"Will they pay for it?" A conceptual framework for analyzing consumer responses to pricing decisions regarding the online distribution of digital content

Diplomarbeit , 2007 , 189 Seiten , Note: 1,7

BWL - Offline-Marketing und Online-Marketing

No other electronic medium - in fact, no other medium at all - has become a mass medium as fast as the Internet did. At the beginning of 2008, there were more than 1.3 Billion users online, which accounts for roughly one fifth of the world population. Historically, the Internet has been conceptualized as a means of communication. Realizing its potential, however, it was soon used for commercial purposes as well. In addition to that, there is a third major area that has long been a major pillar of Internet usage: content.

Much of the tremendous growth of the Internet over the past decade can be explained by the fact that, apart from fees for the usage of bandwith, content and other services on the Internet have usually been offered for free, typically financed by revenues from online advertising. Faced with the burst of the Internet bubble and the sales from Internet advertising breaking away, however, online companies started looking for alternative ways of generating revenues. One of the most obvious options was to start charging consumers directly for the content offered to them, which was a rather significant paradigm shift.

The picture emerging today is twofold: On the one hand, online consumers who have grown accustomed to free services and content find the prospect of having to pay for those rather appalling. On the other hand, there is evidence that there is at least some degree of willingnes to pay for digital content among online consumers.

These controversial findings show that there is still a lot to be learned about business models, pricing strategies, and consumer attitudes towards paid content. It seems as if online consumers are definitely willing to pay for content under certain circumstances, yet there is much confusion about what these circumstances are exactly. As a result, there is apparently a great need for understanding online consumers' behavior and attitudes better in order to make more accurate decisions about when and how to put a price tag on digital content online.

This book intends to bridge this gap. However, the focus of is not on determining the optimal pricing strategy for providers of digital content. Instead, by adopting a consumer behavior perspective, it develops a conceptual framework that identifies the main factors influencing consumers' willingness to pay for digital content in an online context and thus deepens the understanding of how a company's specific pricing decisions affect those factors.

Table of Contents

1 Introduction and Overview
1.1 Justification of the Study and Problem Statement
1.2 State of the Research
1.3 Research Purpose and Chapter Overview

2 The Concept of Digital Content – Definition and Classification
2.1 The Concept of Electronic Markets as the Medium of Exchange
2.1.1 The Internet Economy
2.1.2 Electronic Markets and Electronic Commerce
2.2 Definition of Digital Content
2.3 Economic Characteristics of Digital Content
2.3.1 Experience Good
2.3.2 Indestructibility
2.3.3 Transmutability
2.3.4 Cost Structure
2.3.5 Externalities
2.4 Classification of Digital Content

3 Pricing Strategies for the Online Distribution of Digital Content
3.1 Analytical Framework
3.2 Pricing Schedules
3.2.1 Overview
3.2.2 Alternative classification of pricing schedules for digital content
3.2.3 Comparing usage-based with non-usage-based models
3.3 Price Setting Policy
3.3.1 Overview
3.3.2 Decisions Regarding the Price Structure
3.3.3 Decisions Regarding the Price Level

4 Definition of Constructs
4.1 The Concept of Willingness to Pay
4.1.1 Theoretical Foundations
4.1.2 Willingness to Pay in the Context of the Internet
4.1.3 Willingness to Pay for Digital Content Online
4.2 The Concept of Perceived Price Fairness
4.2.1 Literature Review and Theoretical Foundations
4.2.2 Perceived Fairness in the Context of the Internet
4.3 The Concept of Perceived Risk
4.3.1 Literature Review and Theoretical Foundations
4.3.2 Perceived Risk in the Context of the Internet
4.4 Theoretical Framework
4.4.1 Overview
4.4.2 Prospect Theory
4.4.3 Mental Accounting
4.4.4 Coupling and Mental Depreciation

5 Analyzing Consumer Reactions to the Pricing Decisons of Digital Content Providers
5.1 General Overview
5.2 Determinants of Willingness to Pay for Digital Content Online
5.2.1 Perceived Price Fairness
5.2.2 Perceived Risk
5.3 Model 1 – Comparing the Effects of Different Pricing Schedules
5.4 Model 2 – Comparing the Effects of Different Price Setting Strategies
5.5 Moderating Factors
5.5.1 “Sponsored Lunch” Mentality
5.5.2 Reputation
5.5.3 Offline Pendant

6 Conclusions and Research Opportunities
6.1 Summary of the Results and General Discussion
6.2 Contributions and Directions for Future Research
6.3 Implications for Managers

References

Index of Tables

Table 1 - Digital Content: Overview of Definitions in Academic Literature

Table 2 - Product Classification based on the SEC-Framework

Table 3 - Cost Structures in traditional media markets (adapted form Altmeppen 1996, p. 266)

Table 4 - Summary of Research on Willingness to Pay for Digital Content

Table 5 - Overview of Perceived Risk Dimensions

Index of Figures

Figure 1 – Timing the Spread of Technologies (Holt 1999, Global Policy Forum)

Figure 2 – Internet Penetration by Region (Internet World Stats 2006, based on Nielsen/Netratings)

Figure 3 - Online Buying Behavior in the USA (2001 – 2006)

Figure 4 - Internet Activity Index (OPA, 2006)

Figure 5 - Annual Internet Advertising Revenues (IAB Internet Advertising Revenue Report 2006)

Figure 6 - Annual Online Paid Content Revenue in the US (OPA 2006)

Figure 7 - Annual Online Paid Content Revenue in Western Europe Forecast (Jupiter Research 2003)

Figure 8 - Structure of the Paper (Overview)

Figure 9 - Medium as a Platform for Exchange (based on Schmid 2000)

Figure 10 - Phase Model of Market Transactions (based on Schmid 1993, p.467f.)

Figure 11 - Markets as Media for Communication and Transaction (based on Schmid 2000)

Figure 12 - Interrelations between Characters, Data, and Information (Hierarchical Structure, based on Anding and Hess 2003, p. 6)

Figure 13 - Information-Content Hierarchy (based on Anding and Hess, 2003, p. 10)

Figure 14 - Classification of Digital Products (Choi, Stahl, and Whinston 1997, p. 64)

Figure 15 - Classification of Content

Figure 16 - Markets as Media for Communication and Transaction (based on Schmid 2000)

Figure 17 - Classification of Transaction Platforms for the Distribution of Content

Figure 18 - Two-Tiered Model for Pricing Decisions (based on Zerdick et al. 2001, p. 25)

Figure 19 - Two-Tiered Revenue Model (based on Skiera and Lambrecht 2000, p. 815)

Figure 20 - Pricing Decision Model for the Online Distribution of Digital Content (based on Zerdick et al 2001, p. 25; Skiera and Lambrecht 2000, p. 815; Stahl 2004, p. 72)

Figure 21 - Sources of Revenue Online (Skiera and Lambrecht 2000, p. 16)

Figure 22 - Pricing Schedules for Digital Content (based on Stahl 2005, p. 80)

Figure 23 - Pricing Schedules for Digital Content based on Usage

Figure 24 - Demand for bundles of 1, 2 and 20 goods - linear demand case (Bakos and Brynjolfsson 2000, p. 67)

