Digital markets; internet influences on pricing; digital

productsMARK 230 – WEEK 11

Topics for today’s class

• This week: how does the internet change the dynamics between buyer and seller?

– Digital markets– Internet influences on pricing– Digital products and digital rights management

DIGITAL MARKETS

The digital marketplace: The Long Tail effect

– “In a market with near infinite supply (huge variety of products), a demand will exist for even the most obscure products” Chris Anderson(2006)

– Core concept is “infinite shelf space”

Image source: www.novelr.com/

“Sharing” / collaborative economy• Refers to internet-enabled software platforms that

allow individuals (or firms) to “rent” assets (human and physical) owned by other individuals or firms.

• The software platform enables the market by connecting the person with the asset with the person who needs it.

• The firms participating in this economy are said to be “disruptive” of the existing incumbents in the target industries

“Sharing” / collaborative economy

• Tim O’Reilly calls this the “WTF economy” – Without owning or operating a single car Uber has

3x the revenue of the entire prior taxi and limousine industry.

– Without owning or operating a single room Airbnb has more rooms on offer than some of the largest hotel groups in the world.

– Top Kickstarters raise tens of millions of dollars from individual backers. Amounts of money previously available only from investment firms

INTERNET INFLUENCES ON PRICING

Internet Influences on Pricing

• Internet influences – buyer and seller perspectives of price

• Moving from free to fee• Price comparisons• Dynamic pricing

Buyers and sellers views of pricing

• The meaning of price depends on the viewpoint of the buyer and seller.

• Each party to the exchange brings different needs and objectives that help describe a fair price.

• If buyer and seller can’t agree on a fair price, then there is no sale

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Buyer perspective on price

• Buyers define value as benefits minus cost• Costs to the buyer– Money: what is the real cost? How is it calculated;

what does it include (shipping, taxes, duties, gift wrap)

– Time: finding what you want, waiting for it to arrive, slow web sites

– Energy: Web = self service, so no-one to help in research and locating an item

– Psychic costs: frustration, lack of trust of web commerce, lack of confidence in on-line service delivery etc

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Price is more transparent: comparisons by customer

• Software agents (“bots”) visit web servers and collect pricing information, and / or merchants provide a data stream to the site

• Many of these sites accept payment for “premium” listings

• www.MySimon.com• Google Shopping – now integrated into AdWords so

merchants pay for a listing• Pricing is now much more transparent – no effort

needed for price comparison– more difficult to maintain position as a price leader in the

Internet worldD. Chaffey. eBusiness & eCommerce

Management. Prentice Hall. 2011

Pricing strategies: DYNAMIC PRICING

• Dynamic pricing is fluid pricing– It is one of the most significant effects that the

Internet has had on pricing strategy.– Decreased “menu” costs on the web - changing

prices is easy (no costs of changing price tags, catalogs etc)

– Interactivity - buyers and sellers from all around the world can interact and “negotiate” prices using internet platforms eg:• Uber’s “surge” pricing (short video)

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Dynamic pricing: Auctions

• Variety of auction types– “English” auction such as e-Bay where the price

starts low and is then driven up by bids– “Dutch” auction - the auctioneer announces a

high price for the product, then gradually reduces it until a buyer will accept it

– First-Price sealed bid auction (purchaser does not know the amount of the other bids)• Priceline is an example of this type of auction

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Priceline “Name Your Own Price” Auction Process

Consumer submits non-refundable

bid

Consumer submits non-refundable

bid

Priceline checks if any of its

participating airlines are willing to offer roundtrip flight at bid price

or lower

Priceline checks if any of its

participating airlines are willing to offer roundtrip flight at bid price

or lower

Checks airline’s seat availabilityChecks airline’s seat availability

Priceline accepts or rejects bid

Priceline accepts or rejects bid

Impact of dynamic pricing and price transparency on the market

• Price transparency and the ability to compare prices gives buyers a lot more power– Makes it more difficult to compete solely on price

• However, has not had the expected result of depressing prices or making all prices the same

• Lowest price is not always the best price– Buyers look for other benefits such as reliability of

supplier, known brand name etc

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Going from free to paid • Big issue now is persuading people to pay

for something they can get for “free”• Some strategies (discussed in a previous

class)– Freemium model: provide basic service at no

cost, with upgraded or enhanced service being charged for

– Chris Anderson on Free: The four business models (video, 4 minutes)

So how does this work with digital products?

