Internet Economy - Aalto...France Germany Japan Sweden UK USA USD 50000 40000 30000 20000 10000 5000...
Transcript of Internet Economy - Aalto...France Germany Japan Sweden UK USA USD 50000 40000 30000 20000 10000 5000...
InternetEconomy
OlliMar1kainenAutumn2018
Whatweexpectyoutolearn• Industrialrevolu1ons• Produc1vity• InternetEconomy
– ICT-areasandtheirchangeasabasis– Innova1onintensiveSchumpeteriancompe11on– Dominantdesigns– Switchingcosts– Networkexternali1es– Complementari1es– Asymmetricinforma1on– Newgrowththeory– Systemicstructures– Internetbusinessmodels
• References
Industrialrevolu1onsaredisplayedasproduc1vityrateincreases
Industrialrevolu1ons
• Ineconomicstechnologymeansarecipehowtomakeproductsfromrawmaterials(notonlyatechnicalartefact)
• Theapplica1onofatechnologycomesintwophases–productinnova1onsandprocessinnova1ons(1stlecture)
• ThesephasesarealsocalledasTechnologyPhaseandDiffusionPhase
• Inthediffusionphasethetechnologyisappliedinindustriesandtheproduc8vityinorganiza1onsimproves
• ThemajortechnologicalbreakthroughscanbeseenintheGDPgrowthrateofna1ons
• TheincreaseofgrowthrateiscalledanIndustrialRevolu0onwhichmeansincreaseinproduc8vity:
GDP/popula1on=GDP/workhoursxworkhours/popula1on,i.e.Livingstandard=Labourproduc1vityxWorkamount
600182018301840185018601870188018901900191019201930194019501960197019801990200020102016
China
Finland
France
Germany
Japan
Sweden
UK
USA
USD50000400003000020000
10000500020001000
Source:MaddisonProjectDatabase,version2018.Bolt,Juda,RobertInklaar,HermandeJongandJanLuitenvanZanden(2018)
GDPpercapitagrowth1820-2016
10001820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2016
USD5000040000300002000010000500020001000
AverageGDPpercapitagrowth
FirstIndustrialRevolu1on(diffusionphase)
SecondIndustrialRevolu1on
ThirdIndustrialRevolu1on
Whythegrowthrateisnotincreasing?Whatistheproblemindigitaliza1on?
IndustrialRevolu1ons
• FirstIndustrialRevolu1on(diffusionphase)1830-1920– Steam,industrialproduc1on,railway,telegraph
• SecondIndustrialRevolu1on1920-1980– Electricity,chemicalindustries– Car,telephone,radio,television
• ThirdIndustrialRevolu1on1980-– Informa8onandCommunica8onTechnologies(ICT)– Computer,digitalnetworks,PC,GSM,Internet,Apps– Knowledgeasaninputinproduc1onthathasincreasingmarginalproduc1vity(PaulRomer,Nobelprice2018)
ThirdIndustrialRevolu1on
TechnologyphaseNooffirmsindex
Diffusionphase
1980199020002010
produc0vityincreasesherebyprocessinnova1onsstrongcomplementari1esbusinessstructureredefinedincrementaldevelopment
DominantDesigns
Sources: Abernathy and Utterback 1978 Christensen 1997, OECD 2003
ICTfocusshiisfromtechnologytoprocessesandservices:
Cf.Electricity1880-1929
ICTDiffusionPhase
Source:EUsta1s1cs
ICTDiffusionPhase
• ICTisusedinallindustriestoincreaseproduc1vity• InFinland2/3oftheICTgeneratedGrossDomes1cProduct
(GDP)hasbeenbasedonICT-industryproduc1on• InUSA2/3oftheICTgeneratedGDPisbasedonICTusein
differentindustries• ITincreasesproduc1vityanaverageof8-18%whenitis
combinedwithorganiza8onalandprocesschangesanddatacommunica8ons(ETLA2003,OECD2003).
