Internet Economy

Current Issues in Economics
Internet Economy
Internet Economy
Internet – short history
• The Internet began as a way of linking different
computers over the phone network, but it now
connects billions of users worldwide from wherever
they happen to be via portable or fixed devices.
• People with no access to water, electricity or other
services may have access to the Internet from their
mobile phone.
• The Internet is a multi-billion dollar industry in its own
right, but it is also a vital infrastructure for much of the
world’s economy.
Internet Economy
Exponential growth of Internet access with saturation in
some countries:
• There were about 733 million registered Internet hosts
worldwide in 2010, 17 times more than in 1999.
• On average, 70% of households in OECD countries have
access to the Internet at home. Korea (97%), Iceland
(92%) and the Netherlands (91%)
• Broadband subscriptions grew 20 times over the past
• Between 2004 and 2010, the number of registered
Skype users increased by almost 30 times, up to 560
million worldwide
Internet Economy
Pioneering activities
• Close to 40% of people in OECD countries use
banking services on the Internet. In the Nordic
countries and in the Netherlands over 75% of
individuals use the Internet for banking.
• Almost half of Internet users use the Internet
for formalized education activities. In Finland,
Portugal, Iceland and Luxembourg the share is
over 70%.
Internet Economy
• The Internet is affecting nearly all sectors of
the economy, from making hard-to-find data
available online to transforming entire
markets, as is occurring with music, video,
software, books and news.
• Advertising represents the biggest online
market in absolute terms, followed by
computer and video games, online music and
film and video, end pornography
Internet Economy
Internet economy is different
• Market transaction:
• who is:
– seller?
– buyer?
• what is:
– commodity?
– price?
Internet Economy
Macro consequences of Internet Economy:
• Some vital parts of the Internet Economy barely register in
the GDP. While GDP measures the market value of all goods
and services produced within a country, many stars of IE
(think Wikipedia, Facebook, Twitter, Mozilla, Netscape, and
so on) produce no goods and provide free services.
• IE tend to undercut both, the traditional and IE businesses.
Skype is killing the international phone calls. Free
navigation apps have shrunk sales for Garmin, the GPS
pioneer that was once one of the fastest-growing
companies in the US.
Internet Economy
Wealth effects
• Today, nearly every resident of a developed country – and
soon most of the rest of the world – can easily afford a
smartphone, thereby gaining inexpensive access to a
universe of human knowledge and entertainment that,
until a generation ago, was far beyond the reach of all but
the rich.
• Is it possible that conventional measures of inequality and
income vastly underestimate just how good we have it?
• Depends how we value our time. Time, like money, is a
scarce resource; and, because goods and services related to
information require our attention, they are time-intensive.
Internet Economy
• We spend, on average, two hours a day with our audiovideo devices. Assume that the opportunities provided
by the rollout of broadband Internet has doubled the
utility – the pleasure – that we get during that time.
That is the equivalent of receiving an extra two hours
of free time every day
• The question then becomes whether our
smartphones, Kindles, tablets, and computers actually
do provide us that extra utility. Are Facebook „friends”
more valuable than “off-line” friends?
Internet Economy
• We do not consume goods and services in a
vacuum. Part of the pleasure we receive from
them derives from a feeling that our status is
rising relative to that of our peers.
• Keeping up with the Joneses
• „Poor but mobile” phenomenon
Internet Economy
Maslow’s hierarchy of needs
Internet Economy
IE and national wealth distribution:
• As the better off become richer much of their rising income
will not be spent on ICT-intensive goods and services. There
is a limit to how many iPads and smart phones one can
need, and their price continues to plummet.
• An increasing share of consumer expenditure is devoted to
buying goods and services that are rich in fashion, design,
and subjective brand values, and to competing for
ownership of location-specific real estate.
• Land on which the desired houses and apartments sit is in
limited supply, the inevitable consequence is rising prices.
The price of land is rising because of rapid technological
progress and exorbitant revenues of IE entrepreneurs.
Internet Economy
Labor and capital in IE:
• One consequence is the striking phenomenon
of huge wealth creation with very little labor
and capital input.
• Facebook has an equity valuation of $170
billion but employs only around 6,000 people.
