Cyber Monday - Update

Good news! According to, Cyber Monday sales were up 15% over last year. In fact, spending for the holiday shopping weekend appears to have gone up 12% over last year, according to the survey. This increase helps recapture some of the overall loss on the month. Prior to the Thanksgiving-Cyber Monday shopping spree, online sales were down 4% on the month. The month, including December 1, will wrap up with only a 2% decline. This is still a seven month disappointing downward trend in online sales. provides a similar Cyber Monday picture. While they do not report actual sales, they report that Cyber Monday generated a 10% increase in Web traffic. Nielson calculates the Holiday eShopping Index. The Holiday eShopping index is based on a survey of 120 representative online retailers, and traffic to these cites represents a barometer of online activity.

Interestingly, beauty was the fastest growing product category in the index on Cyber Monday 2008 with a unique audience growth of 151%. (This is a stark change from Black Friday’s traffic leader of consumer electronics at 219%.) This was followed by toys/videogames with a unique audience growth of 112%. Of the top 10 online retail destinations, Amazon, Sears, Best Buy and Netflix showed the most traffic growth (25%, 58%, 51%, and 42%, respectively) over Cyber Monday 2007, while Wal-Mart saw 0% and eBay saw a 2% decline in traffic. Just four days earlier on Black Friday, the top destinations were Wal-Mart, 106%, Target, 136%, Best Buy, 196%, and Circuit City, 352%.

Another index to watch during holiday shopping is Chase’s Paymentech Pulse Index. It paints quite a different picture for Cyber Monday. This index monitors the daily activity of 25 of the largest 150 Internet retailers through data taken from actual “transactions crossing Chase Paymentech’s global processing platform”. This index tells us that on Cyber Monday 2008 sales volume increased by less than 1/2% from last year, but transaction counts were up 14%. Essentially this means that while more transactions were made, much less was spent per transaction than in the previous year. In fact, the average dollar spent per transaction was down 12 percent.

Data Sources:

“Welcome to the 2008 Chase Paymentech Pulse Index: What will this year’s online holiday shopping bring?”



Press Release:, E-Commerce Spending Jumps 15 Percent on Cyber Monday to $846 Million, the Second Heaviest Online Spending Day on Record, December 3, 2008

Cyber Monday – The Online Response to Black Friday

Today is Cyber Monday – The e-Business version of Black Friday. Cyber Monday traditionally falls on the Monday following Black Friday. It is the day when many people who are presumed to be working are huddling behind their computer screens looking for the best deals to buy online. The term Cyber Monday was apparently coined by, the online arm of the National Retail Federation, which is the trade group for online retailers, in 2005, when it was noticed that people were continuing shopping online after returning to work on the Monday following the Thanksgiving break. survey finds that 13 million more Americans (84.6 million total) plan to shop online on Cyber Monday this year over last year. 72.8 million of them will shop from work (representing 55.8% of workers with Internet access). This is up from 44.7% in 2005.

Of retailers, 83.7 percent will have special marketing plans/promotions on Cyber Monday, up 72% from last year. The most popular plans for increasing online sales are specific deals/promotions (38.8%), email campaigns (32.7%), one-day sales (24.5%), and free shipping (22.5%). Find the full report and historical data at

Even so, Cyber Monday is not the busiest online shopping day of the year. Traditionally, the busiest days are in mid-December as buyers rush to get those last minute hard-to-find gifts while there is still time for delivery before Christmas.

Some problems arise on Cyber Monday including sites slowing down or simply crashing as business picks up. Businesses that aren’t prepared for the outcome of successful marketing campaigns may experience these problems. On Black Friday 2008 online shoppers experienced these problems even at large online retailers such as and was actually down for a good portion of the day (Worthen, 2008). Not forgotten is the “network configuration issue” that shut down “tens of thousands” of Yahoo Small Business online merchants from 6 a.m. to 1 p.m. on Cyber Monday in 2007 (Choney, 2008). Firms must also be able to handle the business of successful campaigns. Many parents will remember when Toys R Us failed to deliver by Christmas in 1999 on many orders placed during December of that year.

Online holiday sales are expected to be flat this year according to Online sales declined 4% during the first 23 days of November when compared with the same time frame in 2007, following a trend of declining growth rates in the six previous months (15%, 12%, 11%, 8%, 6%, 5%, 1%). According to, a market-research firm, online sales in November-December of this year are expected to remain flat compared with the previous year – a stark change for online retailers accustomed to double digit gains (Lawton 2008). Even so, reports online spending this year was up six percent on Thanksgiving Day and up one percent on Black Friday over last year, an encouraging sign for online retailers. 11% of online Black Friday sales came between the hours of 4:00 a.m. and 8:00 a.m. – time traditionally spent standing in line at stores like Best Buy, Toys R Us and Walmart. Nearly 50% of online sales occurred between 8:00 a.m. and 4:00 p.m.

The declining growth rates in online shopping sales over the past six months are consistent with the slowing U.S. and global economies. Online retailers are not immune to the problems plaguing brick-and-mortar firms. finds that shoppers are increasingly concerned about unemployment/job security and financial markets conditions. Shoppers making less than $50,000 per year are actually spending 3% less online than last year while those making between $50,000 and $100,000 are only spending about 1% more online. According to another study by, 47% of online consumers are buying fewer gifts this year and 46% are buying less expensive gifts. These same online buyers suggest they will respond more to coupons, free shipping, and comparison shopping.

Only three hours of Cyber Monday left. I still have some shopping to do!

