Category Archives: economics

Economic peace?

The phrase “economic peace” may not be the most popular phrase in the Middle East, since it was utilized for the election campaign of Likud.  However, economics seems to be a powerful element and things happen in spite of politics.

I am writing this because I just learned from the Good Neighbors blog about a new initiative by Wharton (I assume MBA) students, called LendforPeace.org. The initiatives seems to be a close replica of the Kiva, which I think one of the most innovative projects combining micro-finance with possibilities opened up by technological progress.  The main difference between Kiva and LendforPeace is the geographical focus.  In their own words:

LendforPeace.org is a not-for-profit Internet platform that allows individuals like you to make small loans to specific micro-entrepreneurs in the Palestinian Territories.

Our mission is to use micro-lending to promote economic opportunity and political stability in the Middle East.

The website was officially launced at the beginning of this month with a grant from Clinton Foundation after a pilot set of loans ($5000) was successfully returned in about half a year (you can learn more about it on their blog).

One of the “selling points” of the project is that it is established by two Jewish and two Palestinian students.  I presonally think that it would be even cooler if it these were two Israelis and two Palestinians in the team. Nevertheless I find these kinds of joint ventures encouraging.

Paying to socialize?

Tech.blorge, one of the blogs on my RSS feeds, recently published an entry titled “Would you pay to use Facebook“.  They are echoing some of the ideas raised as a reaction to rumors that Facebook, which raised half a billion dollars less than two years ago, is running out of cash.  One of these ideas is subscription-based Facebook, meaning you will have to pay for accessing the website.

Right now this sounds more like a speculation, but it looks like the Russian social networking websites are actually experimenting with the subscription-based models.  I wrote in the past about the various ways Odnoklassniki.ru is monetizing on the social aspects of online social networks.  Recently, my father pointed out an item (RU) in the one of the Russian-language new websites, which states that Odnoklassniki is now requesting payment from new users asking to register.  According to this article, the registration now will cost between $1-2.  Those who choose not to pay will not be able to view other people’s profiles, contact other users, etc.  In other words the free registration is lacking any of the “social” elements, which is the main reason for people to join.

I looked a little bit around and there are more news items about that move in RuNet.  The official rationale stated by the Odnoklassniki management is that the paid registration is aimed at combatting spammers, who tend to open numerous accounts and use them for promotion of their products.  Some of the critics disagree (RU), suggesting this is just a way for Odnoklassniki to force the spammers to share their profits from the network.

In any case, it will be interesting to see whether or not the paid registration model will turn out to be sustainable.  Probably Facebook crew and others will be watching as they think about their next move. In the meantime, I do wonder if you would pay to socialize online?

Do social networks have a business model?

As the economic sky is getting covered with clouds of financial crisis and deepening recession, people start questioning the web 2.0 oriented business models, or more so the lack of thereof.

Recently I read about Mark Zuckerberg making statements suggesting that growth is the primary goal of Facebook at this point, and not revenue.  They do a pretty good job with the former (even though it is becoming harder), but at the end of the day it is the latter that matters.  Basically what he said in an interview to (German newspaper/site) NAZ.com is that Facebook has yet developed a business model, which is really mind boiling provided the amount of investments the receive.

In this light, I started thinking about the different approaches the US and the Russian social networking enterprises are taking.  And I wonder if at some point, Facebook and others will try to adopt some of the methods they Russian counterparts are using.  I think that Russian enterprises are not as “spoiled” in terms of investments and in terms of their investors’ patience.  Yet, there are social networking websites in Runet and they are rather blunt and creative in the way they are making money.  I have some degree of familiarity with two of them – Vkontakte.ru and Odnoklasniki.ru.

Vkontakte“, which is a blunt rip off Facebook, is rather mysterious.  It does not have any ads (but does have a lot of spam) and it is not clear at all how it is funded (to a degree that some conspiracy theories suggest that it is a government project aimed at spying on Russian citizens).  Yet, it seems to be the most popular social networking website in Russia these days.  Some suggest that it has cloned FB’s business model, but I could not see the exact parallel.  They do allow you to buy virtual gifts in Vkontakte, but I have not seen a single add.  The last fact actually attracted some English-speaking people who miss the old FB or cannot access it from work.

I find “Odnoklasniki” more interesting in the sense of monetizing on social sentiments of their users, even though it is not as popular as Vkontakte (and it probably appeals to a different demographic, but that is for another post).  To start with, they have a pretty horrible interface design.  FB (and as a derivation, Vkontakte) have done a significantly better job in making a useful and interesting website (or should I say “platform”?).  Odnoklasniki is very simple and not very intuitive, but apparently it works.  In addition to (supposedly contextualized) ads, Odnoklasniki is experimenting with making money off the very basic human needs that bring people to use their website in the first place.