• Mobilecommunica1onscanincreaseproduc1vityanaverageof40%(ETLA2004)
Produc1vityeffectsofICTinfirms
-40 % -20 % 0 % 20 % 40 % 60 %
Computers
Internet
LAN
Services
Old
Middle
Young
Maliranta and Rouvinen 2003
Produc1vityeffectsofICTinfirms
-40 % -20 % 0 % 20 % 40 % 60 %
Computers
Internet
LAN
Manufacturing
Old
Middle
Young
Maliranta and Rouvinen 2003
Produc1vity• Produc8vityismeasuredasthera1oofoutputvolumeto
inputvolume• Differentproduc1vi1esareobtainedsuchasvalueadded
basedlabourproduc1vity=producedvalueadded/workhours
• TotalFactorProduc8vityTFPismeasuredoverallinputs(work,capitalandotherinputs)andexplainsthegrowthpossibili1es
• Produc1vitygrowthrateisthemeasureoftechnicalchangeandcanbeusedtoiden1fytechnologycycles
• Knowledgeandskillsareessen1alwhennewtechnologyisdevelopedandapplied
Newgrowthisbasedonknowledge
NewGrowthTheory• IneconomicstheproducedoutputQismodeledas
produc8onfunc8onFasfollowsQ=F(L,C,H),whereL=labor,C=capitalandH=knowledgearefactorsofproduc8on
• TechnologicalchangecreatesabederF• WiththesametechnologyFsomefirmsmaybehavemuch
bederthanothers• Thisisaresultofknowledgesuchaseduca1on,skillsand
patents• Forinstance,ecosystemsareknowledgebasedindustrial
systemsthatmayimproveproduc1vitymuchoverna1onalaverages
• Newgrowththeoryemergedfromthisobserva1onthatinforma1onandknowledgearefactorsofproduc1on
Nobelprice2018:PaulRomer
Source:Ilkka
Un1l1980’stheincreaseofproduc1vitywasbasedoninvestments,whichsubs8tutedlabourbymachines.Latertheincreaseoftotalfactorproduc8vity(TFP)hasbeenthemajordriverofgrowth,whichmeansthattheproduc1onfunc1on(“recipeofmaking”)hasbeenchanging.PaulRomerwasabletoexplainthesechangesbyaddingin1986theknowledgeasafactorintheproduc1onfunc1onmodel.Thiscreatedtheso-calledNewGrowthTheory,alsocalledasEmbeddedGrowthTheory(Romer1986).Innova1ons,patentsandknowledgegiveadvantagetotheirownersandcreatemarketfailuresinbusiness.ThesearetypicalinInternetEconomy.
NewGrowthTheory
PRODUCTIONFUNCTIONF(K,L,H)
CAPITALKsuchasmachines
LABOURLsuchaspeople
KNOWLEDGEHsuchaspatents,soiware,educa1on
Availableinanindustrialdistrict,industrialcluster,competenceblock,plaoormorecosystem,asasystemicfactor.Skillsincreasewithallpartnersandonthevaluechain.SeeAcemoglu2015anditsreferencesforins1tu1onalfactors.
FactorsofProduc1on:
Interneteconomyisbasedonmarketfailures
Characteris1csofInternetEconomyInternetEconomyisbasedonseveralmarketfailures.• ICT-areasandtheirchangeasindustrybasis• Innova1onintensiveSchumpeteriancompe11on• Crea1vedestruc1onandproduc1vityimprovements• Patentsas1melimitedmonopolies• Dominantdesigns• Switchingcosts• Externali1es• Complementari1es• Asymmetricinforma1on• Systemicstructures
– Secondunbundling– EcosystemsandPlaoorms– Internetbusinessmodelsbypasstradi1onalmodels
Businessecosystemshaveoienthesefeatures,whichpreventcompe11on,andarehencemarketfailures!
.
.
.