Data Sources and Bibliography, comScore Forecasts Flat Growth for 2008 Holiday E-Commerce Spending, November 25, 2008, Accessed December 1, 2008, U.S. Retail E-Commerce Growth Slows to 1 Percent in October as Concerns about Inflation, Jobs and the Financial Markets Cause Consumers to Curb Spending, November 18, 2008, Accessed December 1, 2008., Black Friday Sees $534 Million in E-Commerce Spending, Up 1 Percent Versus Year Ago, November 30, 2008, Accessed December 1, 2008., Site created by when it came up with the “Cyber Monday” marketing scheme. It is a clearinghouse of sorts for holiday shopping sales of online firms., A Gimmick Becomes a Real Trend, BOB TEDESCHI, , New York Times, November 26, 2007, Accessed December 1, 2008, Getting ready for ‘Cyber Monday’: Despite projected drop in Web holiday sales, sites may be busy with lookers, By Suzanne Choney, November 30, 2008,, Accessed December 1, 2008, Survey Finds 85 Million Americans to Shop on Cyber Monday, Up From 72 Million Last Year– Unveils Select Deals of the Hour—, Accessed December 1, 2008., Retail Sites Crash as Shopping Season Opens, Ben Worthen, November 28, 2008, 4:49 pm, Accessed December 1, 2008, Online Shopping to Plateau As Slump Hits Cyberspace, CHRISTOPHER LAWTON, NOVEMBER 26, 2008, Accessed December 1, 2008.

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Have Reputation, Will Sell – The Market for Links

One day a few years ago I asked my son if he had homework. He told me not to worry because he had a “homework pass”. In other words, he had earned a pass from his teacher to use to cancel out (excuse) a missed homework. I immediately outlawed that practice for him. Missing homework means missing material needed for learning. A few weeks later he told me that his friends were wanting to “buy his homework passes” and is it right to sell them? Very quickly I learned about a market that had developed at his middle school whereby kids were buying and selling homework passes! It is amazing how fast a market develops around a good idea – even when that idea hurts the integrity of the very system in which it developed.

One of the things that fascinate me about Google’s PageRank is the fact that it was basically created to mimic the practice in academia of establishing professors’ research reputations. Professors in research institutions build their reputations by publishing in peer reviewed journals. Their goal is to make a significant contribution to the literature, and it is that literature which provides a foundation for their works. In other words, their works build on the works of others. It is a responsibility to acknowledge the contributions of others to your work. It is an honor to be ‘cited’ in someone else’s work – especially if that person has a better research reputation than yourself or publishes in a high quality journal. This is how you build an academic reputation. Google’s PageRank does essentially the same thing for websites. It evaluates a site not only by its URL and the relevancy of its contents to the search term, but also by the quality of its incoming links – or the number of links from other sites that link back to the site, as well as, the number of links that link back to those sites. If a site with higher quality backlinks (or a higher PageRank) links back to your site, this is a nod of approval of the site.

Thus, the emergence of a market – the purchase of reputation through the buying and selling of links. The sellers? Those who have established reputations and high PageRank. The buyers? Those who are just getting on the web and are looking for ways to increase PageRank. And then there are the swappers - those that follow the axiom “if you scratch my back, I’ll scratch yours”.

If you have a website, at some point you will be contacted by someone wanting to be your “link partner” or someone wanting to “buy text links” on your site. Is this a good idea? The jury is still out for me on this. My first instinct is that it is a free market. Let freedom ring. Just keep in mind that many of these unsolicited emails are simply suspicious or even dishonest marketing tactics. You are likely to pay money for nothing. But even for those that are legitimate, freedom goes both ways. Let Google protect the integrity of their search system as well. Matt Cutts (Shout out to him: Go Big Blue!), head of Google’s Webspam Team, seems to take a lot of criticism for his staunch views on protecting Google’s search engine integrity. He has this to say:

Google (and pretty much every other major search engine) uses hyperlinks to help determine reputation. Links are usually editorial votes given by choice, and link-based analysis has greatly improved the quality of web search. Selling links muddies the quality of link-based reputation and makes it harder for many search engines (not just Google) to return relevant results.

He goes on to suggest the penalty:

Reputable sites that sell links won’t have their search engine rankings or PageRank penalized–a search for [daily cal] would still return However, link-selling sites can lose their ability to give reputation (e.g. PageRank and anchortext).

And more from Matt at Google’s Webmaster Central Blog:

If, however, a webmaster chooses to buy or sell links for the purpose of manipulating search engine rankings, we reserve the right to protect the quality of our index. Buying or selling links that pass PageRank violates our webmaster guidelines. Such links can hurt relevance by causing:
- Inaccuracies: False popularity and links that are not fundamentally based on merit, relevance, or authority
- Inequities: Unfair advantage in our organic search results to websites with the biggest pocketbooks.”

And more from Google:

“Not all links are equal: Google works hard to improve the user experience by identifying spam links and other practices that negatively impact search results. The best types of links are those that are given based on the quality of your content.”

So it is safe to say that Google does not condone outright link-buying for the sake of raising PageRank.

However, Google ironically promotes link buying in some ways. For example, to improve your ranking in search engine page results, Google suggests that you “Submit your site to relevant directories such as the Open Directory Project and Yahoo!, as well as to other industry-specific expert sites.” This draws fire from critics because these directories may charge a fee for listing. Essentially Google is saying that it is ok to buy and sell links in some respects. So how do we know when it’s ok? Jim Boykin debates this in his blog. He suggests that the determining factor is whether or not there is some human element to the review decision and the possibility that the link will not be traded.

