Agile Development and, if available, open platforms and open source. According to Steve Blank, Customer Development involves four steps: 1. Customer Discovery - creating a hypothesis about who your customer might be and then asking those customers what they want, how they work, what they hate, and what they want more of. 2. Customer Validation - developing a repeatable and scalable sales process. This is based on the assumption that the customers in the first phase are early adopters who do not reflect the characteristics of the average customer.

3. Customer Creation - after proof of sales, the strategy for creating new customers is established. 4. Company Building - rebuilding the company’s organisation and management once the business model and client acquisition processes are consolidated.

Ash Maurya, CEO of Spark59, emphasises the

importance and use of Customer Development in web startups and has slightly modified Blank’s schema, particularly the Customer Discovery and Customer Validation phases.

4.5.3 Business Model Innovation The theories of both Blank and Ries give importance to the concept of the business model and the innovation it entails, paying particular attention to the iterative process of testing hypotheses. Up to now, the most widely used tool is the Business Model Canvas by the Swiss researcher Alex

Osterwalder, whose work is also referred to by Blank and Ries. The Business Model Canvas is a powerful tool that makes it easier to understand the current business model of a company, but it is also a means for innovating existing business models and creating new ones. Through the use of the Building Blocks proposed by Osterwalder, it simplifies the understanding of the business model. In practice, the Business Model Canvas is a framework that identifies and displays the elements of a business model and provides an overview of the company. It starts by representing four pillars: Product Customer Interface Infrastructure Management Financial Aspects These pillars can be associated with main

questions that identify their role and what should be specified in the above areas. From this representation of the four pillars we go to one that shows the nine Building Blocks which comprise the structure of the business model.

We then arrive at the following representation of the Business Model Canvas® shown in Figure 4-23.

The Business Model Building Blocks can be used on the Business Model Canvas to obtain a graphical representation of a business, such as that of the Apple iPod, used as an example in Figure 4-24.

Business Model Innovation rarely happens by chance; on the contrary, it is something that can be managed, structured into processes and used to leverage the creative potential of an entire organisation. The challenge, however, is that Business Model Innovation remains messy and unpredictable, despite attempts to implement a process. It

therefore requires an ability to deal with ambiguity and uncertainty until a good solution emerges. This ability must be exercised, from a ‘starting point’ provided either by a startup or an established company, with regard to totally disparate needs and necessities, in the analysis of the various distinctive phases of the Business Model design process. The five phases are: 1. Mobilisation 2. Understanding 3. Design 4. Implementation 5. Management The progression through these phases is never linear, and often phases two and three, i.e. Understanding and Design, tend to be carried out at the same time. The prototyping of the Business Model can easily start in the first part of phase two, the

Understanding phase, in the form of Business Model ideas drawn up beforehand. The last phase, namely management, focuses on the ongoing management of the Business Model, bearing in mind that a business model that is currently optimal may no longer be so after a certain period of time, also due to the various phases of the market in which the company operates. 4.5.4 The role of Venture Capital in the creation of Startups Venture Capital has played a key role in the creation and development of web startups. Although, as we have seen, Internet startups these days require little money for launching and testing the idea, when the time comes to scale the business on the markets, large amounts of capital are required because the competition is global. However, the potential returns are also very attractive. The digital economy is creating incredible opportunities

in all industrial sectors, while at the same time the equilibrium in which traditional businesses operated is being disrupted. The speed and size of this change is phenomenal and it is accelerated by new technology giants, ‘unicorns’ (startups valued at over one billion dollars), and venture capitalists. In February 2014, Facebook announced its plan to purchase WhatsApp for $ 19 billion in cash and stock. Sequoia Capital, the main investor in WhatsApp and one of the most renowned venture capital funds in the world, earned about 3.5 billion dollars from the transaction. An incredible result, considering that the company had less than $ 60 million in funds and had been in operation for about four years, with a staff of 50 employees. We live in a time of rapid, exponential change, driven by an unprecedented ability to connect and reconfigure almost anything into new innovative solutions. The result is a landscape of young unicorns that are

disrupting old markets and forging new ones. CB Insights reports that the number of tech start-ups reaching a valuation of $ 1 billion or more increased by 67% in 2013 compared to 2012. A 2014 report by Orange Silicon Valley examines the unicorns that have been created over the last decade, identifying the main sectors in which they are found: big data, cloud, enterprise, e-commerce, mobile media and social networking. Big Data Big data is the term used to describe a collection of data sets so large or complex that they require tools other than traditional ones for all phases of processing data, from capture and curation to sharing, analysis and visualisation. The progressive increase in the size of data sets is due to the need for analysis of a single set of data, with the aim of extracting

information in addition to that available from the analysis of small sets with the same total quantity of data. An example of this can be found in the analyses to gauge the ‘mood’ of markets and trade, and thus the overall trend in society and the stream of information traveling and passing through the Internet. Big data also involves the interrelationship of data from potentially disparate sources, therefore not only structured data, such as databases, but also unstructured data such as pictures, emails, GPS data and information taken from social networks. With big data, the quantity of data is in the order of zettabytes, or billions of terabytes. It therefore requires a massive parallel computing capacity with dedicated tools running on tens, hundreds or even thousands of servers. This has been and continues to be an interesting area where startups valued at

more than $ 1 billion are born. Companies like MongoDB, Nutanix, Nimble and Splunk are laying the foundation in terms of data management and storage. The burden is now shifting towards tools like Tableau, which extracts valuable insights from the mounting tsunami of information, and solutions such as Palantir, which structures, normalises and consolidates diverse sets of data. Unicorns like Climate Corp., Marketo, RocketFuel, and Veeva Systems show that opportunities are inherent in the algorithms themselves, many of which are contextagnostic, while others are specialising in vertical and customised solutions. The objective is to obtain results that are much more relevant to users’ queries and are promptly delivered through predictive analysis based on historical data and the context of the research. For individuals and our growing set of devices and sensors, use of this data in the real world is the challenge

faced by the next innovators aspring to achieve unicorn status, as Nest and Waze have done. In other words, investors are expecting great opportunities in the field of artificial intelligence and deep learning.

Cloud Cloud

infrastructure

is

seeking

greater

optimisation and a lower cost profile, while continuing to capture new tools and services that use it. This trend has given birth to numerous cloud services, such as Box, Dropbox and Evernote, which are emerging as the new standard for distributed business operations. Giants such as Amazon AWS and Rackspace will probably maintain their hosting dominance, while extending through additional services. Load balancing, energy management, heat dissipation and site location of data centres will guide the development of efficiency. Virtualisation and dynamic network management will continue to decouple services from infrastructure, driven by leaders like VMware, Citrix and Palo Alto Networks. Another great challenge/opportunity already underway is the management of an exponential number of requests, devices and identities moving on and off networks, and the ever-growing vulnerability exerting evolutionary pressures

on storage and data security. More security solutions are claiming unicorn valuations, like FireEye’s purchase of Mandiant for $ 1.1 billion. In this context, there is a huge opportunity in resolving federation and the provision of identities across diverse, flexible, global networks.

E-commerce E-commerce is now more than ever about data. Rigorous analysis of sourcing and

logistics, the use of algorithms to determine dynamic pricing, niche consumer channels like Etsy and Quirky, and hyper-personalised advertising and location tools like iBeacons are advancing refinements in meeting demand at just the right time. This disruptive on-demand movement, which first appeared on mobile, follows in the footsteps of Uber and LYFT. These unicorns are disrupting transportation and car ownership while offering new employment opportunities to car owners. Now, shoppers with smartphones occupy two spaces at once - a physical store and a digital store, comparing offerings online, which forces the introduction of new pricing dynamics. Data, algorithms, influencers and networks are the innovations in the behavioral economics underlying vertical services from Gilt in fashion to AirBnB in hospitality. Yelp’s $ 5.7 billion market capitalisation is a great example of this symbiosis. Services that help

consumers find better deals on the things they actually want will leverage personalisation and network analysis to increase sales. New, mobile-centric platforms like Square and Stripe are changing how we pay for them, foreshadowing a future without cash registers when products find us more easily than we can find them. Enterprise

Enterprises face two fundamental challenges for higher efficiency and greater innovation. First, the much-needed communication and collaboration between different functional groups and across the ecosystem of stakeholders, offered by tools such as

LinkedIn and Docusign, has struggled to emerge as a new category on its own, as many startups have been acquired and folded into larger platforms before attaining unicorn status. For example, Microsoft acquired Yammer, a social network enterprise, for $ 1 billion. Solutions that align business intelligence, budgeting, performance and collaboration across business units will enable considerable gains in productivity. Second, many businesses are still too rigid and slow-moving to adequately respond to growing competitive pressures. They must become more lean, agile, flat, and adaptive. The organisational structure is starting to become more sensitive and responsive to the environment in which it operates. There is a growing demand for tools like ServiceNow, that sense environmental conditions and provide probabilities of oncoming change, and like Workday, that support modeling and

reconfiguration of the organisational structure based on expected future changes. As enterprises move more assets into private, public, or hybrid clouds, new infrastructure needs are creating unicorns like Fusio-io, Pure Storage, and Palo Alto Networks.

Mobile The mobile sector is already starting to be reformulated into various devices – wearables, appliances, and other networked

and computational machines. Nevertheless, there is still tremendous opportunity to make so-called smart phones even smarter. The convergence of precise location, contextawareness and predictive analytics offers the possibility of not only more personalised and relevant mobile applications but entirely new formulations for mobile operating systems. VMWare’s recent acquisition of AirWatch for almost $ 1.5 billion underscores the challenges in managing a fast-growing population of mobile devices that jump on and off networks and make continuous requests for access. It also signals the emerging role of virtual machines in making workspaces accessible everywhere from any device. Meanwhile, human behaviour continues to drive the revolution in the telecom sector, most recently underscored by Facebook’s purchase of WhatsApp’s universal messaging service for $ 19 billion, as well as Facebook’s declined offer of $3

billion for Snapchat.

Media The media sector will continue to fragment, driven by ever-greater diversity. Broadcast TV is slowly losing viewers to a rich marketplace of on-demand services, niche channels and the long tail of user-generated content. Netflix, Amazon, and Hulu produce their own original shows, competing directly with the likes of NBC and CBS. The sports drink producer, Red Bull, has a popular extreme sports channel, and Twitch has 45 million unique viewers every month for its

video game viewing service. YouTube has over 100 hours of video content uploaded every minute, much of it coming from ubiquitous smart phones. Anyone can be a superstar: Jenna Marbles, a 27-year-old from Rochester, NY, has 13 million YouTube subscribers and a billion and a half views. Hollywood has already started to adapt to the new MNC (MultiChannel Networks) reality. The cost of production tools continues to go down, performance gets better and everyone has access to global broadcast platforms. With a small, affordable, and durable camera system, GoPro has added new experiences to our consumption of media, acquiring a $2.5 billion valuation in the process. Facebook’s recent acquisition of Oculus VR has created a new unicorn that proposes a future of deeper immersion in media, as shown by videogaming in casual and hi-res formats, like Zynga, generating more revenue than the

Hollywood industry. Behind the scenes, algorithms are getting better at tracking our viewing habits. They are increasingly able to ‘look at’ video and understand its contents. They are even wielding insights from neuromarketing to make advertising more compelling. Netflix used its viewing data to determine the best drama produced. The result was House of Cards, the hit series starring the Oscar-winning actor Kevin Spacey.

Social Networking Social networking has given rise to a limited

series of exclusive platforms, often with single players dominating regional consumer markets, such as TenCent and Weibo in China, and LINE in Japan and Korea, each of which were inspired by Facebook and Twitter. Social networking has contributed a fundamental interaction model for many of the other unicorn start-ups as Internet services cannot really be built without some degree of social integration. The design models, architectures and best practices of social networking are integrated into all digital services, with unicorns in other sectors adopting messaging, reputation tools, and profiles from Uber to AirBnB.

The search for the next ‘unicorn’ has attracted capital from investors at an unprecedented level. Looking at the American market, which without doubt has the largest Internet and venture capital development, we see that over 16,000 Internet startups were funded between 2003 and 2013, according to the NVCA (National Venture Capital Association). During the same period 39 unicorns (startups born since 2003 and valued at over $ 1 billion) have appeared on the US market, comprising roughly 0.2% of financed startups, i.e. one out of every 410 startups funded by venture

capital becomes a company worth a billion dollars or more. Facebook is what is called a super-unicorn: it accounts for almost half of the $ 260 billion aggregate value of the companies on the list of unicorns examined. Prior decades have also given birth to tech super-unicorns. The 1990s gave birth to Google, currently worth nearly three times as much as Facebook; and Amazon, worth ~ $ 160 billion. Each major wave of technological innovation has given rise to one or more super-unicorns: the 1990s, the dawn of the modern Internet, to Google and Amazon; the 2000s, the era of social networking, to Facebook; and the next decade will probably see the emergence of a mobile super-unicorn. Consumer-oriented unicorns have been more plentiful and created more value in aggregate, even excluding Facebook. But enterprise-oriented unicorns have become worth more on average, and have required

much less private capital, delivering a higher return on VC investments. It took seven years on average for the 24 companies on our list to go public or be acquired, excluding extreme cases such as YouTube and Instagram, both of which were acquired for over $ 1 billion within about two years of their foundation. Enterprise-oriented startups tend to take about a year longer to reach a liquidity event than consumeroriented companies. The average age of the founders of these startups is 34. The youngest was the founder of Facebook, created when he was 20 years of age; the oldest was the founder of Workday, who was 52 years old. Another interesting fact is that 27 of the 39 startups in the analysis are based in Silicon Valley.

The interest of investors in Internet startups is beyond question. According to the latest MoneyTree report by PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), $ 9.9 billion in venture capital investments went to Internet startups in the United States in the third quarter of 2014.

Investments of $ 3.2 billion in Internet startups in the third quarter of 2014 represent an increase of 125 percent from the third quarter of 2013 and a 1.8 percent increase from the previous quarter. Investments in Internet startups are at their highest level since the first quarter of 2001, according to the PwC report.

The increase in funding for Internet startups goes against the trend of the rest of the venture capital sector, as shown in Figure 435.

Compared to the third quarter of 2013, the volume of investments decreased by 11 percent in the third quarter, to 248 deals. The average investment in an Internet startup was $ 12.9 million, an increase of 153% year-over-year.

Investment in early-stage companies increased 34 percent year-over-year to $ 834 billion. The early-stage average deal size was $ 5.7 million in 146 deals, an increase of 67 percent in average deal size, but a decrease of 20 percent in deal volume yearover-year. Investment in late-stage opportunities was $ 2.4 billion in the third

quarter, a 195 percent increase year-overyear. Over the same period, late-stage average deal size was $ 23.2 million in 102 deals, an increase of 181 percent in average deal size and a slight increase of 5 percent in deal volume year-over-year.

The majority of Internet subsectors received

increases in funding during the third quarter compared to the same period in the previous year: Internet Programming, +8,082 percent to $65.5 million Internet Content, +272 percent to $ 1.7 billion Internet e-Commerce, +171 percent to $ 731 million Internet Services, +88 percent to $ 329 million e-Commerce Technology, +15 percent to $50 million Internet Software, -10 percent to $321 million Internet Communications, -81 percent to $23 million

The current level of activity may seem exaggerated, but with the huge numbers of people using the Internet today, many analysts think that this is just the beginning

of the growth of the industry in terms of companies and potential revenue.

The role of accelerators Since the costs of creating a startup have decreased rapidly, the venture capital sector

has struggled to adapt. VC has retreated from early-stage investments, particularly in Europe, and the composition of early-stage investment is changing. Since 2000, business angels have stepped in to fill this gap, in both the US and Europe. The US Angel Capital Association found that the number of angel syndicates tripled over the ten years from 1999-2009. In 2009, the total amount invested by angels was $17 billion in around 57,000 startup deals. In the UK, business angels’ share of private sector investment doubled from 15 per cent to 30 per cent between 2001 and 2007. The decreasing cost of setting up an Internet tech startup, together with the fact that founders are very often technicians, with no formal business training, has lead to a rapid diffusion of accelerator programmes. The first project of this kind was Y Combinator, founded in 2005 by Paul Graham in Mountain View, California. In

2007, David Cohen and Brad Feld founded TechStars in Colorado, while Seedcamp began in London. Many others have been established since then and the number of startups participating in accelerator programmes increases each year. At the end of 2014, according to estimates by Seed-DB, there were 227 accelerator programmes world-wide, which had accelerated a total of 4247 startups. According to an understated and incomplete estimate, only accounting for publicised data, these startups that participated in accelerator programmes attracted approximately $ 7.2 billion in additional investments, and, according to known data, 245 of the accelerated companies generated exit events to a value of approximately $ 3.4 billion.

Distinctive features of accelerator programmes Accelerator programmes are not all the same and can differ in various aspects but the Nesta paper, ‘The Startup Factories’, indicates five distinctive features that accelerators have in common: An application process that is open yet

highly competitive - accelerator programmes have web-based application processes that allow anyone to apply, usually from anywhere in the world. The written material that applicants have to submit is minimal, usually limited to a description of the idea and the team. The programmes are highly selective and the startups that participate are chosen by expert judges. Micro-seed investment the investment provided by accelerator programmes varies but is usually based on an assessment of how much it costs the team to live during the period of the programme and for a short period afterwards. The spread of investment varies between € 10 and 50 thousand and in return the accelerator takes a small share in the partnership.

Focus on teams not individuals accelerators very rarely select lonefounder startups, preferring those with at least two or three founders, and very occasionally four. Time-limited support comprising programmed events and intensive mentoring - accelerator programmes provide support for a period normally of between three and six months. During this period, the team has time to develop the first version of their product. They also have frequent meetings with experts, successful entrepreneurs, investors and other relevant professionals. Accelerators develop extensive knowledge networks and provide highly-skilled mentors, who assist and support the startup participants. The quality of the mentors and the network is one of the most decisive factors when teams are

choosing an accelerator programme. The themes covered in the accelerator programme range from legal, marketing and tax advice to presenting the sales pitch. Accelerator programmes normally culminate with a demo day, where investors and the media are invited to see presentations of the startups by the founders themselves. Startup classes accelerator programmes select a number of startups for the duration of the acceleration period to form ‘classes’ of students, in which the students are the founders of the various startups in each batch. One core advantage of this approach is the support among the students, as occurs, for example, when the founders share technical solutions for their projects. Accelerators also offer co-working

spaces, where the founders work on their own projects alongside others. Why entrepeneurs partcipate in accelerators In his Cambridge University study on accelerator programs, J. Christiansen analyses the main reasons why entrepreneurs participate in accelerator programmes: Initial financial support - the startup founders receive a small amount that allows them to live and develop their product throughout the period of the programme and for a short time afterwards. Product development support although entrepreneurs normally have a strong vision of their product, they are aware that the experts guiding them in the acceleration programme, who are normally former

entrepreneurs or successful managers, can help them to develop a better product through the benefit of their experience. Business support - accelerators are very useful to first-time entrepreneurs. The experience of the mentors helps them to avoid common mistakes and they receive advice on financial, legal and marketing issues as well as other aspects they will face as entrepreneurs. Brand connection - startup founders often view acceptance by an accelerator programme as validation of their ideas and work and highlight this in their marketing and fundraising efforts. Connections to future capital - perhaps the most important motive for which entrepreneurs participate in accelerator programmes is the access

the accelerator provides to a network of investors. 4.5.6 The Economics of Multi-Sided Platform Startups Starting a new business on the Internet is especially difficult when the initiative is based on the creation of a multi-sided platform. In addition to the usual difficulties associated with starting a new company, the founders have to contend with the wellknown chicken and egg problem of multisided platforms. Entrepreneurs need a sufficient number of customers on both sides, and in the right proportions, in order to ensure satisfactory value for both groups of customers and to achieve sustainable growth of the platform. Failure to reach critical mass quickly leads to the implosion of the platform. The chicken and egg problem is a central aspect in economic literature on multi-sided

platforms. Most researchers, however, focus on the study of mature platforms, paying particular attention to the analysis of pricing structures, whereas few studies have covered the critical issues faced in the creation of a platform. Among these, David Evans (How catalysts ignite: the economics of platform-based start-ups, 2008) has devoted the most attention to analysis of the start-up phase of a multi-sided platform. The main points of his analysis are outlined below. The problem faced by young multi-sided platforms is how and when to gather the various groups of customers that the platform promises to bring together: does the platform need to get customer group A on board before group B, or both at the same time? This entails a very difficult task of coordination between the platform and the groups of customers. The problem, however, is not if any customers will be

attracted, but also the number of customers attracted: how many group A customers are needed for a group B customer to gain value from participating in the platform and incurring the costs involved, and vice versa? These questions help to understand that a minimum number of customers is needed in each group to ensure a sufficiently dynamic market for the sustainable growth of the platform. This quantity is described as the ‘critical mass’. The attainment of critical mass depends on numerous factors, including pricing, but the point is that reaching critical mass is essential, otherwise implosion occurs. Google Video, for example, failed to achieve critical mass because it did not generate enough content to attract viewers, which would in turn have stimulated the creation of user-generated content. Hence there are a number of strategies for getting the various groups of customers on board, and in the right proportions. Before

analysing the main strategies that multisided platform start-ups can adopt, let us first examine the various cases they may encounter: Sequential entry - in some cases it is possible to get one group of customers on board over time and then make this group available to the other group of customers at a later stage. This is the situation with multi-sided platforms in an advertising environment. Content can be used to attract viewers and advertisers can be brought on board later. This dynamic works because there are non-positive indirect network effects between the two sides: viewers do not care about advertisers (and may dislike advertising) but come to platform for the content. Entry with significant pre-commitment

investment - in other cases, one group of customers needs to make investments over time to participate in the platform. This is the case with software-based platforms such as operating systems. Developers of games and applications have to invest in the creation of software for the next release of an operating system without knowing how many consumers will be interested in using the platform when it is available. The platform must either convince developers that buyers will show up, provide them with some financial guarantees that buyers will show up, or self-produce games until the platform has proven itself. Simultaneous entry - finally, there are cases in which groups of customers make the decision to join the platform at the same time and have to join at

the same time for the platform to provide them with value. Some platforms require almost perfect simultaneity. Heterosexual men would quickly leave a new nightclub that had no women, and vice versa. Similarly, women would not register with an online dating platform if no men had yet signed up, and vice versa. Other platforms can provide more latitude. Buyers may not desert an exchange platform right away if there are no sellers but they will arrive soon. In all cases, however, platform growth is not sustainable until the platform reaches critical mass. Therefore the key challenge for new platforms is figuring out ways to reach critical mass quickly. We shall now illustrate the main strategies for achieving critical mass.

Zig-zag - a basic strategy for reaching critical mass is to build participation on the two sides incrementally. The platform starts with a small number of economic agents on both sides. It then persuades agents on either side to join. It also relies on the natural processes of product diffusion. Because of indirect network effects, the platform is more valuable to each successive group of prospective customers. eBillMe provides an example of this strategy. Consumers who click on the eBillMe sign at the checkout for an e-tailer can pay with their online banking account. They then receive an email containing the payment details and after entering this information in their online banking account they receive a receipt and the product is shipped. This payment alternative is attractive to people who

are concerned about the security of paying with cards online. To get started, eBillMe persuaded ToolKing to offer eBillMe as one of the methods of payment on the site. A small percentage of customers used this payment alternative. eBillMe then went to other online retailers. Each led to eBillMe having more people who were accustomed to using its service. For each subsequent merchant it went to it offered an increasingly valuable offer since it had more users who were predisposed to use this payment alternative. At the same time it let its users know that they could pay at more places thereby increasing the value to the merchants. eBillMe grew from 1 merchant and hundreds of users during its first year of entry in 2005 to hundreds of online stores, with 2% to 10% of their transaction

volume intermediated by this payment system in 2008. Pre-commitment to both sides - some platforms such as eBillMe are able to start with one member on one side that it uses to attract members on the other side. More commonly, platforms need to have multiple members on both sides to begin the zig-zag process described above. They therefore need to persuade a minimum number of early adopters on both sides to show up at the start of the platform to make it credible. This requires getting both sides to believe that when the platform opens for business there will be members of the other side present. Operating systems are a good example of this strategy. These are platforms that connect application developers with users. The user will not purchase the hardware and

operating system without enough applications and games, and developers will not invest their time if they are not sure that people will buy their applications. This is because the creation of an application is a long process, and the platform has to ensure that there are enough applications and games at launch. Single and double-marquee strategies - a single-sided marquee strategy is aimed at acquiring an influential or prestigious member on one side. Announcement of this may attract enough members of the other side at the beginning. The shopping mall strategy is the classic: the mall gets an anchor tenant which many shoppers want to connect to. The two steps - the two-step strategy involves getting enough members of one side on board first and then

getting members of the other side on board. As mentioned earlier this works when the first side does not value access to the second side which is often the case for advertisingsupported media. Search engines have followed this strategy. They attracted users who did searches of the worldwide-web. The search results were displayed on a series of pages. Once they obtained enough page views they sold access to those pages to advertisers. Google, for example, operated its search engine for 23 months before it opened its search results pages to advertisers. At that time it had more than a billion pages indexed and 18 million user queries per day. Ziz-zag with self-supply - founders may be able to jumpstart their platforms by providing one of the sides

themselves, at least initially. Consider YouTube, which is a three-sided platform: user-generated content attracts viewers, viewers attract content providers who want an audience, and access to the viewers can then be sold to advertisers. YouTube started by focusing on users and viewers. Its founders seeded the site with content they generated themselves and started the process of diffusion by suggesting that members of their personal social networks check out the content. They also used various marketing strategies to attract viewers: they posted an ad on craigslist to reward attractive women who posted on the site and promised to give an iPod to a random user every day till the end of the year. From a mathematical perspective, critical

mass would have to be reached instantaneously to ignite the creation of value. In practice it appears that platforms have a limited period of time to get to critical mass. Early adopters are the first to use a platform. If they come back and if later adopters also find value then it is possible to reach critical mass. If the platform does not grow quickly enough to reach critical mass, early adopters lose interest, fewer later adopters come and word-of-mouth referrals stop or turn negative, leading to the eventual implosion of the platform.

