Regulations will slow down Internet Economy Growth

adam smith like
Adam Smith would have “liked” the Internet Economy

Adam Smith published his famous book “The Wealth of Nations” (full title “An Inquiry into the Nature and Causes of the Wealth of Nations”) in 1776. Among others he observed what he called “The Invisible Hand” that helps society develop. Smith argued that even though economic players are pursuing their own interests they have to trade with others and thus balance and overall growth is achieved.

Smith believed those in power can’t be expected to treat public goods as their own. Overspending, bad management, corruption are bound to appear when governments achieve enough power. The author believed government power should be limited, markets should be free and self interest is the key to economic development. These requirements, however, have to work together. Otherwise the system can’t work. Self interest will drive those in the upper economic echelon into lobby groups, where they will ask and “purchase” favors from those that instill law and order. Such actions will hurt smaller economic players and increase wealth gap. In time the wealth gap will grow exponentially up to a moment society will have to restructure itself and as history taught us these kind of changes aren’t usually peaceful.

The global economy is far from free, government power is anything but limited and economic actions based on self interest are reserved for a select few.

Internet – the (almost) perfect market

Internet has proven that it is the closest thing we have to what Adam Smith described as a perfect market. It’s self regulated, markets are (mostly) free, governments can’t really control it and most of the economic players act in their self interest. Some people don’t like that.

In the Internet Economy consumers dictate the rise and fall of the economic agents. With the rise in Social Media the consumer influence increases ever more. However – it seems that recent events confirm Smith’s thoughts:

“People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.”

Think about SOPA, ACTA, and other such. The Internet has to stay as deregulated as possible if we expect it to continue its growth.

Internet Economy to reach $4.2 trillion by 2016. 5 reasons this figure is an understatement.

In a report made public earlier this year Boston Consulting Group stated that the Internet Economy in G20 countries is expected to reach $4.2 trillion by 2016. The company also expects the number of internet connected users to reach 3 billion (just for the record – there are now approximately 2.2 billion).

At first sight this might seem like a huge figure but I believe that the company understated the importance and potential growth of the internet economy. Yes, I believe $4.2 trillion is an understatement. Why?

1. $4.2 trillion means less than 7 times Apple’s market cap. Yes, Apple might be the largest company ever, in terms of market capitalization but it’s just one company and it means the combined brain and sales power of less than 50.000 employees.

2. The internet economy is still in its infancy. We have just began discovering viable business models that work on the Internet. Companies such as Apple, Google or Amazon innovated and improved on existing business models but are yet to reach their full potential. Amazon for example, has launched its first Kindle device 5 years ago. After half a decade its customers are buying more ebooks than printed editions. This kind of growth could not be expected or planed.

3. We do not have the economic models to understand Internet’s impact. Most of our economy is based on theories that were thought of and published in a time the concept of Internet was closer to science-fiction than academic research. More recent economic theories such as the behavioral economics approach are closer to reality and better at predicting the evolution of the internet economy.

4. The report understates the economic importance and impact of mobile internet. Fixed lines have helped us reach a 32% internet penetration. Mobile connections exceed in many developed and developing countries 100%. Smartphones and internet connected devices will replace older mobile devices. In less than 10 years I expect Internet penetration to reach past 70%. With such a high adoption rate Internet Economy is bound to exceed greatly the $4.2 trillion figure.

5. The figures are probably based on current growth and vastly underestimate innovation. Innovation is the key factor in understanding internet economy growth. The large ecosystem comprised of entrepreneurs, investment funds and talented engineers has taken the world by storm for the past 20 years. Ever since the dot com bubble this ecosystem has had its fair share of skepticism that is still deeply embedded in the economic world. Year after year pundits are proven wrong by this ever increasing sector. Innovation can’t be planned or measured very well for now but it is there and companies that foster innovation manage to increase their market share.

The internet economy has already surpassed in some of the G20 countries some very heavy economy sectors such as energy, agriculture or automotive. This trend will continue. By 2016 industries that have not been surpassed by the Internet will be the exception, not the rule.

