Tuesday, March 16, 2010

Supply/Demand

Has supply (via changes in technology, input prices, or entry) been driving price?

The nearly limitless supply in the Internet industry has driven prices nearly out of existence. Obviously, E-commerce sites such as Amazon and Overstock can put prices on their products, but charging customers a price for content and community, which are my segments of the broader industry, is becoming increasingly difficult, if not impossible, and here’s why:

· Entry. In the Internet world today, there is virtually no barrier to entry. Someone can start producing content in 10 minutes with little or no cost. Additionally, this makes piracy an especially complicated problem because anyone can use such entry to illegally spread for free what would normally cost a price.

· Input Prices. For the little guys in the industry, the prices to create a product are almost none existent. In some cases, the only input required is a little bit of time. Even medium-sized applications and content producers can get by with input prices equal to the cost of renting a server somewhere.

· Technology. As mentioned under input prices, the cost to running a product is tiny. With changes in technology, even the big guys are able to drastically reduce cost in order to host more content and produce more applications. Additionally, the technology used to create these products is becoming vastly easier to use, opening the door to more and more entry, and slicing time to market to fractions.

Has demand (via income growth, changes in preferences, changes in the prices of substitutes) been driving price?

Demand has not driven price because it simply cannot keep up with the overwhelming increase in supply. Everything on the Internet has, at the very least, a handful of alternatives. If one firm decides to charge a price for something, that firm would stand to lose the vast majority of its users to another firm, which does not charge a price for the same service.

Take Flickr for example. Flickr used to allow unlimited photo uploads per user. Now it allows users to host up to 200 photos for free, which most users won’t reach. After that, a user must purchase a pro account for a small annual fee. When Flickr made this decision, it lost a lot of users to competitors such as Zoomr, Photobucket and Facebook, which don’t place limits on uploads.

ESPN.com faces a similar challenge. We offer the vast majority of our content for free, but users can purchase an “Insider” account and get access to restricted information. However, the same information can be found (albeit with a bit more effort) on other sites for free.

Which factors are most likely to be most important over the next five years?

Metrics, metrics, metrics. I predict that nearly all services and content will be available at no price at the end of five years. And no one will be thinking about how to charge the user a cost. The shift to figuring out the price for sponsors and advertisers already has started, but it will be even stronger. The key to structuring those costs are metrics.

· Who are my users?

· What are they interested in?

· How long to they spend on our site?

· What other sites are they interested it?

· How many users do I have?

· Are they likely to click and ad?

What are the implications of these observations for your organization?

ESPN.com’s Community group must collect extremely detailed information on its users, so as to be able to sell them to advertisers. We must figure out how to attract more users and keep them on our site longer. Additionally, we must figure out how to “convert” users that are not ESPN.com users. By this I mean that we must have a strong distributed strategy. With the vast supply that exists, assuming that we can attract everyone to us is naïve. We need to adapt and go to them by building applications that they can interact with on their MySpace, Facebook, iGoogle, or blog pages. Many of these allow sponsorship and count toward relevant metrics. If nothing else, all further strengthen the ESPN brand.
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