5 Economic Models of the Internet

Classic definitions and meanings of the term ‘market’ often refer to both a physical and an immaterial place at the same time, where demand and supply tend to reach a point of equilibrium through an exchange of information by the various sides. In regard to this definition, the Internet has played an important role over time in terms of the changes it has brought to existing markets and the possibility of the birth of new ones. The transformation of traditional forms began, for example, with the introduction of e-commerce tools, when suppliers saw opportunities on the Internet for exploiting new distribution channels; at the same time,

demand also changed, breaking down physical boundaries and allowing a global exchange of information and goods. The Internet has also encouraged the creation of new markets and new players, through the changes occurring generally in economic systems in recent years. In this chapter we will analyse the Internet market from the perspective of economic theories that focus on the Intermediary and Content layers, as these are the most representative of the new economy. In particular, we will try to shed light on the following: the elements of traditional economic theories that acquire greater significance in the analysis of Internet markets the importance of economic theories for multi-sided markets on the Internet

the economic impacts of the Internet the dynamics and structure of Internet markets in the light of new and specifically designed market theories the elements specific to Internet markets as compared to traditional markets 5.1 The Internet in relation to economic models There is great debate in the world over the fact that the Internet Economy and Internet Market cannot be understood, explained or measured with the tools that have been used up to now for the so-called ‘old economy’, but need to be analysed by developing new economic theories and paradigms or adapting existing ones to the various areas of application or new industries. In general, the Internet Economy does not require new rules. However, there are effects or forces with little relevance in

the ‘old economy’ that have now acquired particular significance in the Internet economy. These inlcude so-called ‘Cost Structures’, ‘Network Effects’, ‘Switching Costs’ and ‘Lock-in’. Cost Structures These are defined as the expenses that a business must take into account when manufacturing a product or providing a service. The main ‘cost structures’ include transaction costs, sunk costs, marginal costs, and fixed costs. The cost structure of a company is the relationship between its fixed and variable costs. In the case of software development, for example, once the software has been developed, the cost of electronic distribution via the Internet is virtually nil. The cost of producing a copy on a media support (CD, DVD) is also negligible. This applies not only to purely ‘IT’ products, such as software, but

also to physical goods such as silicon chips. A chip manufacturing plant can cost several billion dollars to build, but an increase in the production of a unit of chips has a small cost, amounting to only a few euros. Therefore high fixed costs and low marginal costs are a particular feature of high tech companies. This is an example of how the curve of total production costs may change from the old to the new economy: the marginal cost may not change as the quantities produced vary, creating changes in costs over the short and the long term and a consequent change in the classic equilibrium of enterprises. Network Effects Network effects refer, for example, to the positive effects by which the more people that use a resource, the greater the benefit for the individual user. For example, an individual fax machine is useless unless

there are other machines it can communicate with. From the moment in which at least two people have fax machines, it usefulness increases. However, if several people and firms use fax machines, then their usefulness for the individual consumer increases, and it provides a high incentive to others to acquire one in order to communicate with the multitude. The power seen in the example of the fax is also illustrated by auction sites (eBay.com). The more people that use them, the more useful they are to individual consumers. Network effects can be direct or indirect: Direct network effects, which can be seen in terms of technical compatibility or standard interfaces Indirect network effects, which can also have an overwhelming effect. For

example, the effects seen when various types of users (e.g. programmers, content producers, suppliers and buyers) adopt a platform that requires some complements in order to be used. Switching Costs and Lock In Switching Costs are the costs associated with changing to a different version of the same type of product, as occurs, for example, with a change in technology or standards. This involves not only the cost of the product but also the time spent learning how to use it (in terms of costs). An illustrative example could be switching from Windows to Linux on a PC. In this case, the switching cost is the time spent learning how to use the new operating system, the cost (in terms of both time and money) of finding software compatible with the new operating system, and the need to change or reinstall device drivers that are

incompatible with the new version of the operating system. The total impact of these costs may prohibit the individual user from switching. The term ‘lock in’ refers to a situation wherein switching costs are so high that potential competitors with similar products are unable to offer sufficiently low prices to persuade consumer to switch to their products. However, the market is always evolving, and when switching costs and network effects become determining factors, the market will adapt itself accordingly. 5.2 Web platforms and multi-sided markets A market is defined as a meeting between a demand and a supply. Sometimes demand and supply cannot meet without the support of an enabling agent. In this case we have a two-sided or multi-sided market. For

example, an operator selling books online through its own e-store is a one-sided business. eBay, however, is a two-sided business as it connects sellers and buyers that would not otherwise come into contact without the eBay platform. Two-sided, or, more generally, multi-sided markets can be described as economic networks in which two or more distinct groups of participants exchange benefits. There is still no single theory that describes them, but several models and studies have been made regarding specific characteristics of various sectors (payment systems, media, Internet, meeting clubs, etc.), which have then been applied to technological development with more complex variants, such as the Internet, where they play a particularly important role. 5.2.1 Characteristics of Two/Multi-sided Markets

Two/multi-sided markets are markets with particular types of network effects. These effects do not depend on the number of agents (such as consumers of the same product) but on a different yet compatible number of agents on the opposite side of the market (two/multi-sided). One of the definitions that best characterises a twosided or multi-sided market was made by Rochet and Tirole in 2005, namely: ‘A two-or multi-sided market structure is based on a platform that enables interactions between different groups of consumers (or ‘sides’ of the market), with the aim of keeping them ‘on board’ through an appropriate price structure.’ Two-sided (or multi-sided) markets are therefore markets in which one or more platforms enable interactions between endusers. In this case, the platforms try to get the two sides on board by charging each side appropriately.

More specifically, two-sided (or multisided) markets exhibit particular characteristics: They have two or more distinct groups of customers; There are benefits in bringing together or coordinating the members of the various groups; An intermediary can make each group richer by coordinating their demand; They reduce search costs before the transaction or the costs shared by the platform during the transaction; The value of the platform comes from its capacity to reduce transaction costs and information asymmetry between sellers and potential buyers; From a closer examination of network effects, two main categories can be defined with respect to their influence within or

outside of the group: Cross-side network effects - these effects are when a group shows preferences regarding the number of members or activities of the other group; they can be either positive or negative: Example of positive effects: the number of buyers and sellers on eBay; Example of negative effects: consumer reaction to an increase in advertising; Same-side network effects - these effects are when what happens in one group does not influence what happens in the other group; in this case the effects can be either positive or negative: Example of positive effects: the number of participants in peer-

to-peer (P2P) systems; Example of negative effects: the presence of several competitors in the same marketplace. 5.2.2 Multi-sided Platforms Multi-sided platforms are found in multisided market contexts in which two or more customer groups are satisfied and where the customers of at least one group need the customers of the other group for various reasons. Multi-sided platforms can generate profits for themselves and benefits for their customers if they are able to capture and increase indirect network externalities by: acting as match-makers (e.g. eBay); building an audience. This is done by advertising-supported media, which uses content to attract ‘eyeballs’, i.e. users who see the ad, and then sells

access to these eyeballs to advertisers; reducing costs by providing shared infrastructure for the customers of each group.

Platforms cater to the needs of each side as they try to make an overall profit, or at least

not to lose money. It can make sense not to charge one group while charging the other group (normally the more ‘captive’ one). 5.2.2.1 An Example of a Multi-sided Platform: Google The theories of two/multi-sided markets have found numerous areas of application, from credit cards to postal services; however, it was only with the advent of the Internet and the network that the models analysed and studied up to then were able to become effective. A typical example of a multi-sided platform is the Google Adsense advertising system, which has three distinct groups of recipients: advertisers, publishers (blogs, websites, etc.) and web surfers. Google in general is a software platform, or more specifically, an advertisingsupported search-engine that competes with other advertising-supported media. It is a

multi-sided platform that brings together advertisers and eyeballs. Unlike other advertising-supported media, it uses search results to attract eyeballs (like the yellow pages) rather than using content of its own.

The Google software platform freely provides

API services (Application Protocol Interface – for the integration of the features offered) to software developers; this has encouraged the development of applications that channel traffic to Google, thus boosting advertising revenues, and has allowed Google to export advertising to other websites and devices. One example are the Google Maps APIs, which rapidly created a huge wave of activity among developers so that by the end of 2005, there were over 500 applications by external developers based on the APIs. 5.2.3 Pricing in Multi-sided Markets In a single/one-sided market, analysis of the price of a service/product starts with the marginal cost of the product. Pricing in a two/multi-sided market is very complicated due to strong indirect network effects (externalities) between the different groups of customers. In the case of dating sites, for example, if women were charged the same

price as men for use of the service, there would be a risk of imbalance between the number of men (the majority) and the number of women (minority). If this occurred, men would lose interest in using the site and it would remain empty.

The economy of two/multi-sided markets

shows that it makes sense to charge little or nothing to one group (or even reward them) so that the service/product takes off. This is what happens, for example, with news sites, where most of the publishers generate revenue solely from advertising, while users can read the news for free. To conclude, the platform employs a careful pricing strategy aimed at internalising externalities in the groups and their interdependence, by defining price policies, making distinctions between the groups and charging different access prices. 5.2.4 Competition in Two-sided Markets Different types of competition affect twosided markets. There is internal competition between individuals interacting on the same platform; external competition occurs between two or more platforms. For example, publishers on the Google AdSense network compete with one another

to gain users in order to generate more revenue from their advertising. At the same time, the Google AdSense platform competes with other platforms that provide similar services. As mentioned above, competition results in lower prices on both sides of two/multi-sided markets, but this does not mean that a balance has been achieved in the price structure. Instead, the level and structure of prices in a competitive equilibrium depend on the intensity of competition in two-sided markets. All this depends on a series of factors that we will explain below: Platform Differentiation - Two-sided platforms offer services that are perceived as different by various consumers. This differentiation, which is negligible or non-existent in the credit card market, has had significant importance in the case of television

and newspaper platforms. Agent Differentiation - Prices depend on the intensity of competition in twosided markets. A key factor here is the degree of agent differentiation on the two sides. In general, there are two ways to convince a seller to join the platform: charging a commission fee that is low, if not zero or negative (a gain for the seller); offering a larger base of potential buyers. The side that will gain more is determined by two factors: the relative degree and type of agent differentiation; the relative weight and importance of network externalities. Multi-homing The customers belonging to at least one side of a

two/multi-sided market often belong to various networks. This phenomenon is known as multi-homing. Advertisers place advertisements on various platforms, just as users can use more than one. For Internet-based platforms this phenomenon assumes the characteristics of multi-homing with regard to advertisers, while for the other side of the platform, i.e. users, it presents a single-homing scenario. In practice, users tend to use one platform (as in the case of Google, which has de facto control of usage) while advertisers use multiple platforms to convey their messages. Another example of multi-homing is shopkeepers who accept different types of credit cards and so find themselves operating in various twosided structures, i.e. in a multi-homing situation, just as users may be holders

of various credit cards and also engage in multi-homing. Endogenous Adoption - The choice of operating on or being part of several platforms should, in principle, be endogenously determined within a platform competition model. The resulting complexity often leads to a tendency towards simplification in analysis models, through shortcuts that allow the market structure to be specified in a phase previous to the appearance of the multi-homing phenomenon. Dynamics - To create a two/multisided market, the long-standing ‘chicken or egg’ problem has to be resolved: to convince some buyers to adopt a certain platform, some sellers have to be first convinced, but to convince the sellers, there must be some buyers on the market. In the

case of two/multi-sided markets, the problem is resolved by assuming the simultaneous arrival of the agents on both sides of the market. The dynamics of the successful birth of a two/multi-sided market therefore require some assumptions, as already mentioned, in order to resolve the chicken and egg problem. 5.3 Economic impacts of the internet We can determine three types of economic impact due to the Internet: impact on suppliers impact on consumers impact on the market 5.3.1 Impact of the Internet - Supplier Side One of the key factors of the Internet is the reduction of input prices for enterprises.

Normally the lowest price at which a company can sell a product is equivalent to the cost of producing the good. For example, a B2B e-commerce platform offers companies the opportunity to reduce sales prices by reducing or cutting costs in three ways: reduction of procurement costs by making it easier to identify the best suppliers, thus cutting order processing costs; better supply chain management; better inventory control, through the offer of reduced or zero inventories and thus a reduction or elimination of inventory costs (storage). One of the most commonly used practices is called just-in-time management. This management practice originated in Japan in the 1950s as a model used in the Toyota factories for the

optimisation of production and distribution costs. Over the years, the model has assumed various forms and it has been extensively applied in the new economy and in the introduction of computerised management models. Another way in which the Internet offers the possibility of reducing input costs is through the development of outsourcing practices. For example, in the development of a software package, the programmers and graphic designers may belong to an external group and develop on behalf of the company that owns the project (for example in India, particularly the Bangalore region, where organisations providing global outsourcing services have been established in recent years). Another tool that the Internet has provided to businesses is the possibility of practising price discrimination towards different

categories or groups of consumers for the same product. This tool is off-set, however, as we shall see in the next chapter, by the possibility the consumer has of comparing the prices of various providers and making an informed decision based on more accurate information. 5.3.2 Impact of the Internet - Consumer Side One of the main factors that influence demand is the price of the product/service. When prices are lower, consumers tend to buy more. Even more significant, however, is the impact of the Internet in making prices more transparent. For this reason, the Internet economy is also referred to as the ‘nude economy’, because it makes information available and transparent, allowing both buyers and sellers to easily compare product prices. One of the main market distortions, according to classic economic theories, is due to the presence of

so-called information asymmetries between supply and demand. An information asymmetry is found in a situation where one person (an expert) is better informed than another (a consumer), or in a case where a buyer does not have all the information about a product, unlike the seller, who knows its entire history. The Internet, as a tool created for the exchange of information between individuals, has changed the old approaches to economic bargaining based on the power of information. It has thereby reduced the weight of information asymmetries, as information is freely and openly available to all (experts, suppliers, consumers, etc.). However, information asymmetries may not be regarded as eliminated since, although information is freely available on the network in conditions of perfect competition, the cost of searching for it and selecting it is high enough to justify the presence of asymmetries.

5.3.3 Impact of the Internet on the Market As mentioned earlier, the economic principles of traditional markets still apply to the Internet market. Information is the currency of the Internet; it is no coincidence that people speak of an information economy: information can be transmitted efficiently, conveniently and cheaply, and is available to anyone. In theory, all potential friction in the market should be reduced when the information is more readily available to both consumers and suppliers. The consumer has the advantage of lower research costs due to the advantages offered by the Internet. The Internet market is, therefore, more efficient than the traditional market, and one of the prime consequences of this is the lowering of transaction costs, seen as the costs of the time taken to search for alternative products, goods or services, and

for price negotiation, price comparison and other similar activities. Another impact that the Internet has had, and continues to have, is through its capacity to generate pricing mechanisms, with the possibility of comparing the prices of products/services and the introduction of forms of auction and exchange. In conclusion, the effects of the Internet are that it reduces costs for both suppliers and consumers, and also provides a common ground (as a platform) where consumers and suppliers can meet and do business more efficiently. 5.4 Market by Evolution - Market by design As previously mentioned, the Internet has facilitated possibilities of expansion or extension of traditional markets, which have discovered some developments - such as ecommerce - as opportunities to explore new

distribution channels. The Internet has particularly facilitated the emergence of new markets with new players, such as the keyword advertising business on search engines. However, can markets in general, and Internet markets in particular, be classified according to macro conceptual categories? The answer is definitely yes, and it leads us to highlight the fact that there are two types of markets:

markets by evolution, which result from an evolutionary stage that in most cases leads to the emergence of new markets or the evolution of old ones; markets by design, which, although based on the same general theoretical principles, have distinctive characteristics. These markets are either designed from scratch or modified in relation to some specific aspect. 5.4.1 Markets by Evolution - the Evolution of New Markets In the beginning, new markets viewed from above would seem like a nebula, with some particles (companies) moving around randomly in a heterogeneous environment, often without a clearly defined direction. This is therefore a stage at which everything is ragged and in constant motion. The first few

companies in a new market normally produce prototype or early stage versions of their products due to awareness of the lack of a main direction and a full and/or clear understanding of the new market, or unawareness of being in a potential new market. In light of the studies and analyses by Paul Geroski on forty cases of new markets that began and evolved in the United States during the 20th century, it can be seen how, at first, an almost total absence of entry barriers leads to the entry and emergence of many companies, lured by the potential of a new market to introduce their products/services. Likewise, there is a very low rate of abandonment of the new market, especially in the early periods of its life. This will lead to a positive net ratio of entrants/drop outs or ‘net entry’, which will tend to increase, especially in the initial structuring phases of the new market.

The number of companies that gradually enter a new market in the early stages increases considerably; this phenomenon is due to efforts by the companies entering the market to launch a product so innovative that it will wipe out the competition and win over consumers. Often in new markets an initial increase is followed by a reversal in which a number of companies exit from the market (often due to failure or, in some cases, a decision to operate in other markets). In this phase, the percentage of entrants becomes low and that of drop outs high, leading to a negative net entry rate. In a subsequent phase, the phenomenon is repeated and a number of new incoming companies flourish in the market. This is due to greater awareness of the market and a definition of standards that now offer greater certainty to new companies. The companies already in the market have

passed the initial stages and enjoy certain advantages and the benefit of experience, which makes them less prone to exit the market. In this phase there is an increase in the number of entrants and a reduction in withdrawals, leading once more to a reversal of the trend and therefore net entry, until stabilisation of the market, with a net entry of almost zero (Time t1). Graphically, the net entry trend over time can be represented as follows:

In his study, Geroski analyses the US automobile market and, through a comparison with other sectors, defines an average time range in years for the first growth phase of 15-25 years. In the particular case of the car market, however, the wave of consolidation began in

1910 and continued gradually for 50-75 years until the entry of foreign brands in the American market in the 1960s. In general, new markets tend to follow this wave with varying degrees of extension, depending on: the market; the historical period in which the market began; numerous factors that may or may not affect the progress and evolution of the new market. In light of the above, it is quite clear that the structure of new markets is generally very fluid in the early years. This fluidity can be observed in relation to two different areas: the number of incoming companies is very high and a portion of them will tend to exit the market at a fairly high

rate; the number of products introduced in the market is high and each is distinguished by a wide range of new features. The products, like the companies, will enter and exit the market at a high rate. 5.4.1.1 Colonisation of New Markets The dynamics that lead to the colonisation of new markets or radical markets arise from the combination of certain forces that work beneath the surface for the birth and growth of the market. These forces are: 1. the combination of an ‘information cascade’ and a ‘wave of enthusiasm’; 2. the provision of infrastructure; 3. the capture of ‘first-mover advantages’. The combination of an ‘information cascade’ and a ‘wave of enthusiasm’ The first entrants in the new market decide

to enter it because they perceive profitable business opportunities and assume that they can effectively manage the risks associated with being mistaken and finding no opportunities. Subsequent entrants, or would-be entrants, wait for confirmation because, unlike the former, they do not have the same level of risk acceptance and want to make sure that there are real opportunities. The greater the number of first entrants who decide to operate in the market, the higher the probability that would-be entrants will follow suit, encouraged by the genuineness of the opportunities. Like a cascade, at the beginning the market is composed of few competitors and then, with the passage of time and useful information, it expands disproportionately through the arrival of those who were initially sceptical. This information cascade may be complemented by a wave of enthusiasm that

creates a tendency for all would-be entrants to overstate the prospects available to them in the new market. Enthusiasm is particularly infectious, or viral, when communicated by word of mouth. The provision of infrastructure Another force that operates below the surface and leads to a wave of new entrants in the early phase of a new market is the provision of infrastructure that the various entrants can tap into. New markets can take advantage of existing infrastructure, organised and used in various ways, which can provide a breeding ground for their birth and colonisation. For example, in the case of the market for online book sales through virtual book stores, Amazon and its competitors did not have to create a transport system from scratch, but were able to use the existing one, making at most minor developments and improvements.

Thus some infrastructure can be recycled, but at times new manufacturing skills, specialisations and infrastructure have to be forged, which requires time and considerable investment in order to become profitable. In general, however, even when new infrastructure is necessary, key suppliers will respond, because they will identify business opportunities, bringing the first companies to approach the market, also attracted by the opportunities that the new and existing infrastructure offers in terms of business management, and creating a kind of virtuous circle. Capturing ‘first-mover advantages’ Last but not least in terms of importance, is the desire of early entrants to gain the benefits of being the first. This opportunity to capture the advantages often pushes some companies to enter very early in the development of a market, in order to develop skills and gain control of essential

resources for that market or to develop technological leadership. These advantages arise whenever first movers are able to alter the market conditions for the entry of other competitors, becoming virtually able to monopolise limited resources necessary for operating in the market, or when they are able to ‘lock in’ or retain consumers with their products so that they will not abandon the original products for those of new competitors. This does not mean that the products of first movers do not evolve or change over time. The distinction between old and new refers to established and new companies in a specific market. The more evident and visible these advantages are to the potential first entrants, the greater the probability and incentives for them to enter as early as possible. 5.4.1.2 Consolidation of New Markets

Market consolidation often occurs through a varied process. At first, some products enter the new market; with the passage of time and growing interest from other consumer segments, the market begins to expand in terms of its offering of products, all with various distinctive features; eventually, market (consumer) choices and agreements among the various competitors stimulate the emergence of a dominant design or product/service standard, which leads to consolidation of the market and its evolution from a niche market to a mass market. At this stage, unlike in the beginning, the first entrants or innovators find themselves as the ferrymen of the colonisation, but are unable to lead the market to expansion, which is almost always the work of consolidated companies whose economic strength enables them to push the market to its natural evolution. The consolidation of markets stimulates an

increase in investment in infrastructure for new products, creating greater appeal for existing and new consumers. Identifying the dominant design or winning product/service created during the colonisation phase provides a propulsive thrust for the producers of complementary goods, which find greater earning opportunities at this stage. Thus the dominant design becomes a standard that defines and orders the various basic features for the manufacture of new products and services. It can be considered as a platform for different types of products with a similar core structure. It also defines the standards of performance associated with the interfaces of new basic products, which become increasingly familiar to the end user, as well as the interfaces of complementary products. Consumers are increasingly motivated to make a purchase choice of the product together with its

complementary goods. In general, the dominant design is a ‘consensus good’. In the market consolidation phase, the dominant design tends to be the vehicle that leads, through standardisation, to: lowering of costs, due to an effective improvement of production processes, and network factors; economies of scale - another driver that leads to a reduction of costs and a consequent reduction of prices. 5.4.1.3 Entry Barriers The effect due to the existence of the network is an important force not only for the achievement and definition of a dominant design but also for the consolidation of the market itself. It can be expressed by the following definition: ‘network effects only occur when goods generate value and are consumed by a large

number of people that form the network.’ Network effects (or network externalities) describe a situation where the utility that a consumer derives from the consumption of a good depends (positively or negatively) on the number of other individuals that consume the same good. The study of externalities is very important for the study of networks, regardless of their nature. The interdependence of consumer utility may be technological or behavioural in nature. Examples of technological interdependence can include: The use of email: the usefulness of email is directly proportional to the number of other people with access to it (i.e. to the size of the network); The use of fax: the benefit of owning a fax machine is directly proportional to the number of other people who own

one; Internet access: the usefulness of Internet access is directly proportional to the possibility of communicating with many people or of browsing other computers similar to the one in use; by accessing the Internet, users not only benefit themselves but also the community, by increasing the size of the network and thus making further connection options available for other users. Examples of behavioural interdependence can include: Fashions and/or trends, which are a characteristic phenomenon of the clothing industry, where consumers are influenced by the purchase decisions of others; Online communities, such as

membership of exclusive social networks such as ASmallWorld®, where the decision to join is dictated by fashion as well as by distinction from social networks open to all, such as Facebook®. If the exclusivity of the ASmallWorld® community is the benefit that its members gain, feeling themselves to part of an exclusive club, with Facebook the principle is exactly the opposite: the potential availability of millions of connections induces users to join so as not to feel excluded or to have access to new contacts and information. Another important aspect regarding the economic characteristics of a telecommunications network comes from the very definition of network externalities. If the value of a good depends on the quantity of similar goods in use (or expected to be in

use in the future), then, in terms of network externalities, the determination of technical standards and compatibility between them becomes particularly relevant. This issue brings up several interesting ideas on how the various actors in a market can interact strategically with each other, and how these interactions affect the adoption of technical standards, their profits and the level of consumer welfare. Here we note only that even if network externalities are relevant, no results have been acquired regarding the possibility of access to a particular technology. For example, the fact that today the most advanced Internet technologies (such as WEB databases) are free and can be used on very cheap computers does not mean that tomorrow, in a worst case scenario, we will still be able to use today’s technology. If tomorrow an enterprise or coalition of enterprises succeeded in setting a new and

more expensive standard, the equipment operating with the old standard would no longer be able to connect with the network, and would therefore be obsolete. 5.4.2 Market by Design Market Design is a new field of study in economics based on awareness that the proper functioning of markets depends on precise rules and modalities. Like engineers, market designers seek to understand the differences that arise, the rules that exist and the procedures that lead different types of markets to operate well or badly. Their objective is to know the functioning and needs of particular markets well enough so that they can ‘fix’ them when something starts to malfunction, or to have the tools for building new ones from scratch. The market design framework is based on two key points: game theory (which studies the ‘rules of the game’ as the basis for

designing rules of interaction) and the strategic behaviour suggested by the rules of the game. The framework is completed by the use of a practical guide, a methodology known as experimental economics, which provides the tools to test the reliability of predictions based on game theory and to test various market designs before introducing them into operational markets. One of the main reasons for market design is the need to address and evaluate market failures. To function properly, markets need to do at least three things: 1. They need to provide depth, i.e. to bring together a sufficiently high proportion of potential buyers and sellers so as to produce satisfactory results for both sides during a transaction. 2. They need to make the ‘territory’ safer for the participants, so that they can share information with others that they would

otherwise tend to keep to themselves. The success of a market often depends on the dissemination of information, so in some cases the market itself provides incentives for participants to reveal what they know. 3. They need to overcome the congestion that the depth (i.e. the high number of participants in the market) may cause, giving participants sufficient time to make satisfactory choices when faced with a variety of alternatives. As we have often stated, information is of particular importance in markets generally and especially in the Internet market; it is essential, for example, when the value of one transaction depends on the outcome of another transaction. In some situations it is necessary to circulate information, just as in others there is greater need to keep it hidden, such as when buyers in an auction on eBay wait until the last moment to reveal

their intentions and make their bid. Below we will see two examples of markets created by design, highlighting in particular the use of auction theory to resolve pricing problems. 5.4.2.1 Sponsored Search Auctions Sponsored advertising in search engines (or sponsored advertisements) tend to appear on the page along with the results of a keyword search. These advertising opportunities are valuable because if a user performs a specific search, for example, with the keywords ‘beach holiday in June’, the search results and the sponsored results are expected to be related to the user’s interest. This is where auction theories come in to define the rules, methods and approach used to determine which ad to show in the various positions allocated on the results page, through keywords specified by the advertiser that determine when the ad should be

shown and what it relates to. Before covering the history and evolution of auction theories up to the present day, we will first examine some of the characteristics of the Internet advertising market that make it unique: bids can be changed at any time; search engines sell flows of perishable advertising services; there is no ‘unit’ of advertising on the Internet that is natural and shared by all the parties involved. Bids can be changed at any time Each advertiser can bid for a particular keyword associated with their ad at any time until they decide to leave the game. Search engines sell flows of perishable advertising services If by chance there are no ads for a particular search in given periods, the

auction is unsuccessful and an advertising search possibility is wasted. There is no ‘unit’ of advertising on the Internet that is natural and shared by all parties involved From the advertiser’s perspective, the relevant unit is the cost incurred to attract a customer to make a purchase. This corresponds to a pricing model in which the advertiser pays only when a customer actually completes a transaction. From the perspective of the search engine, the relevant unit is what it collects in revenues each time a user performs a search for a particular keyword. This corresponds to a pricing model in which the advertiser is charged each time their link is shown to potential consumers. The two ‘units’ of advertising do not coincide and are difficult to amalgamate. For this reason a ‘unit’ of advertising was

introduced that is a middle ground between the two models, namely pay-per-click, i.e. the advertiser pays every time a user clicks on their link. In general, all three payment methods are widely used on the Internet, although the pay-per-click method is used for sponsored search auctions. 5.4.2.1.1 The Evolution of Sponsored Search Auctions The evolution of the theory of sponsored search auctions is an excellent case study of how, and at what speed, markets manage to address their structural shortcomings. They are an excellent example of market-bydesign principles, whereby the market is modified through the introduction of new auction rules in response to some shortcomings. Let us see how the sponsored search auction mechanism has evolved over time.

