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

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

Earlier Major GPTsWriting

(e.g. Code of Hammurabi)

Printing

(e.g. Gutenberg press)

Steam Engine

(e.g. Watt steam engine) Railroad

(e.g. Stephenson Locomotion No. 1)

Electricity

(e.g. Edison Dynamo)

Organizational GPTs

Factory System(Power looms, circa 1830)

Moving Assembly Line(Ford Motor Company, 1913)Flexible Manufacturing

(Intro. 1980s, Picture from Toyota, 2001)

GPTs & Production Functions A production function connects output and

inputs:

A GPT changes both the input prices and eventually the production function itself.

( , ,..., )Output f Labor Capital Knowledge

Fundamental Source of Internet Improvements: Three General Purpose Technologies

•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.

(Two familiar and established, one emerging. )

The Digital GPT: Cost reductions

The Last Century of Computing Power and Sixty Years of Improvement, W. Nordhaus (2002).

The Last Century of Computing Power and Sixty Years of Improvement, W. Nordhaus (2002).

•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.

•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.

This is a Phenomenal Improvement.

•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.

•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.

Memory costs for a computer when a baby is bornMemory costs for a computer when a baby is born

Substituting Digital Material

Marginal Product(Digital content) Marginal Product(Labor)

Price (Digital content) Price (Labor)

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

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

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.

•Digital substitution must be hard, or everything would already be digital!

•Businesses, especially those willing to risk performance problems, will introduce substitution earliest.

Digital Quality Improvement

•Improving football broadcasts by a digital first down marker.

•Improving football broadcasts by a digital first down marker.

•Battling Digital Orcs.•Battling Digital Orcs.

Digital GPT: Many Applications & Many Industries.

Digital convergence is another way of describing the idea of the spin-offs of a GPT.

Transition Points Eventually Occur

The cost of storing information on paper, on disk drives, on flash memory.The cost of storing information on paper, on disk drives, on flash memory.

Original iPod used a hard drive for music storage.

iPod Nano uses Flash memory.

Application: Digital Banking

Sophisticated labor substitution.Sophisticated labor substitution.

Paper substitution.Paper substitution.

Easy labor substitution.Easy labor substitution.

Digital GPT: Many Complementarities

Hicksian Complementarity: other products whose demand x rises when product i’s price p falls.

0j

i

x

p

Technological Complementarity Other Capital Goods & Production

Processes Must be Redesigned to Take Full Advantage of GPT Capabilities.

Changes in: * Architecture, * Accounting, * Book publishing, * …

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.

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

150xincrease

Networking GPT: Variety of Uses

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 ?

0j

i

x

p

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.

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.

Move from aggregate

measures to individual measures.

Applications of the Individualization GPT

Individualized products

Individualized recommendations based on searching or ownership.

“Personal numbers” such as credit scores.

Quote the Right PriceIs this a new customer?Is this a new customer?

Is this a price-driven decision, or a service-driven?

Is this a price-driven decision, or a service-driven?

Vacation travelerVacation traveler

Business travelerBusiness traveler

Individualization Requires Authentication

Authentication Element

Cave of the 40 Thieves

Password Login

ATM Machine

Secure Web Server to Client

1. What is authenticated? Anyone who knew the password

Authorized user Owner of a bank account

Web site owner

2. What is the distinguishing characteristic, token, or authenticator?

The password “Open, Sesame”

Secret password ATM card and PIN

Public key within a certificate

3. Who is the proprietor, system owner, or administrator?

The forty thieves Enterprise owning the system

Bank Certificate authority

4. What is the authentication mechanism?

Magical device that responds to the word

Password validation software

Card validation software

Certificate validation software

5. What is the access control mechanism?

Mechanism to roll the stone from in front of the cave

Login process, access controls

Allows banking transactions

Browser marks the page “secure”

Table 4-1: Elements of an authentication system Source: Adapted from R. Smith (2002)

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

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?”

The Precision-Permission Graph

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.

Improving identification means better authentication and association.

“Cookies” are the minimal level of online identification- some data written on your computer by the web site.

Typical cookie textTypical cookie text

SothebysId7.829677108537132e+307sothebys.com/0232858124830124712354996572829390457*SothebysFirstReferrerSothebyssothebys.com/0232858124830124712355006572829390457*SothebysFirstTimeThu, 6 Jan 2005 18:11:57 UTCsothebys.com/0232858124830124712355066572829390457*

SothebysId7.829677108537132e+307sothebys.com/0232858124830124712354996572829390457*SothebysFirstReferrerSothebyssothebys.com/0232858124830124712355006572829390457*SothebysFirstTimeThu, 6 Jan 2005 18:11:57 UTCsothebys.com/0232858124830124712355066572829390457*

                                                                                                                                                                               

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    }                                                        

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    }                                                        

Software used by server

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?

Registration Improves AccuracyCreate a user-specific registration system, based on values provided and verified at the individual level.

Transactions and additional data improves details even more.

Create a user-specific registration system, based on values provided and verified at the individual level.

Transactions and additional data improves details even more.

After authentication and association comes individualized interaction.

A user arrives - what to show?A user arrives - what to show?

Generic homepageGeneric homepageMen’s homepageMen’s homepageWomen’s pageWomen’s page

Individualized interaction is the ability to present customized information, services, or products. Interaction answers the question “What to do?”

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.

Does a business only worry about current customers? How do we extend this to the future?

Relevant variables:

Formula for a constant series

(1 )( , , , ) .t ii

t

Discounting means that a series of payments every period forever has a net present value.

Example:

Profit of 1 per period,

i =15%

10 periods $5.0225 periods $6.46100 periods $6.67

Formula $6.67

Customer Lifetime Value Individual level profitability

0 (1 ) 11

, with

Customer j profit in period t,

Customer j retention rate in period j, 0 1,

interest rate to discount future profits.

jt

t

Tt

j i k jkt

jt

jt jt

LTV r

r r

i

Example of Lifetime Value Profit constant at $275 per year, Retention

rate constant at 90%.Discount rate constant at 10%, 5 year horizon.

2 3 4 5

5275

(1 .10) 11

275 275 275 275 275(1 .1) (1 .1) (1 .1) (1 .1) (1 .1)

275 .90

275 *.9 *(.9*.9) *(.9*.9*.9) *(.9*.9*.9*.9) *(.9*.9*.9*.9*.9)

275.00 225.00 184.09 150.62 123.23 100.83 $783.77

t

t

k jkt

LTV

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.