Figure 25 – Price Setting Strategies for Digital Content Goods

Figure 26 – Psychological Representation of Monetary Accounting from Prospect Theory to the Theory of Mental Depreciation

Figure 27 - Prospect Theory's Value Function (based on Kahneman and Tversky 1979, p. 279)

Figure 28 - Mental Depreciation Patterns over Time (Auh and Shih 2006, p. 141)

Figure 29 - The Effects of Perceived Price Fairness and Perceived Risk on Willingness to Pay for Digital Content (Basic Model)

Figure 30 - Model 1 (Comparing Pricing Schedules)

Figure 31 - Model 2 (Comparison of Specific Price Setting Strategies)

Figure 32 - Moderating Effects on Decisions Regarding Pricing Schedules (Model 1)

Figure 33 - Moderating Effects on Decisions Regarding Specific Pricing Strategies (Model 2)

Index of Abbreviations

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1 Introduction and Overview

1.1 Justification of the Study and Problem Statement

The Importance of the Internet

No other electronic medium – in fact, no other medium at all – has become a mass medium as fast the Internet did. While it took the Radio 38 years, Personal Computers 16 years, and even the TV 13 years to reach 50 million users, the Internet succeeded in accomplishing the same in less than 5 years (Zimmer 2001, p. 46).

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Figure 1 – Timing the Spread of Technologies (Holt 1999, Global Policy Forum)

According to “Internet World Stats”, as of November 27, 2006, there were 1.076 Billion users online, which accounts for roughly one sixth of the world population This figure is quite astonishing if one takes into consideration that the 50 million user hallmark had only been reached as recently as 1997. Even at the height of the Internet “Bubble”, the Internet was only counting 336 million users (Global Policy Forum 2002), roughly one third of today’s number.

Despite these impressive figures, Internet access and usage are not distributed evenly throughout the world. While internet penetration in the USA has reached almost 70% in 2006, other economically important regions of the world, like Asia (10%) or Latin America (15%), have barely started adopting the new medium, as shown in Figure 2:

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Figure 2 – Internet Penetration by Region (Internet World Stats 2006, based on Nielsen/Netratings)

Considering that even Europe has only reached about half the penetration rates of the USA, it becomes obvious that growth in Internet usage is not likely to slow down anytime soon.

The Commercialization of the Internet

Historically, the Internet has been conceptualized as a means of communication. Especially in its early days, it served the purpose of facilitating the exchange of messages and information between individuals or groups of individuals, independent of their geographical location. Soon, companies realized the potential benefits that came with reaching such a wide audience, however, and the Internet started to be used for commercial purposes as well. This trend has picked up the pace very quickly and is today one of the major reasons people use the Internet. Not very surprisingly, the US is leading this trend as well. According to Jupiter Research, in 2005, 123.29 million Internet users in the US purchased at least one item online, spending $625.61 on average. This amounted to more than $77 billion spent on online shopping last year (Jupiter Research 2005). Figure 3 gives an overview of the growth in online spending in the US relative to that of Internet users in general:

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Figure 3 - Online Buying Behavior in the USA (2001 – 2006)

As can be seen in Figure 3, not only does the number of people buying online increase both absolutely and as a percentage of total users, but online spending per buyer increases as well, from less than $500 in 2001 to more than $700 by 2005. Moreover, according to the Bureau of Census, for product categories like personal computers or software, more than 25% of total sales in 2005 are already being made online (Bureau of Census 2005).

In Germany and Europe, the trend is similar. As reported by Forsa, 50% of all Internet users in Germany have made an online purchase in 2006, which generated total online sales of over €23 billion (SevenOne Media, 2006), up from only €1 billion in 2001 (GfK Media Research 2001). At the same time, online sales for Europe are expected to reach an all-time high of over €100 billion this year (SevenOne Media, 2006).

The figures above illustrate the great commercial potential of the Internet for companies, a trend that has already been observed and extensively discussed by researchers and practitioners alike (see Alba et al. 1997 for an early assessment of the Internet’s commercial potential). There is, however, a third major area that has long been a major pillar of Internet usage: Content. The consumption of information, news, and entertainment online has always been one of the most important reasons consumers used the Internet and has even gained momentum in the last few years. Every month, the Online Publisher Association (OPA) releases their “Internet Activity Index”, tracking consumer online engagement based on four distinct activities: commerce, communications, content and search. Figure 4 shows the share of time spent on each activity for September 2005 and September 2006, respectively:

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Figure 4 - Internet Activity Index (OPA, 2006)

As can be seen in the chart above, while the “Search” and “Commerce” areas remained almost constant, the share of time spent browsing “Communication” related websites decreased from 41.9% to 35.1%, while “Content” viewing increased by roughly the same percentage, becoming the activity consumers spent the most time on in September 2006.

It is important to note that the Internet had originally been conceptualized as a “free medium”. In fact, much of its tremendous growth over the past decade can be explained by the fact that, apart from access fees for the usage of bandwidth, content and other services on the Internet have usually been offered for free. The business model behind this was simple: attract as many viewers as possible by giving away your content for free and rely on proceeds from online-advertising to finance that content. Websites implementing this business model were essentially selling “attention”. As Zerdick et al. (2001) put it: attention was the new “currency” consumers had to pay in the digital world. The more attention consumers literally “paid” to the content of a certain website, the less spare attention they had for the content offered by any other website. The websites, on the other hand, could convert the hits on their websites into money by selling the attention generated by their websites to companies willing to pay for exposure to consumers, a business model that resembled, to a large extent, that of classic advertising-based TV broadcasting.

The problem with this kind of business model, however, is that it relies on attracting a sufficient amount of viewers in order to generate the ad sales needed to produce a unique content in order to keep attracting enough viewers in the future. Many so called “dot.com” companies operating under the assumption that expanding market share at all costs was the only way to go had to realize that producing content may not be as cheap as they had hoped for. Cutting back on quality to save money also meant losing viewers, however, which ultimately translated into even less money from advertising that could be used to produce new content. Figure 5 gives an overview of annual Internet advertising revenues in the US from 1996 to 2005:

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Figure 5 - Annual Internet Advertising Revenues (IAB Internet Advertising Revenue Report 2006)

As we can see in the chart above, revenues from Internet advertising increased dramatically between 1996 and 2000. After that, however, annual revenues even declined for 2 consecutive years, and it was not until 2004 that revenues exceeded their “pre-bubble” level. Many companies were hit very hard by the decline in revenues, and a great number of “dot.coms” were put out of business. The burst of the Internet bubble and its consequences made it clear that relying on advertising sales as the sole stream of revenue would not be a viable financial strategy for the future (Addison 2001, Dewan et al. 2003, Schonfeld 2001).

Two other market characteristics fueled this notion: First, from 1999 to present, between 72% and 75% of total revenues were concentrated with the top ten ad-selling companies, and the top 50 companies commanded 95% of the ad market, meaning that only a handful companies seem to be able to actually generate enough sales to produce high-quality content (PricewaterhouseCoopers, 2006). The second reason for the failure of the pure advertising model is the simple fact that only 4.7% of total ad spending in the US is used for internet advertising, which is well off the bold expectations the majority of the companies had after the first years of rapid growth prior to 2000 (ibid).