Early Internet Advertising (1994) Before the advent of the Internet, the pricing model most commonly used for advertising was based on the cost per 1000 impressions (CPM), where an impression was a showing of an advertisement. This model was used by traditional media such as television and newspapers. In early 1994, the Internet content provider began to use the same model for the Internet market. Just as with traditional media, the advertiser paid a flat fee (CPM), which at the time was very high, and received a fixed number of showings of their ad. Contracts and ads were managed one by one and required human intervention. Generalised First-Price Auctions (GFP - 1997) In 1997, Overture (now Yahoo! Search Marketing) introduced a new model for the sale of Internet advertising. The design proposed by Overture had at least two

innovative features: instead of selling large and expensive packages of advertising space, each keyword was sold by auction (with prices of less than $ 1 per slot); payment was determined on a perclick basis (PPC) instead of CPM (advertisers paid only when a user clicked on their ads). Various slots (or spaces) were auctioned for each keyword, each representing a position in relation to the top of the page, with the results shown in relation to the search made by a user based on a keyword. This gave some advantages to advertisers, who were able to target their advertising by specifying keywords relevant to their ads and the weight these had in relation to the latter. Each time a consumer clicked on a sponsored link, the search engine would

charge the advertiser the figure for their latest bid (for the keyword). The system was called Generalised FirstPrice Auction, or GFP, and ensured that in the case of several items, the links to advertisers were arranged in descending order of bids, making the highest bids the most prominent. Its success was immediate, but it soon became apparent that the system was unstable because bids could be changed very frequently. Generalised Second-Price Auctions (GSP 2002) In 2002, Google introduced their AdWords Select Programme in an attempt to eliminate the problems encountered with the previous model, namely: volatile prices; allocative inefficiencies.

Google then adopted a mechanism called the generalised second-price auction, or GSP, where, in an auction for several positions, the highest bid (of bidder i) won the first place at the second highest price, i.e. at the highest price of the bidder in position i+1. This new model simplified the market and eliminated some instabilities, making it less susceptible to gaming strategies. Google also introduced another innovation based on the fact that advertisers were now bidding and paying according to a PPC rather than a CPM payment model. Instead of assigning advertising spaces in descending order of bids, the slots were allocated according to the descending order of expected income (revenue). These revenues were calculated as the product of the advertiser’s bid and the expected ‘clickthrough rate’, i.e. an estimate of the probability of an ad being clicked. The design features a series of incremental

innovations: bids are per-click and not per-position Simplification; bidders pay the second highest bid and not their own bid Stability; bids are weighted with a quality score Relevance. 5.4.2.2‘Search in E-Commerce’ or ‘Consumer Auctions’ The matching problem encountered in sponsored searches is also found on ecommerce portals and interacts with both the pricing on the platform and with the nature of the competition between sellers. In this case, however, we find two ‘extreme’ situations regarding the consumer: the consumer has a clear and precise idea of the product they are looking for;

the consumer does not have a clear idea of the product (less specific interests) or suppliers offer differentiated products. In the first case, we have a situation where the consumer knows what they want and goes in search of the most reliable ecommerce site that can offer them the product at the lowest price. Price comparison sites are the solution to their problem, because they classify the different vendors (e-commerce sites) on a price basis and often include other information, such as shipping costs and the quality of seller. Sellers often tend to manipulate or interfere with comparison sites in regard to the search process in order soften competition over prices. In the second case, the problem is greater because the consumer does not have a clear idea of the product they are looking for (their

interests are less specific) or the retailer offers differentiated products. This is the case with platforms such as Amazon, eBay and Etsy, which seek to simplify the search as much as possible for the purchaser while charging suppliers a fee for showcasing their products to consumers. eBay is an interesting example since at the beginning it ordered its search results according to the expiry of the auction, giving first priority to expiring auctions and offering all sellers the same opportunities, with no distinctions; they then switched to their current approach, ordering results by relevance or ‘best match’ ranking. On the side of the product offered for auction on eBay, we have an ascending price auction in which everyone can participate until the expiration date and the best offer wins. A strange trend is catching on in eBay auctions, known as ‘late’ or ‘last-second’

bids. The trend is strange because eBay offers its own virtual agent (‘proxy bidder’) to ward off last-second bids and manage the maximum amount that the bidder would pay for the auctioned item. A theory has been proposed to explain this trend, namely that some bidders may not want to reveal their own strategy or interest in an item in order to have a chance at winning the bid or being able to pay a lower price. 5.5 Specific Features of the Internet Market The Internet has facilitated the creation of new markets with better measurement, greater customisation, rapid innovation and more awareness of market design. The Internet has also led to a reduction or rationalisation of the costs associated with the organisation and management of markets.

By analysing Internet markets in relation to technologies (often the source of the creation of new markets), distinctive characteristics can be noted. These are specific features that distinguish them from traditional markets and can be summarised as the following: Scalability (in terms of incremental returns); Customisation (understood as matching users with opportunities); Potential for Innovation (in terms of new products, new BMs etc.); Measurability. Scalability Many Internet platforms operate on very large scales, for example Facebook, which has over 700 million registered users, or Google, which conducts billions of sponsored search auctions.

Most of these have been designed to be easily scalable and at relatively low costs. High scalability at low costs can lead to high incremental returns. This feature alone, however, cannot be the only necessary and sufficient condition to ensure that a particular platform is successful and attracts a large number of users and therefore incremental returns. There are two possible origins: structural costs in operating with an Internet platform (investments [fixed costs] for the creation of a platform that meets users’ needs and produces scalable benefits); network externalities. Customisation The second distinctive feature of the Internet is the degree to which user experiences can be customised. The cost of customisation in

an Internet market is negligible compared to what can be paid in a traditional market. An illustrative example is advertising on TV or on the Internet. In the case of TV advertising, the showing is identical for all and not customisable, unlike advertising on the Internet, which is customised according to the type of user and their search habits. In an economic perspective, customisation can be understood as matching users with opportunities. Potential for Innovation The last distinctive feature of the Internet is its potential for innovation, i.e. in terms of the creation of new products and services, the refinement or introduction of new search algorithms and pricing mechanisms, and many other aspects. One of the distinctive features of Internet platforms is that they conduct experiments,

often several times during the year, as research costs are minimal, and if the added innovation or product/service is not well received by users, it can be reversed in a few seconds at no cost. To give an example, in one year Google alone performed more than 6,000 experiments, some of which received a good public response and have become part of the platform structure. Measurability This feature is the high degree of control and the extension of this to the various actions that can be performed on a platform, from structuring users’ searches to control and monitoring of transactions and testing of new rules and parameters. To conclude, Internet markets have a level of market design that is higher and, above all, more aware and detailed than that of traditional markets. This provides the

possibility of analysing and studying aspects of pricing and having an advantage over traditional markets with regard to analysis of user behaviour, with access to a greater, if not infinite, amount of information.

6 Internet Business Models

In the previous chapter we analysed the economic theories that relate to the web economy. In this chapter we will focus on the business models found in Internet markets, seeking to identify those models used up to now by companies that do business online in the IT, Intermediary and Content layers. The classification of business models [1] for electronic commerce was mentioned for the first time in 1998, and since then a large body of literature on Internet business models has evolved. In 1998 and the following years, it became clear that the various theories on the classification of business models (typological classifications)

were too specific and that a more general classification (taxonomy) of business models was needed that could be universally accepted and, above all, applied. Also in this case, there is no universally accepted taxonomy of business models, and even the concept of a business model has no universally agreed definition or framework. To give the reader a satisfactory overview of existing models for the Internet, we first analysed the existing literature and then, based on the conclusions we reached, we developed our classification system. 6.1 Definition of a business model Intuitively, the term ‘business model’ suggests something to do with the ways in which business can be done, in particular, the main models that can be used in the business world. Remaining on a very general level, we begin with the definition given in

the Zanichelli dictionary for the two words in question: Business: a deal, commercial transaction or activity of buying and selling goods and services; Model: a theoretical framework developed in various sciences or disciplines to represent the fundamental elements of one or more phenomena or entities. By combining the two statements, we arrive at an initial definition of a business model, namely a theoretical representation or framework developed in relation to the way a company conducts commercial transactions or activities involving the purchase and sale of goods and services, in order to generate profits. However, as we shall see in the following paragraphs, there is no globally accepted

definition, but it can be stated very simply that a business model represents, or rather, is a story that describes how a company operates, works, and generates profit. To be convincing, a story has to ‘sound’ good and it should have no discordant notes that may cause it to falter when being told. A good business model should therefore answer specific questions; to echo those asked by Peter Druker: Who is the end customer? What is customer value? How can a company generate profits? What are the economic processes that explain how a company can offer value to its customer at an appropriate price (and cost to the company)? Creating a business model therefore means writing a new story that is coherent for the

customers, explains how the company brings them a value, benefit, product or service, how it manages this, at what internal and external costs (the price paid by the end user) and by means of what strategic agreements (e.g. partnerships) in order to generate profitable and sustainable revenues. A business model could be described as: an abstract, conceptual model that represents the business and money earning logic of a company; a business layer, like a glue between business strategies and processes. In light of the above, we can say that the analysis and the definition outlined by Osterwalder conveys the concept expressed so far in an unequivocal manner: A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing a company’s logic of

earning money. It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams. - Osterwalder A.-

6.2 Literature on the Classification of Business Models Typologies are products derived from deductive research and their great advantage is their capacity to simplify complex concepts through classification by the use of one, or at most two, criteria. Alongside this advantage, however, there are also disadvantages, since although it is able to simplify, its applicability is limited to specific cases. Taxonomies, however, are derived empirically and are the result of inductive

research using multivariate analysis. [2] Based on the definitions of and differences between the terms ‘typology’ and ‘taxonomy’, it may be stated that to date no genuine taxonomy of business models has yet been produced, and the various attempts at classification should be considered more as typological than taxonomical classifications. In 1998, Bambury [3] identified and classified business models, grouping them into two categories based solely on the origin of the model: Transplanted Real-World Business Models (models from the real world transposed to the virtual world); Native Internet Business Models (models created within the Internet in relation to, for example, disruptive innovations).

He called this classification a taxonomy, but in reality it was merely a classification, albeit an excellent one. In 1998, Timmers [4] introduced his classification of business models based on two degrees of differentiation: the degree of innovation and the degree of integration. He identified eleven categories, which, however, cannot be considered taxonomies as they contrast with some of the key principles of the definition of taxonomy given above. In 2001, Weil and Vitale [5] introduced a very structured classification of atomic ebusiness models based on four variables: strategic objectives; revenue sources; critical success factors; core competencies. In their publication they claimed that on the

basis of these four variables they had typologically identified and classified eight atomic e-business models that represented the basic elements or building blocks of all ebusiness initiatives. In their writings they emphasised that atomic e-business models were merely building blocks and did not represent ebusiness models, but, on the contrary, were elements that could be combined together to classify e-business models. Therefore, they did not produce a typology of business models, but merely a typology of atomic e-business models. In 2006, through an in-depth observation of the Web, Rappa [6] identified what he defined as: ‘A Taxonomy of Business Model observed in the Web’, in which he identified nine categories of models with forty-one subcategories. As stated above with regard to Bambury, this classification, while useful for our

analysis of business models, as we shall see in the following chapters, cannot be considered a taxonomy according to the meaning and properties defined above.

6.3 Brambury’s classification - Internet commerce In 1998, Brambury introduced a classification (which he mistakenly referred to as a taxonomy) to describe business activities carried out on the Internet. He identified two main categories: Transplanted Real-World Business Models (activities that existed in the real world and were transposed to the virtual world); Native Internet Business Models (models created within the Internet in relation to, for example, disruptive innovations). The usefulness of this classification is that it identifies those business models or activities that truly originated from the Internet and those that were transposed from the real

world. 6.3.1 Transplanted Real-World Business Models This category of business models includes all models that were applied in the real world and were then transposed to the realm of the Internet. The category includes: the mail-order model; the advertising-based model; the subscription model; the free trial model; the direct marketing model; the real estate model; the incentive scheme model; B2B; combinations of the above models. Mail-order model This

is

used

by

companies

such

as

Amazon.com and has a ‘website shop’ front selling physical goods that are then posted or delivered. Although goods are advertised and payment is made via the Internet, these enterprises are based and operate in the real world and carry out traditional retail operations in the traditional way from their ‘website shop’. This is probably the most common Internet business model. Advertising-based model This has been the model for the success of many of the major search engines, such as Google, Bing and Yahoo, and it is also used by many other free websites. The model is similar to that used by commercial television, where advertising revenues support the operation of a free service. There are numerous variations on this model that depend on the mode of payment by the advertiser, or the means of advertising used, if not the unit of measurement used to

assess the performance of the advertising, and therefore on a payment of a fee for the service used. Subscription model This model is very suitable for combination with digital delivery. Typically, a user will subscribe to or access a database of digital products for a specified period of time. Once the user has logged in, he can make use of the products in the database. Stock photo sites such as Fotolia and iStockphoto also operate with this subscription plan model, where payment of a registration fee grants entitlement to download a number of images, vectors or video content each day. Free trial model The free trial model is often used for testing software and is similar to the ‘30 days free trial’ retail model. Basically, software is available for free download, but will work only for a limited period or will not offer all

the features found in the full software package. Once a fee is paid and the product is registered, all the functions are activated or reset (if the trial period has expired). This type of business model is often used by commercial software companies, individuals and independent developers. The software developed by programmers or independent software developers is often called shareware and the fee charged is generally smaller than that for mainstream commercial software. Direct marketing model The use of direct email marketing (also known as spam) on the Internet has become so widespread and intrusive that various laws over time have limited its application. However, this is just one negative aspect of direct marketing that has been transposed from the real world to the virtual world. Spam has not diminished over time, despite

laws specifically enacted by the governments of the world. Real estate model Some companies apply this model to sell web space, domains and email addresses. While the word ‘domain’ implies ownership or control of a territory, the management of the ‘imaginary territory’ of the domain name system is somewhat confused and distorted by commercial considerations. Some webbased enterprises have over time acquired numerous domains with common names to then resell them in the world at higher prices in the light of their scarcity, due mainly to the uniqueness of certain words that could identify a product, category, or similar better than others. Examples of domains purchased at very high prices include: Business.com $ 7.5 million, AsSeenOnTv.com $ 5.1 million,

Altavista.com $ 3.3 million, Wine.com $ 2.9 million, Autos.com $ 2.2 million, Express.com $ 1.8 million, Wallstreet.com $ 1 million, Rock.com $ 1 million, Websites.com $ 970,000, Drugs.com $ 830,000. Incentive scheme model Sometimes these are combined with advertising. Examples include so-called permission-marketing and competitions. Opportunities to win prizes or to secure ‘free’ or inexpensive goods or services are used to entice people to accept advertising or provide personal information. For example, some web-based market research companies use this model. B2B The models analysed so far are focused on the consumer market, but a large amount of

business is transacted between companies via the Internet. The payment infrastructure behind e-commerce involves activity between vendors, credit card companies, banks, Internet service providers (ISPs), certification authorities (CAs), software companies and others. Internet B2B transactions also include financial, research, legal and employment services. Combinations of the above models The digital environment encourages the combination of various business models and over time many e-commerce businesses have formed creative combinations of various models. For example, numerous companies have software suites that enable online shopping and online payment. There are also those offering multimedia digital delivery products that enable the streaming of digital video and audio. 6.3.2 Native Internet Business Models

It is generally recognised that most of the activities that take place on the Internet do not involve any cash disbursement. Most of the software underlying the Internet and the Web is freeware or shareware. Much of the value created and exchanged on the Internet and the interactions involved are not of a financial nature but, instead, may result in an accumulation of ‘reputation capital’. Unlike the real world, the native Internet economy is not based on scarcity, but abundance. There is an abundance of information and everyone can use it and create value with it. Clearly the concept of scarcity is based on the capitalist system that dominates the real-world economy, which is markedly different from that of the Internet. Business models that originate and were developed in the realm of the Internet include the following:

the library model; the freeware model; the information barter model; the digital products and digital delivery model; the access provision model; website hosting and other models. Library model The Internet and the Web in particular are sources of free information. Academics and scientists were among the first groups to grasp the potential of the public network for disseminating and making available free information. One of the basic templates for a web presence is a site that offers free information. Many of the sites created up to now follow this type of business model. Freeware model The freeware model is used extensively by the Internet software development

community. Much software, including popular web browsers such as Firefox, Chrome, Internet Explorer, etc., is available for free download. The Free Software Foundation actively promotes a software development model distributed with an unconventional approach to copyright. In the commercial field, basic versions of software packages are often offered for free to enable users to assess their potential before deciding on the full paid version. Open source code is often associated with the freeware business model. The open source model has largely been responsible for the development of the public network, unlike the development of proprietary standards by some software companies, which is diametrically opposed to the native freeware culture of the Internet. Information barter model This model is very common and usually

involves some kind of exchange of information over the Internet between individuals and organisations. At times there may be privacy implications where personal information is exchanged for a digital product or service. In some cases, personal information may be sold to others to create mailing lists, or the information may be used to create profiles or customised advertising. Some of the popular Internet news services subscribe to this model. Digital products and digital delivery model Digital products exist in the digital realm and may never need to be manifested as physical objects. These products include images, movies, animation, audio, text, certificates and software. Digital delivery may take place when products are purchased or where information is bartered by providing personal information to the company. A great deal of

digital material that is transmitted or exchanged on the Internet does not involve a financial transaction. Access provision model This model is absolutely fundamental to the operation of the Internet, but it is often neglected in discussions about Internet commerce. This business provides access to the Internet with enterprises called Internet Service Providers (ISPs). Website hosting and other models Many ISPs and other web-based enterprises provide services such as hosting web servers, email and URLs. Some enterprises provide free web hosting and email. These companies are usually financed by the inclusion of advertisements on certain sites and within email. 6.4 Classification of Internet business models

Brambury’s classification is very interesting due to the criterion of classification proposed, namely business models native to the Internet and existing business models transplanted to the Internet. However, this classification was made in 1998 and the ways of doing business on the Internet have certainly evolved. For this reason, we decided to create a new classification of business models that is up-to-date and as comprehensive as possible. The typology used for classifying the business model is based on Professor Rappa’s classification, appropriately reorganised and updated to take into account the evolution of the Internet. In addition, a criterion for classifying BMs was established for the typology activity that was not part of Rappa’s original classification [7]. The way in which the exchange between supply and demand occurs has been used as a criterion for distinguishing types, which has

led to the identification of three families of business models: Transaction-based, i.e. business models based on direct transaction between supply and demand; Advertising-based, or business models that are based on an indirect transaction between supply and demand; Free-based, i.e. models where the exchange between supply and demand takes place for free, or at least in part or for a certain period of time.

6.4.1 Transaction-Based Models In transaction-based models, demand and supply reciprocally and mutually affect one another. Goods or products are exchanged either directly or with the aid of a third enabling party. Within transaction-based models, we can distinguish: the brokerage model - a model that

involves bringing together buyers and sellers, or facilitating transactions; the merchant model - a direct encounter between seller and buyer; the subscription model - the exchange between seller and buyer is made through a recurring fee for use of the good/service; the utility model - the exchange between seller and buyer is made by payment of the effective use of the good/service by the buyer.

6.4.1.1 Transaction-Based Models: the Brokerage Model Various business models can in turn be identified within the brokerage model, including: Marketplace exchange - offers a full range of services covering the transaction process, from market

assessment to negotiation and fulfilment (ChemConnect); Buy/sell fulfilment - takes customers’ orders to buy or sell a product or service, including terms like price and delivery (Respond.com); Demand Collection System prospective buyers make a final bid for a good or service, and the broker arranges fulfilment (Priceline.com); Auction Broker - conducts auctions for sellers (individuals or merchants). The broker charges the seller a fee and commission on the transaction (eBay); Group buying - makes a discounted sale to the seller on the condition of selling a minimum number of items. Revenue = % on sales (Groupon); Transaction Broker - provides a thirdparty payment mechanism for buyers and sellers to settle a transaction (PayPal);

Distributor - a catalogue operation that connects a large number of product manufacturers with wholesalers. The broker facilitates business transactions between distributors and their trading partners; Search agent - software used to search-out the price and availability of a good or service specified by the buyer; Virtual marketplace - a hosting service for online merchants that charges setup, monthly listing, and/or transaction fees. The service may also provide marketing activities. (Amazon zShops, eBay stores).

6.4.1.2 Transaction-Based Models: the Merchant Model

Various business models can be identified within the merchant model, including: Virtual merchant - a retail merchant that operates solely over the web (Amazon.com); Catalogue merchant - a mail-order business with a web-based catalogue. Combines mail, telephone and online ordering; Click and Mortar - a traditional retail establishment with a web storefront (Barnes & Noble); Bit Vendor - a merchant that deals strictly in digital products and services over the Web (Apple iTunes Music Store); Manufacturer Model - a manufacturer reaches buyers directly and thereby compresses the distribution channel (Apple);

6.4.1.3 Transaction-Based Models: the Subscription Model Various business models can be identified within the subscription model, including: Content services - an offering of

various types of premium content in return for a user subscription (Repubblica.it - paid news section); Application services - an offering of various types of services in return for a user subscription (Salesforce); Person-to-person networking services distribution of user-submitted information, such as individuals searching for former schoolmates or online dating (Meetic); Trust services membership associations that abide by an explicit code of conduct and in which members pay a subscription fee (Truste);

6.4.1.4 Transaction-Based Models: the Utility Model Various business models can be identified within the utility model, including: Metered usage–measures and bills

users based on actual usage of a service (Amazon Elastic Cloud); Metered subscription allows subscribers to purchase access to content in metered portions (Embed.ly);

6.4.2 Advertising-Based Models Advertising-based models are multi-sided models, i.e. more than two operators are present and involved, and the exchange

between supply and demand cannot occur without a third operator that acts as an enabling agent. Companies that want to advertise their products seek potential customers, but to reach them they need third-party operators that offer content and media to the company’s target. It can therefore be stated that, in general, companies are directly interested in customers to promote their services, whereas customers are not directly interested in companies but in a content or service that is offered to them for free, or almost, in exchange for advertising. A particular case is Yellow Pages and classified ad sites, where the content offered to attract users is in fact the advertiser’s advertising content. Within advertising based models we can distinguish: Advertising models - offer of content

and services for free but with the inclusion of advertising content; Intermediary models - a model based on advertising intermediation, i.e. the aggregation of property and audience.

6.4.2.1 Advertising-Based Models: Advertising Models Various business models can be identified as advertising models, including: Content provider - an offer of various types of free content based on

revenues from advertising inherent to the use of the content (Huffingtonpost.com - free news); Service provider - an offer of various types of free services based on revenues from advertising inherent to the use of the services (Gmail); Product provider - an offer of a product, e.g. free download of a game or program, based on revenues from advertising inherent to the product; Classified - a list of items for sale or wanted for purchase. Listing fees are common, as are membership fees (Monster.com); User registration - a site based on content that is free but the user is required to register and provide personal information of value to advertising campaigns (Winnerland.com);

Query-based paid placement - sale of positioning links (sponsored links) related to particular search terms in a user query (Google).

6.4.2.2 Advertising-Based Models: Intermediary Models Various business models can be identified as advertising models, including: Advertising network–intermediation between advertisers and inventory owners through an automated technological platform (Google Adwords/Adsense); Dealership - intermediation between advertisers and inventory owners through a sales force and nonautomated pricing processes (Bread & Butter); Affiliation network - intermediation and affiliations, i.e. an offer of incentives based on revenue or contacts to affiliated partner sites (Tradedoubler); Metamediary it facilitates transactions by providing comparisons

between several vendors. Revenues come from traffic generated to vendors or a percentage of sales (Trovaprezzi).

6.4.3 Free-Based Models Free-based models involve the delivery of a product or service for free, or at least in part. Free-based models can be divided into:

Community models - models based on the loyalty of users who invest time and passion in the development of the good/service. Free models - models based on the initially or permanently gratuitous nature of the good/service.

6.4.3.1 Free-Based Models: Community Models Various types of business models can be identified as community models, including:

Open source - software developed collaboratively by a global community that shares the code. Revenues are based on related services (Wordpress); Donations - services and products that are offered for free and are supported by donations from users (Wikipedia).

6.4.3.2 Free-Based Models: Free Models Various types of business models can be identified as free models, including:

The freeware model - services and products released for free that provide the author/company with visibility or publicity (Bittorent); Freemium - services issued for free, but with limited features that can be extended through payment of a fee (Dropbox).