For example, Odnoklasniki has a very different view of privacy and unlike FB, it always shows you who and when viewed your profile.  Yet, they understand that as much as we want to know who is looking at us, we don’t want others to know that we are looking at them.  So, if you would like to remain invisible as you visit other people’s profiles, they can offer you this service for just a little bit over US $4 a month.  Apparently it works!  You know that because even when an “invisible” user visits your profile, you still see that there was a visit, you just don’t know from whom.

Another example is the picture rating system they use on the website.  Odnoklasniki allows its users to rate other users’ pictures on a 1-5 scale.  This is of course another socially sensitive issue.  On the one hand, you would probably like to complement people you like by giving them the highest rating possible.  On the other hand, it is a social networking website, so it has a little bit of a beauty contest component to it.  In other words, you want your pictures to have high ratings, as this probably signifies popularity.

Odnoklasniki are using (or shall i say exploiting) both sentiments.  On the one hand, for a little bit over US $4 a month, you can get an ability to give out a 5+ mark to other people’s pictures (5+ vs. 5 is like A+ vs. A).  On the other hand, you can insure one picture at a time in your collection from getting low ratings.  When you apply this service, the system will automatically add 1 point to any rating below 5.  Surprisingly, this service is free, but it is “sponsored” by an insurance agency, which proudly advertises itself when you are trying to insure your pictures and I assume once you apply this insurance.

These are just a couple of examples and some of the serveices are rather new.  I don’t know how viable the business model of Odnoklasniki is, but I do find it fascinating that they are trying to monetize on the social aspects of these networks, which is why people people are using these domains in the first place.  What do you think?  Can/should FB think about other aspects of the platform they’ve developed?  Should they view it not just as an advertising platform?  Can/should they try making money out of it?

Mobiles – luxury or basic good?

Just a few days ago I posted a few links to interesting numbers about the growth of the mobile phone industry.  According to the ITU, we are expected to finish the 2008 with 4 billion mobile cellular subscribers, which supposedly represents over 60% of the world population and indicates growth rates of 25% annually for the past 8 years.  Even though i don’t know the details of how the ITU collects its statistics and how it addresses issues such as multiple subscriptions owned by a single individual (there are countries with over 100% penetration of mobile, primarily due to the billing models applied in those countries), the numbers are certainly impressive.

Probably even more interesting, Millicom, a Luxembourg based mobile provider that operates in South Africa, Africa, and Asia, has released numbers indicating “92% year-on-year increase to 7.58 million subscribers from its seven African operations as at 30 June 2008″ (source).  On average, the emerging economies where Millicom is operating showed a very impressive, and consistent with the ITU statistics, growth of 58% within a year.  These and other similar numbers can be found in numerous reports published in the recent years (you need paid subscription to get most of them though, here is a snippet of a free one) and the forecasts are rather optimistic.

Such an overwhelming penetration rate generated a fare amount of discourse that would picture mobile phone as a basic, almost necessity, good.  Indeed, communication is a very fundamental human activity and a device enhancing it to such extend as the mobile phone does, can easily be pictured as similarly fundamental.  For example, the ITU report mentioned above links the mobile phone penetration with achieving the MDG goals, thus linking it to socioeconomic development (without describing an exact mechanism though).

However, as of a few weeks ago the world has entered a financial turmoil.  Just a few days ago, the Washington Post published the following article suggesting that the growth estimates for the mobile phone industry will have to be adjusted:

While industry executives often say mobile phones are the last thing consumers will give up to save money, analysts are now citing lengthening phone replacement cycles and weakening economies around the world for their weaker sales estimates.

UBS analyst Maynard Um halved his forecast for 2009 global handset growth to 3 percent from 6 percent, pointing to particular weakness in Europe and North America.

also:

Handset market leader Nokia warned early last month that the mobile phone market would be hurt by weakening consumer confidence in many markets in 2008 and the company itself would lose market share in the third quarter.

All this got me thinkingthat my initial intuition a few years ago was correct.  In 2005 I spoke at an industry conference dedicated to the “future” of telecom industry.  Back then I was surprised to hear the executives debating the next killer app, which will bring them the next stream of revenues focusing on, what i viewed at the time, margins – the very technologically advanced users in developed countries.  The point I tried to make in that presentation was that there is enormous business potential in the developing countries (and apparently I was right).  Moreover, I was trying to make a case for cheap, durable, and simple technology as opposed to expansive, gentle, and (many times unnecessarily) sophisticated one.  Now I understand that I was trying to explain a dissonance between the rhetoric of mobile communication as a basic good and developing handhelds and applications that were in fact luxury.