Exploring Alternative Business Models – Charging for Content

Faced with the reality of sales from Internet advertising breaking away, companies started looking for alternative ways to generate revenues. One of the most obvious possibilities was to start charging the consumer directly for the content offered to them (Olsen 2001, Goldman 2001, Prasad et al. 2003, Taylor 2001). One of the better-known companies to adopt such a strategy is the Encyclopedia Britannica, which had been offering free access to the online version of its well established 32-volume set that was retailing offline for $1,250 since 1999. In 2001, Britannica.com – the online edition of the Encyclopedia – fired one third of its US workforce and announced it would accelerate the marketing of its paid services (Streitfeld and Cha 2001). Other well-known examples include NetZero, Yahoo or Amazon^[1] (DiCarlo 2001, Streitfeld and Cha 2001).

The trend outlined above turned out to be a quite significant paradigm shift in one of the most fundamental assumptions of the Internet community, which stated that, unless it was very specialized, content should generally be free (Carlson 2003, p.54). The picture emerging today is twofold: on the one hand, online consumers who have grown accustomed to free services and content find the prospect of having to pay for those rather appalling. Sign-up rates for fee-based online newspapers turn out to be as low as 0.2% to 2.6% of the corresponding print circulation (Borrel and Associates 2001). Several surveys also point in the same direction. In 2006, Pew Internet found that even though users consider the Internet as one of their primary sources for news and tend to use it even more often than newspapers (especially broadband users), only 6% stated they are actually willing to pay for it (Horrigan 2006). These findings supported an earlier survey by AMR Interactive conducted in Australia, where 72% of the respondents never paid for online content, and 57% did not understand why they ever should (Boumans 2004).

On the other hand, there is evidence that there is at least some degree of willingness to pay for digital content among online consumers. According to the Online Publishers Association, revenue from paid content showed strong year-to-year growth from 2001 onward and hit $2 billion in 2005 (OPA 2006). Annual revenue from 2001 to 2005 is presented in Figure 6 - Annual Online Paid Content Revenue in the US (OPA 2006)

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Figure 6 - Annual Online Paid Content Revenue in the US (OPA 2006)

What is especially interesting about these figures is that, contrary to revenue from online advertising, paid content experienced no post-bubble downturn after 2001.

In 2003, Jupiter Research also published a survey that corroborates these findings. Although clearly lagging behind sales in the US, paid content revenue in Western Europe is also forecasted to hit the €2 billion mark as soon as 2007. Annual revenue for the years 2002 – 2007 is presented in Figure 7:

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Figure 7 - Annual Online Paid Content Revenue in Western Europe Forecast (Jupiter Research 2003).

The controversial findings outlined above show that there is still a lot to be learned about business models, pricing strategies, and consumer attitudes related to paid content. The OPA figures and Jupiter Research forecasts already hint at the great potential that electronic markets and with them paid content strategies may have in the future. The Wall Street Journal, for example, succeeded in converting about 10% of its regular visitors into paid customers by 2003 (Wang et al. 2005). At the same time, many websites still struggle with their offerings. Ireland.com, the online version of The Irish Times of Dublin, only attracted 10,000 of its 2.3 million unique visitors per month to its paid offerings (Boumans 2004). It seems as if online consumers are definitely willing to pay for content under certain circumstances, yet there is much confusion about what these circumstances are exactly. So far, websites seem to rely on a rather intuitive trial-and-error process in determining their paid content strategies.

1.2 State of the Research

The discussion above exemplifies the increasing importance of selling digital content as a viable alternative to the classic Internet business model of selling “attention” and relying on advertising to generate revenue. Therefore, it comes at no surprise that with the rise of the Internet, topics related to the electronic distribution of products have also received a substantial amount of attention from academic researcher. Since price is without doubt one of the most important purchase decision factors in general (Lichtenstein, Ridgway, and Netemeyer 1993), pricing-related issues have also dominated research investigating the effects of electronic commerce (see Kauffman and Walden 2001 for an early review of the literature on electronic commerce).

Much of the appeal of the topic stems from the added complexity of pricing decisions in the context of electronic markets, as pointed out by Choi, Stahl and Whinston (1997, p. 347): “Basic economic research shows that in a competitive market, prices are determined by the level of demand and the cost of supply, or production. […] However, digital products fall into a gray area where such standard economic reasoning fails to give an insightful answer to business professionals looking to know how to price their products.” Due to the macroeconomic implications of the problem, economists were among the first to investigate such pricing issues. Consequently, initial research on Internet pricing was directed at topics like the effect of lower transaction costs on the price levels of electronic markets (e.g., Malone, Yates and Benjamin 1987, Schmid 1993, Bakos 1997, Smith and Brynjolfsson 2001) or the specific economic characteristics of information goods^[2] (see, for example, Shapiro and Varian 1998, Brynjolfsson and Smith 2000). Later, the focus moved to more microeconomic-oriented issues like new approaches to traditional pricing strategies resulting from those characteristics, such as bundling (Bakos and Brynjolfsson 1996, 1999; 2000), congestion pricing (MacKie-Mason and Varian 1995b), non-linear pricing (Sundrarajan 2003), or price- and product differentiation (Shapiro and Varian 1998, Skiera 2000, Varian 1995; 1998, 2001; 2001, 2003). We will use these findings for our categorization of pricing decisions later.

In marketing, research followed these impulses, resulting in a rather narrow focus of the studies conducted in this field. Consequently, in our review of A-Level marketing publications, most studies were directed at comparing price levels on and off the Internet (Pan et al. 2002, Anacarani and Shankar 2004, Lindsey-Mullikin and Grewal 2006, Zettelmeyer et al. 2006) based on electronic price quotes for various products. While expanding our knowledge of the subject matter, there is one important limitation to the scope of research in both economics and marketing: The pricing issues presented above have been studied from the seller’s point of view.

So far, contributions exploring consumer reactions to such strategies have been rather scarce. Marketing research on consumer behavior in an Internet context has focused on the electronic commerce implications of tangible goods, generally omitting implications for pricing, however (e.g., Alba et al. 1997, Tan 1999). As we will see later, digital content goods differ significantly from their tangible counterparts though, which limits the applicability of those findings. In addition to that, researchers have only started to investigate the impact of a fee-based service model on the purchasing behavior of online consumers who have grown accustomed to accessing these services for free (e.g., Dou 2004).

1.3 Research Purpose and Chapter Overview

As our introduction showed, there is a substantial amount of confusion as to which of the pricing strategies identified by research are indeed appropriate for inducing Internet users to pay for content. That is, there is apparently a great need for understanding online consumers’ behavior and attitudes better in order to make more accurate decisions about when and how to put a price tag on digital content online.