Ultimately, Jim suggests this:

“Getting a few of the right links, from the right places can be more valuable than getting 100 links from the wrong places.” He provides some great graphic analogies depicting what link buying does for a site’s reputation.

Aaron Wall, of SEO Book, suggests additional legitimate ways of buying links here.

In other words, DO YOUR OWN HOMEWORK. Think about the potential consequences of buying the pass. Follow good practices to make your site easily found on the web, and don’t overdo it or over pay for it. As businesses who want to sell online, the important lesson is to have a good product that people find worthy of buying. Build a reputation the old fashioned way – earn it.

I started this blog a few months ago. It naturally had a PageRank of zero. I am quite proud that it now has a PageRank of 2. I have a long way to go…

Bibliography and Additional Reading:

John Battelle, The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture, Penguin Group, 2005, NY, NY

Aaron Wall, SEO Book,, How to: Buy Links Without Being Called a Spammer, August 17, 2007

Jim Boykin’s Blog,, Why That Site With 50 Backlinks Beats Your Site With 1000 Backlinks, September 2006.

Jim Boykin’s Blog,, Link Buying: Reviewed and Not Guaranteed Is the Line in the Sand, January 2008.

Matt Cutts, Google Webmaster Central Blog, Information about Buying and Selling Links that pass PageRank,

Matt Cutts, Matt Cutts, Gadgets, Google, and SEO, “Text Links and PageRank”,, September 2005 (Read article and comments for a good debate.)

Building a Bridge to Everywhere – Closing the Global Digital Divide

I wrote in an earlier post about the digital divide – in particular, it was about who is buying online. Now I ask, “What is the global digital divide?” And is the gap closing?

What is the Global Digital Divide?

The global digital divide represents the differences in internet and other telecommunications access and usage across countries. The global digital divide encompasses two concepts. First, there is a divide in access and usage across definable groups within countries, and second there is a divide in access and usage across countries themselves.

Individual country statistics routinely show an intra-country digital divide. In a Pew Internet and American Life study and nearly all the countries surveyed in a 2008 OECD study, internet use within OECD countries decreases with the age of the user, increases with the education of the user, and increases with the income of the user. Globally, households with children are more likely to use the internet and urban/suburban users more likely to have access than rural users. And in many countries men access the internet more than women. This same study also found that internet access varies with firm size. Larger firms (firms with more than 100 employees) are twice as likely to have internet access than smaller firms.

According to Internet World Stats, the latest number of world internet users in October 2008 is 1,463,632,361 which represent 21.9% of the world population. I have reproduced some of this data in Table 1. Between 2000 and 2008 the number of users grew at a rate of 305%. The highest percentage of users per population (known as “internet penetration”) can be found in the North America, 73.6%, and the lowest percentage of users can be found in Africa, 5.3%. Asia may have the largest number of total users of the Internet, but access is still largely concentrated in the higher income urban areas (Kuang 2008). However, the fastest rate of growth of users is in the Middle East. While the Middle East only represents 2.9% of world usage, its rate of growth since 2000 is an astounding 1,175.8%. A similar pattern can be found in Africa where usage by only 3.5% of the world’s users has grown at a rate of 1,031.2%. While these numbers seem staggering , when you begin with a low number of users initially, even a small increase in the number of users can lead to big growth rates.

An enlightening image of the digital world, shown here in Figure 1, illuminates the relative densities of Internet connectivity across the globe. The U.S. and Europe are literally lit up with connections, while Africa and parts of Asia are dark. The map illustrates connections around the world, but this is not usage. In areas such as Africa, the density is low but usage may be higher because many people may be using a single connection (e.g., in an Internet Café) (Rogers 2008).

World Connection Density

Figure 1: World Connection Density, Image provided courtesy Chris Harrison, Carnegie Mellon University

Is the global digital divide closing?

Countries with low penetration rates can expect to see bigger gains in the global digital divide. The change in the digital divide “pie” is represented in Figures 2 and 3. Perhaps it is not best to treat the global digital divide as a pie of a certain size such that gains in one area represent declines in others. Statistically, the global digital divide will naturally decline as internet access in developed countries gradually grows closer to population limits (i.e., as penetration rates draw nearer to 100%). It is best to view the pie as growing, and a reduction in the digital divide would see the pie becoming closer to representing population differences. Increasing access in developing countries need not take away from the access of current of users; however, it can, as countries deal with such issues as the bandwidth sharing (Kuang 2008) and the current IPv4 address shortage (OECD 2008).

Figure 2:  Source Internet World Stats,

Figure 2: Source Internet World Stats,

Figure 3:  Internet World Stats,

Figure 3: Internet World Stats,

What causes the global digital divide?

According to recent studies (e.g., Chinn and Fairlie 2007, OECD 2001), there are several major contributors to the global digital divide including differences in income, literacy, infrastructure, and the regulatory climate. As expected, the lower income developing countries have lower access to the Internet. In countries where people worry about from where their next meal will come, internet access is less likely to be their major concern. In these same countries, illiteracy also complicates internet usage. When the internet is accessed, users must share a very low bandwidth. As a result, text based internet pages are the most likely to be successfully accessed. The irony is that these pages often cannot be read because of low literacy levels and translation difficulties. These users are deprived of the audio and video components of the web that would be most beneficial to them due to low bandwidth. “The lowest broadband speeds available to affluent countries, such as Japan, Singapore and South Korea, are faster than the maximum broadband speeds in Bangladesh, Cambodia, Laos and Tonga.” (Kuang 2008) One OECD study shows that a single user in Japan has access to more bandwidth than the 45 countries with the lowest bandwidth combined (OECD, 2004).