Social gaming architecture

“Your friend sent you a request” says my Facebook notification. That must mean one of my Facebook friends is playing one of Zynga’s or Konami’s social games. You know the type – manage a farm, a city or something close to that. You’ve finished building a windmill – what an achievement –  share it with your friends. Need your crops faster – oh, no – share it with your friends.

Zynga’s top brand: Farmville

These type of games, however annoying are highly addictive (at least for a moderately short period of time), highly viral and for a while they seemed to be the grim future of the gaming industry. After a fast growth period Zynga reported a loss of $400 million dollars in 2011. Not because of how bad its games were doing (Zynga owns 2011 top 5 most played games on Facebook and its revenues were $1.14 billion dollars). No, they payed “stock-based compensation expense for restricted stock units issued to employees”.  $510 million dollars in stock-based compensation it did not had to pay until it went public.

However bleak Zynga’s future might look they still own some of the most popular social games and they started to adapt to the rising trend of mobile-based gaming (tablets and smartphones).

Its main competitor, Konami, is not doing too bad, either. Actually Konami’s social gaming division reported a 77% increase in revenue. Given the sharp rise in Zynga’s and Konami’s revenue we can see clearly that social gaming is a great investment . What makes it so?

Social gaming is highly addictive

Social gaming makes use of some incentive design based on social activity and achievements. Social gaming companies use human psychology to create levels of addiction close to gambling and these games usually have slow learning curve, use many motivators to commit users to revisit the game (plant a crop, come back after 10 hours to use it) and use instant gratification to convince users to purchase upgrades.

Behavior economics in social gaming

Interestingly, most of behavior economics principles can be found in these type of games: from peer pressure to “doing the right thing” (don’t let your crops die) and clearly seeing the outcome of one’s action – all add up to a picture where behavior economics seem to be the baseline for virtual economic architecture in games such as Farmville.

The virtual life in social games

Collectible real-life World of Warcraft coins

Reality perception is altered when such games are played and playing the game seems to be more of a daily task then entertainment. To understand the high interest users have in this type of gaming we must remember that in our day to day life few things seem to add up like the virtual life in social games does. Click a button – start building a farm. Click another – plant crops. Come back after a day and you can cash in your hard earned coins that you can reinvest. It is a little harder to do that in real life. Sometimes – no matter how hard we try achievements don’t seem to pup-up.

We expect an end to our actions. If possible a fortunate one. We have been planting crops and harvesting them for thousands of years. Our bed time stories always have an end. The movies we watch program us to expect an introduction, action and the grand finally. Our lives don’t usually have that and this is one of the causes of modern stress and depression. Having a secondary life where everything is simpler and more colorful is a reward in itself.

The architecture of social gaming

Most social games have a pretty simple story that gets you hooked. The first form of profitable social games were the MMORPGs (Massive Multiplayer Online Role Playing Games) where you played a character and took possession of his actions. Other players would join in and you would search for coins, artifacts and battle different monsters or other players.

What are the lowest common denominators of most successful social games?

1. The story – as we are used to stories from infancy we best deal with adopting a new concept if we receive it in a story. Weather you are living in a future where aliens are threatening to take over the universe, a village where your survival depends on how well you manage your farm or a fantasy world where elves and trolls are trying to get you – you need a story. Without a story no game-addiction can develop, there is no understanding of one’s actions and the game flops.

2. The setting – the environment is really important as that is the context for the players actions. If you are in a farm you don’t usually battle star ships. There is no need for extra mana to cast a spell and there are, usually, no monsters you have to slay.

3. The character – people play games to foster their imagination and to escape the usual reality. That’s the same reason we watch movies – we need alternate realities where we can embody some other character.

4. The economy – whether players are searching for extra stamina bottles, artifacts, coins or other incentives they do that because they understand the need for an alternate economy. Economics are so well embedded in us that social games that have no economic notion can never become mainstream.

5. The limitations – social games have to have limitations. Without limitations there are no achievements. Without achievements there is no psychological  gratification. No limits – no endorphin.

6. The incentives – what makes users tick? Incentives. Search for an artifact and you can defend your castle. Develop more farms and you can buy more land. Upgrade your ship and you can win the battle you previously lost. Incentives makes people act. Just as the real world economics incentives are the carrot that works better than the stick.