In this paper, we present a conceptual framework that intends to bridge this gap in current research. Consequently, the focus of our paper is not on determining the optimal pricing strategy for providers of digital content based on economic arguments. Instead, we will adopt a consumer behavior perspective in order to explore potential consumer reactions to the pricing strategies proposed by research. Previous findings in behavioral pricing research suggest that consumers subjectively perceive prices (see Winer 1988 for a general overview). Also, it has been shown that these perceptions can influence behavioral intentions (Thaler 1985; Biswas and Blair 1991; Grewal, Monroe, and Krishnan 1998). Therefore, we will focus on the psychological aspects of consumers’ perceptions regarding the pricing strategies implemented by digital content providers. To our knowledge, this has not been attempted before. Consequently, the overarching purpose of this paper can be stated as follows:

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Our goal is to develop a conceptual framework that identifies the main factors influencing consumers’ willingness to pay for digital content in an online context and that deepens our understanding of how a company’s specific pricing decisions affect those factors.

Essentially, the main body of our paper is divided into two distinct parts. In the first part, comprising chapters 2 through 4, we will provide the theoretical and conceptual foundations for our analysis. In the second part, consisting of chapter 5, we will then integrate the findings from the previous three chapters to state our research hypotheses and build two models depicting consumers’ reactions to the pricing decisions set forth by digital content providers. Based on the current state of the research on the online distribution of digital content, the general research question presented above can be broken down into a number of specific research aims. In the following, we will introduce these along with the structure of the paper, which is depicted in Figure 8.

First, there is number of different terms for the goods traded on electronic markets today, such as digital products, digital goods, information, information goods, content, digital content, or paid content. Most of them lack precise definitions and are therefore used almost interchangeably in electronic commerce literature. Therefore, our first goal will be the following:

R1: Deriving a precise definition for the object of our investigation and outlining a number of specific economic characteristics that influence pricing decisions regarding the online distribution of digital content.

Since these characteristics clearly set digital content apart from other products like physical content, we feel there is a great need for a conceptual categorization of the various classes of content. In addition to that, the digitization of content also allows for new platforms of transaction besides that of conventional offline commerce. This leads to our second research aim:

R2: Establishing a classification of the various categories of content as well as of the different platforms of transaction made possible by the specific economic characteristics of digital content.

In order to do reach this research aims, we first need to introduce the concept of electronic markets and electronic commerce, since this is the medium used for the distribution of digital content to consumers. We will therefore dedicate Chapter 2 to establishing a profound understanding of electronic commerce in general and the term digital content in particular.

In chapter 3, we will review the literature on pricing strategies for information goods on and off the Internet and assess their applicability to the pricing of digital content. We feel that is important to organize the existing concepts first before assessing their effects on consumer behavior.

R3: Reviewing and classifying the concepts and models related to the pricing of information goods discussed in literature.

Integrating the various concepts discussed in literature, we propose a sequential, three-tiered framework that can be applied to the decision process involving the pricing of digital content. In doing this, we will also discuss implications for consumer behavior.

Next, we will introduce the conceptual framework for the various constructs included in our theoretical analysis. Chapter 4 is divided into two parts. In the first part, we will provide a literature review covering research on willingness-to-pay in a digital content context. In addition to that, we will identify two factors from pricing and consumer behavior research that we believe will have a substantial impact on consumers’ willingness-to-pay, namely perceived price fairness and perceived risk, respectively. In the second part, we will discuss the theoretical background of our analysis. In the context of this paper, we focus on theories dealing with individuals’ mental representation of monetary transactions.

Based on the findings of the previous three chapters, in chapter 5 we will develop two causal chain reaction models that will provide us with an appropriate framework for analyzing consumers’ reactions to the pricing strategies implemented by digital content providers. The scope of the two models will follow the classification of pricing decisions outlined in chapter 3. Therefore, the research aim of our first model can be stated as follows:

R4: Contrasting the effects of pricing decisions regarding pricing schedules for paid content offerings on consumers’ perceived fairness and the perceived risk of such offerings.

Accordingly, the research scope of second model is the following:

R5: Contrasting the effects of pricing decisions regarding specific pricing strategies for paid content offerings on consumers’ perceived fairness and perceived risk of such offerings.

Finally, in chapter 6, we will summarize and discuss our findings. Above all, this chapter will present an integration of the results derived from the two models discussed in chapter 5. In addition to that, we will also outline implications for practitioners and give directions for future research.

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2 The Concept of Digital Content – Definition and Classification

2.1 The Concept of Electronic Markets as the Medium of Exchange

2.1.1 The Internet Economy

At the end of the millennium, it became clear that the last decade had changed the world profoundly. Companies, old and new, were racing for the World Wide Web, emails had become indispensable for communication, and dot.coms listed on stock exchanges were essentially a license to print your own money. Moreover, especially during the Internet hype of the late 1990s, economic principles that had been developed and used ever since Adam Smith’s “Wealth of Nations” seemed to have become obsolete. Buzzwords like “Internet Economy”, “Digital Economy”, “Network Economy” and, first and foremost, the “New Economy”, indicated that there had to be an “Old Economy”, with old theories and beliefs, that were of no use in this new age. Content was given away for free on the Internet, web-sites did not compete on selling products, but on gaining “eye-balls”, and financial analysts did not care about sales and profits, but about “burn rates”^[3].

After the burst of the Internet bubble, however, it became painfully clear that, essentially, the “New Economy” is subject to the same economic principles as its older counterpart. “These forces are not ‘new’. Indeed, the forces at work in network industries in the 1990s are very similar to those that confronted the telephone and wireless industries in the 1890s” (Varian 2001, 2003, p.5). But, Varian goes on to say, “forces that were relatively minor in the industrial economy turn out to be critical in the information economy” (ibid.). Thus, the reasoning went, the “New Economy” would not replace the “Old Economy”, but enrich it with new impulses^[4].

2.1.2 Electronic Markets and Electronic Commerce

Although the New Economy described above did bring about major changes in traditional economic thinking, it is still largely based on the activities of interacting individuals and organizations. Traditional mechanisms for coordinating these activities are hierarchies, networks, and markets (McGuiness 1991). In their seminal article “Electronic Markets and Electronic Hierarchies”, Malone, Yates, and Benjamin (1987) suggested the concept of “Electronic Markets” as one possible mechanism for coordination in the New Economy. Ever since, the “E” has been tagged to a variety of concepts and applications that are carried out electronically and are meant to fulfill the requirements of a market. Examples include Electronic Commerce, Electronic Business, Electronic Markets, Electronic Marketplaces, or Electronic Marketspaces to name but a few (Picot et al. 2001, p.337).

These different denominations point to the great diversity of definitions that are in use in academic literature today. Especially the two terms “Electronic Markets” and “Electronic Commerce” are being used almost interchangeably. In order to arrive at a single, more precise definition of the two concepts, we will start by analyzing the concept of markets in general, before discussing how this concept can be applied to the New Economy.

Historically, markets have always been places where suppliers of goods and prospective consumers, i.e., autonomous agents, met in order to exchange information, goods and services (Henderson and Quandt 1980). These interacting agents required a common language to describe rules and protocols of their interactions as well as a functioning infrastructure to ensure the transportation of the goods that were exchanged. Schmid (2000) uses the example of the ancient “Agora” in Athens as a paradigm for such a place where exchanges could take place.