ICT-areasandtheirchangeICT(Informa0onandCommunica0onTechnology)industriesarebasedonInforma1onpresentedandtransferredindigitalform:
• ContentIndustry– Mediabecomesdigital(E-media)
• Consumerelectronics– Audiovisualreplayandbroadcasttechnologies
• ComputerIndustry– PCtopersonal,consumerandmobile
• TelecomIndustry– Broadbandnetworks,mobileandinternetservices,digital
mul1media
ICT-areasandtheirchangeICTLawsofGrowth:
• Moore’sLaws: MIPSx2every1.5years
TRs/Chipx2every2years
Chipsize-25%every2years
• Guilder’sLaw:bpsx3eachyear
• Shugart’sLaw: Diskcapacityx10every4years
Price/bit-50%every18months
• Edholm’sLaw:Radiobw=fixedwith8yeardelay
• Metcalfe’sLaw: NetworkValue=(NoofUsers)2
InternetProtocol(IP)asnetworkandWebasuserinterfacestandard
HighInternetandMobilePenetra1on
ICT-areasandtheirchange
0.1
1
10
100
1000
10000
100000
1000000
2000 2005 2010 2015 2020
CPU PC (GHz)CPU HandheldsMemory PC (GB)Memory HandheldsFixed network (Mbps)Wireless network
ICT-areasandtheirchange
VR=VirtualrealityOTT=Over-the-topcontentsuchasNeoix(alsoVOD=VideoonDemand)
Innova1onintensivecompe11on• Innova8onisanideawithcommercialpoten1al• Innova1onsdriveindustrialdynamicsandproduc8vity• Schumpeter(1911)Thetheoryofeconomicdevelopmentand
(1942)Capitalism,Socialism,Democracy• SchumpeterintroducedtheconceptCrea8veDestruc8on,
whichmeansthatnewinnova1vefirmstakeoverbusinessfromoldandlessinnova1vecompanies
• Crea1vedestruc1onexplains30-50%ofproduc1vitygrowth• Successfulinnova1onsanddominantdesignsgiveashort
1memonopolytotheirowners(e.g.iPhone)• Similarly,plaoormsandecosystemsmaygivestrongbusiness
advantagestotheircreators(e.g.Apple,Google,Amazonetc.)• Patentedinnova8ongivesamonopolyfor20years
Example:Innova1onecosystems• AppleiPhoneandGoogleAndroidphonescreatedstrong
ecosystemswithAppsmarkets• InterviewofRistoSiilasmaa,theChairmanofBoardof
Nokia,YLE15.10.2018:”Wesold300000Lumiaphones(withtouchscreenandWindows)permonthin2012butAppleiPhoneandAndroidsold300000perday.Itwasthenimpossibletocatchupbecausetheapplica1ondeveloperspreferredthesetwofastestgrowingopera1ngsystems(iOSandAndroid).”“WefinallydecidedtosellNokiaMobilePhonestoMicrosoifor5,5billionUSDin2013.”
Source:TekniikkajatalousSeealsoExternali1es
Produc1vity
Defini1onofProduc1vity:
Produc1vity=Y/X,where
Y=output(ineuros,tons..)X=input(hours,labourcosts,..)
Usuallyonlyrela1vechangesarecompared(%).Thedefini1ondependsonwhoisdoingtheanalysis:
Na1onaleconomy:Y=industryvalueadded,X=labourhoursFirm:Y=profit+labourcosts,X=labourcostsTechnicalprogress(technologicalinnova1ons):87%ofthegrowthinUSofthegrossoutputperperson-yearwasadributabletotechnicalprogressin1909-1949(Solow,1957).
• Amajorproduc1vityimprovementinindustriesresultsfromtheCrea8veDestruc8on(Schumpeter1942),whereenterpriseswhichhavenewandbederwaystocombinefactorstoproductsorservices(i.e.whichhaveabeHerproduc8onfunc8on)winmoremarketsharefromtheoldfashionedfirms(withanoldproduc1onfunc1on),andasaresultpartoftheoldfirmsgofinallyoutofthemarket
• Compe88onbetweenfirmsisessen1alhere,firmswithbederproduc1onfunc1ongetlimited1meadvantage
• TheCrea8veDestruc8onexplainsmorethan30-50%oftheproduc8vityimprovements.Therest(lessthan70-50%)followfromdevelopmentac1vi1esinsidetheorganiza1ons(BöckermannandMaliranta,2007)
• Thesefeaturescreateindustrialdynamics
Produc1vity
Crea1veDestruc1on
Produc1vityindex
Time
NewProduc1onFunc1ons(howfactorsarecombinedas(b)(c)productsorservices)
Produc1onFunc1on(a,blue)withorganiza1onsthatusethisoldmodelvanish.NewProduc1onFunc1ons(b,green)andlater(c,red)comeintouse.
