Our Topics Today

1. Our Topics Today • General Purpose Technologies- what are they, how do they develop? • The General Purpose Technologies underlying Internet growth. • The Economic Value of a New Customer

2. What is a General Purpose Technology (a GPT)? • Wide Scope for Improvement • Cost reductions • Quality improvements • Wide Variety of Uses • Multiple industry applications • Many follow on inventions • Strong Complementarities, both technological and economic

3. Earlier Major GPTs Writing (e.g. Code of Hammurabi) Electricity (e.g. Edison Dynamo) Printing (e.g. Gutenberg press) Steam Engine (e.g. Watt steam engine) Railroad (e.g. Stephenson Locomotion No. 1)

4. Factory System (Power looms, circa 1830) Moving Assembly Line (Ford Motor Company, 1913) Flexible Manufacturing (Intro. 1980s, Picture from Toyota, 2001) Organizational GPTs

5. GPTs & Production Functions • A production function connects output and inputs: • A GPT changes both the input prices and eventually the production function itself.

6. Fundamental Source of Internet Improvements: Three General Purpose Technologies (Two familiar and established, one emerging. ) • Digital GPT: Rapidly declining costs and the convergence of core components to a shared digital platform. • Low cost digitization of almost anything. • Networking GPT: Physical and social networking that leads to rapid sharing, specialization, and augmentation of digital and non-digital assets. • Electronic marketplaces as hubs of activity. • Individualization GPT: Assignment of identity and meaning to people, things, and information.

7. The Digital GPT: Cost reductions • This is a logarithmic graph, so each is a power of ten. • From 1945 to 2001 an increase in computer speed of 180 billion times. • A decrease in cost per computation of 1.3 trillion times. The Last Century of Computing Power and Sixty Years of Improvement, W. Nordhaus (2002).

8. This is a Phenomenal Improvement. Memory costs for a computer when a baby is born • 1984: $1000 in extra memory added. • Mid-1985: That memory costs $500. • 1987: Now $250. • First grade • Late 1990: $62.50, six years, 94% fall. • High school graduation • 2002: Less than 25 cents, 99.97% fall in cost.

9. Substituting Digital Material • The price of digital content keeps falling dramatically, while inputs such as labor costs are roughly constant. What should happen?

10. Room for Improvement: Not Everything Works Well at the Beginning • Digital substitution must be hard, or everything would already be digital! • Businesses, especially those willing to risk performance problems, will introduce substitution earliest.

11. Digital Quality Improvement • Improving football broadcasts by a digital first down marker. • Battling Digital Orcs.

12. Digital GPT: Many Applications & Many Industries. Digital convergence is another way of describing the idea of the spin-offs of a GPT.

13. Transition Points Eventually Occur iPod Nano uses Flash memory. Original iPod used a hard drive for music storage. The cost of storing information on paper, on disk drives, on flash memory.

14. Sophisticated labor substitution. Paper substitution. Easy labor substitution. Application: Digital Banking

15. Digital GPT: Many Complementarities • Hicksian Complementarity: other products whose demand xrises when product i’s price pfalls.

16. Technological Complementarity • Other Capital Goods & Production Processes Must be Redesigned to Take Full Advantage of GPT Capabilities. Changes in: * Architecture, * Accounting, * Book publishing, * …

17. Networking GPT: Cost Reductions • Recall the cost reductions of telecom. Also steep reductions in price of routers, servers, and modems. • AOL: Originally cost $2.95 per hour for connections at 14.4K.

18. Networking GPT: Quality Improvement • Standard Consumer Modem Speeds. • WWW: Huge improvements in content. Analog Modem speeds: 56K 28.8K 14.4K 2400 baud 1200 baud 300 baud 150x increase

19. Networking GPT: Variety of Uses

20. Networking GPT: Complementarity • Hicksian ( ): As price of networking falls, demand increases for these products. • Indian Call Centers • Streaming Music • ? • Technological: Redesign in order to utilize well. • Airline ticketing • ?

21. Is there an Individualization GPT? • Individualization is a general-purpose technology, creating ability to • Recognize individual people, items, and information • Remember relevant information and to learn from current activity, • React on an individual basis to the available knowledge and demands. Move from aggregate measures to individual measures.

22. Applications of the Individualization GPT Individualized products Individualized recommendations based on searching or ownership. “Personal numbers” such as credit scores.

23. Quote the Right Price Is this a new customer? Is this a price-driven decision, or a service-driven? Vacation traveler Business traveler

24. Individualization Requires Authentication Authentication is the ability to identify an individual user or device. Authentication answers the question “Who are you?”

25. Improving Information Precision Improves Association Association is the ability to ability to connect observable online choices with a customer profile. Association answers the question “What are you?”

26. The Precision-Permission Graph Improving identification means better authentication and association. Currently, the precision of information requires increasing levels of Net user cooperation with a site. As the Individualization GPT develops, this becomes automated and possibly less dependent on permission.

27. function setCookie (name, value, expires) {        if (!expires) expires = new Date();    document.cookie = name + "=" + escape (value) +  <-- save cookie value    "; expires=" + expires.toGMTString() +  "; path=/"; <-- set expiration date and path    }     “Cookies” are the minimal level of online identification- some data written on your computer by the web site. Software used by server SothebysId7.829677108537132e+307 sothebys.com/0232858124830124712354996572829390457* SothebysFirstReferrerSothebyssothebys.com/0232858124830124712355006572829390457* SothebysFirstTimeThu, 6 Jan 2005 18:11:57 UTCsothebys.com/0232858124830124712355066572829390457* Typical cookie text

28. Hidden Pixels let measurement companies also set cookies. Only a server writing a file to your browser has the right to write a cookie. Q: How to outsource measurement to another company such as Coremetrics?

29. Registration Improves Accuracy Create a user-specific registration system, based on values provided and verified at the individual level. Transactions and additional data improves details even more.

30. Generic homepage Men’s homepage Women’s page After authentication and association comes individualizedinteraction. Individualized interaction is the ability to present customized information, services, or products. Interaction answers the question “What to do?” A user arrives - what to show?

31. A Fundamental Lesson That Arises from Identification: Customers Vary Greatly in Profitability Typical results from ranking current customers by annual profitability. A profitability skew diagram of banking customers. Profits would rise with fewer (bad) customers.

32. Does a business only worry about current customers? How do we extend this to the future? Relevant variables:

33. Discounting means that a series of payments every period forever has a net present value. Example: Profit of 1 per period, i =15% Formula for a constant series

34. Customer Lifetime Value • Individual level profitability

35. Example of Lifetime Value • Profit constant at $275 per year, Retention rate constant at 90%.Discount rate constant at 10%, 5 year horizon.

36. Summary • General purpose technologies dynamically shape the economy. • Internet developments are being driven by three GPTs. • Digital, Network, Individualization • Individualization allows a much richer set of economic strategies – individual focus, not the full market.