Transcript

Internet Economics with David Prentice

Dr David PrenticeDavid Prentice
d.prentice@latrobe.edu.au

Matt Smith:

Welcome to the La Trobe University Podcasts. I'd be your host, Matt Smith. And I'm here today with Dr. David Prentice from the School of Economics and Finance. Thank you for joining me, David.

David Prentice:

Thank you, Matthew.

Matt Smith:

So, we're here today to talk about the economics of the Internet, which is a subject that you've been teaching for a while, Dave?

David Prentice:

I taught it for a few years. It's not actually currently offered at the moment. But I think when we started it, which was in 2002, the Internet was a big thing by then. We probably had students who when they started high school, for example, the Internet wasn't really there. By the time they got to university, they were still discovering it. By now, basically your average student has always lived with the Internet.

Matt Smith:

It's part of everyday life now.

David Prentice:

Yeah. It's like you went to the 1900s, they had subjects on the economics were the railroads. There's no need to teach that now.

Matt Smith:

So, what are some of the aspects of the economics of the Internet? It's now a very useful tool to make money out of.

David Prentice:

Yeah. I think there are two things. One is how a business would approach using the Internet. To a certain extent, we also approach the Internet as an issue for economic policymakers. The Internet was an innovation that dramatically lowered the costs of transmitting information. The information costs went down, both for standard information that was transmitted previously. So, for telegraphs and posts and that sort of thing, that all went down. But as it went down, the ability to send new types of information were even harder to send, whether it's video, whether it's music. One of the niceties of the work that we talked about was the rise of online role-playing games. The fall of these costs, the scale of these things is just increased exponentially. It's just one thing.

The second thing it was associated with was the Internet was a technology that had network externalities. With network externalities the benefit to the user goes up with the number of other users. The theory had already been worked out before the Internet arrived because it had been initially applied to telephones. But the Internet was just a much bigger network on a much bigger scale. So, people were very interested to apply it there. The theory has worked out, but probably the benefits were oversold. So, just because something is taking place over a network, it doesn't mean that it has a network externality.

Matt Smith:

So, there are a lot of businesses now that make their living solely from the Internet. I mean, it has really changed the way that we work because we can now work from anywhere potentially. And there's forms of jobs that never existed before, and there’s companies like Google, and there's even people who just do things like buy domain names and squat on them until people find something useful that they need that domain name for.

David Prentice:

Yes, a domain name is a valuable piece of property, a piece of ground in a sense.

Matt Smith:

I suppose you could compare it to that, yeah.

David Prentice:

And something like a search engine is new. But before that, there were extensive directories. So, whether it's the Yellow Pages, business directories or that sort of thing, it was more work. I mean, the big thing with the Internet was that it lowered the costs enormously of this and increased the flexibility. So, before, if you were looking for a business in a particular area, you had to go and find that particular directory and you had to look through it. And that directory was only accurate at the time it was produced. Now, whether it's Google or one of its competitors, you can get information that's timely, and information that wouldn't have been in the print directory.

Matt Smith:

The service is still there but the way that it is being delivered is just constantly evolving.

David Prentice:

It's evolving and it's a much bigger scale. One of the bigger factors of the Internet probably for businesses is it changed the competitive environment, selling things like books, music, that sort of thing; it's just completely different. If you're looking for second-hand books, basically you trolley around the bookstores or you might call them. You go into AbeBooks. You go into libraries. You go on eBay. You're now buying books from all over the world.

One of the effects that was noted with that is that it brought down the prices of first editions because the first editions might be scarce in a regional market. But in the global market, there are lots of first editions and even signed editions. Again, when they're all sitting up there on eBay, the price comes down and the market power disappears.

Matt Smith:

What about as a platform for scammers and things like spam?

David Prentice:

Yeah. Well, they were there before.

Matt Smith:

I suppose it got worse.

David Prentice:

It just made things much easier.

Matt Smith:

Like Jack and the Beanstalk. If these networks were around there, you'll be selling your cow for peanuts.

David Prentice:

Yeah, exactly. I think, again, the effect is there. Just lower the costs. There are people who started utilization of AMP. This company sent out letters offering, "We'll sell the shares for you," again, at a ridiculous price, who will buy them from you and say you don't have to deal with all the hassle of dealing with stockbrokers and things like that.

And that was basically a scammer. They did it by post, packages of several hundred dollars. And so, it must have been worthwhile for them to send out those letters individually. What we spam now is for essentially free. So, even if the take-up rate is much, much lower than what was probably happening, once you get to those email addresses, just send it out even if the take-up is really large.

Matt Smith:

It takes one person to fall for it, I suppose.

David Prentice:

Well, I think we saw this with the scam letters for the Nigerian and all the variations. You only need to send many to easily cover the costs of setting it up online.

Matt Smith:

I think the figure last year, one of the ones that I read was $12 million had been shipped to Nigeria last year from Queensland alone.