I think now it all falls in places.  Now, it seems that the market is highlighting this dissonance.  People are not going to stop communicating and it will be difficult for them to give up the convenience of mobile communication.  However, as people start viewing mobile communicaiton as a basic good, they start treating it as such and start voting with their wallets for cheaper, simpler, and more durable technology that would answer their basic need first.  And the economic environment, particularly in the developed countries, is currently enhancing this process.  All the extra functionality is becoming a luxury and there is only so much space for competition in the luxury market compared to the market for basic goods.  It will be definitely interesting to see how this situation unfolds.

Another face of media concentration?

I am not sure if many of the readers know, but my Masters’ thesis was on media industries dynamics. One of my original motivations to start looking at media industries was vast literature on media economics, particularly media concentration/conglomeration, i was exposed to during my undergraduate and graduate studies. In a super-simplistic way and in a nutshell, the common concern regarding the dynamics of media industries is that as time goes on there are fewer hands controlling the growing number of media outlets. Of course the actual picture is more complex and i should probably blog about it (and my thesis?) at some point.

However, the point of this post is different. Yesterday I read a Washington Post article about the shrinking membership of the Entertainment Software Association – an association of video/computer games producers. The fact of intra-industrial battles was not as interesting as the mention of merger discussions between Activision (Guitar Hero) and Vivendy (WoW). This news comes in a span of just a few months from EA’s (The Sims) attempts to take over Take-Two Interactive (Grand Theft Auto). Are we moving towards

I find it really interesting and tied to the debate over mass media ownership at large. Ironically, being a huge and rather fast growing industry, video games industries are gaining less attention compared to the mainstream media. At the same time, i think the cultural function of video games can be legitimately compared to that of the popular culture. As video games become a more prominent outlet for leisure time we can start asking similar questions about this industry as we were asking about other culture-related industries.

I think the link above will become even more obvious as the two industries continue moving towards each other. For example, not too long ago I read about an attempt to create an interactive movie based on the popular WoW. The idea is that it would combine elements of the game and users’ input with cinematography and it is a clear step towards merging the two domains.

Probably the combination of the two developments – conglomeration of the video-games industries and amalgamation of cultural outlets – prompted me to think about the WP article in terms of another expression of media concentration. What do you think?

Quickly glancing at OLPC

Quite a while ago i read this post about the rise of cheap computing solutions. In light of the growing critique of the OLPC project, it got me thinking that perhaps, by focusing on the details of this specific project we are overlooking some of its most important contributions.

OLPCJust three or four years ago OLPC was the only project explicitly targeting the developing world and the market for low cost, simple computers. Today, we have over 7 competing models targeting this very market (potentially more). As long as this competition continues we can expect better machines and lower prices in this segment. Perhaps that is good, since industry is probably better in taking care of the technical aspects (even if sometimes it needs a push, such as the OLPC project), leaving space for the educators and activists focusing on developing a decent educational infrastructure to utilize this technology.

The main critique of OLPC from the very beginning was that it should be an educational and not a technological project. And I agree that the technological solution alone is meaningless and the true potential for change lies in appropriate adoption framework, particularly when we talk about education. At the same time, I think that its contribution to the technological push should not be underestimated. Does it make any sense?

On an unrelated note, now you can also use Skype on XO computers. I think this is really cool, even though Skype has been recently loosing its quality.

(Images taken from laptop.org, licensed under the Creative Commons Attribution 2.5.)

More on Facebook

Here is a post that has been sitting in my drafts for a while (I am even embarrassed to say how long).  Even though, re-reading it now, I think it is still relevant.

Since Microsoft bought a minority share in Facebook (FB), the later refuses to leave the news pages. Actually, i personally was surprised by the 15 billion evaluation of a network that has a rather fuzzy product. Unfortunately i was (and still am) stuck with school tasks, so i didn’t have the time to play with the numbers myself. Fortunately there are people out there with more time, who did the excercize.

As i suspected, the 15 billion figure is indeed appears blown out of proportion. Jesse Chan of FisTrain has a detailed explanation that leads him to estimate FB’s annual earnings in 2007 at US $47.7 million, which in turn gives Facebook a price-to-earnings (P/E) ratio of 316. In other words, Microsoft paid US $316 for each US $1 of earnings of Facebook. For comparison, General Electric’s P/E in the last 12 month was about 18.5, General Motors’ 11.23, Google’s (which i think is still high) was 58.21, and Amazon’s (even higher) 102.21.