– Alternative business models for digital products?

– Artificially high prices?

COPYRIGHT, DIGITAL PRODUCTS, AND PRICE

Intellectual Property/Copyright on the Internet: Main challenges

• Global environment: laws governing intellectual property as it relates to copyright differ

• The law cannot keep up with technology– Canada / US differences in downloading/uploading of music &

copyright levies via the Canadian Private Copying Collective• A blank CD costs in the range of 50 cents. Of that, 29 cents is collected for

musicians and provides compensation to creators for private copies that are made of their music without authorization

– This has been in place since it was enshrined in the Canadian Copyright Act of 1997 (when it addressed the taping problem)

– Since 2003 over $230 million has been paid to music rights holders for private copies made of their music

– why are they advocating strongly for an extension of the levy?

Canadian Private Copying Collective• “The amount available for distribution to rights holders from

the private copying levy has dropped from $27.6 million in 2008 to an estimated $8.4 million for 2012 – a 70% reduction. This downward trend is expected to continue”

• Strong lobbying to extend the levy to more current technologies used for copying– In 2007 advocated $75 for memory component of “digital audio

recorders” (eg. mp3 players)– The courts have ruled (2008)that Copyright Board has no legal right to

certify such a tariff on digital audio recorders

• One other problem is that it leaves the law unclear as to the legality of private copying by an individual (who seem to have paid the rights holder via the levy)

http://www.cpcc.ca/en/the-cpcc/rights-holders

Problems caused by IP abuse of digital goods

• Inability to control and capitalize on real product demand

• Loss of revenue caused by unauthorized use and/or redistribution;

• Loss of product integrity caused by unauthorized users having unimpeded access

• Loss of knowledge regarding user bases (you don’t know who your users are)

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Digital Rights Management

• DRM refers to all the techniques that might be used to manage copyright (digital and non digital) and control such things as:– # of installations (games and software)– Copying– Playing on different systems

• There are many forms of DRM and technologies that implement and track it.

D. Chaffey. eBusiness & eCommerce Management. Prentice Hall. 2011

Photographs and other images

• Watermarking– Digimarc technology built into PhotoShop and

other leading image editors – with a Digimarc subscription copyright information can be embedded imperceptibly into digital images and then tracked as the image is used

– Digimarc Digital Watermarking

Managing digital rights in music sales

• Apple iTunes example: FairPlay• Uses a system of “keys” to decrypt and manage

the user rights of the files • Restricted the computers and devices the songs

could be played on• iTunes started selling DRM-free music in 2009• Apps from iTunes and subscription songs from

Apple Music still have FairPlay DRM

Many arguments against the use of DRM• It makes criminals out of ordinary people because

the law is both too strict and too uncertain• It decreases the usefulness of legitimately purchased

products and inconveniences customers in what many feel is an unreasonable manner

• It actually increases piracy because it makes products with DRM less attractive to potential purchasers

• It just doesn’t work anyway (too easily circumvented)– “trying to make digital files uncopyable”……is like "trying to

make water not wet“ Bruce Schneier (internet security specialist)

Discussion• Bearing in mind the notions of price

transparency, buyer’s perception of value, and “costs” other than actual dollars:– What should digital music cost?– How should we pay for it?– Why would we “pay” that? (think about the price

you are suggesting taking into account both dollars and other “costs”)

• Some interesting research on P2P usage and music, concert, merchandise sales