In the past, the focus of reducing the global divide centered on expanding landlines to increase dial-up access. In one 2001 OECD study, expanding broadband via cables was the major emphasis for expanding access. In just a few years “those previously described as ‘haves’ as dial-up users would be considered ‘have nots’ for the emerging broadband divide.” (OECD 2004, pg. 7) In OECD countries, broadband subscribers increased by 11 times between 2000 and 2006 (OECD 2008, pg. 11). Expanding broadband into developing countries is still a prominent interest of telecommunications companies and governments. However, while the positive externalities in terms of productivity and economic growth of laying submarine and land fiber optic cables are potentially profound, governments often view internet access as a public good. This creates issues as to who should pay for creation, access, and even repair of the cables. (e.g., Waltner, 2006, and Johnson, 2008). A variety of public and private telecommunication structures has developed connecting to one vast network. Public policy analysts fear that monopoly pricing and limited access by private firms will continue to isolate vast geographical areas (e.g., see CIPESA, 2006). One OECD (OECD 2004) study suggests that the solution to the global digital divide is through liberalizing telecommunications markets while keeping a sound regulatory framework.

How can the global digital divide be reduced further?

Studies of the global digital divide often focus on both internet access and pc availability. Moves to expand laptop and pc availability to developing third world countries will help increase access to broadband and reduce the global digital divide. However, the popularity of mobile communications in developing countries may suggest that satellite technology is the medium of the future. In 2002, the number of mobile phones outnumbered fixed phone lines globally. (Euromonitor International, 2007) Mobile phones are less expensive for developing country citizens and providing access is cheaper for firms than building or repairing landline infrastructure. It is therefore easier to use satellite transmission to extend access in these areas. The US, UK and Italy are leaders in mobile Internet penetration with 15.6 percent of mobile subscribers in the US, 12.9 percent of subscribers in the UK and 11.9 percent in Italy who actively use the mobile Internet. (Nielson Mobile 2008) A Nielson report in July 2008 finds that while the US leads in overall mobile internet usage (of total users), other nations, such as Russia, Brazil, and India, are now using mobile devices as the primary mechanism for getting online. Mobile phone use in the Sub Saharan Africa grew 67% in 2005 and currently outnumbers North American customers. (Waverman 2007) A company called O3b Networks, backed by Google, Liberty Global, and HSBC Principal Investments, is currently producing a satellite-based infrastructure to bring high speed internet access to developing countries in Asia, Africa, Latin America and the Middle East by late 2010. This company faces obstacles similar to those facing broadband providers, such as various regulatory structures, particularly government owned telcos, that control prices of access in the countries that seek it. (Cherry, 2008)

Concluding Thoughts

As I mentioned above, the global digital divide will naturally tighten as user rates become closer to population levels. This requires coordination via companies that produce the broadband and satellite access, telcos and ISPs that provide the access to the consumers, and governments. Provision of access alone will not close the divide. The cost of that access for the consumers, their income, their literacy level, and their willingness to learn new technologies are also factors. There are many groups seeking to reduce these burdens and provide the tools necessary to equalize access to these markets, including those that volunteer funds and equipment (e.g, One Laptop Per Child program and other programs), accords between governments, and cooperation between private companies.

Bibliography and Selected Readings or Sites:

Kuang, Peng. “Asia picks up broadband fast, but poor still disconnected”, 15 September 2008,

OECD. “Internet Address Space: Economic Considerations in the Management of IPv4 and in the Deployment of IPv6” , May 15, 2008,

OECD. “Understanding the Digital Divide”, 2001,

OECD. 2004. “Regulatory Reform as a Tool for Bridging the Digital Divide”

Chinn, Menzie D. and Robert W. Fairlie. “The Determinants of the Gobal Digital Divide: A Cross-Country Analysis of Computer and Internet Penetration”, Oxford Economic Papers 59 (2007), 16-44, doi: 10.1093/oep/gp1024.

Waltner, Charles. May 31, 2006. “International undersea fiber optic cable promises much needed bandwidth to East Africa but specter of monopoly pricing threatens project’s benefits”, News@Cisco,

Johnson, Bobbie. “How one clumsy ship cut off the web for 75 million” February 1, 2008, The Guardian,

Bridging the Global Digital Divide, One Laptop at a Time, June 11, 2008, Knowledge@Wharton,

Critical Mass: The Worldwide State of the Mobile Web, Nielsen Mobile, July 2008,

Schewe, Sarah. “Nielsen reports mobile internet usage has reached ‘critical mass’”, July 18, 2008,, Accessed October 30, 2008

Mobiles, The Digital Divide, And Google, Google Tech Talks, January 12, 2007, Waverman, Leonard,

Cherry, Brett. Satellites to bring speedy Internet to developing world, 18 September 2008,

Rogers, Madolyn Bowman. Mapping the Digital Divide, Symmetry Magazine, September 2008, Volume 5, Issue 4,

Heimbuch, Jaymi. Closing the Global Digital Divide: Technology for Developing Countries, Central Coast, California on 10.15.08,

CIPESA. “The Eastern African Submarine Cable System (EASSy): The Open Access Challenges and Debate”, Collaboration on International ICT Policy for East and Southern Africa, May 2006,

Interesting Related Images:

Submarine cable map:

Damaged and proposed cable:

Large cable ships that lay and repair fiber optic cable

The Global Digital Divide, Euromonitor International,, 2007

World Internet Connection Density, Chris Harrison,

Global Traffic Index – how fast data moves around the world.

Visualize African Connectivity with Physicist Les Cottrell.