Of course, we can assume that the company is going to grow tremendously in the future. For example, at the end of 2007 FB launched “FB Pages” that will allow local businesses and brands to have their own pages. Users will be supposed to interact with those pages, contributing to viral marketing and sharing their demographics. In other words it moves towards the mainstream, marketing-oriented media activity (an further away from its potential educational promises), which suggests better profitability. However, according to Chan, even if FB will generate US $200 million in net income in 2008 (four times more compared to 2007) , its P/E ratio will still be at 75, which in my view is very high.

My point is that FB is an example that has too much resemblance with the spirits of late 1990′s when we worked with multipliers of 400 and 600. Of course some lessons have been learned and the advertising models online are more sophisticated compared to what we saw in the year 2000. However, the remaining question is if the advertising industry capable of supporting an entire other industry that is producing nothing but detailed demographics while being expected to grow 3 and 4 times a year.

More on online product placement

In the past i blogged about online product placement. Here is another interesting video linked from the Washington Post and telling the story of growing phenomenon of product placement in online, supposedly grassroots, content. (Sorry, but i still didn’t figure out how to embed video other than YouTube and Google in WordPress).

So much for 2.0-ish innovation?

To cheer you up, here is another one on the subject, but less serious:

My Yiddishe Mama post, or “I told you so”

A couple of years ago I participated in a conference titled “Telecoms in Transition”. It was a gathering of (primarily European) telecom industry leaders who were discussing the question of the future of their industry. My talk focused on the “digital divide” and the main point was that the next big wave of users is going to come from the developing world. It seems like this idea is catching up and here is a post on “Information Policy” blog with a link to an article analyzing where the next billion of internet users will come from based on the last Internet Governance Forum.

And no, i am not claiming the authorship, but I think it is important to stress this point once again. I believe that we are at the beginning of a trend in the rhetoric (and probably action) of the telecom industry and it is nice to say “I told you so” :)

Fun bubble 2.0 + some thoughts on FB

Thanks to Eszter for posting this:

On a different note, i keep on following the buzz about Facebook (FB) criticism due to deployment of Beacon platform.  For those who did not have a chance to follow, recently FB launched a platform that allows them to follow you to third-party websites (anybody said spyware?) and if you make a purchase there, news about it would go to your FB news feed (for your friends to see, follow your opinion leadership, and of course go and buy something from that company).  Of course they do not follow you to any website, but only to those who have an advertising agreement with FB, but nevertheless, this move raised a lot of antagonism and questions of privacy.  It also unleashed a wave of critique of FB and its founder, Mark Zuckerberg.

One of the things i noticed recently is people being surprised by FB non-responsiveness to the PR crisis it is going through.  The assumption is that to manage this wave of negativity, FB has to make substantive changes to the Beacon platform followed by a massive PR campaign.  Although i have my own critique of FB and more so questions about the nature of their business and its long-term sustainability, this later wave, particularly expectations for response, made me thinking.

I wonder if Zuckerberg’s strategy of ignoring the critique is actually the correct one.  I remember about over a year ago, FB introduced the news feed.  Back then it raised a lot of criticism from the privacy advocates and there was, not as strong, but still noticeable, negative buzz about FB.  I don’t remember the company investing as much in PR back then.  What it did was adding a couple of tweaks to make its users feel as if they were in charge of their privacy and in a matter of a couple of months the wave of negativity died and, as we can see today, people are happily using the feed.  In fact, can we imagine FB without the news feed these days?

Now, following the current criticism, FB also added some minor tweaks to the Beacon platform, and is now waiting for the wave of criticism to path.  The main threat to FB when its users would start massively leaving it.  Getting the users angry by exposing their Christmass surprises is indeed a step in that direction.  But in my (unsupported by any kind of evidence) opinion this is not enough.  Simply because most of FB users do not care or do not realize what is going on.  Talking to my friends, for example, i gain further support to an intuition that people don’t really view it as a big deal.  They continue logging into their FB account, poke each other, bite, send virtual gifts and drinks, etc.  and at the end of the day this is all FB needs.

So, from FB point of view,the business is as usual and all they need to do is wait until the critique in mass media and the blogosphere dies out.  After all how long can this be news/blog-worthy?  People will get bored and it will happen sooner than we can think.  Once the wave of negative publicity is no longer there, the advertisers will come back, and the next thing we know Beacon will be a recognized standard in the industry.  Doesn’t it sound as a logic scenario?

I still have a sense that the basic idea behind FB is bubblish (linking back to the video :), but maybe at the end of the day, FB is actually more strategic about how it is handling the current crisis than what it appears in the press and the blogosphere?