• The investment that went into building the
software that runs it entailed no more than
around 5,000 software engineer man-years.
Internet Economy
IE and Labor Market
• Generates new type of entrepreneurs:
– Experience does not matter
– Formal education does not matter – university
– “Instant rich” motivation
• Employees:
– Brainy kids
– No loyalty to the firm
Internet Economy
IE and capital markets
• The low cost of capital (low interest rates)
because of the reduced demand for capital for
investment in Internet based business. If you can
start a $170 billion company in a dorm room and
then bring it to the market with just 5,000
software engineer man-years, you don’t need to
borrow much money.
• In effect, financial investors chasing return in the
real estate, currencies, gold and other highly
speculative and prone to bubbles markets.
Internet Economy
IE in capital markets
• IE gradually reconfigure a notable part of the capital
market, particularly in consumer finance, while challenging
regulators to adapt.
• Internet-driven lending and borrowing initiatives in
consumer financial services seek to compress net interest
margins, including through lower expenses and more
efficient data assessments and aggregation, and by
targeting an enhanced consumer experience.
• Such empowerment schemes could serve to reduce the
cost of financial intermediation while providing for fairer
risk-pooling outcomes and better credit underwriting.
Internet Economy
Economy is likely to suffer two adverse IE side effects:
• First, it may be inherently unstable, because the more
wealth resides in real estate, the more the financial
system will provide leverage to support real-estate
speculation, which has been at the heart of all of the
world’s worst financial crises.
• Second, it may be a highly unequal society. The
modern economy may resemble that of the eighteenth
century, more than the middle-class societies in which
most developed countries’ citizens’ grew up.
Internet Economy
Digital divide? Not technical
Fixed subscriptions:
Mobile subscriptions:
Per 100 inhabitants. b Estimate
….. but on substance?
• Distant learning education vs. traditional faceto-face education:
– transfer of knowledge
– verification of progress
– nonverbal
– networking
Internet Economy story
• Due to the rise of commercial growth of the
Internet, venture capitalists saw record-setting
growth as dot-com companies experienced
meteoric rises in their stock prices
• VC moved faster and with less caution than usual
in financing new firms, hedging the risk by
starting many contenders and letting the market
decide which would succeed.
• The low interest rates in 1998–99 helped increase
the start-up capital amounts.
Internet Economy company's business model
• It relied on harnessing network effects by operating at
a sustained net loss to build market share. These
companies offered their services or end product for
free or with losses with the expectation that they could
build enough brand awareness to charge profitable
rates for their services later.
• The "growth over profits" mentality led some
companies to engage in lavish internal spending, such
as elaborate business facilities and luxury vacations for
employees. Executives and employees who were paid
with stock options instead of cash became instant
millionaires when the company made its initial public
Internet Economy public and private infrastructure
• Cities all over the United States sought to become
the "next Silicon Valley" by building networkenabled office space and offered tax exemptions
and subsidies to attract Internet entrepreneurs
• Communication providers, convinced that the
future economy would require broadband access,
went deeply into debt to improve their networks
with high-speed equipment and fiber optic
Internet Economy aftermath
• The stock market crash of 2000–2002 caused the
loss of $5 trillion in the market value of
• Investment guru and billionaire Warren Buffett
had just one message for investors following the
bursting of the internet bubble "Value is
destroyed, not created, by any business that loses
money over its lifetime" referring to the business
model dot.coms employed - to enrich investors
through rising share prices rather than profits.
Internet Economy failures and successes
• was never able to give pet owners a
compelling reason to buy supplies online. A customer
had to wait a few days to get delivery and lost
money on most of the items it sold. Despite this, raised $82.5 million in an IPO in February
2000 before collapsing nine months later.
• However, there were remarkable and enduring
successes during this period - Amazon, eBay, Craigslist,
Yahoo, Google
• stock went from $107 IPO to 7 $ per
share, but a decade later exceeded $400 per share
Internet Economy
• Positive:
Replacing traditional channels of commerce
Internet of things
Zero marginal cost society (better use of resources)
Near free services and goods
Private currencies
• Negative:
Net segmentation
Net filtering (censorship)
Lost privacy
Hacking to destruction (latest Sony case)

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