Unclogging the Pipes – Does the Net Need a Joe the Plumber?

With all the focus these days on Joe the Plumber, I couldn’t resist the desire to use the nation’s newest cliché. But this post’s topic is not on the issue of taxes on small business that Joe so artfully brought to the forefront but rather on the issue of the effect of net neutrality regulation for businesses selling online. The issue has gained importance in the past year, even prompting Senator Obama to declare it a priority in his first year if elected to office of President. (Broache 2007)

What Is Net Neutrality?

Net neutrality is unfettered access to content on the Internet. Net neutrality legislation would prevent Internet providers from controlling user access to certain content on the Internet. The Internet’s function is to move content from provider to user. While this seems obvious enough for those of us who have grown accustomed to a growing Internet, some believe that there lurks a growing potential for Internet Service Providers, who control access to the Internet, to begin using that control in such way as to filter or limit access to certain sites and services.

To understand the threat this imposes, it is helpful to view the Internet as a broad set of connected pipes. Data travels through these pipes, known as bandwidth, which is shared among consumers. When some consumers devote large amounts of time to downloading music, streaming movies, and consuming other forms of rich media, they essentially begin clogging the pipes of the Internet which affects the service to other consumers that share the pipe. To reduce this effect, ISPs can either upgrade (e.g. widen) the pipes, improve the technology (e.g., speed data through the pipes) or reduce the traffic at either its source or destination. Unfortunately, widening the pipes or improving technology takes money, and many of the ways that ISPs can raise this money have been viewed as impediments to providing a neutral network that does not discriminate based on the nature or source of the content that moves through it. Ways that ISPs could raise this money involve charging the users, charging the content providers, or filtering the content that goes through the current pipes.

Currently, many ISPs charge the consumers a flat fee for unlimited access to the pipes. This method of charging consumers essentially has the lighter Internet users subsidizing users that download large volumes of rich media. Recently some ISPs have begun allowing consumers to self-select into the wider or faster pipes via tiered and metered usage pricing schemes. For example, I pay $10 more per month to have my broadband service delivered at download speeds up to 20.0 megabits per second – supposedly double the speeds that 10.0 customers receive. Presumably, it allows me to work on my blog while my spouse searches the Internet, my older son plays Xbox Live, my daughter talks to friends using VOIP (our phone service via our ISP) and my other son works on his school project on his laptop - all without any significant loss in performance of these online activities. Although tiered pricing is not new (i.e., it was used by ISPs such as AT&T Broadband, Charter Communications and Cox Communications as early as 2002 to curb illegal movie downloading and music swaps), ISPs around the nation are testing similar plans (again). For example, Time Warner’s latest plan is to allow consumers to choose a tiered plan based on usage while allowing customers to monitor their usage in order to choose the right plan. (Bosworth 2008) “One way or the other, as video becomes a bigger part of overall broadband usage, it is inevitable that usage-based plans supplant current ‘all you can eat’ plans. Video is the reason.” (Kim 2008) In Australia, the three major ISPs use a price discrimination plan based on quotas that limit the access of the consumer to the Internet and charge heavier users who go over these quotas additional usage fees. (Winterford and Hill 2008).

In each of these cases, paying for service upgrades is coming from charging the users of the content. Where the biggest source of concern seems to be is that ISPs might begin charging content providers who provide and encourage the use of the many forms of rich media, such as YouTube, iTunes, MSN, Yahoo, peer-to-peer sites, etc. Content from these sites tend to “clog the pipes” more so than text content. The fear is that ISPs will charge premium fees to these content providers to prioritize and push their content through the pipes at faster rates than providers who don’t pay premiums. Or ISPs might simply charge premiums to content providers who have sites heavily laden with rich media. In which case, those firms with deeper pockets will be more successful at reaching and serving the consumer. With net neutrality legislation filtering or slowing content would be illegal. An example of what such legislation might look like can be found in a bill introduced into the Senate in January 2007 co-sponsored by Senator Obama and his former Democratic opponent Hillary Clinton titled the Internet Freedom Preservation Act. A similar bill was introduced into Congress titled the Internet Freedom Preservation Act of 2008 in February 2008. Neither bill seems to have made it out of committee.

A recent case that led to sanctions by the FCC (which represented its first net neutrality ruling) brought the issue of a non-neutral net into the spotlight. Comcast, the nation’s second largest ISP, was managing (or delaying) the use of bandwidth by its consumers with respect to peer-to-peer technologies such as BitTorrent. These activities gobble up bandwidth and clog the network pipes. Comcast claims that it simply limited these activities during high Internet traffic times. In a joint statement in March, Comcast and BitTorrent issued a joint statement that they were working together to solve the bandwidth issue and that government intervention is unnecessary. “Both BitTorrent and Comcast expressed the view that these technical issues can be worked out through private business discussions without the need for government intervention.” Regardless, the FCC’s decision to sanction Comcast came on August 1, 2008. On September 5, 2008, Comcast filed a suit against the FCC to overturn the decision. Also, as a result of the suit, beginning on October 1, 2008, Comcast will include a quota or monthly cap on users in its pricing strategy. These quotas are extremely high and meant to snare only the highest bandwidth hogs. This plan is an alternative to slowing a particular service or access to any one site.

What Does Net Neutrality Mean for Small Businesses Selling Online?

According to Cummings (2007), small businesses fear that telephone and cable companies will “rig the system so that the Web pages of premium-paying customers would open faster and be ranked higher than those that don’t pay the extra fee.” This puts smaller businesses at a disadvantage to larger businesses. She quotes Branch Heller, a retiree in Delaware, who says the law is needed to ensure that big corporations can’t dominate the Internet by censoring content or slowing — or blocking — links to their competitors’ customers.”