Interacting agents need a medium in order to carry out these transactions. In this frameworkA medium in this framework is conceptualized as “a platform for communication of an organized community of agents” (Schmid, Klose, and Lechner 1999, p.4). Based on the ancient “Agora”, Schmid (1997a; 1999) develops an organizational model of exchange markets as media facilitating the interaction of transaction partners. Such media for interaction require three essential components:

- A logical space – The syntax, i.e., the structure, and the semantics, i.e., the interpretation, of the content represented on the platform. The logical space thus serves as the common “language” of the agents interacting in a specific medium, coding the information that may be communicated through its channels.
- A channel system – A physical carrier to transport the exchanged information or goods over space and time^[5]. Channels connect agents that are located in time and space and facilitate communication and navigation.
- An organizational system – describing (a) the configuration of a community of agents by means of roles as well as the behavior expected from them, and (b) protocols, which identify the admissible actions within the sphere of interaction via the channel system.

Consequently, a medium can be described as consisting of a channel system fulfilling the focal transportation task over time and space, a common language enabling agents to communicate with each other and organizational rules constituting a system of roles and the processes carried out: Medium = Channel System + Logic + Organization.

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Although the specific design of the transaction medium may have changed due to technological and political evolution, today’s market institutions have to include the same components described above to enable agents to perform the basic tasks of a transaction: exchange information, arrive at mutually binding agreements, and carry them out (Schmid 1993, 1999).

Any market transaction consists of a finite number of interactions between market participants. These can be grouped into classes and arranged in the sequence in which they are carried out. Schmid (1993; 2000) differentiates four different phases of any market transaction:

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- Knowledge Phase – The exchange of goods and services is the ultimate goal of any market transaction. In order to exchange goods, however, market participants need to acquire a market overview by gathering information. Thus, the exchange of information about the general business environment (e.g., new technologies, industry outlooks) or about potential market partners as well as the goods and services offered on a given market increases the knowledge of market participants and is therefore fundamental for any market transaction.

- Intention Phase – The knowledge provided in the preceding phase, together with their desires and goals, enables market participants to build specific intentions and to signal those. The common logical sphere enables them to submit offers regarding their supply of or demand for specific goods and services.

- C ontracting Phase – In this phase, agents negotiate the conditions of possible transactions, which may be finalized in a contract. This contract, representing the agreement between the market partners, is legally binding, obliging agents to act as indicated in the agreement. The protocols for reaching an agreement can vary from one-sided, fixed-price offers to auctions (Krähenmann 1994; Reck 1993).

- Settlement Phase – The goal of this final phase is to carry out the agreed-upon terms of the contract by the transaction partners. This phase may include the shipping of the goods and the transaction of money, services which may initiate secondary market transactions, e.g., logistic or financial services.

The market as described in the model above thus fulfills two main criteria:

- First and foremost, markets are media for transactions. Their main task consists in matching supply and demand by providing a platform where exchange partners can meet and negotiate agreements that help them fulfill their goals and desires.

- In addition to this, markets are also media for communication. Markets foster transactions by providing information, thus enhancing knowledge about suppliers’ offers and customers’ needs. Markets do not only present the actual offers, they can also create new needs by showing what could be. Thus, markets are also always spaces for marketing and PR.

The four phases of a market transaction introduced above can be grouped together to show how they support these two main tasks of a functioning market mechanism:

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Historically, the organization of markets has always been shaped by the infrastructure available for the transportation of goods and information. Consequently, markets are once again undergoing a substantial change due to the new digital media. Digital or electronic media are the result of the convergence of informatics and telecommunications technologies, sometimes also referred to as “telematics” (Schmid and Lindemann 1998). Information technologies allow for the integration of traditional carriers of information like print, audio, or visual media into one and can be programmed to carry out almost any kind of process automatically, while new telecommunication technologies facilitate the transportation of goods and information without any restrictions on space or time.

Consequently, when this new medium is employed to build marketplaces as conceptualized above, Electronic Markets are created (Zerdick et al. 2001, p.217). Thus, Electronic Markets create virtual Agoras, that is, platforms for the interaction of agents, by utilizing information and telecommunication technologies. The specific requirements within the organizational framework of the market are derived from the needs of its participants. The most prominent characteristic of Electronic Markets is their independence from time and space. Electronic Markets are not only accessible 24/7, but they are also ubiquitous, and therefore globally available, which differentiates them significantly from real markets (Schmid et al. 1995, p.20). Based on Schmid’s organizational model of markets outlined above, we propose the following definition for Electronic Markets:

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Electronic Markets are platforms for interaction (Agoras) within new media, where agents (market participants) – or their electronic proxies, respectively – meet in order to exchange goods. All phases of a market transaction (Knowledge, Intention, Contracting, Settlement Phase) take place within the new media or are at least supported by them.

Schmid (1993, 1999) points out that an essential requirement of Electronic Markets is that the Intention Phase, i.e., the communication of offers or buying intentions, take place within the electronic media. Only if this step takes place within the digital medium and intentions can be communicated electronically, the market becomes ubiquitous and truly global.

Contrary to other academic publications, Zerdick et al. (2001, p.218) clearly set apart Electronic Commerce from the concept of Electronic Markets described above. Based on the definition of Electronic Markets derived from Schmid’s (2000) organizational concept of markets as media for transaction, Stahl (2005) defines the term “Electronic Commerce”^[6]:

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Electronic Commerce refers to all processes and phases considered necessary to carry out a market transaction within the new media, including the Knowledge Phase, the Intention Phase, the Contracting Phase and the Settlement Phase, under the condition that all these processes and phases take place within the new medium.

2.2 Definition of Digital Content

Content, in the sense of information “contained” in media – we will specify these terms later in greater detail – has long been central to communication and entertainment within societies. The importance of media content in modern societies has steadily increased with advances in telecommunication and information technologies, such as radio, TV, and, very recently, the Internet, which enabled its widespread dissemination. In fact, the main reason for the rapid adoption and diffusion of these technologies is often believed to be their very function as carriers of content (e.g., Zerdick et al. 2001, p.48). As we pointed out earlier, the Internet itself had originally been developed to exchange information. Since content, as we will see later, is nothing but information that has been modified, it had soon been identified as the key resource of the information economy due to its potential for online distribution (McGovern and Norton 2002).

Despite the increasing attention in academic literature, a concise economic definition of content is still missing. Instead, the term content – or, in the broader perspective of the Internet, digital content – is used vaguely in a variety of contexts and meanings in both theory and practice. As a result, it is frequently used overlapping with other terms, like information, information goods or digital products. An overview of definitions used in this context is given in Table 1. In the following, we will attempt to develop a more precise and consistent terminology and thus clearly distinguish the term “digital content” from other related expressions.