7 The main Internet markets

In the previous chapters we looked at the economic models applied to the study of Internet markets and the business models used by companies that operate online. In this chapter we shall have a closer look at two main Internet markets typical of the Intermediary and Content layers: advertising and e-commerce. These two markets have been chosen because they are the most representative of the Internet industry. In each of them we shall see the application of the economic theories examined so far and examine in greater detail how some business models function.

We will analyse the following aspects for each market: structure; evolution; main innovations that distinguish them from traditional offline markets; main sub-segments; economic size. 7.1 The Online advertising market The online advertising market began as a transposition of the concept of offline advertising online. Advertising allows advertisers to convey a message to other people (‘eyeballs’). The attraction between advertisers and eyeballs is asymmetric since advertisers want to reach potential customers (direct attraction) whereas users are attracted by content rather than advertisements (indirect

attraction). With Yellow Pages, however, the attraction is mutual: users have a need and seek advertisers that can satisfy it, while at the same time the advertisers seek users (direct attraction on both sides). Although the ultimate goal of advertising is to generate sales of goods and services, this can be done in very different ways: One type of advertising is designed to generate sales directly by creating contacts, or ‘leads’. The advertising on Yellow Pages is an example. The advertising in the advertisers’ listings on Yellow Pages is designed to create solid sales prospects for advertisers; Another type of advertising is informative, providing a description of products and prices. Informative advertising for supermarkets, showing their products and offers, is an

example of this type; Yet another type of advertising is branding, which can change people’s perceptions of a product or service. The MasterCard TV advertisement (‘There are some things money can’t buy. For everything else, there’s MasterCard’) is an example of this. Online advertising has brought technological innovations, particularly for advertising that generates leads. The mass media are the principal channels for advertising, as the main commercial tool for bringing together suppliers and potential customers (businesses or consumers). The profitability of business in the media market depends on the capacity to balance and enhance the two characteristic offerings: the sale of the media to the audience (readers, viewers, users) and the sale of space to advertisers (commercial operators).

Content, technology and distribution are the tools with which the media enable potential contacts between advertisers and customers.

The new online advertising industry has much in common with the traditional one.

The main characteristics of online advertising are its use of Internet-based technologies and data-collecting mechanisms, which enable the profiling and tracking of specific individuals and automated sale of advertising spaces. The web advertising model is based on a website (publisher) that provides content (normally free, but not necessarily so) and services, combined with advertising; The ads can be the main or sole source of revenue. The publisher can be a content creator or a distributor of content created elsewhere; The advertising model works best when the volume of visitor traffic is very large or highly specialised; Online advertising is similar to its offline counterpart with regard to the use of ads, allowing the display of text

(as in classified ads), graphics (as in magazines) and video (as on TV). Online advertising conveys advertising in various forms: text, graphics and video, and therefore includes the various formats of the traditional advertising industry.

The main pricing models used in online advertising work on a pay-per-performance

basis. There are also other types based on a one-time payment, for example the flat fee model (pay per insertion) used by Yellow Pages.

The advertising market can generally be considered as a market created by the shift online of an existing offline market.

However, some market segments, such as search advertising, can be regarded as entirely new and created by design. Online advertising is not merely another channel into which advertising can flow, but a truly radical innovation that is patently distinct from the offline channel: 1. The Internet provides a highly efficient mechanism for delivering ads to individual users and gathering information for targeting ads. 2. It allows more efficient intermediation in the advertising market, as seen, for example, in the auction mechanism used for keywords. 3. It fosters specialisation economies: online publishers aim increasingly at selling advertising space through specialised platforms. The media maximise advertising revenues by creating an optimal balance between the

spaces available and the dilution of the information, with a consequent loss of the value of the spaces. Space on the Internet is infinite only in a virtual sense and the enhancement of advertising has evolved over time due to the innovations in the Internet media, as seen in Figure 7-4.

The early 2000s signalled an evolution from

a content-driven model to a technologydriven model, due to the failure of the revenue models of the first-generation portals and the paradigm shift imposed by the success of Google, as shown in Figure 75. 7.1.1 Market size The market as a whole is growing very rapidly, as can be seen from the evolution of the American market over the past decade shown in Figure 7-6. It should be noted that there was a slight decline in 2009 due to the global economic crisis, but recovery came as early as 2010. In general, we can say that the online advertising market has withstood the recession better than any other type of advertising. By 2013, annual revenues were increasing on an annual basis. The compound annual growth rate (CAGR) for Internet advertising over the last ten years

was 18% in the US, exceeding the national GDP growth rate, which was 4% in the same period. Since 2010, the growth of Internet advertising has been fuelled by a CAGR of 123% in mobile revenues (compared to 12% growth in non-mobile revenues).

The American market is concentrated with the ten leading operators, which together accounted for 71% of total revenues in the fourth quarter of 2011. The subsequent fifteen operators generated 11% of the market total, and the following 25 players 8%. In total, we have 90% of the American online advertising market in the hands of the

top 50 companies. Online advertising continues to be a concentrated market, with the top 10 companies that sell online advertising accounting for 71% of total revenues in the 4th quarter of 2013, down slightly from 72% in Q4 2012. The companies ranked 11th to 25th in the list of leading companies accounted for 10% of revenues in Q4 2013, consistent with the 10% recorded in the 4th quarter of 2012. Despite the emergence of some Internet advertising giants, the concentration of the top-10 in terms of revenue has remained relatively unchanged over the past decade, fluctuating between 69% and 74%.

The online advertising market also shows strong growth compared to other media. In 2011, online advertising in the United States surpassed the advertising revenues of cable TV, and in 2013 it surpassed broadcast TV, positioning itself as the leading media in

terms of advertising investments. From 2005 to 2011, only two forms of media in the American advertising market had a positive compound annual growth rate (CAGR): cable television at 4.0%, and the Internet at 16.7%. Since 2005, the growth rate of online advertising has exceeded that of any other advertising media every year.

7.1.2 Market segments The online advertising market can be broken down into the national market, consisting of large companies particularly focussed on

branding, and the local market, composed of SMEs mainly seeking a direct response: National – normally associated with branding-type advertising that communicates at a national level; Local – local advertising (local searches, directories, ads…). The national market is covered by dealerships, normally owned by publishers, and the largest buyers are the media agencies. The market is therefore characterised by several operators on the supply side and few on the demand side. The local market, however, is characterised by several operators on the demand side and a fragmented context on the supply side, composed of various local operators. At a national level, however, there are few active operators with an industrialised offering that are capable of

managing the complexity involved in dealing with a large number of customers. The main players in the local market are the directories and Google, with its share of local searches (what and where). Within the advertising market we can also identify more specific market segments based on advertising formats. The Internet Advertising Bureau, a benchmark industry association, identifies the following subsegments of the market: Search - the market for keyword advertising on search engines; Display - the display advertising market; Classified - the classified ad market (ads, directories); Rich Media and Digital Video - the market for advertising formats that use advanced technologies, such as streaming video or flash animation,

and can interact with the user; Lead Generation - the advertising market based on the creation of contacts (e.g. filling out of forms or calls-to-action); Sponsorship - the online sponsorship market (e.g. web pages branded by an advertiser that group thematic content, advertisers that sponsor a section of a site); Mobile - the market for online advertising on mobile devices. The most important market segments in terms of economic weight are search and display, which account for 41% and 19% of the US market respectively. Classified ads have decreased in recent years, however, mainly due to erosion of the online revenues of Yellow Pages by search engines, which have seen an increase in local searches by users.

The performance-based pricing model, the main model since 2006, fell slightly to 65% of total sales in 2013, from 66% in 2012. The impression-based pricing model (CPM) accounted for 33% of total revenues for the sector in 2013, slightly up from 32% in 2012, and the highest since 2010. Hybrid models

remained at 2% of total revenues in 2013, in line with the 2% recorded in 2012.

Both the search and display segments are found to be highly concentrated. With regard to search, Google is seen to be the market

monopolist, receiving almost 67% of all online searches, according to data from Comscore. Research by eMarketer indicates an increase in concentration in the search and display segments over the coming years. As the two segments account for over 65% of the total for the online advertising market, the entire market can be expected to see greater concentration, as shown by the data on the US market provided by eMarketer.

The main global companies operating in advertising are as follows: Google: the company whose main product is its famous search engine, created in 1997 and now the most visited site in the world. Google operates an online advertising system that allows advertisers to promote their own ads on the search engine results pages by combining their messages with keywords used in

searches by users. In addition, advertisers can also publish their messages on websites that belong to Google’s advertising network. In this case, Google divides the profits generated from the advertisers’ investments with the publishers of the affiliated websites. Google Adwords is the platform on which advertisers can create their own ad campaigns, while on the Adsense platform they can affiliate their websites with Google’s advertising system. Since 2003, Google has been growing at a CAGR of 50%, achieving a turnover of over $ 55 billion in 2013 and confirming itself as the largest online advertising company in the world by far.

Yahoo!: was founded in 1994 and was originally a web directory, i.e. a hierarchically ordered collection of links to web pages. Yahoo! grew rapidly in the 1990s and evolved with the addition of a search engine, later becoming a genuine web portal offering content and services. Yahoo! now operates as a portal offering the

latest news and providing access to online services such as Yahoo Mail (email), Yahoo Maps (map service), Yahoo Finance (financial information services) and Yahoo Messenger (instant messaging between users online). Most of its revenues come from advertising-type searches performed on its search engine and display advertising on the portal and its network of websites.

Facebook: the famous social network was launched in February 2004 and by October 2012 was managing one billion active registered users, more than half of whom use the social network from a mobile device. Users

have to register in order to use the site, after which they can create personal profiles, add other users as friends, and exchange messages, including automatic notifications when they update their profiles. They can also join user groups organised around a common interest, a place of work, a school or college, or other characteristics, and organise their friends into lists, such as ‘workmates’ or ‘close friends’. Revenues are derived primarily from advertising (85%), and there are also payments for virtual goods (15%). Advertising is either tabular or in the form of sponsored posts or suggestions. Facebook achieved a turnover of about $ 7.9 billion in 2013.

In the following paragraphs we will have a closer look at the search and display market segments because, as we have seen, they are among the most important segments of the online advertising market. We will also study the phenomenon of advertising

networks, technology platforms that mainly intermediate display advertising and play a fundamental role in the online advertising landscape. 7.1.3 The Search Advertising Market in Detail This provides advertisers with the possibility of advertising within the context of the results displayed on a search engine. The ‘trigger’ of the (possible) ad exposure is the ‘match’ between the keywords chosen by the advertiser and the query entered by a search engine user. The advertisement displayed is normally text (a header and two lines of ‘ad’ text in the most popular version) with the words that ‘triggered’ the display highlighted. There can also be other graphic forms of display (banners, multimedia, etc.). Search engines initially displayed keyword advertising results only to the right of the ‘organic’ results list; however, for some time now they have also

been displayed at the top of the search results in order to increase the number of ‘clicks’ (often relying on the unclear separation between ‘paid listings’ and ‘organic results’). The most widely used keyword advertising management systems (normally composed of ad creation, budget management, distribution and reports) are Google/AdWords-AdSense, Yahoo/Search Marketing (Overture), Microsoft AdCenter and Miva. 7.1.3.1 Web search taxonomy There are three types of web searches by users: 1. Navigational. The purpose of this type of search is to find a particular site that the user has in mind. Navigational searches usually only have one correct result. 2. Informational. The purpose of this query is to search for information available on the

Web in a static form. No further interaction is involved aside from reading. The term ‘static’ implies that the target document was not specially created for the user’s search. 3. Transactional . The purpose of a transactional search is to look for a website where further interaction will occur. The main categories involved in this type of search are shopping, various webservices, downloading various types of files and accessing specific data-bases (e.g. Yellow Pages).

A web search can be performed through two different technologies: full-text; taxonomic. The search may also represent a commercial need of the user, and so we can distinguish web users’ intentions as: non-commercial; commercial. It can also be geo-targeted: national; local.

7.1.3.2 The size of the search advertising market The search-based advertising market was created in 1995 with Infoseek, one of the first web search engines, which began to profile advertising banners based on the keywords entered by users. Cost per click (CPC) was introduced for the first time in a transaction between Procter & Gamble and Yahoo in 1996. In 1998, GoTo.com introduced the first ads alongside search results, making advertisers pay on a CPC basis. GoTo.com was subsequently purchased and became the ad search platform for Yahoo. Other search engines followed the CPC model and in 2000 Google launched Adwords. Although Infoseek started first, there was no leader in the search advertising market until 1999, when Yahoo assumed the top position until 2002. In 2003, Google became

the leader of the search advertising sector, despite having been established later.

Google’s page rank algorithm played a crucial role in the company’s rise to become the leading search engine and it is treated like a state secret. The gap between Google and its rivals continues to widen. The market is thus very concentrated. In 2008, the revenues of the leading platform (Google) were three times those of the second largest platform (Yahoo). The market clearly has a two-sided structure, with the advertisers on one side and the users who perform searches on the

other. We can see multi-homing and singlehoming effects in detail, both on the side of the advertisers and that of the users: Multi-homing - advertisers generally use several search-ad platforms. This is because they only pay when a user clicks on their ads and so there are no reasons to use a single search engine; Single-homing - users, however, tend to use a single search-ad platform. The main economic factors that affect the two-sided structure of searchbased advertising and influence the market structure are: Keyword pricing - platforms that attract few advertisers tend to have a lower CPC. Platforms that have less efficient auction mechanisms or generate less valuable contacts also tend to have low CPCs; Indirect network effects - a greater

number of users means a greater number of searches, which attract a larger number of advertisers, increasing the probability of a profitable match between searches and ads. The increase in actors on one side of the market brings benefits to the whole system; Fixed costs - advertisers incur fixed costs for the use of search-ad platforms, including setup (software installation, training for use…), campaign management and monitoring costs. These costs discourage advertisers from launching their campaigns on small platforms; Revenue per search - various searchad platforms with similar traffic and keyword bids can differ in terms of revenue-per-search (RPS). This can happen if one platform is more successful than others at extracting

value from the advertisers, due to more efficient auction mechanisms or better estimation of CTRs. This allows them to have higher CPCs. 7.1.3.3 Main innovation in search advertising The main innovation in search advertising consists of the algorithms used by the search platform. The development of algorithms as the tools at the heart of search engines has been the key element in undermining the assets of previously existing companies and creating new opportunities, and thus new markets. Prior to the advent of search engines, Internet browsing was more or less based on the hyperlinks that linked the pages. The pages for accessing the Web were mainly portals such as Yahoo!, on which users were guided towards sites containing the content they desired through taxonomies that organised and catalogued the websites. User behaviour subsequently

matured, becoming more active, and desired content at this point was sought through a search engine. During this transition, an increasing complexity could be observed in user behaviour. Initially, the average query was composed of one or two words. Queries then became increasingly complex, including more than two words, until entire phrases were searched for. This user maturity was reflected in the need for search engines to provide results that were as relevant to the query as possible. This had the effect of affirming the search platforms with the most advanced technology, and thus the best ranking algorithms. And so, thanks to its technology, Google was able to unseat the players of that era, who were established operators, and become the undisputed leader. This gap now created by the market leader makes the possibility of true competition from any competitors increasingly difficult. In

fact, its access to an enormous audience allows the leader to accumulate statistically relevant data (or, in any case, more relevant than that of its competitors) on user behaviour in relation to the results provided for any given query. This data can be analysed and used to improve the search algorithms or to develop new features that are superior to those of its competitors, such as correlated searches or anticipating misspellings (‘showing results for…’) in the event of invalid queries, etc. The main innovations on the side of the advertisers consist of the auction system and the mechanism for matching ads with queries, which is not only done through keywords matches but also by assigning a quality score to the advertisement. This is for the simple reason that the search platform only earns if the ad is clicked, therefore it has to try to maximise its return by displaying quality ads that can receive

more clicks than those of lower quality. The two main innovations on the advertisers’ side can be summarised as follows: Keyword bidding system - search advertising platforms generally use an auction system in which advertisers bid for the most visible slots associated with searches for specific keywords; CTR - the only auction not determined by the position of the ads. To maximise their profits, search advertising platforms estimate a quality score for the ad, called the click-through rate (CTR). By combining this with the auction mechanism, they determine the cost per click (CPC) and the slots where the advertisers appear. Thus search platforms are ensured the best slot allocations.

7.1.4 The Display Advertising Market in Detail At the end of 2014, there were around 1.1 billion websites. All of these sites have the opportunity of providing space for advertising and receiving money from advertisers for the users that will see the ads. Almost all websites with a significant amount of traffic contain advertisements. Most sites on the Internet owe most of their revenue to advertising. The publishers of these websites include traditional companies that have created online extensions, such as La Repubblica with repubblica.it, new companies essentially established on the Internet, such as YouTube, blogs such as Tecnocrati.com, social networks such as Facebook, and, finally, web portals that operate with their own platforms, such as Msn and Yahoo. The advertising sector on web publishers’ sites is a complex ecosystem

that we shall attempt to analyse and describe in the remaining part of this manual. Web editors create advertising inventory as they prepare the layout of their web pages, so that graphics, text or video content can be inserted in various parts of the page. The portions of the page reserved for advertising include a code that allows them to receive the ad in real time from various sources. Due to the need for code, many websites do not change the spaces dedicated to advertisements frequently, and when advertising is not available, they often use these spaces for their own publicity. The image at the side shows a typical layout of a web page with various spaces to host advertisements. The ad inventory provided by the publishers comes from a combination of two key variables: the quantity of space dedicated to the advertisement and the type of readers that it attracts. The spaces

provided by publishers are very heterogeneous and varying in quality for a number of reasons: some spaces are more desirable than others (for example, the top right is preferable to the bottom left for the reason that it receives more attention from users); some users are more desirable than others to advertisers (for example, readers from 18-49 years of age vs. 50+) and online advertising technology allows publishers and advertisers to establish prices for users with particular characteristics; Some sites are more valuable than others (e.g. sites dealing with financial topics vs. leisure), due in part to the type of user that the site attracts and the predisposition that the users have to buy (purchase intention).

7.1.4.1 The display advertising market As happens with every type of market with buyers and sellers, publishers and advertisers need methods to identify opportunities of exchange and to establish transaction prices. There are two methods of intermediation used between publishers and advertisers (or media agencies that represent the advertisers): Direct, through bilateral exchanges between publisher and advertiser using a sales force; Indirect, through multilateral exchanges between publisher and advertiser using advertising networks. The extent to which advertisers and publishers may use direct or indirect methods varies. Small publishers typically rely on indirect intermediation because the costs of managing a sales force are not

viable for them. Large publishers and advertisers, however, use both methods. Large publishers sell their premium spaces, such as those on their homepage, directly. However, they also use indirect methods to sell lower quality spaces, such as those at the bottom of the pages, or to sell premium space left unsold, either because not all the inventory was sold at the prices sought in direct intermediation or because of an unexpected increase in visits to the site, leading to an unexpected increase in inventory. Publishers are able to obtain higher prices for their websites through direct intermediation than with indirect intermediation.

Research conducted by Bain in collaboration with IAB showed, indicatively, that 90% of inventory is sold indirectly and the remaining

10% through direct sales. The 10% of inventory sold directly generates 70% in terms of value, with an average CPM (cost per thousand impressions) of between $ 12 and 18, whereas the 90% intermediated indirectly is responsible for 30% of the market value, with an average CPM of around $ 1 (see the image at the side). Advertisers and publishers depend on various services, which they either provide directly with solutions developed in-house or else obtain from third-party suppliers: Large advertisers and advertising agencies use licensed advertising software services such as AdManager by aQuantive or DART for Advertisers by DoubleClick. These normally manage different types of advertising on hundreds of sites. The software allows them to manage this variety of

advertising campaigns and instructs the server in regard to the type of advertising (creativity, formats…) to deliver and where to deliver it. These tools are generally server-based software hosted on the provider’s web server. Large publishers generally use tools such as DART for Publishers by DoubleClick. The publisher integrates a code in their pages that links the advertising spaces to tools so that they can manage the software, make reports and deliver the ads. When a user accesses a page, the publisher’s tool makes decisions based on predetermined rules: it checks that the advertising space the user is about to see has been sold as premium, if not it checks whether there is an advertising network that can fill the space. It then retrieves the ad or requests the

network server or advertiser to retrieve it, and it will then be displayed on the page. This entire process takes place in the blink of an eye. Only a few large publishers have developed their own tools instead of relying on third-party software. Even in these cases, it is server-based software hosted on the provider’s web server. A few providers also supply complete solutions for advertisers and publishers. Google AdSense/AdWords, for example, is one of these. Publishers can link their spaces to AdSense, which then takes care of everything: selling the space, delivering the ad, monitoring and managing the space and delivering the proceeds to the publisher while retaining a commission for its services. Similarly, the advertisers can buy spaces from Google Content Network through

AdWords (in bundles with search advertising services). Yahoo! and Microsoft offer similar solutions. These solutions come from technologies developed for search advertising, particularly the mechanisms for keyword auctions. 7.1.4.2 Innovation in display advertising The main innovation in online advertising compared to advertising on traditional media is its capacity to target ads to specific consumers. In online advertising various data can be used to target specific individuals and it is also possible to customise advertising spaces for each visitor: thus people that access the same website at the same time can see a different advertisement. There are basically two types of targeting technologies: contextual targeting and non-contextual targeting. 7.1.4.2.1 Contextual Targeting This is based on scanning the content of the

publisher’s webpage to be able to insert an ad that matches the context of the topic covered. Search engine platforms use their keyword bidding systems to sell advertising on the sites of publishers that belong to their networks. Advertisers bid on keywords exactly as they do with search advertising. The contextual platform then tries to deliver the advertiser’s ad to the web pages on which the keywords that the advertiser bought appear. Aside from the keyword bidding system, advertisers can choose the position of the ads based on other criteria, such as the time of day, the type of website, etc. Contextual targeting, despite being widely used and adopted by leading platforms such as Google, displays a profound weakness, namely, it is not sufficiently intelligent to fully understand the context of the page hosting the ad. This is what the semantic

technology that succeeded contextual targeting proposed to do. Contextual targeting inserts ads in pages based on the fact that they contain keywords that the advertiser has linked to the ad. The limit of this technology is the semantic gap that is not taken into consideration. A web page may refer to wines without necessarily mentioning the word ‘wine’, but perhaps by describing it through synonyms or forms of speech, such as ‘nectar of the gods’. Likewise, a platform might display ads for ocean cruises on a page featuring the actor Tom Cruise. In other cases, the context is right but the negative connotations are not perceived, such as the ad of an air company in a page about flight disasters. Semantic advertising is aimed at overcoming the limits of contextual targeting, by seeking to understand the context and the concepts of the web page. At present, the technology is not yet mature, but the first experimental

attempts are beginning to appear. Ad Pepper, for example, has bought a company that has developed semantic technology for 8 million dollars and has integrated this technology into its advertising platform. It is reasonable, however, to assume that the greatest steps in this technology will be taken by the search engines that also use this technology to provide their users with better results and then deploy it in their advertising platforms, as happened with contextual targeting. 7.1.4.2.2 Non-Contextual Targeting Non-contextual targeting uses browsing and user information to show users an ad that is unrelated to the context of their current page. Three main sources of information are used for this purpose: The IP address of each visitor is used to geolocate the users; Cookies sent by the site to the user’s

computer allow various data to be collected, including the web pages the user has visited; Correlation of the IP address with other information. As IP addresses are captured by various sources, it is possible, at least in theory, to determine exactly who the users are. The main non-contextual targeting technologies that advertising networks and platforms use include: geographic, sociodemographic, predictive, collaborative, technical and behavioural technologies. Geographic technologies Users’ IP addresses are identified in terms of their country/city of origin. Advertisers can therefore choose to display their advertising messages only to users in a particular area. The main problem of this technology is that it can be inaccurate, especially when users located in various geographical areas all

leave the connection backbone of their Internet provider (for example, Fastweb users). Socio-demographic technologies The ads are shown to users profiled according socio-demographic data, such as age and sex. This information comes from registrations users have made for online services, or is inferred from the sites they visit. Predictive technologies User data acquired in real time regarding use of the Web is evaluated and combined with socio-demographic data (such as age and sex). An exact combination of matching interests and socio-demographic characteristics ensures increased coverage and accurate definition of target groups and their interests. Collaborative technologies Ads are placed in association: if many users

click two ads, a correlation is created between them. The ads most recently clicked by a specific user are selected and those most ‘related’ to them are displayed. Users’ clickstreams are analysed in order to understand how to correlate ads. Technical technologies Various technical details can be evaluated: the type of browser, plug-ins installed such as Flash Player, and sometimes even the recall speed. Behavioural technologies Behavioural targeting identifies user groups or individuals whose actions reveal a specific interest in a given product, service or brand. This type of information is taken from analysis of the user’s browsing on websites, ads clicked, searches performed and other information used by the non-contextual targeting technologies we have already seen.

The browsing analysis obviously requires a network of sites on which the user’s activity is monitored, as outside of this network, the browsing cannot be traced. Therefore, to obtain good results, the network has to include as many sites as possible. The information on the searches the user has made comes from sites in the network that host search services or from referrals from the site of origin, which is not part of the network. For example, when searching on Google, the user is taken to a results page with the search parameters in its URL. If the user then clicks on a result that leads to a site that is part of a network using behavioural targeting, this platform will identify their information in the referral of the site of origin (in this case, the results page of the search engine), which it will use to determine the user’s interests. Interests can be determined from the browsing analysis through code tags inserted

in the network sites that explain to the platform what each particular page is about. This is done by the webmasters and then verified by the platform either manually or through an automated process that analyses the page content and semantically verifies the relevance of the tag (through the use of ontology or free sources of knowledge, such as Wikipedia). The following diagram shows the various sources of data used to determine users’ profiles.