This issue particularly affects small businesses that sell or provide rich media content such as movies, music, interactive games, training videos, etc. online. ISPs could use their positions to slow access to these sites. Another fear is that Internet service providers may want to charge premiums to prioritize traffic connecting to some sites. Better and faster service would be provided to sites of firms who pay higher premiums.

However, another issue is that many small businesses are also turning to various forms of rich media for advertising online. Rich media advertising is a fast growing form of online advertising. This form of advertising may include sound, video, or Flash, and with programming languages such as Java, Javascript, and DHTML. These slow the loading of web content and may add a strain on the network. The Interactive Advertising Bureau is attempting to set standards for this media to reduce the strain. Examples may be found here. DoubleClick’s study of its online advertisers learned that customers are 5 time more likely to click video ads, that video ads usually play at least 2/3 of the way through, that users click the video “Play” button more than they click on image ads, and that 8% of video ads generate a user reaction. Some rich media ads even allow consumers to interact with the seller even without leaving the current site they are visiting. PointRoll says that rich media accounted for 116% click-through rate over standard banner ads and that consumers spend an average of 14.7 seconds of time with the brand. These are all topics for posts on another day but these stats will lead to an increased interest and therefore use of this pipe clogging media. Control of access to that media is feared to be in the hands of those who hold the pipes. Because of that control, proponents of net neutrality want preventive legislation. Opponents say that legislation leads to further regulation of the Internet.

What Are the Presidential Candidates’ Views of Net Neutrality?

One look at the Presidential candidates’ websites illustrates the extent to which both candidates use rich media on the net. Both Presidential candidates have opinions about net neutrality, and as expected, their views fall along party lines. Senator Barack Obama believes that net neutrality should be legislated.

“I will take a backseat to no one in my commitment to network neutrality…Because most Americans have a choice of only one or two broadband carriers, carriers are tempted to impose a toll charge on content and services, discriminating against Web sites that are unwilling to pay for equal treatment. This could create a two-tier Internet in which Web sites with the best relationships with network providers can get the fastest access to consumers, while all competing Web sites remain in a slower lane.” (Interview with CNET News)

Here are some relevant and related excerpts from Obama’s Technology Plan:
• Barack Obama strongly supports the principle of network neutrality to preserve the benefits of open competition on the Internet.
• Obama will encourage diversity in the ownership of broadcast media, promote the development of new media outlets for expression of diverse viewpoints, and clarify the public interest obligations of broadcasters who occupy the nation’s spectrum.
• Barack Obama and Joe Biden will use technology to reform government and improve the exchange of information between the federal government and citizens while ensuring the security of our networks. Obama and Biden believe in the American people and in their intelligence, expertise, and ability and willingness to give and to give back to make government work better.
• Obama and Biden believe we can get true broadband to every community in America through a combination of reform of the Universal Service Fund, better use of the nation’s wireless spectrum, promotion of next-generation facilities, technologies and applications, and new tax and loan incentives.
More on Senator Obama’s views can be found here.

Senator John McCain believes that net neutrality should be regulated only if necessary. McCain’s plan focuses on letting markets and firms go as far as possible in ensuring a neutral network and use regulation only when the market fails. Perhaps the negotiations between Comcast and BitTorrent are an example of such a settlement.

“In general, I believe that we need to move to a different model for enforcing competition on the Internet. Its focus should be on policing clearly anticompetitive behavior and consumer predation. In such a dynamic and innovative setting, it is not desirable for regulators to be required to anticipate market developments, intervene in the market, and try to micromanage American business and innovation.” (Interview with CNET News)

McCain’s technology plan suggests that existing antitrust legislation can handle many of the issues that may arise that cannot be privately negotiated. Some excerpts from the McCain Technology Plan:
• Given the enormous benefits we have seen from a lightly regulated Internet and software market, our government should refrain from imposing burdensome regulation. John McCain understands that unnecessary government intrusion can harm the innovative genius of the Internet. Government should have to prove regulation is needed, rather than have entrepreneurs prove it is not.
• John McCain will focus on policies that leave consumers free to access the content they choose; free to use the applications and services they choose; free to attach devices they choose, if they do not harm the network; and free to chose among broadband service providers.
• John McCain does not believe in prescriptive regulation like “net-neutrality,” but rather he believes that an open marketplace with a variety of consumer choices is the best deterrent against unfair practices.
• As President, John McCain would continue to encourage private investment to facilitate the build-out of infrastructure to provide high-speed Internet connectivity all over America. However, where private industry does not answer the call because of market failures or other obstacles, John McCain believes that people acting through their local governments should be able to invest in their own future by building out infrastructure to provide high-speed Internet services.
More on McCain’s views can be found here.

Net neutrality is sure to become an issue that resurfaces again and again. The issue is so large that I can’t possibly have done the topic the justice it deserves here, but hopefully it is a little less mysterious. In my Bibliography and Additional Reading, I included additional sources if you have further interest in the issue.