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Table 1 - Digital Content: Overview of Definitions in Academic Literature

As already pointed out above, the terms “information good” and “digital content” are used almost interchangeably by most authors, suggesting that “information” is, essentially, “content”, as long as it can be digitized: “I take this [information goods] to be anything that can be digitized – a book, a movie, a record.” (Varian 1998, 2001, p. 3; parenthesis mine). Especially the examples given – a book, a movie or a record – are classical examples of content, albeit non-digital. Similar applications can be found in Choi, Stahl, and Whinston (1997) or Shapiro and Varian (1998). Similarly, Brandtweiner (2000) states that information goods are “goods which are bought for their content.” Although the two terms are definitely closely related and display very similar economic and technical characteristics, they are not the same. Information – which also lacks a precise and consistent definition – is generally defined from a communication perspective using a semiotic framework^[7]. Within this framework, characters, data and information are usually placed in a hierarchical structure, wherein data consists of different characters – or “signs” – that are grouped according to a syntax, or set of rules, to form a certain meaning. Subsequently, when this data is placed within a specific context, i.e., interpreted, a certain information can be derived from it, thus adding to the knowledge of a person regarding specific processes, facts or situations (e.g. Schwarze 2000, Biethan, Muksch, and Ruf, 2000). This hierarchical structure is depicted in Figure 12:

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Figure 12 - Interrelations between Characters, Data, and Information (Hierarchical Structure, based on Anding and Hess 2003, p. 6)

Based on this understanding of information, we will now attempt a differentiation of the term content. In most academic disciplines, information is seen as a component of content: “Information that passes casually around in the world isn’t content. It becomes content after someone grabs it and tries to make some use of it” (Boiko 2002, p. 7). In the computer sciences, for example, content is seen as a combination of information and metadata, which “corrals and confines that information and packages it for use, reuse, repurposing, and redistribution” (Boiko 2002, p. 28). Similarly, the cognitive sciences see information as raw material for knowledge. Accordingly, content is then seen as information that has been altered and presented in a new way, i.e., interpreted (Anding and Hess 2003). The same view is used to justify copyright laws in western-style legal systems. Essentially, copyrights protect a particular expression of an idea or information. Note that copyright law does not intend to protect the actual idea, concepts, facts or information itself. Rather, it aims at protecting the form or manner in which these ideas or information have been manifested.

Therefore, just like data needs to be organized to become information that can be processed, the same information can be interpreted and presented in various ways to form different contents utilizing different forms of editorial designs, media and forms, thus institutionalizing a “copyright” of the author on the underlying information. Including content in the information framework hierarchy presented above, we obtain the following structure:

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Thus, certain product specifications regarding certain qualities of a product issued by the producer would be classified as information. If, on the other hand, these specifications are tested and compared to other products in the same category, for example, and the results subsequently presented in a magazine, the original information has been modified, adding a new context to it, and it becomes content.

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Content is information that has been edited by an author using a creative act of design, thus giving it a specific interpretation and a unique form, and exists independently from transportation media.

The last part of the definition takes into account that, inherently, content is not bound to a specific medium for presentation or transportation. That is, the content itself exists independent of any transmitter. In order to communicate and make it marketable, however, content requires a transmitting signal, i.e., a medium for communication. This dual nature of content – and information goods in general – is pointed out by several authors (e.g. Hass 2003, Stahl 2005). The transmitting medium can be anything from paper (e.g., books, newspapers) or the air (e.g., oral communication), to CD-ROMs, cable or the Internet (Picot et al. 1993, 2001).

On traditional markets, the carriers of content are physical devices, like paper for content such as books or newspaper articles. On electronic markets, however, the carriers of content are the new media that constitute these markets in the first place: network infrastructures that employ information and communication technologies. In an extension of the definition of content, digital content can be defined as follows:

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Digital Content is information that has been edited by an author using a creative act of design, thus giving it a specific interpretation and a unique form. Transportation and storage of Digital Content is achieved by means of the new media, i.e., by information and communication technologies.

In this paper, we will use the term content as defined above, that is, as information that has been modified. This understanding allows us to use most of the findings and statements regarding information goods, which is still the generic term used predominantly in academic literature in this context. As Stahl (2005) points out, the analysis of paid content, that is, the electronic commerce of digital content, is primarily concerned with the electronic commerce of media content. In this specific context, the terms information good and digital good can therefore indeed be be used almost synonymously (Stahl 2005, p. 42).

A term used frequently in the context of digital content is that of digital products or digital goods. Generally speaking, digital goods are any products that exist and are transferred using information and telecommunication technologies. Consequently, any digital content is definitely a digital good, as we can deduct from the definition presented above. The reverse does not apply, however. That is, a digital good need not necessarily be a digital content. As Choi, Stahl, and Whinston (1997, p. 59) put it: “Information, even in its broadest sense, is far from the only product that can be digitized. […] Other examples are electronic currencies and various forms of financial instruments or securities. Even market processes are being digitized.” They classify digital goods in three categories, as presented in Figure 14:

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In order to specify the scope of digital content as opposed to other related expressions, Stahl (2005) also differentiates digital content from digital services. He holds that although the two categories are indeed very similar, especially sharing the feature of immateriality, which has long been used to distinguish services from other products, there are three economic characteristics that can be used to clearly differentiate the two categories:

- Transferability – while digital content goods (Stahl uses the example of an MP3-song) can be transferred to someone else without reducing the utility that can be derived from it, digital services (like the right to play online poker, for example) can only be exercised by one person. The actual right to play, i.e., the account itself, can be transferred to someone else, but by doing so, one forfeits his own right to play.

- Suitability for storage – digital content can be stored for an indefinite period of time, e.g. on the harddrive of a computer, without experiencing a loss in quality or utility. Digital services, on the other hand, are basically consumed immediately after they have been purchased, e.g. when paying for the transfer of a file on the Internet.

- Production process – this characteristic has long been used to distinguish services from tangible goods. Typically, with services, the consumer is part of the production process. In order to charge a customer for downloading a song, for example, that customer has to perform the act of downloading the song. The original production of the song, on the other hand, i.e., the digital content, does not require any consumer input. Rather, the consumer buys the song after it has been written, recorded, and stored on a medium.

After we have precisely defined the term digital content and clearly differentiated it from other related expressions used in the context of electronic markets and electronic commerce, we will now discuss the economic characteristics and consequences that are unique to digital content goods and set them apart from other products.

2.3 Economic Characteristics of Digital Content

In our attempt to define and differentiate digital content goods from other related expressions, we already encountered several features that set them apart from other goods and services. In this chapter, we will now perform a more systematic and detailed analysis of the economic characteristics of digital content. As outlined in the previous two chapters, digital content goods are a combination between content in general and digital goods. Consequently, digital content displays attributes that are a mixture of both. In the following, we will discuss five characteristics that are fundamental for the transaction of digital content. These characteristics are: experience good, indestructibility, transmutability, reproducibility/cost structure and externalities. The selection of these features relies mainly on the properties of information goods discussed by Varian (1998, 2001) and Choi, Stahl, and Whinston (1997).