Theproduc1vityimprovementinphase(b)byorganiza8onaldevelopment
Theproduc1vityimprovementfromCrea8veDestruc8on
(a) FIRM
DominantDesigns
• DominantDesign(DD)isthewinningstandardacceptedbythemarket– Notnecessarilythebestpossibleavailable– Sufficientlywellperforming– Oiensimpleorelegant
• Publica1onandpatentamountshaveoienmaximumsomeyearsbeforetheDD(Ehrnberg)(TechnologyPhase)
• ThenumberoffirmsinvolveddecreasesstronglysomeyearsaiertheDD(AbernathyandUderback)
• Applica1onofthenewDDcon1nuesinfirmswithincrementalandprocessinnova1ons(DiffusionPhase)
Example
• Mobilephonedominantdesigns–seethe1stlecture– Keyboardandscreenonthephone– Shellphone– Touchscreenphone– Applica1onmarketsforservices
• Todaythedominantdesignsareoienbundledwithecosystems
Switchingcosts• Switchingcostsincurwhencustomersswitchfromone
suppliertoanother.• Examplesofswitchingcosts:
– Theeffortneededtoinformcolleaguesaboutanewtelephonenumber
– Thecostsfromlearningtheinterfaceofanewmobilephonefromadifferentbrand
• Switchingcostsinclude– Exitfees– Searchlearningandemo1onalcosts– Equipment,installa1onandstart-upcosts– Financial,psychologicalandsocialrisk.
Example• Numberportabilityinsmartphones
– SeveralEuropeanmobileoperatorsleasedthemobilephonetogetherwiththemobileconnec1on(withmobilenumber),itwascalledbundlingthephoneandnumber
– Itwaspossibletoswitchtoanothermobileoperatorbutyouhadtopaythepreviousleasingperiodbill,too
– Thispreventeduserstoswitchoperatorstoooien– InFinlandthenumberandphonewereseparate,andwhennumberportabilitybecomecompulsoryinEUin2003,theFinnishusersswitchedtothecheapestoperatormany1mes,andmobileservicesturnoveralmosthalvedinoneyear
Externali1es• Externali8esareconsequencesofeconomicac1vi1esto
unrelatedthirdpar1es,e.g.pollu1on,educa1onleveletc.• Networkrelatedexternali1esarecallednetworkeffects• Networkeffectcreatesvaluetoapoten1alcustomer
dependentonthenumberofcustomersalreadyowningthatgoodorservice
• Examples:soiware,telecomservices,web• Metcalfe'slaw:thetotalvalueofagoodorserviceis
roughlypropor1onaltothesquareofthenumberofcustomersalreadyowningthatgoodorusingthatservice
• Cri8calmass:networkeffectbecomessignificantaieracertainamountofcustomers
• Sideeffect:thepurchaseofaservicebyonecustomerindirectlybenefitsotherserviceusers
Externali1esThesuccessofiPhonesandAndroidphoneswasspedupbytheApplica1onmarketexternali1es:
Source:hdps://play.google.com/storeSource:hdps://www.apple.com/ios/app-store/
SeealsoComplementari1es
Complementari1es• Thecommercializa1onofaninnova1onissystemic,itmust
bedoneinconjunc1onwithComplementaryassets,suchas– Manufacturing– Marke1ng– Distribu1on– Services
• Complementaryassetscanbegeneric,specialized(withdependencebetweenpar1es)orcospecialized(mutualdependencebetweeninnova1onandasset)
• Missingcomplementari1esoienexplainwhysomanyinnova1onsfail
• Tightappropriabilityregimessuchaspaten1ngortradesecretsprotectinnovatoragainstimita1onandcompe11on
Complementari1es• Underwhichcondi1onshouldfirmscollaboratetoaccess
complementaryassets?Incorporatesdynamicsoftechnologicalchange.
• Twokeydimensions:(i) Appropriabilitycondi1ons=thepossibili1estoprotectR&Dand
innova1ons(e.g.patents,copyright,complexity,lead1mes)(ii) Natureofcomplementaryassets=externalassetsthatinnovators
needtocommercializetechnologies– Genericassets– Specializedassets(unilateraldependency)– Co-specialisedassets(bilateraldependency)
• R&Dalliancesareviableifappropriabilitycondi1onsareweakandcomplementaryassetsarenon-generic–thisistypicallythecaseintheearlyphaseofatechnologylifecycle
Complementari1esStart: you have new innovation
Innovation requires
complemenatry assets?
Commercialiseimmediately
Complementary assets specialized?
Specializedasset critical?
Weakappropriability?
Cash position OK?
Competitors better positioned?
CollaborateYes
Yes
Yes
Yes
Yes
No
No
No
No
No
Yes
Collaborate
Collaborate
Collaborate
CollaborateDevelop assets
yourselvesNo
(Source: adapted from Teece 1986)
AsymmetricInforma1on
• Asymmetricinforma1onoccurswhenonepartyoftransac1onhasmoreorbederinforma1onthantheotherparty.