Bibliography and Additional Reading

Broadband Access Policy: The Role of Antitrust, J. Thomas Rosch, June 13, 2008,

No Need Now For New Net Neutrality Regulation, Tom Giovanetti, 05/03/2006

Inside Obama and McCain’s Conflicting Takes on Net Neutrality, Glenn Derene, October 8, 2008,

Frequently Asked Questions about Net Neutrality,

Obama pledges Net neutrality laws if elected president, Anne Broache, October 29, 2007,;txt

Net neutrality is an ‘American problem’, Brett Winterford and Julian Hill,, 24 September 2008,,139023754,339292161,00.htm

Test of Tiered Pricing for Broadband Access, Gary Kim, Thursday, January 17, 2008,

Time Warner To Test Metered Pricing For Broadband, Martin Bosworth, Jan. 17, 2008,

Obama Biden Technology Plan,

John McCain Technology Plan,

Comcast to Appeal FCC’s Decision On Internet Blocking, Amy Schatz, September 5, 2008,

Comcast to Cap Data Transfers at 250 GB in Oct., Chloe Albanesius, 08.28.08,,2704,2329170,00.asp

Video Ad Benchmarks: Average Campaign Perfomance Metrics, A DoubleClick Rich Media and Video Report, February 2008,

The Human Face of Net Neutrality, Jeanne Cummings, April 9, 2007,

For the Love of Blogs

I attended a presentation this week by a fellow colleague, Dr. John Whitehead, from Appalachian State University, at the Kentucky Economic Association meetings on the topic of “blogonomics“. He presented very insightful information on the topic of economics blogs. The data also shed some light on blogging and who is blogging in general. This led me to think about what role blogging plays in the business of selling online.

What is blogging?

By now, most online users that would be reading this post will know that a blog is a “web log” and the blogosphere is the online community of weblogs. A Pew Internet and American Life Project found that about 39% of the online population reads blogs. Technorati publishes an annual “State of the Blogosphere“. The report is loaded with statistics about who is blogging. According to Technorati, U.S. Bloggers tend to be male (57%), over 35 (58%), employed full-time (56%), earn more than $75,000 (51%) and college graduates (74%). Of interest to small business is that more than four in five bloggers post product or brand reviews. One-third of bloggers have been approached to be brand advocates. According to Sifry (2008), there were 70 million weblogs in early 2008 with 120,000 new weblogs started each day. 3000-7000 of the new blogs are likely to be splogs (fake or spam blogs).

What does blogging mean to small business?

Zahorsky defines a business blog as “a corporate tool for communicating with customers or employees to share knowledge and expertise.” A business can use a blog to do a number of things such as provide commentary, product reviews, event or sale information, social networking, and the like. Kyrnin suggests that blogs can be a powerful tool for marketing and promotion. Yet only about 41 percent of small businesses have their own websites, so a much smaller portion would actually have blogs.

According to, 12.2% of the Fortune 500 companies have blogs that are “active public blogs by company employees about the company and/or its products”. A listing is provided here: This site also analyzes 30 blogs from the list and puts them on a “bias” graph according to whether or not the blog provides “casual & colloquial” or “logical & formal” information or commentary. This is interesting information shedding light on the why’s and how’s of corporate blogging.

Blogs, however, are a simple, low-cost easy way to keep consumers informed and keep your site fresh and changing. In a recent post, I talked about the role of article marketing in raising PageRank and keeping content changing. These are important for raising your position in SERPs (search engine results pages). A blog is a similar and related way to do this. Zahorsky suggests using blogs to answer frequently asked questions, promotions, contests, new and forthcoming product information, photos, and news. He suggests keeping blog posts short, keyword heavy, and full of links. (I tend to prefer long posts less often, but there are no set rules on blogging as long as it is useful.)

So what are some economics of blogs?

Briefly, here are some thoughts on this topic.

Opportunity costs: Blogging is a low-cost, low-tech, no entry barrier, and scalable way to promote your company. However, the opportunity costs can be high. Blogging takes time. In the business world, the oft quoted phrase “time is money” couldn’t hold more true. The opportunity costs of blogging include the sales and productivity lost when blogging as opposed to operating one’s business. Technorati finds that one in four bloggers spends ten hours or more blogging each week and more than half spend at least five hours weekly on their blog. For many small business men and women, this time is better spent organizing their business and drumming up sales. Thus, blogging often gets put on the “good idea for later” list of things-to-do. So the question then becomes whether or not the benefits of blogging outweigh these costs. According to Technorati, one in ten professional and corporate bloggers pay staff to contribute to their blogs.

Marginal analysis: We just mentioned the opportunity costs of blogging. These costs increase as more and more time is spent blogging. As with most economic questions, we assume rational behavior. In other words, an activity should be continued as long as the marginal (additional) benefits exceed the marginal (additional costs). The benefits of blogging for small business include improved customer and employee relations from the provision of information and the potential increase in PageRank and SERPs positions with major search engines. There is also the potential for advertising and affiliate sales revenue as well.

Advertising: Blogs can be used to promote your brand or as a direct revenue producer via advertising revenue. According to Technorati, professional and corporate bloggers are more likely to include search ads, display ads, and affiliate marketing. One in four bloggers uses three or more means of advertising. In the same study, Technorati, reports the mean annual investment in a blog is $1020. Bloggers that include advertising tend to invest more, about $1800 on average, and corporate bloggers invest the most with an average of $3,790. The average annual revenue is more than $6,000. This revenue average is deceptive because most advertising revenue is earned by the top 1% of bloggers. The major determinant of advertising revenue is traffic to the site. The high earning bloggers receive more than 100,000 unique visitors per month. If no one reads the blog, then the profits earned from the blog will be quite low. Therefore, it is important to provide good quality content that will keep folks coming back.