7. The social features – imagine playing tag by yourself. It isn’t too fun, is it? We are deeply social animals and everything we do is based on how other people react to our actions. Social gaming evolved so fast that it makes it so easy for users to attract peers and develop common interests.

What social gaming lacks right now?

Most of what we now call social games have developed strong social ties, a great system of incentives, some kind of limitations, some kind of game economics but they lack the story and characters. It’s not all about the graphics. The user has to understand the back story and understand who is he in the game. Just like our real lives the most important things about how we relate to the world are the things that shaped us, who we are and who will we become.

Zynga’s social games lack the story and the characters which is not much of a problem right now but people will get bored with the shiny incentives and peer pressure. For a long term user retention social games need to develop personas and epic stories.

Thomas Metzinger, a German philosopher, stated in “The Ego Tunnel” that we understand reality through a scaled down replica of the reality surrounding us. He based his research on neurological research, human psychology studies and artificial intelligence tests. Why is that important for social gaming? If users are not fully immersed in the gaming reality – they can easily abandon games. The game world is not really a personal perception of reality. Social games are shifting the perception of what is real and what is not but only for a limited time.

In the future I expect social games to develop the social gaming worlds to an alternate reality and developing characters. It’s happening right now with World of Warcraft. There are 10.2 million paying subscribers, fully immersed in the story and characters Blizzard created.

Bonus takeaway

In 2010 we wrote a study on Facebook Gaming. Most of the assumptions and predictions turned out to be right. Here is Gaming on Facebook .

Part two of this article will come soon and will focus on the economics of social gaming.

 

Internet in my car?

The internet connected car has been a great concept for quite some time now. As 3G connections  become more and more popular and 3G coverage extends to even the most remote areas car manufacturers have seriously taken into account adding internet to your car.

iSuppli’s telematics analyst Richard Robinson expects 25% of all cars to be internet connected in the next 5 years. Changes in auto industry in-car entertainment are expected to be as great as changes in entertainment post and pre dial-up internet connections.

audi connect
Audi Connect will be available to the 2012 luxurious models Audi A6, A7, A8

Intel expects the internet connected car to be the third fastest growing technology, after smartphones and tablets. Audi, Ford, Kia and Nissan are among the first to adopt such technology. Audi has equipped the A7 with a Wi-Fi system callled Audi Connect that turns the car into a hotspot able to host 8 connections at a time.

Ford has also jumped the wagon with its Microsoft powered Sync My Ride and has solved the connectivity issue with a simple internet stick solution.

In car internet killed the radio star

In car internet radio is now an option with MyFord Touch as drivers can tune in to their Pandora accounts and listen to their favorite stations.

Google, Apple, Samsung, Microsoft and LG are already testing connected cars concepts and gadgets. Google has recently confirmed that their self-driving cars have passed the 300.000 miles threshold incident free.

In car internet is surely to develop into a huge industry that will benefit car makers, entertainment and media companies, telecom operators, mobile device producers and of course – the buyers.

How does internet change the auto industry?

As consumers get more attached to their mobile devices and start expecting everywhere connectivity the auto industry will start monetizing on this trend. But that’s not all. What else should we expect? Here are a few consequences of increasing in car internet adoption:

  1. Increase in popularity and subscriptions to internet radios: there is a 52 minutes daily timeframe when 44% of all Americans listen to in-car radio. That margin will turn into revenue streams for internet radios and other internet music streaming providers.
  2. Location-based advertising will lead to a decrease in outdoor advertising: as advertisers will find it easier and more efficient to target consumers on their daily routes, by estimated income and purchase intents, billboards will become obsolete.
  3. Car traffic and mileage optimization: having large data available car manufacturers or internet services providers can offer the best real-time routes for faster navigation and better mileage.
  4. A new class  of in-car entertainment devices: GPS devices had a huge increase in popularity and sales as they were fitted to cars. So will the internet ready entertainment devices.
  5. Increase in driving safety: as more and more cars will get connected they will be able to pair and increase safety by automated collaboration.
  6. Increase in audio books sales. Audio books streaming. So far we got accustomed to listening to audio books on CD’s. With in car internet we will see more and more subscriptions to audio books streaming service. Amazon will surely benefit from this.
  7. Car hacking.  Car software security software. We don’t really expect our car to be “hacked” but this will surely happen. Where there is a connection, there is a potential breach of security. Software security companies will have offers specifically targeted to internet-connected car owners.