The basic objective of behavioural targeting is not the sale of pages on which advertising can be placed, but personal profiles. The diagram in Figure 7-25 shows the simplified processes of a behavioural targeting platform. A critical issue in behavioural targeting is that of users’ privacy, for which there is no clear legislative framework at present but only guidelines. 7.1.5 The advertising network market in detail As mentioned previously, the term advertising network refers to individuals or companies involved in connecting advertisers with sites or portals interested in hosting advertising. Given the scale of the Internet, advertising networks are important players in online advertising. If, as we have said, finding information online is an activity that involves costs in terms of time and the

quality of the information collected, the same is true for the intermediation and sale of advertising spaces. Direct intermediation has very high operating costs, mainly due to the need to create one-to-one contacts between the advertiser and the individual operator of each site. The top 100 publishers sell only 40% of their inventory through direct intermediation. 30-40% of all web page visits are to the ten busiest domains, while the advertising proceeds of the ten largest publishers traced by the Interactive Advertising Bureau (IAB) amounted to about 70% of the entire market. This concentration towards the top is destined to diminish before too long: ad networks offer a way to spread wealth and at the same time increase the revenue growth of the entire market. In a world without ad networks, only a few large publishers would be able to sell their entire inventory. Small publishers cannot

afford their own sales forces and are unable to provide specific services such as search and statistics to sell their spaces directly. On the other hand, even the large publishers are unable to place their entire inventory with advertisers at the rates that they have to charge to maintain the integrity of their marketplace. It is also important to understand the needs and motivations of two different groups of advertisers: brand advertisers and direct marketers. A marketing objective of brand advertisers, such as P&G and Colgate, is to communicate with a certain established target audience with the development of media campaigns, which may or may not include the use of online spaces such as banners or rich media. To balance objectives against costs, advertisers or their agencies use a measurement and statistics service, such as ComScore or Nielsen, to select potential sites

for placement of their ads, based on demographic criteria or other characteristics of the target audience. After selecting the web spaces that seem most appropriate for the individual product, negotiations are then conducted, through direct intermediation, for the purchase of the desired spaces. These premium advertisers normally acquire spaces on large portals and ad networks may be included as an item in their marketing and communication budgets (whether as a media mix strategy or as a marketing plan) to reduce the total cost of the campaign or to give the campaign more exposure in specific sub-segments (similar to what happens with national and satellite TV). Direct marketers, such as Amazon.com, which sell products or acquire contacts through online channels, develop their campaigns using their online inventory systems. The ROI of the campaign is essential for direct marketers. For this

reason, direct marketers continuously optimise the placement of their ads. Ad networks directly answer this need through their efficient pricing and extensive reach. Advertisers, whether brand advertisers or direct marketers and their agencies, have to deal with particular situations in the digital advertising market: Small sites are perceived as low quality by large brand advertisers. Popular or high-traffic sites are generally considered to be of greater value, given the needs of large brand advertisers for reach and frequency; Problems of context at a conceptual level (some publishers are acceptable while others are not); Buying space from small sites is very costly in terms of time for brand advertisers and direct marketers; Few sites or networks can meet the

objectives of brand advertisers by themselves; Digital fragmentation and an increased share for mid-tail and longtail niche sites; The explosion in numbers of various digital platforms, from mobile and social networks to widgets, which further fragments the market. Ad networks can offer a solution to all these concerns: Direct marketers can procure excess inventory from higher quality publishers as well as greater capacity from long-tail publishers; Brand advertisers can purchase display space, as they always have, but thanks to a more efficient purchasing method introduced with ad networks, they can consider mid-tail, long tail

and other residual content, while managing media costs better; The administrative costs of purchasing from several suppliers for a campaign lead advertisers to turn to the networks, which can provide one-stop shopping with evident gains in efficiency; They aggregate audiences of millions of people. The largest networks have a 90% reach. The key resources of advertising networks are their technological platforms. There are two main types of platforms for connecting advertisers with publishers: integrated contextual platforms and decentralised noncontextual platforms. Integrated contextual platforms These provide a full suite of integrated

services for advertisers and publishers. Advertisers use the same software as search advertising campaigns to make their advertising campaigns contextual. They bid for keywords on the publishers’ network platform and the IC platform then inserts the ads provided by the advertisers in the sites on its network, according to the bids and content. Search engines have essentially relied on their technological assets, creating their own platforms to manage advertising networks (Google’s AdWords/AdSense, Yahoo Content Publisher, MSN). Decentralised non-contextual platforms These are based on targeting technologies that do not consider the content of the site but information regarding the visitor and general information about the site (noncontextual targeting). They are described as decentralised because the platform does not manage the entire process, which ranges

from finding the ad to making it visible to users: Publishers normally use tools to manage their spaces. They sell the spaces on ad networks, either directly or indirectly. Advertisers use tools to manage their campaigns and to optimise their spending. They buy spaces on various ad networks, either directly or indirectly. 7.2 The E-Commerce Market Information technologies began to transform the relationships between businesses and markets in the late 1960s, when the first electronic data interchange (EDI) applications were developed, followed by the rapid diffusion of electronic fund transfer (EFT), telemarketing, telephone banking,

etc. Entire industries have been able to change their structure and production processes thanks to the development of computer networks, and electronic commerce is, without doubt, one of the most promising services of the network and one of the key drivers of the information society. So what is the meaning and the scope of e-commerce today? It has various meanings, depending on the perspective from which it is viewed: From the perspective of communications, electronic commerce is the dissemination of information about companies and organisations, and their activities, products and services, through telephone lines, computer networks or any other electronic means. From the perspective of customer

relations, electronic commerce consists of a series of tools to enhance the effectiveness and efficiency of business systems to promote, develop and strengthen relations with existing and future customers. Finally, from the perspective of the business process, electronic commerce represents the application of technology to automation, transactions and operating cycles. Two researchers from MIT, Thomas W. Malone and R.J. Laubacher, write: ‘...with the introduction of powerful personal computers and broad electronic networks [...] the economic equation changes. Individuals can manage themselves, coordinating their efforts through electronic links with other independent parties. Small becomes good.’ Aside from this type of analysis, there are several definitions of electronic commerce,

some of which very significant in terms of authority and level of diffusion: ‘Electronic commerce is about doing business electronically. It is based on the electronic processing and transmission of data, including text, sound and video. It encompasses many diverse activities including electronic trading of goods and services, on-line delivery of digital content, electronic fund transfers, electronic share trading, electronic bills of lading, commercial auctions, collaborative design and engineering, on-line sourcing, public procurement, direct consumer marketing and aftersales service’(European Commission, 1997c.). ‘Electronic commerce is a system that includes not only those transactions that centre on buying and selling

goods and services to directly generate revenue, but also those transactions that support revenue generation, such as generating demand for those goods and services, offering sales support and customer service, or facilitating communications between business partners’ (Kosiur, 1997). ‘E-commerce is the general term for the buying and selling process that is supported by electronic means’ (Kotler, Armstrong, Saunders and Wong, 1999, p.966). 7.2.1 The origins of e-commerce In 1979, Michael Aldrich developed a predecessor of online shopping to allow the processing of online transactions between consumers and businesses, or between one job and another, a technique now known as e-commerce.

However, the origins of e-commerce date back to the early 1970s and the Electronic Data Interchange (EDI) system, which enabled the transfer of information and business documents in an electronic format. It was developed by transport companies and became highly important in industries that involved the circulation of high volumes of stock (such as the food or automotive industries). EDI is a very easy way to automate purchases, and retailers normally use it so that their warehouses can have direct access to suppliers’ databases. At the time of its birth, there was no global network like today’s Internet, so the system was supported by secure private telecommunications networks. Despite the advantages it provided, EDI was a very expensive solution to implement, requiring a dedicated connection line between the transacting partners. Furthermore, it was not

interactive, which meant that the seller and buyer could not negotiate and discuss the price of goods, but only accept the terms given in the transaction. These disadvantages meant that for a long time EDI was the exclusive domain of big businesses. This all changed with the arrival of the Internet: the Internet was everything that EDI was not. It was convenient and easy to use, and anyone could access it anywhere. Before the era of the Web, e-commerce was an almost unknown business-tobusiness activity, but the dotcom gold rush soon brought e-commerce into the limelight. In a press release on 19 February 1996, Olivetti Telemedia announced the opening of Cybermercato, the first virtual store in Italy and one of the first in Europe. At www.mercato.it people could buy books, gift items, computers, multimedia products and much more. The initiative was promoted by

La Rinascente, the publishers Franco Maria Ricci and McGraw-Hill, Apple, Olivetti, Vobis, Dessilani, Parmador and others. Just before the summer of 1999, many European companies rushed to launch activities on the Internet, but, as noted by Webmergers, a company that deals with mergers and acquisitions, over 100 ecommerce companies had to close their businesses, mainly because they were unable to generate any revenue. Sceptics argued that e-commerce had died before it was born. Certainly the first generation of companies that ventured into the world of electronic commerce did so by trial and error: with virtually no background, they were trying to make a profit, as quickly as possible, in order to gain the most advantageous positions. 7.2.2 Types of e-commerce The

term

‘electronic

commerce’

(e-

commerce) refers to a series of commercial transactions between producers and consumers implemented with the use of computers and telecommunications networks for the exchange of information directly related to the sale of goods and services. The history of electronic commerce dates back to the 1970s, when companies were able to exchange commercial information through the use of private networks so that suppliers and buyers could communicate and receive constant updates. Electronic commerce is found in various forms and contexts, depending on the parties concerned, whether private individuals, businesses, institutions, etc. The most common forms of electronic commerce are described below. 7.2.2.1 Business to business (B2B) ecommerce This involves trade between companies, and

therefore does not affect the end consumers of goods and services. The transactions are between a limited number of actors and the amounts are usually high and managed offline. B2B covers all electronic transactions between companies and is generally organised into three main areas: eMarketplace, e-Procurement and eDistribution. A marketplace is a real or virtual location where exchanges are made. In this specific case, it is an online market where the goods of various vendors or websites are grouped. The best known example is the eBay marketplace, which has enabled collectors to meet online and exchange a huge variety of items. e-Procurement is a series of technologies, procedures, operations and organisational methods that enable companies to acquire goods and services online. It is based on an

electronic platform developed to support companies in the procurement phase, and it allows identified and qualified users to search for sellers of goods and services (ecatalogue), as well as buyers. e-Distribution is an e-business application that facilitates every aspect of the supply chain, from warehousing, orders, inventory, delivery and payment to service management. B2B electronic commerce is fundamentally changing the relationships between suppliers and customers: businesses use e-commerce sites for auctions, ready cash deals, online product catalogues, bartering, group offers, digital goods and other online resources for more advantageous prices. The objective of e-commerce is to ensure greater effectiveness in the various markets. In the past, the collection of information on potential suppliers operating around the world required enormous efforts; now, thanks to the Internet, buyers have easy

access to a huge quantity of information, which can come from: business-to-business e-commerce sites; infomediaries, i.e. intermediaries that offer added value by aggregating information on available alternatives; or business intermediaries, i.e. third parties that create new markets by bringing together buyers, sellers and consumer communities, namely sites or blogs where buyers exchange information on the products and services of suppliers. B2B e-commerce also allows more efficient inventory management: synchronisation of a website with internal management provides an efficient working tool with updated inventory and invoicing. It also facilitates the automation of sales, improves the management of customer requests, speeds up the availability of products on the market, and reduces personnel costs, as certain offices are no longer required. Finally, we distinguish two types of B2B e-

commerce sites: support sites for the traditional sales network, providing pre-sale and post-sale support for products that cannot be marketed online for various reasons, and sites for genuine online sales. 7.2.2.2 Business to consumer (B2C) ecommerce The best known model of electronic commerce is that for the purchase of goods and services by the end consumer. Its expansion coincided with the widespread diffusion of the Internet in offices, homes and schools. B2C e-commerce provided a fast and cheap new distribution channel that allowed companies to bypass traditional distribution channels and sell directly to the end customer. The advantages of this type of solution are, for the company, the possibility of higher profit margins, thanks to greater control of the market in which it operates,

and greater potential, being able to contact consumers that would otherwise be difficult to reach; for consumers, the benefits consist in lower prices and access to an exceptionally wide range of products and services from the comfort of one’s own desk top. One of the most successful examples is Amazon.com, a true virtual library that launched its site in 1995 and offers over 2,000,000 titles. In addition to books, Amazon has extended its product range to DVDs, music CDs, software, video games, electronics, apparel, furniture, food, toys and more. B2C e-Commerce has grown to also include services such as online banking, travel agencies, online auctions, health information, and real estate sites. A further distinction can be made between direct and indirect electronic commerce with regard to how the product is delivered. In the first

case, the product is in digital form - such as software, a document or investment information - or in any case an intangible asset that does not require a physical medium for its transfer, and can therefore be sent electronically. The term indirect electronic commerce is used when the product is a physical item that is ordered on the Web and shipped by courier. 7.2.2.3 Business-to-employee (B2E) ecommerce The evolution of ITCs has already affected all areas of company operations: therefore it could hardly bypass one of the most sensitive areas, that of personnel. B2E refers to all infrastructure and applications used to manage the business and working relationship between companies, employees and collaborators. The one entity that best represents this

exchange and its underlying transactions is the portal. We can define B2E as a ‘set of tools and methodologies that influence the way in which individual workers interact with organisations, increasing the impact of the individual on the business’. Many disciplines are involved in this area, ranging from the hardware infrastructure to several types of applications (content management, business intelligence, knowledge management and administrative management software). In a broad sense, B2E includes everything that the company must do to attract and retain highly qualified personnel in a competitive environment, and much more. For example, ADP, a global provider of payroll and HR outsourcing services, offers a solution for precise, fast and reliable management of personnel administration. The benefits are numerous: personnel office activities are decentralised to the

employee, who has direct access to his or her own situation - personal records, holidays and expenses - with less dispersion of time and paperwork. Now all the providers of these services offer a web interface within the corporate portal. 7.2.2.4 Business to administration (B2A) ecommerce The term B2A refers to electronic transactions between companies and public authorities: requests for public supplies are published on the Internet and businesses can respond electronically. B2A supports the interaction of companies with local government on issues such as the payment of fees and taxes, requests for information, social security, public procurement, employment and much more. City, provincial and national governments offer a variety of services through their websites. Government participation in e-

commerce has the potential to create several beneficial effects. First, both as a consumer and a provider of e-commerce services, governments have the opportunity to learn about the economic and business reality of online transactions, and to understand the interdependence between the public and private sector in online transactions. Second, as participants in e-commerce, governments have the possibility to adopt rules and regulations to facilitate their activities online. 7.2.2.5 Consumer to business (C2B) ecommerce This is a type of electronic commerce in which (private) consumers offer goods and services to businesses and companies: a complete reversal of the traditional business model. In this particular form, consumers

determine the price they are willing to pay for a product or service and companies can then accept or reject their offer. This type of economic relationship is described as an inverted business model. The C2B system arose in response to major changes. The connection of a large group of people in a bidirectional network made this kind of commercial relationship possible. Unlike other traditional media, the Internet is a two-way medium. Furthermore, lower technology costs provided individuals with access to technologies that were once only available to large companies (digital printing and acquisition technology, high performance computers and powerful software). There are many types of companies whose business model can be considered as C2B. Online advertising websites such as Google Adsense, affiliation and monitoring platforms, such as Commission Junction, and

affiliate programs are the best examples of C2B regimes. By registering with sites of this kind, individuals can publish contextual text ads, advertising banners, or any other promotional item on their personal websites, choosing the exact location and the type of ad based on its relevance to the site. At this point, advertisers make bids for the advertising space in a real time auction and users are paid based on the number of visits or clicks on ads. The new C2B business model is a revolution because it introduces a new scheme of collaborative exchange, opening the way to new applications and socioeconomic habits in a perspective of growing customer empowerment, i.e. the lever of power is shifting in favour of the buyers. 7.2.2.6 Consumer to consumer (C2C) ecommerce

C2C e-commerce is a new form of ecommerce that has entered the market in recent years. It has become increasingly popular due to the creation of several sites that provide online auctions. In this case, the site manages the environment in which the users interact and the transaction amounts are fairly modest, since the exchanges normally involve individual items. The way in which the transaction is organised is agreed between the seller and the buyer. Developing markets such as these have many obstacles to overcome: firstly, they need to bring together buyers and sellers, because, unlike in the case of traditional merchants, it is not easy for individual consumers to advertise and market their activities. Once the buyer and seller have made contact, the issue of trust arises: are the parties to the transaction reliable and how can this be determined? Finally, there is

the problem of monetary transactions: individuals are not able to use all the methods for the reception of money or payment systems that are available to businesses. Two of the most successful models in C2C e-commerce, both brought directly from the physical world to the online domain, are auctions and classified ads. One of the key success factors, especially for auction sites, is a large subscriber base, and in the C2C sector there is a global leader: eBay. 7.2.2.7 Peer-to-peer (P2P) e-commerce The term peer-to-peer, i.e. peer network, refers to a network of computers that share their multimedia resources, documents, movies, audio files and images, and interact with each other directly, without the need for intermediary server devices, simply through the use of dedicated software applications.

P2P networks consist of the interconnection of individual nodes, i.e. individual computers, connected through the Internet. The P2P service is therefore based on an architecture that is the opposite of client-service models, which have a central entity, such as a server, to which the communications of the various clients are addressed, as they cannot communicate directly to exchange multimedia files and documents. In other words, each node, while able to request information from other servers, also has the capacity to act as a server and respond to requests for information from other customers. This approach increases the amount of value that each node can add to the network, because not only does it take information from a source, but also has the possibility of sharing that information with other sources. There are three important functions in P2P:

discovering new peers, sharing files within a common computer network, which can also be done through client-server architecture, and, finally, the querying function, which involves requesting content from other peers. Perhaps the best known example of peerto-peer technology was Napster, a filesharing program that allowed MP3 music files to be swapped anonymously and free of charge. It accumulated ten million users within ten months of its launch. Clearly, the infringement of copyright is illegal, and so Napster was sued by a consortium of five large record companies. In July 2000, a US judge ordered the closure of the site. However, other services of the same type spread rapidly, including Gnutella and WinMX. In October 2000, Napster announced its partnership with Bertelsmann, in an agreement that allowed the site to operate

through the payment of a sort of registration fee. It was obliged to install software that prevented the exchange of copyrighted files and so lost much of its appeal. However, it was not a pure peer-to-peer network as it used a central server system that managed the list of connected systems and shared files, while the actual transactions took place directly between users. Therefore it used the client-server model for some services and the peer-to-peer model for all the others. Networks such as this are referred to as ‘hybrid’ due to their use of more than one model. Others, such as Gnutella or Freenet, however, are classed as true peer-to-peer models, in that they use a peer-to-peer structure for all types of transactions, and are therefore described as ‘pure’. 7.2.3 Innovation in e-commerce The evolution of e-commerce systems has not involved particular changes due to the

introduction of technological specifications, but has followed the general trends that have affected the Internet as a whole. We can say that for web-based business, the level of innovation in terms of business models has been greater than that of a merely technological nature. In fact, value proposition has been greatly impacted by very clear demands, such as low costs and rapid availability of the desired product. The open infrastructure of the Internet, its low costs and increased bandwidth have made it easy for buyers and sellers to enter the world of global trade. As already stated, the Internet facilitates the exchange of information, with a tendency to reduce the costs of information asymmetries. Thus the trade-off in information typical of the relationship between customers and sellers is reduced, creating an almost perfect basis for a competitive market, in which the price is a

fairer representation of the point of balance between supply and demand. In a ‘frictionless’ market, where buyers and sellers are directly connected, both the ecommerce companies and the customers benefit and acquire value (on the demand and on the supply side) in terms of reduced research costs, lower transaction costs and improved response times. In addition, the Internet breaks down barriers and limitations of time and creates a market in which each company is equally and directly accessible to any customer. Basically, the web-based applications of the business model can be classified as business-to-customer (B2C), business-to-business (B2B), customer-tobusiness (C2B), and customer-to-customer (C2C). Web-based commerce allows businesses to be directly connected to their customers; this enables a significant reduction in costs in terms of transactions, labour, advertising,

support and inventory. For example, General Electronic (GE) cut its purchase costs by $ 500-$ 700 million and reduced its labour costs by 30% through use of the Internet over a three-year period. 7.2.4 Benefits from e-commerce The Internet has transformed the so-called supply chain (the process from the supply of raw materials to retail sale) into a ‘demand chain’, through the integration of the customer in the production chain. According to experts in the New Economy, only companies that manage to establish a direct relationship with their customers will be able to create value. Customer loyalty is a primary goal for companies that view their website as an opportunity for the consumer, rather than as simply a means to increase their own profits. We will now analyse the most significant effects of electronic commerce, both in terms

of benefits for buyers and opportunities for businesses. The benefits or advantages that buyers, consumers and organisations gain from electronic commerce can be identified as follows: A greater range of choice. The Internet allows interplanetary shopping. We can buy not only digital products but also basic necessities, niche products and ‘unique’ products that are difficult to find on the local market. The process of searching for the source of purchase for a particular product or service can be extended to a much greater number of potential suppliers than those available under ordinary conditions. The buyer can thus make a more complete comparison of prices, performance, guarantees and other relevant factors.

The availability of portals and search engines that enable searches for a variety of products worldwide greatly simplifies browsing. The intangibility of the transactions and the preference for direct contact obliges companies to provide quality products and abundant information, with the goods well illustrated and features described in detail. Secondly, we must consider the convenience of buying online, which, in addition to the benefits of time and place highlighted above, allows users to have purchases delivered directly to their homes; e-commerce stores are always open, every day, including holidays: with just a few clicks you can buy whatever you want, whether from home or from work. The convenience of receiving the goods directly at home is an important added value. The consumer also has a greater

possibility of customising products and services. The interactivity allowed by information technology allows manufacturers to automatically adapt their production capacities to the individual and specific needs of a large number of buyers, without this reflecting on costs. It is therefore possible to achieve custom-made production at standardised production prices. Improvement in the quality of services. E-commerce technology allows a greater range of services both before and after sales. The degree of customer satisfaction consequently tends to increase, with positive repercussions on customer loyalty, which is the primary objective for most businesses today. E-commerce can provide a faster response to their needs. This is because it is a ‘business’

online twenty-four hours a day, 365 days a year. Finally, e-commerce allows businesses to significantly cut their operating costs, resulting in a more competitive and affordable offering for the end consumer. The company saves money and can afford to offer favourable terms, lower prices, discounts and promotions to entice customers. Downward auctions between manufacturers can be generated by consumers through the network, thereby directly determining the price of the product. The possibility for the customer to compare and decide reverses the traditional concept of market relationships: through the Internet the consumer commands and demands, and the company complies or else risks exclusion from the market.

In addition to the discounts and promotions that flood the network, there is the convenience of avoiding travel and saving time. Turning now to consider the main opportunities that electronic commerce provides for the business system, we can identify: A reduction in costs. The development of electronic commerce extends the benefits of the automation of production to the distribution of goods and services, with significant cost reductions in both production and distribution, resulting in a lowering of the prices paid by the final purchaser. Costs are reduced for the management of supply requests, the provision of product prices and the determination of stock availability. The development of an e-commerce

operation normally involves fixed costs. Although management costs are variable, in most cases these are negligible compared to the cost of initial development. This means that an electronic commerce operation tends to become increasingly profitable over time. In particular, ecommerce is much less labourintensive than traditional retail business. With online sales, a further cost category is reduced, as businesses can reach their customers without the need for intermediaries. Another advantage is the possibility of knowing one’s customers directly: the development of the information economy allows companies to acquire detailed information on the needs, characteristics and habits of individual customers. We could define this capacity with the expression: high

traceability. In other words, this is the possibility of knowing where customers are coming from, which links they have followed to reach the site and which search engines and search phrases they have used. Reduction of market access barriers. This is because the costs of starting up a business online are significantly lower than those of a traditional activity. The development of global communications networks also allows smaller companies to access ever wider markets. In particular, companies that have developed core competencies in relation to certain market niches are able to establish optimal matching with these niches, regardless of their geographical location. They therefore have the possibility of selling their products and services in various geographic

markets. Finally, due to the reduction of entry barriers, there is an increase in the competitiveness of global markets. 7.2.5 The size of the e-commerce market According to recent forecasts by eMarketer, worldwide business-to-consumer ecommerce sales will increase by 20.1% in 2014 to reach $ 1.5 trillion. This growth will come mainly from the rapid expansion of online and mobile user bases in emerging markets, increasing e-commerce sales, the development of logistics and payment options, and the push by major brands towards new international markets.

In 2014, consumers in Asia-Pacific will spend more on e-commerce purchases than consumers in North America for the first time, making it the largest regional market in the e-commerce world. This year alone, B2C e-commerce sales are expected to reach $ 525.2 billion in the region, compared with $ 482.6 billion in North America.

China will receive more than six out of every ten dollars spent on e-commerce in AsiaPacific in 2014, and almost three-quarters of regional spending by 2017. The country’s ecommerce market is second only to the US, but this should not last for much longer. From 2016, China’s spending will overtake that of the United States. The huge markets in China, together with those of India and Indonesia, will drive the growth of the AsiaPacific region. These countries, along with Argentina, Mexico, Brazil, Russia, Italy and Canada, will drive the growth of sales throughout the world of e-commerce. The strength of sales in emerging markets is largely due to their large populations, which are going online and purchasing for the first time. Asia-Pacific will account for over 46% of digital buyers worldwide in 2014, although these users will represent only 16.9% of the region’s population. Penetration will still be low in

Central and Eastern Europe, Latin America, the Middle East and Africa. At present, North America and Western Europe are the only regions where the majority of residents will make purchases via digital channels. The market’s potential for expansion, however, remains significant, with commerce still only accounting for a small percentage of total sales. Looking at the data for the most developed market, the USA, we see that online sales account for only 6.6% of the total market (the travel industry, auto sales, refuelling and event ticket sales are not included in the analysis).

Amazon and eBay are two of the main global e-commerce companies, operating worldwide as multi-sided platforms. Amazon - Amazon is an American electronic commerce company founded in 1994 and based in Seattle, United States. It was among the first major companies to sell goods on the

Internet and started its business by selling books bought from publishers. The company has evolved since then and now operates as: i) a retailer, ii) a multi-sided platform, iii) a technology provider. Amazon acts a retailer when it buys and sells products on its website. It acts as a multi-sided platform when it enables third-party vendors to sell on its website (and therefore to have direct contact with end customers). The multi-sided segment of the business was developed in 2000-2001. Amazon recently introduced another multisided business, the Kindle platform. The Kindle device is an e-book reader that allows electronic books to be read in Kindle format; books in Kindle format can only be purchased on the Amazon site and are accessible from a PC, a mobile device or a Kindle. Kindle

is a multi-sided platform as the purchase of a book is basically the purchase of a license granted by the publisher of the digital content, so there is a direct iteration between the end user and the publisher of the book, an iteration allowed by the Amazon platform. Finally, Amazon AWS provides technology services: data storage, cloud computing, etc. Amazon is now the largest company in the global e-commerce market, achieving a turnover of $ 74.5 billion in 2013.

eBay: eBay is a multi-sided platform that offers its users the possibility to buy and sell both new and used items at any time, from anywhere on the Internet and through various methods,

including fixed-price and dynamic-price sales, commonly known as ‘online auctions’. eBay therefore allows buyers and sellers to meet on its website and perform transactions. There are several sales formats (auction, buy-it-now, buy-it-now with a purchase offer and direct contact). Sales consist mainly in the supply of goods or services by both professional and non-professional sellers; buyers submit bids to acquire the merchandise. Fees are charged, borne entirely by the sellers, both for publishing any kind of ad and as commission on the final value of the sold item. There are platform mechanisms to eliminate information asymmetry between buyers and sellers, such as the feedback given after the transaction is concluded, so that the seller and buyer can evaluate

their experience and inform others in regard to the reliability of the person with whom they have traded. Today eBay is an online marketplace, with a turnover of $ 16 Billion in 2013.