2.4.1 Experience Good

Based on the idea of asymmetric information between buyers and sellers derived from transaction cost theory, Nelson (1970) and later Darby and Karni (1973) develop a search-experience-credence framework (SEC – framework) for goods that are the objects of a transaction (Animesh et al. 2005, p. 2). According to this framework, goods can be analyzed in terms of three properties: search, experience and credence. Consumers can already identify the specific characteristics of a search good prior to the actual purchase simply through inspection. Consequently, information asymmetry between buyers and sellers is almost nonexistent in this case. The features of experience goods, on the other hand, cannot be judged prior to purchasing the good. They are revealed only through consumption. Thus, experience goods can cause an asymmetric information situation even before the transaction takes place. Finally, consumers can typically never be certain of the quality and value of credence goods, not even from ex post observations. Fehler! Verweisquelle konnte nicht gefunden werden. gives an overview and examples for each category:

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Table 2 - Product Classification based on the SEC-Framework

Picot et al. (2001) point out that this classification is not rigid. Instead, the boundaries are fuzzy, and the categories can be seen as “regions” on a continuum. They represent the growing uncertainty characterizing the purchase of these products and the consequences for the partners engaging in such a transaction. Zerdick et al. (2001) hold that virtually all goods that are the object of a transaction can be classified using the SEC-Framework. They point out that traditional tangible goods sold via the Internet instead of using traditional, offline distribution channels tend to move from the search goods category to the experience goods category due to the limited possibilities to assess their quality. Varian (1998, 2001) states that information goods are essentially experience goods: “You must experience an information good before you know what it is.” Along the same lines, Picot et al. (1993, 2001, p. 358) hold that digital content exhibits an inherent “information paradox”: in order to make a decision to buy an information good, consumers need to assess their willingness-to-pay for that information. To do this, they would need to know the content of that information. Do consumers already know the content, however, there is no further incentive to purchase that information good.

2.4.2 Indestructibility

Contrary to physical goods, the quality and form of digital content goods does not change over time. Similarly, digital content goods are also not prone to a loss of quality due to extensive usage. “For most purposes, a product sold by a producer is equivalent to one offered in the second-hand market” (Choi, Stahl and Whinston 1997, p. 70).

Varian (1998, 2001) holds that this unique characteristic of digital content makes it a public good, essentially. “Information goods are typically non-rival and sometimes non-excludable” (Varian 1998, 2001, p. 4). The first feature – non-rivalness – means that consumption by one individual does not diminish the amount of the good available for consumption by others. Non-excludability on the other hand means that it is not possible to exclude individuals from the consumption of the good. (Pindyck and Rubinstein 2004). Varian (1998, 2001) points out that it is merely a legal convention, however, that makes information goods essentially private, e.g., through intellectual property and copyright laws. It is yet impossible, however, to exclude individuals from consumption technologically. Consequently, it is this last feature that has actually turned into one of the biggest problems of the Internet economy: since quality does not diminish with use – that is, a copy is identical to the original – and copies can be easily reproduced, because content is digitized, digital content is perfectly “suited” for copyright piracy. This diminished incentives to pay for legal copies of the original product and explains the popularity of content exchange platforms like Napster or Kazaa. “Digital products frame the issue of intellectual property rights, because digital products can be reproduced for free and then distributed by anyone who has acquired an initial copy” (Kauffman and Walden 2001, p. 27).

2.4.3 Transmutability

Transmutability refers to the fact that it is very easy to modify digital content and produce ever new versions of the original blueprint of the product. Choi, Stahl, and Whinston (1997, p. 72) hold that digital content goods “are extremely customizable and, indeed, seem to be changing constantly.” While the indestructibility and the public-good character may inhibit the marketability of digital content, transmutability definitely facilitates it. Varian (2001, 2003, p. 16) shows that traditional, non-digital information goods “are very commonly sold in different versions”. He gives the examples of books that are sold in paperback and hardcover or movies that are available in theaters, on airplanes, on tape or on TV. Therefore, it comes at no surprise that due to the transmutability of digital content, “versioning is being widely adopted in the technology-intensive information goods industry” (ibid, p. 17).

Choi, Stahl, and Whinston (1997, p. 73) even see such a strategy to be a necessity for companies offering digital content: “The strategic implication of transmutability is that rather than trying to protect content integrity, producers need to differentiate their products by customizing and updating, and by selling them as interactive services, not as standard shrink-wrapped products. This product differentiation is not only a possibility but should be the overall business strategy adopted by companies producing digital products.”

2.4.4 Cost Structure

The cost structure of digital content is probably its most prominent feature. Classical economic theory teaches us that the total cost of production consists of fixed costs and variable costs. Fixed costs are the initial investment needed to produce at least one unit, e.g., setting up the production plant and machines. These costs are fixed because they do not change, regardless of how many units of a certain good will be produced later. Variable costs on the other hand depend on the number of units produced. For example, the more cars are being produced, the higher the material costs of a given car producer.

This traditional model of production costs does not fully apply to digital content goods, however. Essentially, “information is costly to produce but cheap to reproduce” (Varian, 1998, 2001, p. 5), meaning that the production of content requires high fixed costs – sometimes called “first-copy-costs” (Zerdick et al. 2001, p. 165) – but only very low marginal costs for subsequent copies. Hollywood movies can cost hundreds of millions of dollars to produce, while a copy of the movie, e.g. on a DVD, can be produced at a negligible cost. In fact, most authors support the notion that “on the Internet, the marginal cost of providing information to a customer is usually zero” (Barwise, Elberse and Hammond, 2002 p. 36; see, for example Kauffman and Walden 2001; Bakos and Brynjolfsson 1996, 1999; Zerdick et al. 2001).

Zerdick et al. (2001, p. 165) point out that this high-fixed/ low-marginal-cost structure can already be found in traditional media production like newspapers or motion pictures. While reproduction costs can still be pretty significant for print media, however – such as the costs of printing additional copies of a newspaper – this cost structure is clearly accentuated by digitizing media content. The same reasoning applies to the distribution costs of digital content, as shown by Skiera and Spann (2002a). They use the example of a music download website that has to be set up as well as the server in order to ensure enough capacity. Once this infrastructure is in place, however, the costs for downloading individual songs can almost be neglected, regardless of the number of downloads. Again, a traditional newspaper may incur higher additional distribution costs, for example for delivering the copies to the people’s houses. Altmeppen (1996) provides a comparison of the cost structures for different media content categories:

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Table 3 - Cost Structures in traditional media markets (adapted form Altmeppen 1996, p. 266)

As we can see, reproduction and distribution costs add up to almost 35% (magazines) and 60% (newspapers) of the total costs of print media, respectively, and can even surpass the costs of production. As we will see later on, the substantially lower costs of distributing and altering digital content goods facilitate the differentiation of products and prices, while the specific structure of those costs widens the range of possible prices that can be set.

There are two caveats, however, to this “brave new world”. First, the fixed costs necessary for producing content are not just fixed, they are also sunk (Zerdick et al. 2001), meaning that “they typically must be incurred prior to production and usually are not recoverable in case of failure. If the movie bombs, there isn’t much of a market for its script, no matter how much it cost to produce” (Varian 1998, 2001, p. 5). Thus, while the cost structure favors the production of an unlimited number of copies, there has to be demand for these extra copies. These sunk costs are the main reason why pirated content hurts the producers so much. Second, there is some evidence that marginal costs may not strictly apply in all cases (Choi, Stahl, and Whinston 1997). As Kauffman and Walden argue (2001, p. 29), “although it is true that reproduction costs are low, the value from any new technological product quickly diminishes once newer versions arrive in the marketplace. […] Clearly, a firm like Microsoft can produce copies of Windows NT or Windows XP very cheaply. But the reality is that Microsoft O/S is an evolving product on which Microsoft spends millions of dollars on an ongoing basis to maintain its place as a market leader.”