Key takeaways:

  • in car internet will happen. get ready
  • in 5 years 25% of all cars will have internet connections
  • there is a great business opportunity in providing connected car owners with car specific internet services

How is Facebook changing the Internet Economy?

By now you have probably heard of this little thingie called Facebook. You have also heard it has a bunch of users and these users are spending a lot of time on the platform sharing thoughts, news, photos, playing games or interacting with each other.

The Influence of Facebook on the Internet Economy

Right now Facebook accounts for roughly 30% of all internet users and is estimated that 20% of all pageviews on the Internet are on Facebook.

Facebook is big. It is so big that Internet World Stats added a special Facebook usage indicator to each country. As you can see there is no Google usage, no Yahoo usage, no Twitter usage indicator but there is a Facebook usage indicator. For good reasons too …

Using Facebook to increase online sales

In just 8 years from the 2004 launch, Facebook is expected to reach 1 billion users in 2012. That number is more than impressive. It is fastest adoption of any communication related technology.

Facebook related sales are a huge part of what lures giants such as Amazon, Apple, Ebay on the platform. From my experience Facebook seems to be the most profitable refferal for small and mid-size ecommerce companies and accounts for a large part of sales generated by larger online retailers.

While Facebook stores may not yet be the best choice (JC Penney, Gap and Nordstrom have opened and than closed their Facebook stores) there is a clear opportunity to be harnessed with Facebook related ecommerce.

Facebook creates jobs, has a  7.3 Billion Euro economic impact on Europe

A recent study by Deloitte states that Facebook accounts for a 7.3bn Euro economic impact and has so far, through the creation of Facebook pages and advertising , created more than 110.000 jobs in the EU.

Just like Europe many other regions benefit from the impact Facebook has had in the recent years. In the EU the country with the heaviest Internet Economy, the UK, has also the largest Facebook user base. Although merely a correlation and not a cause for the heavy impact the internet has on the UK economy it is easy to see that Facebook usage increases internet economy impact and many small and mid-sized companies can benefit from it.

Where is Facebook headed?

With such extraordinary growth and impact on our lives, both socially and economically, Facebook is sure to develop even more. Facebook is more than an website or application. It is a communication framework, a market that has already changed the life of its users. It will continue to do so. It will reach beyond extending the Internet.

I expect Facebook to cycle through some inherent changes but in the end it will probably be the biggest internet – based business in the world.

UK – the heaviest Internet Economy in the world

Internet has changed many aspects of our lives and will continue to do so. As people shift their attention more and more toward the internet so does the economy.

UK leads the way towards this new economy with a £82bn ($128 billion) internet economy. About 16% of this ecosystem is accounted for by mobile connections. The overall traffic is expected to increase each year between 2010 and 2015 by 37%. What does that mean? Having an ever increasing interest for mobile connections and ecommerce we might see three trends in the future:

  1. Mobile networks will need better infrastructure to handle the growing traffic.
  2. Mobile internet will increase in popularity which leads us to…
  3. Mobile commerce will set new challenges to retailers as consumers get more informed, faster deliveries and better deals

Data regarding these numbers has been put together on a study commissioned by Vodafone UK to ATKerney. You can find the study here.

It’s interesting to see that the internet economy reacts to people needs and wants as is stated in the graph bellow:

 

As you can see the internet is expected to be the most commonly used media in Europe by 2013, with 50% of all media consumption.

The other media (radio, print, TV) is expected to continue to decrease in the following years.

With smartphone usage doubled between 2008 and 2010 it is expected that smartphone terminals will be a major player in the internet economy ecosystem. Data is already used more often than voice. Mobile operators will adjust their market accordingly and that will increase the internet consumption even more.

Online retail (both web and mobile) accounts for roughly £45bn ($70bn) – approximately 6% of GDP, leading the UK to the 1st place in G20 countries as internet economy share of GDP.