• Exampleswithseller:used-carsalespeople,stockbrokers,realestateagents
• Examplesofbuyer:lifeinsuranceforabuyerwithheavysmokinghabits
• Interneteconomyhasaneffectoninforma1onasymmetrybyallowingtheuserstoacquirepreviouslyunavailableinforma1onsuchaspricesofrecentsalesortransac1ons,foreignprices,selec1onofavailableusedcars,etc.
• Butalso–fakenews
Secondunbundling• Thefirstunbundlingallowedthespa1alsepara1onof
factoriesandconsumers• Thesecondunbundlingspa1allyunpackedthefactoriesand
officesthemselves.Theoldparadigm–essen1allytradi1onaltradeeconomics–wasusefulforunderstandingtheimpactofthefirstunbundling(Baldwin2006)
• Understandingthesecondunbundling(whichhasvariouslybeencalledfragmenta1on,offshoring,ver1calspecializa1onandslicingupthevalue-addedchain)mayrequireanewparadigm,especiallywhenitcomestotheoffshoringofservices
• Secondunbundlingdistributesna1onalvaluechainsandclusterstointerna1onalvaluenetworks(Pajarinenetal.2010),someofwhichdeveloptoecosystems
NokiaN95phoneretailprice€546decomposedtohardware,soiwareandothervalueaddedin2007:
ThevaluebreakdownofNokiaN95bysupplychainpar1cipant(%):
Systemicstructures• Industrialclusterisageographicallyproximategroup
ofinterconnectedcompaniesororganiza1onsinapar1cularfieldlinkedbycommonali1esandcomplementari1es– Innova1on,produc1vitygrowthandnewbusinessforma1oncanbeexplainedbyawellworkingcluster
– Increasingsophis1ca1onofcompe11ongrowstheimportanceofcluster
• Competenceblock(Eliasson)explainswhichsystemicactorsareneededtocarryanideathroughaninnova1ontosuccessfulbusiness
• Ecosystemisaglobalindustrialsystembasedondominantdesigns,plaPormsandIPRs
CompetenceBlock
• CompetenceBlockcreatesasystemicviewoffirmsandexplainstheselec1onofwinnersandlosers
• Actorsrepresen1ngdifferentlevelsofknowledgearenecessaryinthecompetencebloc:1.Competentandac1vecustomers2.Innovatorswhointegratetechnologiesinnewways3.Entrepreneurswhoiden1fyprofitableinnova1ons4.Competentventurecapitalistswhorecognizeandfinancetheentrepreneurs
5.Exitmarketsthatfacilitateownershipchange6.Industrialistswhotakesuccessfulinnova1onstoindustrialscaleproduc1on
Source:Carlsson&Eliasson2003
Ecosystems• Ecosystemisaninterna1onalvaluenetworkwith
commonali1esandcomplementari1esprovidedbyitsactorsandmanagedbyaleadingorganiza1on
• Ecosystemsarecharacterizedby(Moore1993,2006,GawerandCusumano2002,Gawer2009,KenneyandPon2011,Adner2017)– Commonvisionsharedbytheactors– Commonplaoormandstandardsusedbytheactors,alsocalledasthe”solu1onstack”
– IPRdevelopedbytheplaoormowner(ifcommercialecosystem)– Highinterdependencebetweentheactors– Highpoten1alforinnova1onbyeachactor– Valuecapturebasedone.g.dominantdesignsandcustomerlockin(ifcommercial)
– Entrybarriersbasedone.g.proprietaryelementsandIPR(ifcommercial)
– Customerlockup
InternetBusinessModels• ThegrowthofInternetisnotthesamephenomenonasthedevelopmentofInternetEconomy
• TheInternetopenedseveralsectorsforbusinessentrantsbypassingtradi1onalchannels:– PortalsservingConsumertoConsumer(C2C)– E-commerceasBusinesstoConsumer(B2C)– Brokeringbetweenbusinesses(B2B)– Subs1tu1onofpreviouselectronicsupplychainmanagementsystemsinsideandbetweencorpora1ons(B2B)
• 85%ofInternetbusinessvaluegloballyliesinB2Bandbackofficesystems(Kogut2003)
Summary
• NewGrowthTheoryexplainsthefastproduc1vityincreaseandgrowtheffectsinnewindustrialsystemssuchasplaoormsandecosystemsbytheapplica1onanddistribu1onofknowledgeintheformofinnova1ons,patents,industrialstandards,competenciesandskills
• Theplaoormorecosystemownersusuallyhave1ghtappropriabilitycondi1ons(industrialstandardownerships,patents,trademarksetc.)
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