2.4.5 Externalities

Classical economic theory teaches us that the greater the number of a certain good on a market, the lower the consumer valuation for that good will be, a phenomenon also known as “diminishing returns to scale”. In is article, Arthur (1996) holds that knowledge-based industries are, on the contrary, characterized by increasing returns to scale. In other words, the more a company succeeds in selling a certain product, the more people will want to buy that same product as well (Economides 1996). The reason therefore is known as “network externalities”, first discussed by Rohlfs (1974). The classic example of a network effect is the rapid adoption of the fax machine in the US, which was mainly based on the increasing number of fax owners (Economides and Himmelberg 1995). “Network effects are clearly prominent in some high-technology industries” (Varian 2001, 2003, p. 34). Examples are Microsoft’s Windows OS or music exchange servers. In addition to this positive enhancers, research also suggests that such networks may display so-called lock-in effects. Lock-in effects arise when consumers incur substantial mental or monetary costs to switch to alternative offers. In the case of Microsoft’s Windows OS, it may be very hard for consumers to switch to a different operating systems, because of behavioral inertia and the unappealing prospect of having to learn how to utilize a whole new system. Moreover, they would also incur additional monetary expenses in order to purchase the new OS. Therefore, Varian (2001, 2003) concludes that once customers are locked in, they can be a substantial source of profit.

Choi, Stahl and Whinston (1997, p. 68) point out, however, that there still are digital content goods that display negative externalities, that is, their value diminishes with more people owning the same content or information: “Nevertheless, there are numerous instances where exclusive information is more valuable because its exclusivity renders the owner benefits. A primary example would be market information that can be used for investment or speculative purposes. The profitability of insider trading, although illegal, depends on the exclusivity of the information.”

2.4 Classification of Digital Content

The rise of the Internet is inextricably linked to the emergence of digital content – and vice versa. Web sites on the Internet needed to be filled with something that would make people click on it. Because, essentially, a website consists of nothing more than bits and bytes, it can only be filled with bits and bytes. Since physical products cannot be “uploaded” to a website, they have to be transformed into digital products. On the other hand, before the rise of online networks, digital products in general and digital content in particular lacked an efficient transportation medium. Thus, innovations in one area were conditioned on innovations in the other area. There was no need for new transportation channels if there was nothing to transport. Similarly, technology allowed for new forms of content, but without appropriate means to store and transport these, they had no value.

Based on this reasoning, digital content can be classified within two different frameworks. The first framework is based on the dual nature of content discussed in section 2.2. As we showed there, while abstract content can exist by itself; it is not marketable, however, without a medium acting as a carrier for transportation and storage. Thus, content in the sense of a good that can be bought and sold in a market consists of the content, i.e., the information that is conveyed in it, and the medium utilized for transmission. As a result, content goods can be classified along these two dimensions. First, the content itself can exist in a digital or a non-digital form. Likewise, the transportation medium can also be either digital or non-digital. Based on this categorization, we can classify content goods within a 2x2-matrix. This classification is illustrated in Figure 15 below.

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As we can see here, ever since content was first created in ancient civilizations, non-digital media like stone slabs, wood, and, in modern times, paper, was traditionally used for storage and transportation. These early information goods were nothing different from other tangible goods like clothing or cars. We will therefore stick with the generic term Physical Content Goods. In the early 1990s, technological progress made it possible to create digital content, transforming non-digital content into a string of bits and bytes. So by now, the content was digital, but because computers were not connected with each other yet, this content was transferred between them using physical devices, like CD-ROM’s or, in the “early days”, floppy disks. Due to this combination of both digital and non-digital features, we will call this form of content Hybrid Content Goods. Finally, with the advent of the Internet and Electronic Markets, the infrastructure was created, which allowed for the digital transportation of content, without using physical devices as intermediaries. As already outlined in our definition of the term Digital Content Goods, this refers to goods for which not only the content is digital, but new information and telecommunication technologies are used for its transportation and storage.

While this method of classifying digital content is based on the product characteristics, an alternative way of looking at it is to analyze how the products are suited to support the economic potential of electronic commerce made possible by the new information and telecommunication technologies. To do this, we will employ the transaction phases framework outlined in chapter 2.1:

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At first, the Internet was mainly used as a communication medium. Company websites served simply as an alternative to product catalogues and in-store displays. Bar and Murase (1999) call this form of electronic commerce network-aided commerce. In this stage, electronic communication technologies merely assist traditional economic activities, they “do not fundamentally change the commercial process”, however (Bar 2001). Bar and Murase (1999) hold that in order to actually speak of an electronic marketplace, in addition to allowing buyers and sellers to inform themselves better and express their intentions, the network – in this case, the Internet – also needs to enable the matching of supply and demand by allowing for contracting online. Because the goods and services are ultimately delivered physically to a customer, however, they refer to this sort of electronic commerce as indirect e-commerce. Up until now, this has been the most widespread use of the Internet as a marketplace. Companies like Amazon or Dell allow their customers to browse their product offering, retrieve information about quality, content or price, agree to buy their products online and even pay via the Internet. The actual product, however, the book or the computer, is then delivered to the customer’s front door. Because the products are tangible goods, however, their distribution has to be carried out physically.

[...]

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^[1] Yahoo and Amazon both started charging for online auction listings that had previously been free; the actual content offerings remained free, however.

^[2] We will discuss the differences between information goods, digital content and other related terms in chapter two.

^[3] The “burn-rate” is a term that has been created by financial analysts to express the rate at which companies “invested” – but actually really did “burn” – inflowing money.

^[4] For an introduction to the economics of Information Technology, see “Information Rules – A Strategic Guide to the Network Economy” (Shapiro and Varian 1998a) as well as “Economics of Information Technology (Varian 2001, 2003).

^[5] This, i.e., the mere transportation of information, is the main task assigned to a “medium” in traditional models. Thus, the model at hand extends the traditional understanding of a medium by integrating the logical and social space that is inherent in every medium.

^[6] The emphasis of the definition of Electronic Markets and Electronic Commerce used in this paper is on the new medium enabling end-to-end business transactions. As a result, it can be applied to both traditional businesses, where the new medium is included as an additional distribution channel (so called “bricks-and-clicks” companies), as well as to new, Internet-only companies (so called “pure-click” companies).

^[7] Semiotics – or semiology – is the theory and study of signs and symbols and the way meanings are formed (e.g. Sturrock 1986, Eco 1976).

• Hochschule: Universität Mannheim (Lehrstuhl für Allgemeine BWL und Marketing I)
• Note: 1,7
• Autor: Lucian Morariu (Autor:in)
• Erscheinungsjahr: 2007
• Seiten: 189
• Katalognummer: V88047
• ISBN (eBook): 9783638035910
• ISBN (Buch): 9783638936866
• Sprache: Englisch
• Schlagworte: BWL, Marketing, Consumer Behaviour, Internet, E-commerce, Paid Content, online distribution, online content, Internet Marketing, CRM