8 Interplanetary Internet: the Internet in space * This chapter has been written as a suggestion and under the revision of Vint Cerf.

The Interplanetary internet is conceived of as a computer network in space, consisting of a set of network nodes that will enable Internet-like communications with objects such as space vehicles, remote planetary habitats, rover vehicles and support infrastructure on or near a planet and between planets. While Internet communication on Earth is

almost instantaneous, the distances between planets (Earth and Mars, for example) are in the range of millions of miles, involving significant technical problems, such as variable communication delay (several minutes at best) and potential loss of information. Therefore, an Interplanetary Internet will not be able to duplicate the real-time immediacy of the Internet with which we are accustomed. A store-and-forward method will allow information to be sent in bundles and overcome the concern of data being lost due to delays or disruption of signals. The Interplatenary Internet began in 1998 at NASA’s Joint Propulsion Laboratory, with a team of scientists at JPL working with Vinton Cerf, one of the pioneers of the Internet. ‘This project started in 1998. And it got started because 1997 was the year that the Pathfinder spacecraft landed on Mars and 1998 was the 25th anniversary of the design

of the Internet. The entire communications capabilities for space exploration had been point-to-point radio links. So we began looking at the possibilities of TCP/IP as a protocol for interplanetary communication. The real question was, ‘Would it work between the planets?’ And the answer turned out to be, ‘No.’ (Cerf, wired interview). The vision of an Interplanetary Internet was expressed in a famous Manifesto (Cerf, 2002) entitled: ‘The internet is is for Everyone’: ‘The Internet is moving off the planet! An interplanetary Internet is already part of the NASA Mars mission programme, now underway at the Jet Propulsion Laboratory’ (Cerf, 2002). The reasons why TCP/IP would not work between planets, and the developments required, are clarified by Cerf himself (Cerf, 2013 Wired interview):

‘First of all, the speed of light is slow in relation to the distances in the solar system. A one-way radio signal from Earth to Mars takes between three-and-a-half and 20 minutes. So round trip time is of course double that. And then there’s the other problem: planetary rotation. If you’re communicating with something on the surface of the planet, it goes out of communication as the planet rotates. It breaks the available communications and you have to wait until the planet rotates back around again. So what we have is variable delay and disruption, and TCP does not do terribly well in those kinds of situations.’ In fact, the Transmission Control Protocol/Internet Protocol (TCP/IP) is dependent upon (low) latencies of approximately tens of milliseconds and, combined with low bit error rates (BER), it allows TCP to reliably transmit and receive

acknowledgements for messages traversing the terrestrial Internet. Communication would be greatly delayed by the huge interplanetary distances, so a new set o f protocols and technology is needed that would tolerate large delays and errors. Although the Internet as it is known today tends to be a busy network of networks with high traffic, negligible delay and errors, and a wired backbone, the interplanetary Internet is a store-and-forward network of internets, which is often disconnected, has a wireless backbone and is fraught with errorprone links and delays, ranging from tens of minutes to hours, even when there is a connection. Therefore, information processing nodes, whether satellites or ground stations, need to be able to store the data they receive until they are able to safely send it to the next node in the network. Some of the challenges facing

Interplanetary Internet include: The possibility of hacker break-ins; Distance -- light has to travel millions of miles, instead of thousands of miles, between transmitter and receiver; Line of sight obstruction -- anything that blocks the space between the signal transmitter and receiver can interrupt communication; Weight -- high-powered antennas that would improve communication with deep space probes are often too heavy to send on a space mission, because the payload must be light and efficiently used. As Cerf points out: “One of the things that the TCP/IP protocols assume is that there isn’t enough memory in each of the routers to hold anything. So if a packet shows up

and it’s destined for a place for which you have an available path, but there isn’t enough room, then typically the packet is discarded” “We developed a new suite of protocols that we called the Bundle protocols, which are kind of like Internet packets, in the sense that they’re chunks of information. They can be quite big and they basically get sent like bundles of information. We do what’s called ‘store and forward’, which is the way all packet switching works. It’s just in this case the interplanetary protocol has the capacity to store quite a bit, and usually for quite a long time before we can get rid of it based on connectivity to the next hop” (Cerf, 2013 Wired magazine interview). As specified by Cerf, interplanetary Internet protocol needs: the store and forward method, which will allow information to be sent in

bundles and overcome the concern of data being lost due to delays; the Bundle Protocol (BP), which is similar to the Internet Protocol, or IP, that serves as the heart of the Internet here on Earth. The big difference between the regular Internet Protocol (IP) and the Bundle Protocol is that IP assumes a seamless end-to-end data path, while BP is built to account for errors and disconnections — glitches that commonly plague deep-space communications. In addition to the basic store and forward internetworking service, delay-tolerant networking (DTN) was also designed, in order to enable standardised communications over long distances and through time delays. DTN provides a general-purpose network/transport-layer

service that is logically similar to what TCP/IP provides for the terrestrial Internet, but suitable for use in the space environment. DTN also provides efficient reliability and security. Disruption-tolerant networks improve communications by ensuring no information is lost even when a connection is interrupted. Such networks can improve Internet communication in specific areas (in addition to Interplanetary Internet), such as: sensor networks; military and tactical communications; underwater; disaster recovery; hostile environments; mobile devices; remote outposts.

9 The Internet is for everyone by Vinton G. Cerf Former Chairman and President, Internet Society January 2002 Copyright (C) The Internet Society (2002) Consent to Publish given by the Author

The Internet is for everyone Abstract This document expresses the Internet Society’s ideology that the Internet really is for everyone. However, it will only be such if we make it so. The Internet is for everyone

How easy to say - how hard to achieve! How have we progressed towards this noble goal? The Internet is in its 14th year of annual doubling since 1988. There are over 150 million hosts on the Internet and an estimated 513 million users, world wide. By 2006, the global Internet is likely to exceed the size of the global telephone network, if it has not already become the telephone network by virtue of IP telephony. Moreover, as many as 1.5 billion Internetenabled appliances will have joined traditional servers, desk tops and laptops as part of the Internet family. Pagers, cell phones and personal digital assistants may well have merged to become the new telecommunications tools of the next decade. But even at the scale of the telephone system, it is sobering to realize that only half of the Earth’s population has

ever made a telephone call. It is estimated that commerce on the network will reach somewhere between $1.8T and $3.2T by 2003. That is only two years from now (but a long career in Internet years). The number of Internet users will likely reach over 1000 million by the end of the year 2005, but that is only about 16% of the world’s population. By 2047 the world’s population may reach about 11 billion. If only 25% of the then world’s population is on the Internet, that will be nearly 3 billion users. As high bandwidth access becomes the norm through digital subscriber loops, cable modems and digital terrestrial and satellite radio links, the convergence of media available on the Internet will become obvious. Television, radio, telephony and the traditional print media will find counterparts on the Internet - and will be changed in

profound ways by the presence of software that transforms the one-way media into interactive resources, shareable by many. The Internet is proving to be one of the most powerful amplifiers of speech ever invented. It offers a global megaphone for voices that might otherwise be heard only feebly, if at all. It invites and facilitates multiple points of view and dialog in ways unimplementable by the traditional, oneway, mass media. The Internet can facilitate democratic practices in unexpected ways. Did you know that proxy voting for stock shareholders is now commonly supported on the Internet? Perhaps we can find additional ways in which to simplify and expand the voting franchise in other domains, including the political, as access to Internet increases. The Internet is becoming the repository of all we have accomplished as a society. It has become a kind of disorganized ‘Boswell’ of

the human spirit. Be thoughtful in what you commit to email, news groups, and other Internet communication channels - it may well turn up in a web search some day. Thanks to online access to common repositories, shared databases on the Internet are acting to accelerate the pace of research progress. The Internet is moving off the planet! Already, interplanetary Internet is part of the NASA Mars mission program now underway at the Jet Propulsion Laboratory. By 2008 we should have a well-functioning Earth-Mars network that serves as a nascent backbone of an inter-planetary system of Internets InterPlaNet is a network of Internets! Ultimately, we will have interplanetary Internet relays in polar solar orbit so that they can see most of the planets and their associated interplanetary gateways for most, if not all of the time. The Internet Society is launching a new

campaign to facilitate access to and use of Internet everywhere. The campaign slogan is ‘Internet is for everyone,’ but there is much work needed to accomplish this objective. Internet is for everyone - but it won’t be if it isn’t affordable by all that wish to partake of its services, so we must dedicate ourselves to making the Internet as affordable as other infrastructures so critical to our well-being. While we follow Moore’s Law to reduce the cost of Internet-enabling equipment, let us also seek to stimulate regulatory policies that take advantage of the power of competition to reduce costs. Internet is for everyone - but it won’t be if Governments restrict access to it, so we must dedicate ourselves to keeping the network unrestricted, unfettered and unregulated. We must have the freedom to speak and the freedom to hear. Internet is for everyone - but it won’t be if it cannot keep up with the explosive demand

for its services, so we must dedicate ourselves to continuing its technological evolution and development of the technical standards the lie at the heart of the Internet revolution. Let us dedicate ourselves to the support of the Internet Architecture Board, the Internet Engineering Steering Group, the Internet Research Task Force, the Internet Engineering Task Force and other organizations dedicated to developing Internet technology as they drive us forward into an unbounded future. Let us also commit ourselves to support the work of the Internet Corporation for Assigned Names and Numbers - a key function for the Internet’s operation. Internet is for everyone - but it won’t be until in every home, in every business, in every school, in every library, in every hospital in every town and in every country on the Globe, the Internet can be accessed

without limitation, at any time and in every language. Internet is for everyone - but it won’t be if it is too complex to be used easily by everyone. Let us dedicate ourselves to the task of simplifying the Internet’s interfaces and to educating all that are interested in its use. Internet is for everyone - but it won’t be if legislation around the world creates a thicket of incompatible laws that hinder the growth of electronic commerce, stymie the protection of intellectual property, and stifle freedom of expression and the development of market economies. Let us dedicate ourselves to the creation of a global legal framework in which laws work across national boundaries to reinforce the upward spiral of value that the Internet is capable of creating. Internet is for everyone - but it won’t be if its users cannot protect their privacy and the

confidentiality of transactions conducted on the network. Let us dedicate ourselves to the proposition that cryptographic technology sufficient to protect privacy from unauthorized disclosure should be freely available, applicable and exportable. Moreover, as authenticity lies at the heart of trust in networked environments, let us dedicate ourselves to work towards the development of authentication methods and systems capable of supporting electronic commerce through the Internet. Internet is for everyone - but it won’t be if parents and teachers cannot voluntarily create protected spaces for our young people for whom the full range of Internet content still may be inappropriate. Let us dedicate ourselves to the development of technologies and practices that offer this protective flexibility to those who accept responsibility for providing it. Internet is for everyone - but it won’t be if

we are not responsible in its use and mindful of the rights of others who share its wealth. Let us dedicate ourselves to the responsible use of this new medium and to the proposition that with the freedoms the Internet enables comes a commensurate responsibility to use these powerful enablers with care and consideration. For those who choose to abuse these privileges, let us dedicate ourselves to developing the necessary tools to combat the abuse and punish the abuser. Internet is for everyone - even Martians! I hope Internauts everywhere will join with the Internet Society and like-minded organizations to achieve this, easily stated but hard to attain goal. As we pass the milestone of the beginning of the third millennium, what better theme could we possibly ask for than making the Internet the medium of this new millennium? Internet IS for everyone - but it won’t be

unless WE make it so. References [1] Internet Society - www.isoc.org [2] Internet Engineering Task Force - www.ietf.org [3] Internet Corporation for Assigned Names and Numbers www.ICANN.org [4] Cerf’s slides: www.wcom.com/cerfsup [5] Interplanetary Internet - www.ipnsig.org [6] Internet history - livinginternet.com

10 Conclusions

The analysis that we have conducted over the previous chapters allows us to make some final reflections by way of conclusion. The Internet is essentially a series of computer networks that provides an extraordinary opportunity for interconnection between people. In 2000 there were about 360 million people connected to the Internet; by 2011 the figure had increased to 2.1 billion, a growth of 480%, with the Internet reaching 30% of the world population. The growth of the user base shows no signs of slowing down, with over 3 billion users forecast for 2015 (> 40% of the world population).

Users today are connected by a multitude of different devices: in 2008, online devices mainly consisted of the one billion desktop computers connected to the network, whereas the prevalent feature today is the rapid growth in the installed base of mobile devices with Internet connections. In 2011, sales of PCs and laptops amounted to about 370 million units, whereas sales of smartphones (intelligent mobile phones that connect to the Internet) were about 420 million, and tablets about 60 million. Thus sales of Internet-enabled mobile devices have already overtaken those of the more traditional devices for accessing the network. By the end of 2014, the number of online mobile devices was forecast to exceed the number of people on earth, and by 2018 there will be 1.4 mobile devices per capita. There will be over 10 billion online mobile devices by 2016, which is more than the world population estimate for that year (7.3

billion). The number of mobile broadband subscriptions at the end of 2011 was over 1.1 billion, and they are expected to reach 5 billion in 2017, while at the end of 2011, the number of fixed broadband subscriptions was about 600 million. The average person visits over two thousand web pages each month, on 89 different websites. 900 million people are now registered on Facebook, and every 60 seconds there are 700 thousand new posts and 500 thousand new comments. Twitter, another popular social network, had 225 million users in late 2011, generating 250 million messages (tweets) each day. Every minute online there are: 695 thousand search engine queries, 168 million emails, 370 thousand calls on Skype and 13 thousand iPhone app downloads. In addition, online users purchase goods and services with an estimated value of $ 8 trillion each

year. All these users and their activity online generate a staggering amount of information on the network: in 2010, the digital universe broke through the barrier of the zettabyte; in 2011 it was estimated that the amount of information created and replicated had surpassed 1.8 zettabytes (or 1.8 trillion gigabytes, nine times the amount in 2006) and by 2020 the digital universe is expected to reach a size of 35 trillion gigabytes. The growth in Internet traffic due to mobile users is quite considerable. Overall mobile data traffic is expected to grow to 10.8 exabytes per month by 2016, an eighteen-fold increase compared to 2011. Mobile data traffic will grow at a CAGR of 78 percent between 2011 and 2016. Therefore, data traffic is growing faster than the number of users, which means that Internet use per user is increasing. Given the rapid growth of the Internet, and

the increasing use made of it, the desire to quantify its impact on economic systems could hardly be ignored. McKinsey examined the thirteen countries that together account for over 70% of global GDP and assessed the contribution of the Internet to their economies. In the countries analysed, the Internet had a weight of 3.4% of their total GDP (data for 2009). This ranged from virtuous Sweden and the United Kingdom, where the Internet had a percentage weight in GDP of 6.3% and 5.4% respectively, to Russia, where the contribution was only 0.8 % of the national GDP. The estimate by BCG differed slightly, with the Italian Internet economy amounting to € 28.8 billion (1.9% of GDP) in 2009 and € 31.6 billion (2.0% of GDP) in 2010, with a positive growth trend from the previous year of about 10%. The disparity of the contribution of the Internet to the GDP of the

major global economies (from 6.3% in Sweden to 0.8% of Russia) indicated that the Internet is still at a fledgling stage and the conditions are in place for it to grow and increase its economic weight. The rapid spread of the Internet, together with its impact on international economies, justifies the interest of researchers in attempting to model the phenomenon from an economic perspective. Several models, both general and specific to the Internet industry, have been developed and analysed. Analysis of the Internet using models such as the CAS (Complex Adaptive System), GPT (General Purpose Technology) and LTS (Large Technological System) has provided us with an overview that highlights the main characteristics of the Internet and enables a study of how it relates to and affects other systems. The disadvantage of these models is their lack of specificity in their analysis of

the nature and composition of the Internet, as they do not provide scholars with the necessary tools to break it down and understand how its various parts interact. The more specific models of analysis, such as layered models, flow models and those based on the value chain, have the advantage of looking into the Internet and trying to identify the various pieces of which the industry is composed. However, in our opinion they do not adequately represent the specific features of the economic models in the Internet industry and do not broaden the analysis to other dimensions of investigation beyond a simple definition of its parts. For this reason, we proposed a new framework of analysis for the Internet industry, the LIIF. This framework is based on the interpretation of the Internet as a multi-layer meta-platform, i.e. a universal and neutral platform that constitutes the ecosystem in which numerous other platforms are formed

and evolve. These in turn, through the functions they perform, create the various layers that make up the Internet industry. The layers identified are the following: The infrastructure layer, which includes the manufacturers of equipment and materials needed for the Internet infrastructure and the operators involved in the creation and management of the infrastructure, i.e. all the technological infrastructure platforms that support the Internet; The access layer, which includes the operators that provide access (ISPs), manufacturers of Internet-enabled devices, and manufacturers of operating systems and connection software, i.e. all the Internet access platforms; The IT layer, which includes the manufacturers of web development

software, Internet commerce applications, and online content management systems (CMS), i.e. all Internet-based software platforms; The intermediary layer, which includes the intermediaries that handle online technology and services, such as search engines, payment intermediaries, platforms that enable transactions between sellers and buyers, and online advertising platforms, i.e. all Internet intermediation platforms; The content layer, which includes the operators that offer content and sell products and services, i.e. all Internet content platforms. The model of the Internet as a metaplatform allows us to highlight the main stages of the network’s evolution, each of which features the emergence of a particular

aspect of the Internet meta-platform: Scientific Platform: when the Internet began, very few users were connected, bandwidth speeds were very limited, there was little content and access costs were high, making it sustainable only in research environments. In this phase, the Internet was a scientific platform for the exchange of information among researchers. The fundamental innovations that occurred in this stage laid the foundations that led to success of the Internet and its widespread dissemination. Informative Platform: the Internet began to spread within the corporate environment and access devices for the consumer market began to appear. Bandwidth speed was still low, the information available was

limited and only textual and graphic content could be used. The web was dominated by portals, which organised the content and absorbed most of the time users spent online. Searchable Platform: the amount of information started to grow considerably due to a significant reduction in the cost of content creation, bandwidth speed increased and access costs were lowered further, enabling a greater expansion of the user base. The explosion of content led to a paradigm shift: the Web was no longer the closed world of the portals, but had become an expanding galaxy in which search engines were the entry point for the network. Social Platform: the reduction of access costs and increase in bandwidth speed brought more and more people online. Together with the

new online technology platforms, this created an explosion of content generated by users themselves, including photos, videos, text and audio. The network became the new media, in which everyone could have their say thanks to social platforms, heralding a new paradigm shift in relation to the previous stages: information was no longer one-tomany but many-to-many. Mobile Platform: access costs have been greatly reduced, the Internet can now be accessed from low-cost terminals and has also become a requirement while on the move, both to access content and remain connected with one’s social networks. At this stage, we see an explosion of the installed base, due to sales of smartphones, tablets, e-book readers and other online mobile devices.

Things Platform: the next evolution of the Internet is the ‘Internet of Things’. Lower access costs and high bandwidth speed have allowed the Internet to establish itself as the reference infrastructure for the exchange of information. Not just people, but also sensors, objects and things are connected to the Internet to exchange information. This stage will bring a further explosion of devices connected online and of content created, as information will no longer be created only by humans but also by objects. The framework of analysis allowed us to identify the distinctive features of the Internet meta-platform: Cumulativity: the physical growth of the network occurs through its

capacity to integrate other infrastructure technologies. For this integration to succeed, however, it is important that there are no conflicts between the new technology and the previous one. The most significant example of this aspect is the great change that the Internet infrastructure has undergone in recent years, namely the integration of ‘wireline’ networks, based on cables, with cable-free ‘wireless’ networks. Openness: the Internet is a decentralised dynamic system with a modifiable and scalable structure. Three particular conditions are required in the case of the Internet: the network connection architecture must be open, decentralised and distributed, with multi-directional interactivity; secondly, all communication protocols and their

implementations must be open, distributed and subject to change; finally, government institutions must be founded on the principles of openness and cooperation that form the cultural basis of the Internet. Programmability: the Internet is able to develop and evolve independently, with users that become producers of technology and shape the entire network. Given the extreme ease with which nodes can be added, the cost remains low and software is always open and available; by the mid-1980s, anyone with technical knowledge could connect to the Internet. This multi-form contribution led to an whirlwind of unplanned applications, from email, electronic bulletin boards and chat rooms to the modem and, finally, hypertext. Elimination of Time and Space:

physical distances do not exist in the Internet, in the sense that they have no influence on communications. The Internet operates at a speed close to that of light, which on a planet the size of Earth is virtually equivalent to real time. Universal accessibility: the Internet provides universal access, giving the same powerful capabilities to anyone with access to the network, regardless of where they are. The open design of the Web makes it easy to build browsers for a wide range of devices. In fact, web browsers have been developed for mobile phones, personal organisers and mp3 players, and even some new generation household appliances use the Web to send and receive information. The Web is now the standard interface for access to information.

Fast evolving tech-based media: new uses for the technology, and any effective changes introduced, are communicated whenever they occur in real time to the whole world. Thus, the time that elapses between learning-by-using and producing-byusing processes has been remarkably shortened, with the result that we are all involved in a learning-by-producing process that generates a virtuous circle between the diffusion of technology and its advancement. Centralised computing and software as a service: Internet-based computing allows the sharing of calculations, resources, software and information, which are provided by one computer to others on request. Infinite storage capability: the price of storage is also decreasing year by year: it dropped from $ 15.15 for 1 GB

in 2000 to 0.29 per GB in 2008. This has allowed the creation of online storage, with virtually endless possibilities for saving and using data at any time through services, such as YouTube and Flickr. Information asymmetry reducer: the Web reduces information asymmetries as anyone may seek any information they lack on the Internet. Online applications such as mailing lists, web conferencing, forums and bulletin boards make the Internet a group media for many-to-many communications. These new tools are great levellers and reducers of organisational hierarchies. Each user has access to any other user and an equal opportunity to be heard, at least in theory. Flexible mediating technology: the Internet is a technology that connects

parties that are independent from one other or seek to be so. Interconnection can be business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C) or consumer-to-business (C2B). The connection can also be within a company or organisation - in which case it is called an intranet. Increasing Management Efficiency: the use of the Internet as a management tool improves efficiency in many sectors of the economy, leading to a far-reaching restructuring of business processes. The efficiency comes especially from the use of web technologies for better management of the value chain and the supply chain. Transaction cost reducer: transaction costs are the costs involved in searching for buyers and sellers,

finding product information, negotiating prices and drafting and monitoring contracts. The Internet reduces transaction costs in terms of time and money by reducing the costs related to seeking information about the market and the definition of agreements. Supply of creative content: the Internet is an extraordinary source of content; the fact that it enables the use of content on demand with a oneto-many approach, has a virtually infinite storage capacity and offers the possibility of immediate access has led to the uploading of extraordinary quantities of content. Initially, printed content was digitised, but users soon shifted from a passive mode of use to become user-creators and creating their own content to upload to the network. The advent of Web 2.0

brought an explosion of usergenerated-content, not only created offline and then uploaded to the network, as with pictures or videos, but also content created online, such as threads, blogs, reviews and articles. Content unbundling: there is no doubt that web search has changed the way publishing and content marketing are managed. The old publishers’ saying, ‘content is king’, has been replaced by the new Web 2.0 slogan ‘the user is king’. Just as iTunes allows music buyers to acquire an individual song separately from the entire album, so too Google allows any searcher to rapidly identify and download articles of all kinds from thousands of sources. This possibility of obtaining a single item, song or piece of information has wide repercussions for both users and business. Users no longer need to buy

or consume more than what they really want. Content owners have to pay very serious attention to this disaggregating trend, as it is cannibalising sales of newspapers, books and CDs. Search is one of the main platforms on the Internet. Search activity had a measurable impact in 2009, approaching a gross annual value of 780 billion dollars, equivalent to the GDP of the Netherlands or Turkey, making each search worth approximately $ 0.50. Internet search is a classic two-sided market in which the search engine acts as an intermediary between those searching for information and those placing advertisements. The price that searchers pay is exposure to advertising. Clearly, the most popular search engine is likely to earn the largest revenues and deprive its rivals of funds with which to compete. Google, the

global search platform, has fully exploited the conditions of the multi-sided market, reaching economies of scale beyond those of the other platforms, thus ensuring it a position of absolute dominance of the market. Another important Internet platform is Internet publishing. The explosion in the use of the Internet over the last ten years has led to a huge growth in online advertising. As people spend more time with online content, it is natural that advertising investments also shift online. This should have led to an increase in the prices of advertising online and on websites, but this has not occurred, at least not to the extent that might have been expected. This is because the economics of industrial production do not apply in the new online publishing markets, at least not perfectly. Adding new pages to a printed magazine incurs substantial material, production, and

distribution costs, whereas generating new pageviews and attendant ad inventory online involves very marginal costs. In such cases, the supply could be infinite as long as the price exceeds the marginal cost per unit. An increase in demand would not imply an increase in price, because this remains constant at any level of demand. To create the imbalance in supply that leads to an increase in prices, focus was shifted to the audience, creating scarcity for it with two main methodologies: creation of vertical content and targeting technologies, i.e. matching the ad to the reader. Websites with vertical content, such as automotive sites, normally have higher CPMs than general sites. This is because the audience interested in cars is limited and not infinite and therefore there is a context of scarcity. With the improvement of targeting technologies, advertisers have the possibility of targeting a very specific consumer

audience (age, area of residence, education, interests, etc.). The Internet features a significant phenomenon on the supply side, namely the creation of startups on a massive scale. This happens above all because it has enabled a lowering of the entry barriers to starting a business: The Internet provides services and technologies at a lower cost and with low implementation complexity (e.g. IT, IT-enabled accounting and cloud computing). For example, Google has made estimated savings of 50% to 70% by using its cloud-based applications instead of traditional solutions. engines, portals and social networks allow the advertising of goods and services at considerably lower budgets than traditional advertising channels.