David Prentice:

It's unbelievable. And the thing is, I think the first time I saw that scammer was in early 2001. And even then it was clear that it was too good to be true. And so, with all the stuff that has been around, that's an amazing figure.

Again, we talked about it in this class; it's about intellectual property. So, really Internet is about transmitting information and an awful lot of other things, whether it's books, whether it's music, whether it's video, TV, basically just information. And they could be transmitted at much lower costs. So, broadband in the first few years we thought it was just starting to go, but that has been a big thing, making it much easier to send music and now movies, the whole thing.

Matt Smith:

Actually, the Internet has entirely changed the way that we listen to music. I mean, it's a lot easier to buy something off iTunes than to go out and buy a CD. One of the things that really have come up is with copyright. Even with music rights, music industry is quite worried about losing revenue to piracy. Is that worry founded? Is that sort of thing founded?

David Prentice:

The evidence is really mixed. I should say, it's very difficult to get good data on this. The conclusion from the empirical work is that it hasn't been strongly established. It's still controversial, whether there is actually a significant effect. Probably, the effect again is just it made it much, much easier on a much bigger scale to do what people were doing before. They copied LPs onto cassettes. They burned CDs. They marketed video clips. They taped Rage or whatever. What the Internet did was just it made it very, very easy.

Matt Smith:

Most of the thinking seems to come down to that if a person likes an album, they will buy it. And I know for myself if I really like the album, I'll go out and buy it. And now, I'm going to the point where if I really, really like an album, I'll go and buy it on vinyl just because I'm a massive nerd that way. But I'm going to hate myself for not remembering this properly. But I think it might be a band called Spiderbait who put their newest albums online for free on their website. And they said, "Look, you pay what you think it's worth."

David Prentice:

It was Radiohead.

Matt Smith:

Was it Radiohead? That was one of their best-selling albums, wasn't it?

David Prentice:

Yeah. I think it is one of their best-selling albums because people paid what they thought it was worth. And they ended up making a lot of money because they weren't going through the recording label that way. And because the thing is, with the major costs of recording, there's a famous essay by Steve Albini about how much money do you get out of music. And it's pretty scary how little one actually gets.

Matt Smith:

Yeah. This is directly into their pocket.

David Prentice:

Yeah. I know from my own music experience. Basically I've bought things because I've heard them on Internet radio or I've seen them on YouTube. These are things that I would have never bought. There are two arguments about it. One is that downloading is taking sales away from people who would have previously bought it. The other is it's expanding the market. The people are getting access to music that they wouldn't have otherwise got to and then they end up buying it. The other way it could also increase revenue is to require the sales of concert tickets and things and other merchandise.

Matt Smith:

What about advertising on the Internet? Is that as effective as it is in something like newspapers or billboards or the television?

David Prentice:

Different sorts of advertising is effective to different extent. The banner ads on the Internet sites, advertisers are willing to pay good money to put on popular sites, even on sites that are relatively specialized. I read a number of economics blogs which I doubt would have a large readership. There's a market on Facebook, though the Facebook ads tend to be almost more like lower-level ads. Advertisers are willing to pay much, much less. So, I think the figure was a banner ad could be twelve dollars fifty for a thousand views, whereas on a social networking site it could be fifty cents.

Matt Smith:

So, the advertising is less effective on a social networking site like Facebook?

David Prentice:

Yeah. Basically, when people go to Facebook, they're really focused on whether it's the news or whether it's going to look at people's photos or to do a quiz or something like that. One of the things about Facebook, the area that's most valuable is the banner at the top. And the Facebook ones are all down their site.

Matt Smith:

Yeah, they don't have top banner.

David Prentice:

They don't have a top banner. Maybe they'll get more if they will allow advertisers to use the top banner.

Matt Smith:

Don't put that into their heads.

David Prentice:

I think that with the social networking, where the value is coming from is not from these ads but more through their ways to improve word of mouth.

David Prentice:

Social networking sites or even blogs are a way to get that sort of information out. Some of the other issues we talked about, a lot of that are about telecommunications. There's a lot of competition policy issues with monopolization. So, again, this was not so much specific to the Internet. Google is sort of starting to get that a bit now.

But I mean, when we were doing the course, it was right after the Microsoft trial. So, that was again software and IBM before that. Again, with these markets, where there can be networks and all these, there's a tendency for monopolization. It may not be market power but it's certainly monopolization.

Well, eBay is a monopoly that way itself as well, these people who just make their living off eBay, these people who had shops but don't actually have a shop anymore are still on eBay. Basically, a second-hand bookstore, which I used to visit, I saw years down in calling that they're on eBay now. They're basically online. They went completely online. So, they live up in the country somewhere and they'd rather live there. They're buying stuff on eBay as well.

Matt Smith:

David Prentice, thank you for your time today.

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