The Internet provides distribution channels of global potential at very low costs (e.g. eBay app store, Etsy). E-commerce platforms and search engines have also allowed the creation of micro enterprises (e.g. people who sell on eBay full time). Venture capital has played a key role in the creation and development of startups. 2014 saw the highest level of VC investment in startups since 2000 :World wide a total of $ 86, 7 billion , went into 6507 Venture Capital backed investments in startups . Starting a new business on the Internet is especially difficult when the initiative is based on the creation of a multi-sided platform. In addition to the usual difficulties associated with starting a new company, the founders have to contend with the wellknown chicken and egg problem of multisided platforms. Entrepreneurs need a

sufficient number of customers on both sides, and in the right proportions, in order to ensure satisfactory value for both groups of customers and to achieve sustainable growth of the platform. From a mathematical perspective, critical mass would have to be reached instantaneously to ignite the creation of value. In practice, it appears that platforms have a limited period of time to get to critical mass. Early adopters are the first to use a platform. If they return, and if later adopters also find value, then it is possible to reach critical mass. If the platform does not grow quickly enough to reach critical mass, early adopters lose interest, fewer later adopters come and word-of-mouth referrals stop or turn negative, leading to the eventual implosion of the platform. In general, the Internet economy does not require new rules. However, there are effects or forces with little relevance in the

‘old economy’ that have now acquired particular significance in the Internet economy. These include so-called ‘Cost Structures’, ‘Network Effects’, ‘Switching Costs’ and ‘Lock-in’. Cost Structures: if we consider software development, once the software has been developed, the cost of electronic distribution via the Internet is virtually nil. This applies only to purely ‘IT’ products, such as software, but not to physical goods. Therefore high fixed costs and low marginal costs are a particular feature of high tech companies. This is an example of how the curve of total production costs may change from the old to the new economy: the marginal cost may not change with variations in the quantities produced, creating changes in costs over the short and

the long term and a consequent change in the classic equilibrium of enterprises. Network Effects: Internet platforms are steeped in network effects, i.e. to give a positive example, the effects produced by a situation in which the more people that use a resource, the greater the benefit for the individual user. For example, the more people who use an online marketplace, such as eBay, the more useful it will be for the individual consumer. Network effects can be direct or indirect: Direct network effects, which can be seen in terms of technical compatibility or standard interfaces; Indirect network effects, which can also have an overwhelming effect. For example, the effects seen when various types of

users (e.g. programmers, content producers, suppliers and buyers) adopt a platform that requires some complements in order to be used. From a closer examination of network effects, two main categories can be defined with respect to their influence within or outside of the group: Cross-side network effects these effects are when a group shows preferences regarding the number of members or activities of the other group; they can be either positive or negative. (Example of positive effects: the number of buyers and sellers on eBay; example of negative effects: consumer reaction to an increase in advertising);

Same-Side Network Effects these effects are when what happens in one group does not influence what happens in the other group; in this case the effects can be either positive or negative. (Example of positive effects: the number of participants in peer-to-peer systems; example of negative effects: the presence of several competitors in the same marketplace). Switching Costs and Lock In: switching costs are the costs associated with changing to a different version of the same type of product, as occurs, for example, with a change in technology or standards. The transition from one online platform to another can involve switching costs as it not only includes the cost of the asset but also the time

invested in learning how to use it (in terms of costs). The term ‘lock in’ refers to a situation wherein switching costs are so high that potential competitors with similar products are unable to offer sufficiently low prices to persuade consumer to switch to their products. However, the market is always evolving, and when switching costs and network effects become determining factors, the market will adapt itself accordingly. We can determine three types of economic impacts due to the Internet: impact on suppliers; impact on consumers; impact on the market. One of the key factors of the Internet is the reduction of input prices for enterprises.

Normally the lowest price at which a company can sell a product is equivalent to the cost of producing the good. For example, a B2B e-commerce platform offers companies the opportunity to reduce sales prices by reducing or cutting costs in three ways: reduction of procurement costs by making it easier to identify the best suppliers, thus cutting order processing costs; better supply chain management; better inventory control, through the offer of reduced or zero inventories and thus a reduction or elimination of storage costs. Another way in which the Internet allows input costs to be reduced is through the development of outsourcing practices. For example, in the development of a software

package, the programmers and graphic designers may belong to an external organisation and develop on behalf of the company that owns the project. Another tool that the Internet has provided to businesses is the possibility of practising price discrimination in regard to different categories or groups of consumers for the same product. This tool is offset, however, as we shall see in the next chapter, by the possibility the consumer has of comparing the prices of various providers and making an informed decision, based on more accurate information. One of the main factors that influence demand is the price of the product/service. When prices are lower, consumers tend to buy more. Even more important, however, is the impact of the Internet on making prices more transparent. For this reason, the Internet economy is often referred to as the ‘Nude Economy’, because it makes

information available and transparent, making it easy for both buyers and sellers to compare product prices. One of the main market distortions, according to classic economic theories, is due to the presence of so-called information asymmetries between supply and demand. The Internet, as a tool created for the exchange of information between individuals, has changed the old logics of economic bargaining based on the power of information. It has thereby reduced the weight of information asymmetries as information is freely and openly available to all (experts, suppliers, consumers, etc.). The Internet market is thus more efficient than the traditional one, and one of the prime consequences of this is the lowering of transaction costs, in terms of costs for the time used to search for alternative products, goods or services, to negotiate deals, to compare prices, and other similar activities. Another impact that the Internet has had,

and continues to have, is its ability to generate pricing mechanisms, through the possibility of comparing the prices of products/services and the introduction of various types of auctions and exchanges. In conclusion, the effect of the Internet is that it reduces costs for both suppliers and consumers, and also provides common ground (as a platform) where consumers and suppliers can meet and conduct business more efficiently. Internet markets can be classified into two types: Markets by Evolution are born through an evolutionary phase, which in most cases leads to the emergence of new markets or the evolution of old ones. Markets by Design, although based on the same general theoretical principles, have distinctive characteristics: these markets are

‘designed’ from scratch or modified in relation to some specific aspect. Examples of these markets include online auctions and the sale of advertising keywords on search engines. The Internet has facilitated the creation of new markets with better measurement, advanced customisation, rapid innovation and more informed market design. It has also led to a reduction or rationalisation of the costs associated with the organisation and management of markets. An analysis of Internet markets in relation to technologies (often the source of the creation of new markets), reveals distinctive characteristics. These are specific features that distinguish them from traditional markets and can be summarised as: scalability (in terms of incremental

returns); customisation (understood as matching users with opportunities); potential for innovation (in terms of new products, new BMs, etc.); measurability. Internet business models can be classified according to types, i.e. the modalities with which the exchange between supply and demand occurs, leading to the distinction between three families of business models: Transaction-based, i.e. business models based on direct transaction between supply and demand. In transaction-based models, demand and supply reciprocally and mutually affect one another. Goods or products are either exchanged directly or through the assistance of a third enabling party. Within transaction-

based models, we can distinguish: the brokerage model - a model that involves bringing together buyers and sellers, or facilitating transactions; the merchant model - a direct encounter between seller and buyer; the subscription model - the exchange between seller and buyer is made through a recurring fee for use of the good/service; the utility model - the exchange between seller and buyer is made by payment of the effective use of the good/service by the buyer. Advertising-based, i.e. business models that are based on an indirect transaction between supply and demand. Advertising-based models

are multi-sided models, i.e. more than two operators are present and involved, and the exchange between supply and demand cannot occur without a third operator that acts as an enabling agent. Within advertising based models we can distinguish: advertising models - an offering of free content and services, but with the inclusion of advertising content; intermediary models - models based on advertising intermediation, i.e. the aggregation of property and audience. Free-based, i.e. models where the exchange between supply and demand takes place for free, or at least in part or for a certain period of time. Free-based models can be divided into:

community models - models based on the loyalty of users who invest time and passion in the development of the good/service; free models - models based on the initially or permanently gratuitous nature of the good/service. The main online markets are represented by online advertising and e-commerce. These two markets were chosen because they are the most emblematic of the Internet industry. The application of the economic theories examined over the course of the chapters can be seen in each of them, and they provide a detailed insight into how certain business models function. The main characteristics of online advertising are its use of Internet-based technologies and data-collecting

mechanisms, which enable the profiling and tracking of specific individuals and the automated sale of advertising spaces. The web advertising model is based on a website (publisher) that provides content (normally free, but not necessarily so) and services, combined with advertising; The ads can be the main or sole source of revenue. The publisher can be a content creator or a distributor of content created elsewhere. The advertising model works best when the volume of visitor traffic is very large or highly specialised. Online advertising is similar to its offline counterpart with regard to the use of ads, allowing the display of text (as in classified ads), graphics (as in magazines) and video (as on TV).

Online advertising is not merely another channel into which advertising can flow, but a truly radical innovation that is patently distinct from the offline channel: 1. The Internet provides a highly efficient mechanism for delivering ads to individual users and gathering information for targeting ads. 2. It allows more efficient intermediation in the advertising market, as seen, for example, in the auction mechanism used for keywords. 3. It fosters specialisation economies: online publishers aim increasingly at selling advertising space through specialised platforms. Within the general advertising market we can identify more specific market segments: search advertising - the market for keyword advertising on search engines;

display advertising - the display advertising market; advertising networks - the market for advertising intermediation through technology platforms; classified advertising - the classified ad market (ads, directories); email marketing - the market for advertising based on sending emails; lead generation - the market for advertising based on generating contacts; affiliate marketing - the market for advertising based on affiliations to the product/service that is promoted. The term electronic commerce (e-commerce) refers to a series of commercial transactions between producers and consumers implemented with the use of computers and telecommunications networks for the exchange of information directly related to

the sale of goods and services. Electronic commerce is found in various forms and contexts, depending on the parties concerned, whether private individuals, businesses, institutions, etc. The most common forms of electronic commerce are: B2B – business to business; this involves trade between companies, and therefore does not affect the end consumer of goods and services. The transactions are between a limited number of actors and the amounts are usually high and managed offline; B2C – business to consumer; the best known model of electronic commerce is that for the purchase of goods and services by the end consumer; B2E – business to employee; B2E refers to all infrastructure and applications used to manage the

business and working relationship between companies, employees and collaborators; B2A - business to administration; the term B2A refers to electronic transactions between companies and public authorities; C2B – consumer to business; this is a type of electronic commerce in which (private) consumers offer goods and services to businesses and companies: a complete reversal of the traditional business model; C2C – consumer to consumer; this is a new form of e-commerce that has entered the market in recent years. It is has become increasingly popular due to the creation of several sites that provide online auctions; P2P – peer to peer; the term peer-topeer, i.e. peer network, refers to a network of computers that share their

multimedia resources, documents, movies, sound files and images, and interact with each other directly, without the need for intermediary server devices, simply through the use of dedicated software applications. The main innovations in the of e-commerce market are: A greater range of choice. The Internet allows interplanetary shopping. We can buy not only digital products but also basic necessities, niche products and ‘unique’ products that are difficult to find on the local market. Improvement in the quality of services. E-commerce technologies allow a greater range of services both before and after sales. A reduction in costs. The development

of electronic commerce extends the benefits of the automation of production to the distribution of goods and services, with significant cost reductions in both production and distribution, resulting in a lowering of the prices paid by the final purchaser. Another advantage is the possibility of knowing one’s customers directly: the development of the information economy allows companies to acquire detailed information on the needs, characteristics and habits of individual customers. Reduction of market access barriers. This is because the costs of starting up a business online are significantly lower than with a traditional activity. What is the future of the Internet as an industry? This is difficult to say, given its rapid evolution, but we can certainly state

that the phenomenon seems to be still in its infancy, as the number of users is increasing by 200 million each year, the number of connected devices is growing exponentially (once only stationary computers, and now laptops, cell phones, smartphones, TVs, tablets, appliances...), and the contribution of the Internet to GDP varies widely, depending on the country, even with similar levels of development, which suggests a significant future growth of the online economy. Furthermore, new platforms are born, emerge and develop, creating new markets that were previously unthinkable, such as peer-to-peer car sharing (RelayRides), or peer-to-peer rental of houses, rooms or even beds, as an alternative to hotels (AirBnB). All the elements we possess highlight the great importance of the Internet economy today, but the growth prospects are greater still, suggesting a rapid evolution of the

network.

11 APPENDIX A Taxonomy of Internet products

The need exists in any modern industry to represent products by creating a taxonomy of production, which also serves statistical and economic purposes. To this end, as there was nothing of comprehensive scope in the current academic literature, we decided to produce one ourselves. In order to classify the products and services found in the Internet domain, the following types were used as criteria of distinction: Visibility to the end user, i.e. whether

the product/service is intended for the end user; Content, i.e. whether the required product/service needs content; Technology, i.e. the level of technology required to supply the product/service. Figure 11.1 – Classification of Web Products/Services in relation to the variables of Technology, Content and Visibility

Source: Produced by the author. Based on these criteria we can examine the typological analysis in greater depth and identify the following:

Website Content site E-commerce site Social site Technology platform Search Productivity CMS Communications Sites/platform services Creative services Advertising services Infrastructure services Security services Analytics services Figure 11.2 – Classification of Web Products/Services

Source: Produced by the author. 11.1 Websites

11.1.1 Websites: Content sites

Among content sites we can identify: Content site News National Local Topical Entertainment Audio Video Images Games Directory Business Subscribers Websites Classified ads Learning Vertical Reviews Comparison

Figure 11.3 – Classification of Content Sites

Source: Produced by the author. 11.1.1.1 Content site

News

National

This category of site publishes information content online with a national and international geographic target. We chose the website of the ‘Financial Times, an English-language international daily newspaper with a special emphasis on business and economic news, as an example of this category. The site publishes news, inquiries, analysis and live reports of the main economic and political events in the Uk and the world.Ft.com is one of the most important information websites in the world, with real-time updates, user interactivity and content published in various formats, including text, audio, video and images. Figure 11.4 – Ft.com

Screenshot taken on 10/10/2015. 11.1.1.2 Content site

News

Local

This category of site publishes information content online with a local geographic target. As an example of this category, we chose the CityNews network, which offers online local newspapers providing specific information to various geographic target areas (e.g. Torino Today, Roma Today...).

CityNews is a startup founded in January 2007. Patch.com is an independent US local news and information platform, primarily owned by Hale Global. As of May 2014, Patch operated some 906 local and hyperlocal news websites in 23 U.S. states. Figure 11.5 – Patch.com/california/mountainview

Screenshot taken on 10/10/2015

11.1.1.3 Content site

News

Topical

This category of site publishes news online in a vertical format. As an example of this category, we chose Autoblog, an American internet-based automotive news website owned and operated by AOL Inc. through their Weblogs, Inc. subsidiary..AOL reports 2.4 million visitors to the Autoblog website each month. Figure 11.6 – Autoblog.it

Screenshot taken on 10/10/2015. 11.1.1.4 Content site

Entertainment

Audio

This category of site publishes audio entertainment content online for its users. We chose Spotify as an example of this category.

Spotify is a Swedish commercial music streaming, podcast and video service that provides digital rights managementrestricted content from record labels and media companies. It is available in most of the Americas, Western Europe and Australasia. Music can be browsed or searched by artist, album, genre, playlist, or record label. Spotify operates under a freemium business model, with two music streaming tiers: Spotify Free (160kbit/s) and Spotify Premium (up to 320kbit/s). Figure 11.7 – Spotify.com

Screenshot taken on 10/10/2015. 11.1.1.5 Content site

Entertainment

Video

This category of site publishes video entertainment content online for its users. We chose Netflix as an example of this category. With more than twenty-three million users in the US and Canada, Netflix is the world leader in Internet subscription services for

films and TV shows. For $ 7.99 a month, Netflix users in the US can watch unlimited movies and TV episodes streamed immediately to their TVs and computers, and can also receive unlimited DVDs delivered directly to their homes. The devices supported by Netflix streaming include consoles such as Microsoft Xbox 360, Nintendo Wii and Sony PS3; Blu-ray disc readers; Internet TVs such as LG, Samsung, Sony and Vizio; digital video recorders such as Roku and TiVo (available only in the US); Android devices and Apple devices such as iPhone, iPad and iPod touch. Figure 11.8 – Netflix.com

Screenshot taken on 10/10/2012. 11.1.1.6 Content site

Entertainment

Images

This category of site publishes entertainment content online in the form of images, such photos or drawings. We chose Instagram as an example of this category. Instagram is an online mobile photosharing, video-sharing and social networking service that enables its users to take pictures and videos, and share them on a variety of social networking platforms, such as

Facebook, Twitter, Tumblr and Flickr. The service was acquired by Facebook in April 2012 for approximately US$1 billion in cash and stock. Figure 11.9 – Instagram.com

Screenshot taken on 10/10/2012. 11.1.1.7 Content site

Entertainment

Games

This category of site publishes video game entertainment content online for its users.

We chose Travian as an example of this category. Travian is a free massively multiplayer online game (MMOG) played on web browsers. The game is set in the Roman era and the main characters of this world are Romans, Gauls and Teutons. Each player can freely select one of these tribes; the choice greatly affects the game strategy because each tribe has different characteristics. At the beginning of the game, each player is assigned a village to manage, which they have to develop by using the various features that the game offers. Figure 11.10 – Travian.it

Screenshot taken on 10/10/2015. 11.1.1.8 Content site

Directory

Business

This category of site organises information content about local businesses online for its users. We chose Yellow Pages as an example of this category. Yellow Pages gathers the data of all businesses with listed business phone

numbers in the selected area and organises them online in categories for its users. Users can perform searches for businesses based on keywords and locations. Businesses that desire greater visibility can pay to include additional information, which will be searchable by users. Figure 11.11 – Yellowpages.com

Screenshot taken on 10/10/2015. 11.1.1.9 Content site Directory subscribers

Telephone

This category of site provides the names and telephone numbers of users who subscribe to a phone service online. We chose White Pages as an example of this category. White Pages collects the data of all fixedline telephone subscribers, both private and business users, and allow the names to be searched on a search engine that is freely accessible to users. It is mainly used to find a telephone number listed under a particular name. Figure 11.12 – whitepages.com

Screenshot taken on 10/10/2015. 11.1.1.10 Content site

Directory

Websites

This category of site organises website listings online according to a taxonomical tree. We chose ODP as an example of this category. Open Directory Project (ODP), also known as DMOZ (from directory.mozilla.org, its

original domain name), is a multilingual open-content directory of the World Wide Web. It is owned by Netscape, but is built and maintained by a community of volunteer editors. ODP uses a hierarchical ontological scheme for organising its site listings. Sites on a similar topic are grouped into categories that can include more specialised subcategories. Figure 11.13 – Dmoz.org

Screenshot taken on 10/10/2012. 11.1.1.11 Content site

Classified ads

This category of site organises classified ads from private individuals or professionals online. We chose Craiglist as an example of this category. Craiglist is a website that collects local classified ads in various sections, such as work, home, motoring, etc. Anyone can publish their ad, stating whether they are offering or seeking (e.g. employment), specifying the category (car, work, mobile, etc.) and giving the geographic location for which the ad applies. Figure 11.14 – Craiglist.org

Screenshot taken on 10/10/2015. 11.1.1.12 Content site

Learning

This category of site organises information content useful for learning in a given field of knowledge online. We chose Code School as an example of this category. Code School is an online learning service that teaches a variety of web design and

programming skills. The courses range from beginner to advanced level and users earn rewards and badges based on the level of knowledge that they attain. The courses consist of screencasts and interactive exercises to guide users in programming. Each course has at least five levels. Each level starts with a screencast lasting 10-15 minutes, followed by a series of challenges that must be solved in order to move up to the next level. Figure 11.15 - Codeschool.com

Screenshot taken on 10/10/2012.

11.1.1.13 Content site

Vertical

This category of site organises various types of vertical thematic content online, such as information, tutorials, news, guides, tips, etc. We chose Makezine as an example of this category. Makezine focuses on do it yourself (DIY) and/or DIWO (Do It With Others) projects involving computers, electronics, robotics, metalworking, woodworking and other disciplines. Figure 11.16 – Makezine.com

Screenshot taken on 10/10/2015. 11.1.1.14 Content site

Reviews

This category of site mainly offers its users reviews on products, services or places, which in many cases are written by users themselves. We chose Yelp as an example of this category.

Yelp is a website with reviews on local business, covering the United States, Canada, United Kingdom, Ireland, France, Germany, Austria and the Netherlands. The site drew an audience of more than fifty million individual visitors in March 2011. Yelpers, the users active on the site, have written more than eighteen million local reviews, making Yelp the leading local guide on everything from boutiques to mechanics, restaurants and dentists. Figure 11.17 – Yelp.com

Screenshot taken on 10/10/2015.

11.1.1.15 Content site

Comparison

This category of site offers its users price comparisons for goods and/or services. We chose Kelkoo as an example of this category. Kelkoo is a price comparison site that operates in ten European countries. The company provides a comparison for over two million products, including those by technology brands such as Apple and Sony, as well as non-tech brands such as Black & Decker and Aston Martin. Figure 11.18 – Kelkoo.com

Screenshot taken on 10/10/2015. 11.1.2 Websites: E-commerce sites

Among e-commerce sites we can find: E-commerce site Physical goods

Digital goods Group Buying Auction Figure 11.19 – Classification of e-commerce sites

Source: Produced by the author. 11.1.2.1 E-commerce site

Physical goods

This category of site sells physical products to its users online. We chose Amazon as an example of this category.

Amazon.com, Inc. is an American electronic commerce. It is the largest Internet-based retailer in the United States. Amazon.com started as an online bookstore, later diversifying to sell DVDs, Blu-rays, CDs, video downloads/streaming, MP3 downloads/streaming, software, video games, electronics, apparel, furniture, food, toys and jewelry Figure 11.20 – Amazon.com

Screenshot taken on 10/10/2015. 11.1.2.2 E-commerce sites

Digital goods

This category of site sells digital products to users online. As the products are used

digitally on electronic equipment, they do not require physical shipment and users can receive them simply by downloading them. We chose the iTunes store as an example in this category. The iTunes Store (iTunes Music Store until 12 September 2006) is an online store for the sale of digital music, music videos and films managed by Apple Inc. It was launched on 28 April 2003 to coincide with the fourth version of iTunes, the freeware application through which the store is accessed. Figure 11.21 – iTunes

Screenshot taken on 10/10/2015. 11.1.2.3 E-commerce site

Group buying

This category of site online sells its users coupons to receive products or services at a discount, provided a minimum threshold of buyers is reached. We chose Groupon as an example of this category. Groupon is present in over 565 cities around the world, offering in each of them

one or more ‘deals-of-the-day’. Groupon promises a minimum number of customers to local businesses, which offer their products and services at a discount (usually 50%). Groupon therefore offers the consumer an unbeatable deal, and offers businesses a large number of new customers. Figure 11.22 – Groupon.com

Screenshot taken on 10/10/2015.

11.1.2.4 E-commerce site

eBay

This category of site sells products or services online through an auction system. We chose eBay as an example of this category. Founded in San Jose, California, in 1995, eBay connects millions of buyers and sellers globally in the world’s largest online marketplace. eBay items can be sold either through a silent auction, where users bid the maximum price they are willing to pay and the site automatically increases the offers up to that maximum, if necessary, or through ‘Buy It Now’, in which an item is purchased at a fixed price. Figure 11.23 – eBay.com

Screenshot taken on 10/10/2015. 11.1.3 Websites: Social Sites

Among social sites we can find:

Social Discovery Social Question & Answer Social Bookmarking Social Dashboard Social Publishing Blogs Wiki Microblog Social Sharing Video Photos Music Text Social discussion Social networks Friends Professional Social livecast Virtual worlds Figure 11.24 – Classification of Social Sites

Source: Produced by the author. 11.1.3.1 Social Site

Social Discovery

This category of site allows users to catalogue, organise and discover information, topics, places or news socially, i.e. according to relevance within their social graph, by sharing objects with contacts in the social networks to which the user belongs. We chose CircleMe as an example of this category. This service allows users to import favourites from other services, such as Facebook, and to arrange the things the user likes in a visually appealing way on their own personal page. Users can see what their friends like and discover new things that they might enjoy, or discover and meet new people on the basis of shared common interests. Figure 11.25 – Circleme.com

Screenshot taken on 10/10/2012. 11.1.3.2 Social Site

Social Question & Answer

This category of site allows users to ask or answer questions within a community. We chose Quora as an example of this category. Quora is a growing collection of questions and answers that can be created, edited and organised by anyone who uses the online

service. The objective of Quora is for the web page hosting the question to become the best possible resource for those interested in the subject matter concerned. Figure 11.26 – Quora.com

Screenshot taken on 10/10/2012. 11.1.3.3 Social Site

Social Bookmarking

This category of site allows users to save their bookmarked sites online and make them visible to the site community. We chose Delicious as an example of this category. Delicious is a social bookmarking site, mainly used for storing bookmarks online, as the site allows users to access their bookmarks from any computer and add bookmarks from any location. Delicious allows bookmarks to be organised and remembered through tags (labels with keywords), a much more flexible system than folders. Users can also use Delicious to see interesting links shared by other people. Figure 11.27 – Delicious.com

Screenshot taken on 10/10/2012. 11.1.3.4 Social Site

Social Dashboard

This category of site allows users to control and manage various social networks from a single interface. We chose HootSuite as an example of this category. HootSuite helps organisations use the social web to launch marketing campaigns,

identify and increase their audience, and distribute targeted messages across multiple channels. With HootSuite, users have a single dashboard where they can schedule updates on Twitter, Facebook, Linkedin, Wordpress and other social networks through web platforms, desktop PCs or mobile phones. Figure 11.28 – Hootsuite.com

Screenshot taken on 10/10/2015. 11.1.3.5 Social Site

Social Publishing

Blog

This category of site allows users to publish their own content online in a temporal sequence, like in a diary. We chose Wordpress.com as an example of this category. Wordpress.com offers users an easy way to share their opinions with the rest of the world on current events or any other subject. The site has several features to make the blog activity simple and effective. In addition, users can navigate various blogs in the community and follow the updates of those they like. Figure 11.29 – Wordpress.com

Screenshot taken on 10/10/2015. 11.1.3.6 Social Site

Social Publishing

Wiki

This category of site allows users to publish thematic content online in a participatory manner. We chose Wikipedia as an example of this category. Wikipedia is a project of the Wikimedia

Foundation to build free encyclopaedias in all the languages of the world. Basically, anyone with Internet access is free to contribute, provided they do so neutrally and cite their sources. In March 2008, Wikipedia was available in 250 languages. Figure 11.30 – Wikipedia.org

Screenshot taken on 10/10/2012. 11.1.3.7 Social Site

Social Publishing

Microblog

This category of site allows users to publish information, opinions or other types of textual content online in a concise and abbreviated form, according to set limits of length. We chose Twitter as an example of this category. Twitter, founded by Jack Dorsey, Biz Stone and Evan Williams in March 2006 (launched publicly in July 2006), is a micro-blogging and social networking service that allows users to post their latest updates. An update is limited to 140 characters and can be posted in three ways: a web form, text message or instant message. Figure 11.31 – Twitter.com

Screenshot taken on 10/10/2015. 11.1.3.8 Social Site

Social Sharing

Video

This category of site allows users to publish, share and enjoy video content online. We chose YouTube as an example of this category. YouTube is the global leader in video sharing through a web-based experience.

YouTube allows users to upload and share video clips on the Internet through the website, mobile devices, blogs and email. Everyone can watch videos on YouTube. Users can watch videos on current events, find videos about their hobbies and interests, and discover strange and unusual videos. Figure 11.32 – YouTube.com

Screenshot taken on 10/10/2015.

11.1.3.9 Social Site

Social Sharing

Photos

This category of site allows users to publish, share and enjoy photographic content online. We chose Flickr as an example of this category. Flickr is an online photo sharing site created in 2004. The site allows its users to upload and share their photos, and to view and comment on those of their friends or other users in the community. Figure 11.33 – Flickr.com

Screenshot taken on 10/10/2012. 11.1.3.10 Social Site

Social Sharing

Music

This category of site allows users to share their musical tastes, their current favourites, and even audio tracks with others, with respect for copyright. As an example of this category we chose SoundCloud. SoundCloud is a social network for music

that allows users to share audio tracks by uploading them easily online. Users can connect with others, follow their updates and listen to the music they share. Figure 11.34 – Soundcloud.com screenshot

Screenshot taken on 10/10/2012. 11.1.3.11 Social Site

Social Sharing

Text

This category of site allows users to share what they are reading, or even textual

content such as books, reports and guides, with others, with respect for copyright. We chose Scribd as an example of this category. Scribd is a social network for reading and sharing publications. The company is home to tens of millions of written works, including best-selling books, journals, research reports, recipes, presentations and more. Scribd allows users to upload documents of various formats, including MS Office documents, Google Docs, PDF and ePUB files. Users can then research these documents (via the web and within the documents themselves), share them with other users and incorporate them into websites or blogs. Figure 11.35 – Scribd.com

Screenshot taken on 10/10/2012. 11.1.3.12 Social Site Social Networks Friends

This category of site is based on the connection between people who know each other, with each one creating their own social network in which they share thoughts, comments, links, videos and more. We chose Facebook as an example of this category.

Facebook was founded by Mark Zuckerberg in February 2004, originally as an exclusive network for Harvard students. It was a great success: within two weeks, half of the schools in the Boston area had joined the Facebook network; within four months, Facebook had added thirty other universities to its network. Since then, it has grown at a dizzying rate, extending its access to all network users. Facebook users can share their status, links, videos and photos with friends, and comment on or express their appreciation (‘like’) of the things shared by their friends. Figure 11.36 – Facebook.com

Screenshot taken on 10/10/2015. 11.1.3.13 Social Site Social Networks Professional

This category of site is based on connections between users formed by relationships in a professional field. We chose LinkedIn as an example of this

category. With more than 100 million users from over 200 countries worldwide, LinkedIn is the largest professional networking site and allows its users to create business contacts, seek employment and find potential customers. Individuals have the opportunity to create their own professional profiles, which can be viewed by others in their network, and they can view the profiles of their contacts. Figure 11.37 – Linkedin.com

Screenshot taken on 10/10/2012. 11.1.3.14 Social Site

Social Livecast

This category of site is based on the sharing of live video content broadcasts with other users. We chose Justin.tv as an example of this category. Justin.tv, established in October 2006, is the largest online community for broadcasting, watching and interacting with live video. Using only a laptop, users can share their event with anyone in over 250 countries, with real-time conversation among the viewers. With more than forty million individual visitors per month and 428,000 channels broadcasting live video, Justin.tv is the leading site for live video on the Web, allowing users to create real-time

connections with others around the world. A new live video starts every second, and users watch more than 300 million videos each month. Figure 11.38 – Justin.tv

Screenshot taken on 10/10/2012. 11.1.3.15 Social Site

Virtual Worlds

This category of site creates virtual worlds,

where users can socialise and perform various activities. We chose Second Life as an example of this category. Second Life is a 3D Internet-based virtual world whose inhabitants - known as ‘residents’ - can create, buy and sell virtual content. Although the virtual world was created by Linden Lab, almost all of the content is user-generated, amounting to over 250 terabytes of data. Second Life has almost fifteen million registered users, from over 100 countries, and a fully functioning economy with more than $ 300 million Linden dollars (the currency of the virtual world) changing hands annually. Figure 11.39 – Secondlife.com

Screenshot taken on 10/10/2012. 11.2 Technological platforms

11.2.1 Technology Platforms: Search Among the technology platforms dedicated to search functions, we can find

Search Content People Figure 11.40 – Classification of the Search Technology Platforms

Screenshot taken on 10/10/2012. 11.2.1.1 Search Technology Platforms

Content

The platforms in this category allow searches for various kinds of content on the Web. We chose Google as an example of this category. Google provides search and advertising

services, which together serve the purpose of organising and monetising the world’s information. In addition to its globally dominant search engine, it offers a plethora of online tools and platforms, including: Gmail, Maps and YouTube. Most of its webbased services are free products, funded by the company and closely integrated with its AdWords and AdSense online advertising platforms. Google promotes the idea that advertising should be highly targeted and relevant to users in order to provide a rich source of information. Figure 11.41 – Google.co.uk

Screenshot taken on 10/10/2015. 11.2.1.2 Search Technology Platforms

The platforms in this specialised in searching information about people. We chose 123People as an category. 123people is a real-time

People

category are the Web for example of this search tool for

information about people that looks into almost every corner of the Web. Through its proprietary search algorithm, users can find complete and centralised information about people, together with images, video, phone numbers, email addresses, social network profiles and much more. Figure 11.42 – 123people.it

Screenshot taken on 10/10/2012. 11.2.2 Technology Platforms: Productivity

Among productivity technology platforms we can find: Productivity Project Management E-learning Webinar Web presenting File sharing Scheduling Figure 11.43 – Classification of Productivity Technology Platforms

Source: Produced by the author. Productivity Technology Platforms Management

Project

The platforms in this category provide users with tools for project management. We chose BaseCamp as an example of this category. BaseCamp is a project management and

group collaboration tool. It was launched in 2004 as a product by 37signals. The tool includes functions for planning, activities, file sharing and messaging. Figure 11.44 – Basecamp.com

Screenshot taken on 10/10/2012. 11.2.2.1 Productivity Technology Platforms learning

E-

The

are

platforms

in

this

category

specialised in enabling users to create online learning courses. We chose Moodle as an example of this category. Moodle is an Open Source Course Management System (CMS), also known as a Learning Management System (LMS) or Virtual Learning Environment (VLE). It has become very popular among educators around the world as a tool for creating dynamic web sites for their students online. Figure 11.45 – Moodle.com

Screenshot taken on 10/10/2012. 11.2.2.2 Productivity Technology Platforms Webinar

The platforms belonging to this category are specialised in the creation of online courses through webcasts, or video screen broadcasting, in which the instructor performs actions that are watched by all the participants (known in the jargon as

webinars). We chose GoToWebinar as an example of this category. GoToWebinar allows individuals and organisations to give instruction and perform presentations and demonstrations to a wide audience online. Figure 11.46 – GoToWebinar screenshot

Screenshot taken on 10/10/2012. 11.2.2.3 Productivity Technology Platforms

Web presenting

The platforms belonging to this category are specialised in creating online presentations. We chose Freepath as an example of this category. Freepath allows users to combine multimedia resources including videos, photos and music with traditional desktop files such as PowerPoint, Excel and Word. Figure 11.47 – Freepath.com

Screenshot taken on 10/10/2012. 11.2.2.4 Productivity Technology Platforms File sharing

The platforms in this category allow people to share files. We chose Dropbox as an example of this category. Dropbox offers online storage space where users can upload their files, which can then be accessed from various devices and easily shared with other users. Figure 11.48 – Dropbox.com

Screenshot taken on 10/10/2012. 11.2.2.5 Productivity Technology Platforms Scheduling

The platforms in this category allow users to schedule appointments. We chose Doodle as an example of this category. Doodle is the world leader in event scheduling, with more than six million

individual visitors per month. The website helps users find the right times for group events such as appointments, conference calls, family reunions, etc. It is particularly useful for people who do not use a common calendar. Doodle is a free web service that does not require registration or software installation. Figure 11.49 – Doodle.com

Screenshot taken on 10/10/2012.

11.2.3 Technology Platforms: CMS

Among technology platforms for content management systems we can find: CMS Portals Websites forums Blogs E-commerce Groupware Image galleries Wiki Figure 11.50 – Classification of CMS Technology Platforms

Source: Produced by the author. 11.2.3.1 CMS Technology Platforms

Portals

The platforms in this category allow the creation and management of web portals. We chose Joomla as an example of this category. Joomla is an award-winning content management system (CMS), which enables

users to create websites and portals. Many aspects, including its ease-of-use and extensibility, have made Joomla one of the most popular platforms available. Joomla is an open-source solution that is freely available to everyone. Figure 11.51 – Joomla.org

Screenshot taken on 10/10/2012. 11.2.3.2 CMS Technology Platforms

Website

The platforms in this category allow the creation and management of websites. We chose Concrete5 as an example of this category. Concrete5 is a platform for creating and managing websites with ease. On any page of the site, an editing toolbar offers all the controls needed for updating it, with no need of administration interfaces: just point and click. Concrete5 is free and open source. Figure 11.52 – Concrete5.org

Screenshot taken on 10/10/2012. 11.2.3.3 CMS Technology Platforms

Forums

The platforms in this category allow the creation and management of web forums. We chose phpBB as an example of this category. PhpBB is short for PHP Bulletin Board, because it is written in the PHP code, one of the most popular programming languages for the Web. PhpBB is among the top free systems for the management of online forums, with a large community of users (in all languages) and numerous sites that offer support and material for customisation. Figure 11.53 – Phpbb.com

Screenshot taken on 10/10/2012. 11.2.3.4 CMS Technology Platforms

Blogs

The platforms in this category allow the creation and management of blogs. We chose Wordpress as an example of this category. WordPress is an open source CMS that is distributed free of charge and has a huge community of users and enthusiasts. It is definitely the most popular and widely

used platform for the creation of blogs. Large brands such as Ford, Samsung, Playstation, CNN, the Wall Street Journal and many others use WordPress for their websites, thanks to the flexibility and potential that make it equally usable for smaller blogs and the largest web portal. Figure 11.54 – Wordpress.org

Screenshot taken on 10/10/2012. 11.2.3.5 CMS Technology Platforms Commerce

E-

The platforms in this category allow the creation and management of e-commerce sites. We chose Magento as an example of this category. Magento is an e-commerce platform built on highly flexible open-source technology. Its intuitive administration interface, search engine optimisation and catalogue management tools make Magento one of the most comprehensive and widely used platforms for creating online stores. Figure 11.55 – Magentocommerce.com

Screenshot taken on 10/10/2012. 11.2.3.6 CMS Technology Platforms Groupware

The platforms belonging to this category facilitate cooperative work among groups of people and make it more effective. We chose Collabtive as an example of this category. Collabtive is an open source groupware enterprise system that offers email, a

calendar, contacts, tasks, file management and project management. Figure 11.56 – Collabtive.o-dyn.de

Screenshot taken on 10/10/2012. 11.2.3.7 CMS Technology Platforms galleries

Image

The platforms in this category allow the creation and management of image

galleries. We chose Coppermine as an example of this category. Coppermine is a platform that is fast and easy to set up, and packed with features to manage photo galleries. Features include: user management, private galleries, automatic thumbnail creation, ecards and easy customisation. Figure 11.57 – Coppermine screenshot

Screenshot taken on 10/10/2012. 11.2.3.8 CMS Technology Platforms

Wiki

Platforms in this category are specialised in the sharing of documents between users in a collaborative manner. We chose MediaWiki as an example of this category. MediaWiki is a platform that allows users to create wikis, modelled on Wikipedia, where users can share their knowledge on a given topic. Figure 11.58 – Mediawiki.org

Screenshot taken on 10/10/2012.

11.2.4 Technology Platforms: Communication

Among communication technology platforms we can find: Communication Email Instant messaging VoIP Figure 11.59 – Classification of Communication Technology Platforms

Source: Produced by the author. 11.2.4.1 Communication Technology Platforms Email

The platforms in this category allow users to send and receive asynchronous electronic messages. We chose Gmail as an example of this category. Gmail, also known as Google Mail, is a free email service with innovative features such as ‘conversation view’, email threads, a search-oriented interface and abundant free space (about 7.7 GB). Figure 11.60 – Gmail.com

Screenshot taken on 10/10/2015. 11.2.4.2 Communication Technology Platforms Instant Messaging

The platforms in this category allow users connected to the platform at the same time to send and receive electronic messages. We chose Whatsapp as an example of this category. WhatsApp Messenger is a proprietary cross-platform instant messaging client for smartphones that operates under a subscription business model. It uses the Internet to send text messages, images, video, user location and audio media messages to other users using standard cellular mobile numbers. Figure 11.61 – Whatsapp.com

Screenshot taken on 10/10/2015. 11.2.4.3 Communication Technology Platforms VoIP

The platforms in this category enable voice communication between users through the Internet network.

We chose Skype as an example of this category. Skype is software that allows users to make voice/video calls and chat on the Internet. Calls to other Skype users are free, while calls to traditional phones, both fixed and mobile, can be made for a fee. The service has also become popular for its additional features, which include instant messaging, file transfer and video conferencing. Skype had 663 million registered users as of 2010. Figure 11.62 – Skype.com

Screenshot taken on 10/10/2012. 11.3 Site/platform services

11.3.1 Site/platform services: Creative services

Among creative services for websites and platforms we can find: Creative services Site building Video creation Image creation App building Figure 11.63 – Classification of

Creative Services

Source: Produced by the author. 11.3.1.1 Creative Services

Site Building

The services in this category allow users to create a site through an online guided process. We chose Weebly as an example of this category. Weebly is a web-hosting service featuring a drag-and-drop website builder. As of

August 2012, Weebly hosts over 20 million sites with a monthly rate of over 1 million unique visitors. Figure 11.64 – Weebly.com

Screenshot taken on 10/10/2015. 11.3.1.2 Creative Services

Video Creation

The services in this category allow users to

create online videos from photos or video clips. We chose Animoto as an example of this category. Animoto generates professional-looking customised videos from music and photos uploaded by the user. Their patented ‘Cinematic Artificial Intelligence’ technology analyses users’ photos and music like a real director and editor, taking into account the structure of the song, rhythm, instrumentation and vocals. Once completed, the video can be emailed, downloaded and embedded on other sites. Figure 11.65 – Animoto.com

Screenshot taken on 10/10/2012. 11.3.1.3 Creative Services

Image creation

The services in this category allow users to create online videos from photos or video clips. We chose Pixlr as an example of this category. Pixlr is a cloud-based supplier of photographic editing services that provides editing capabilities in the browser for both consumers and businesses. Figure 11.66 – Pixlr.com

Screenshot taken on 10/10/2012. 11.3.1.4 Creative Services

App building

The services in this category allow users to create various types of applications, including apps for smartphones. We chose App breader as an example of this category. App breader allows users to create iPhone apps even without knowledge of

programming codes, through a simplified guided process. Figure 11.67 – Appbreeder.com

Screenshot taken on 10/10/2012. 11.3.2 Site/platform services: Infrastructure services

Among infrastructure services for websites

and platforms we can find: Infrastructure services Hosting services Cloud services Figure 11.68 – Classification of Infrastructure Services

Source: Produced by the author. 11.3.2.1 Infrastructure Services services

Hosting

The services in this category include hosting

websites on servers and making them accessible to anyone on the Internet. We chose Hostmonster as an example of this category. Hostmonster provides hosting solutions, the sale of web domains and other ancillary services for putting websites online and maintaining them. Figure 11.69 – Hostmonster

Screenshot taken on 10/10/2012. 11.3.2.2 Infrastructure Services

Cloud services

The services in this category provide users with computing power generated by servers arranged in a cloud architecture. We chose Rackspace as an example of this category. Rackspace provides its users with online services that include cloud computing, cloud storage and hosting. Figure 11.70 – Rackspace.com

Screenshot taken on 10/10/2012. 11.3.3 Services for sites/platforms: analytics services

Among infrastructure services for websites and platforms we can find: Analytics services Website analytics Social analytics Figure 11.71 – Classification of Analytics Services

Source: Produced by the author. 11.3.3.1 Analytics Services

Website analytics

The services in this category provide users with statistical tools to measure the metrics of their websites, including visits, visitors and page views.

We chose Google Analytics as an example of this category. Google Analytics (GA) is a free service offered by Google that generates detailed statistics about the visitors to a website. The product is aimed at marketing managers rather than webmasters and technologists. Figure 11.72 – Google Analytics

Screenshot taken on 10/10/2012. 11.3.3.2 Analytics Services

Social analytics

The services in this category analyse data from social networks. We chose Radian6 as an example of this category. Radian6 helps companies to listen to what is said about them online. From comments on blogs and forums to social networks like Twitter, Radian6 gathers the discussions happening online and gives companies the ability to analyse, manage, monitor and document their presence on social media. Figure 11.73 – Radian6.com

Screenshot taken on 10/10/2012. 11.3.4 Services for sites/platforms: Advertising services

Among advertising services for websites and platforms we can find: Advertising services

SEO SEM Advertising networks Affiliate marketing Email marketing Lead generation Figure 11.74 – Classification of Advertising Services

Source: Produced by the author. 11.3.4.1 Advertising Services

SEO

The services in this category help websites to optimise their visibility on search engines. We chose DIY SEO as an example of this category. DIYSEO is aimed at making the complex world of Search Engine Optimisation (SEO) simpler and more attainable than ever for small businesses. This web-based service helps small businesses to make a previously complex task simple, through step-by-step procedures, tutorials and an expert guide to help turn novices into SEO experts. Figure 11.75 – Diyseo.com

Screenshot taken on 10/10/2012. 11.3.4.2 Advertising Services

SEM

The services in this category offer the creation and management of marketing campaigns on search engines. We chose Trada as an example of this category. Trada has developed a PPC marketplace that allows agencies and advertisers to

leverage the capabilities of hundreds of the best PPC experts in the world, who earn money by generating clicks and conversions for advertisers. Figure 11.76 – Trada.com

Screenshot taken on 10/10/2012. 11.3.4.3 Advertising Services Networks

Advertising

In this category we include operators that aggregate inventory through various websites and offer it to advertisers. We chose ValuClick Media as an example in this category. ValuClick Media offers scalable solutions for advertisers to acquire customers at an optimised cost and for publishers to maximise their profits. Figure 11.77 – Valueclickmedia.com

Screenshot taken on 10/10/2012.

11.3.4.4 Advertising Services Marketing

Affiliate

In this category we include the operators that create advertising campaigns for advertisers based on affiliation. We chose Zanox as an example of this category. Zanox is the leading performance advertising network in Europe. With Zanox, advertisers pay only for the measurable success of their online advertising efforts. The publishers are paid for each share of revenue generated by their advertisers. Figure 11.78 – Zanox.com

Screenshot taken on 10/10/2012. 11.3.4.5 Advertising Services

Email Marketing

In this category we include the operators that provide services to advertisers to promote their messages through email advertising. We chose Mailchimpas an example of this category. MailChimp is an email marketing service and trading name of its operator, a United States company, founded in 2001.

The MailChimp service is accessed through a web- or mobile-based application; for some features there is an offline application. Figure 11.79 – Mailchimp.com

Screenshot taken on 10/10/2015. 11.3.4.6 Advertising Services

Lead Generation

In this category we include the operators that create advertising campaigns for

advertisers with the aim of creating business contacts. We chose Domo Domain as an example of this category. Domodomain is the Business Lead Generation Service that automatically recognizes the Company Name and the Company Profile of your Web Visitors, and delivers actionable contacts to improve your web business and to support sales online. Figure 11.80 – Domodomain.com

Screenshot taken on 10/10/2015. 11.3.5 Services for sites/platforms: Security services

Among security services for websites and

platforms we can find: Security services Firewall services Antivirus Antimalware services Figure 11.81 – Classification of Security Services

Source: Produced by the author. 11.3.5.1 Security Services

Firewall Services

In this category we include the operators providing protection from cyber attacks on the Web through the use of firewalls. We chose Zone Alarm as an example of this category.

Millions of people around the world use the free ZoneAlarm firewall. ZoneAlarm blocks attacks from hackers and prevents viruses and spyware from stealing personal data and sending it elsewhere on the Internet. Figure 11.82 – Zonealarm.com

Screenshot taken on 10/10/2012. 11.3.5.2 Security Services

Antivirus

In this category we include the operators who provide protection against computer viruses that can be caught through web browsing. We chose Symantec as an example of this category. Symantec provides IT system security for corporate and individual users. Symantec helps customers protect their information, identity, infrastructure and interactions by delivering software and services that address security, access, compliance and performance risks. Figure 11.83 – Symantec.com

Screenshot taken on 10/10/2012.

Bibliographical references and insights

Chapter 1 Notes: [1] The framework is the result of reflections over years of teaching at the LUISS University and of cooperation in this period with the Venture Capital Fund Innogest. It has also benefitted from the contribution of colleagues and students. The acronym LIIF (Luiss Innogest Internet Framework) is meant to testify to this contribution and participation in framework. Further information: McKnight & Bailey, Internet Economics. The MIT Press, Cambridge, Massachusetts, 1997. Andrew Davies, Innovation in large technical systems: the case of telecommunications, University of Sussex, 1996.

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Harvard Business School Press. Weill, P. and M. Vitale (2002). ‘What IT Infrastructure Capabilities are Needed to Implement E-Business Models?’ MIS Quarterly Executive. [6] Rappa, M. (2006). Managing the digital enterprise - Business models on the Web. [online], last accessed July 2011, http://ECommerce.ncsu.edu/business_models.html. [7] Rappa, M. (2006). Managing the digital enterprise - Business models on the Web. [online], last accessed July 2011, http://ECommerce.ncsu.edu/business_models.html. For further study: Zott, Amit and Massa, The Business Model: Theoretical Roots, Recent Developments and Future Research. IESE Business School University of Navarra, 2010. Applegate, L. (2001). E-Business Models: Making Sense of the Internet Business Landscape. Information Technology and the Future Enterprise, New Models for Managers. G. Dickson and G. De Sanctis. Upper Saddle River NJ, Prentice Hall. Betz, F. (2002). ‘Strategic Business Models.’ Engineering Management Journal 14(1): 21-27. Bienstock, C., M. Gillenson and T Sanders (2002). ‘A

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For further study: Internet Society - www.isoc.org Internet Engineering Task Force - www.ietf.org Internet Corporation for Assigned Names Numbers - www.ICANN.org Cerf’s slides: www.wcom.com/cerfsup Interplanetary Internet - www.ipnsig.org Internet history - livinginternet.com Sources of statistics used in the book:

and

http://money.cnn.com/2011/05/26/technology/Internet http://blog.nielsen.com/nielsenwire/online_mobile/janu 2011-top-u-s-web-brands-and-news-sites/ http://blog.nielsen.com/nielsenwire/online_mobile/marc 2011-top-u-s-web-brands/ http://www.nielsen.com/us/en/measurement/onlinemeasurement.html http://www.census.gov/ http://www.itu.int/en/pages/default.aspx http://www.nielsen.com/us/en/measurement/onlinemeasurement.html http://www.gfk.com/ http://www.Internetworldstats.com/stats.htm http://www.onlinemarketingtrends.com/2011/01/Internet-global-trafficmap.html

http://googleblog.blogspot.com/2008/07/we-knewweb-was-big.html http://techcrunch.com/2008/07/25/googlesmisleading-blog-post-on-the-size-of-the-web/ http://www.quora.com/How-many-pages-are-inGoogles-web-index http://royal.pingdom.com/2009/06/04/number-ofdomain-names-pass-183-million-up-12-from-lastyear/ http://ebookbrowse.com/verisign-dnib-nov2010-webpdf-d87415584 http://inventorspot.com/articles/Internet_things_exceed http://blogs.cisco.com/news/the-dawn-of-thezettabyte-era-infographic/ http://www.cisco.com/en/US/solutions/collateral/ns341 http://www.cisco.com/en/US/solutions/collateral/ns341 481374_ns827_Networking_Solutions_White_Paper.ht http://blogs.cisco.com/sp/ip-traffic-to-quadruple-by2015/attachment/ciscovni_infographic_19-2/ http://blog.nielsen.com/nielsenwire/online_mobile/time spent-on-facebook-up-700-but-myspace-still-topsfor-video/ http://www.reelseo.com/2011-nielsen-comscoreonline-video-numbers/ http://www.Internetworldstats.com/facebook.htm http://www.socialtechnologyreview.com/articles/50-

facebook-stats-every-marketer-should-know http://londoncharlotte.files.wordpress.com/2010/12/scr shot-2010-12-11-at-10-05-52.png http://www.comscoredatamine.com/ http://www.comscoredatamine.com/2011/07/usshare-of-time-spent-facebook-content-section/

Table of Contents (TOC) Foreword to Internet Economicsby Vinton G. Cerf (Vice president and Chief Internet Evangelist, Google) Acknowledgements Internet Economics: the evolution of the discipline 1.The Internet industry 2. Characteristics 3. Internet demand 4. Internet Supply 5. Economic Models of the Internet 6. Internet Business Models 7. The main Internet markets 8. Interplanetary Internet: the Internet in space (This chapter has been written as a suggestion and under the revision of Vint Cerf.) 9. The Internet is for everyoneby Vinton G. CerfFormer Chairman and President, Internet

Society January 2002Copyright (C) The Internet Society (2002) Consent to Publish given by the Author 10. Conclusions 11APPENDIX – A Taxonomy of Internet products Bibliographical references and insights