Asymmetric Information: Nobel prize winning economist, George Akerlof, received his Nobel in 2001 for formalizing the concept of the “lemons” problem. The lemons problem is a result of asymmetric information. Asymmetric information is a situation in which one party in a transaction has more or superior information compared to another. With regards to blogs, this situation is one of adverse selection - deceptive behavior that takes advantage of information asymmetries before a transaction. Akerlof explained adverse selection using the case of used cars. The seller of the car knows more about the history of the car than the buyer. The seller will happily take the price of a good quality car for a lemon but will not accept the price of a lemon for a good quality car. If the buyer on the other hand believes there is some positive probability that the car might be a lemon, they will not want to pay the price of good used car at all. As a result, fewer good cars are sold on the used car market, and a distrust of the entire market develops. Read more. In other words, when someone reads a blog, they don’t always know about the qualifications of the author. Anyone can fire up a blog at a moment’s notice without any need for experience or knowledge. If a person learns that the information is uncertain after they have read the blog, they may grow to distrust all blogs as a result. The amount of time they invest into reading blogs will be reduced by the suspicion that the information may be frivolous, untrue, or incomplete. As a result of this problem, you will begin to see more ratings systems and listings develop to help sort the good quality information from the vast sea of frivolities. In consideration of this issue, I am honored that you have read this far!

Demand and Supply: Much of the conversation above alludes to this topic of supply and demand. My colleague, Dr. Whitehead, and his co-author, Aaron Schiff, are making one of the first attempts of which I am aware to actually estimate the supply and demand for blogs. Their focus is more on the economics blog writers, who, like myself, tend to write for self promotion, or, as I would prefer to put it, “the dissemination of knowledge in our area of expertise.” The major problem, of course, in this market is the determination of a “price”. The demand for such information would likely yield a low price for many of us. And as they show in their research, the concentration of the market is very low with no real entry barriers. The supply of small business blogs would more likely depend on the costs mentioned above for the provision of information concerning products and services and the demand for such information by consumers, employees, and advertisers.

Moral to the story

Blogs can be a very useful tool for promoting your small business and boosting your online sales. The provision of a blog is inexpensive in dollar terms, but the costs are not negligible when the value of your time is considered. These costs must be compared to the value of sales conversions from improved search engine results, direct promotion, information provision, and advertising revenue. Done properly, blogs could be profitable for selling online.

Bibliography and Additional Readings

Sifry’s Alerts, David Syfry,, September 2008

How to Blog Your Way to Small-Business Success, Matthew Bandyk, September 26, 2008,

All Technorati information comes from Technorati’s State of the Blogosphere 2008,

Blogging Is Bringing New Voices to the Online World: Most Bloggers Focus on Personal Experiences, Not Politics, 7/19/06,, What a Blog Can Do For Your Small Business, Darrell Zahorsky,

How to Use a Blog for Non-Diarists: A Blog Can Hellp Your Business Even if You Don’t “Blog”, Jennifer Kyrnin,

The Worldwide What? Only 41% of Small Business Owners Have Websites, Warrillow & Company, 2008,

Blogonomics, John Whitehead,, October 2008

The Check Is in the E-Mail?

The recent headlines about the hacking of Republican Vice Presidential Candidate Sarah Palin’s email has brought up some interesting questions about the security of email for use in small business. An amazing amount of business is being transacted over email every day. According to a study by the Radicati Group in 2008 (as cited on there are 218 billion emails sent per day. (Tschabitscher 2008) A Pew Internet study estimates that 57 million American adults are “work emailers” that use email for daily work tasks. 62% of all employed Americans have Internet access and 98% use email on the job (Fallows 2002). Radicati Group estimate that there are 516 million business inboxes worldwide. “Gartner [Analyst Group] figures reveal 84 percent of high-cost security incidents occur when insiders send confidential data outside the company without properly securing the data… a quick hit of the “send” button could result in a competitor getting hold of confidential product-launch plans, the exposure of customer Social Security numbers, a premature leak of corporate financial information or patient medical records being revealed to the masses.” (Robb 2007)

How secure is email?

Many folks use email as if it is secure and safe from individuals with malicious intent. They are misled into a false sense of security by the fact that they must log into their email. Web mail uses a secure login page, but then email is often accessed over an unsecure server. The truth is that sending information over email is about as safe as sending it on a postcard. For an eye opening illustration of what postal email would be like if it had the same security as email, see,289483,sid14_gci521107,00.html.

Republican Vice Presidential candidate Sarah Palin’s email was not accessed in this way, however. Her email was accessed by the perpetrator after he researched her personal life and then took stabs at answering her security questions for a forgotten email password. Her very public life and her very honest answers to the security questions made it easy to access her email.

What is email security?

After protecting your login and password information, there are two essential parts of email security. First is digital signing. Digital signing requires a special email security certificate that can be purchased from a third party vendor. A digital signature lets the recipient know that the email is from you and has not been altered while in route. Once business partners and customers are used to receiving digitally signed email from you, they are less likely to be misled by someone trying to “spoof” your address to send phishing emails to them.

The second part of email security is the encryption of the email itself. Email encryption is the conversion of content into a code that cannot be understood until it is decrypted. Email encryption technology has been around for a long time. However, it is cumbersome to use and slows the email process. Email encryption keeps sensitive information private so that if the email is intercepted, the interceptor could not read it. This involves encrypting the email when it is sent and decrypting the email by the recipient when it is received. This process suffers somewhat of a network problem. Email encryption involves the use of public and private “keys” which are necessary for secure email communication on the part of senders and recipients. To send an encrypted email to an individual, you must know their public key. They will use their private key to decrypt it. Sending an email to someone who can’t decrypt it poses a barrier to communication much like sending an email in a foreign language for which there is no dictionary. Businesses have to get customers, clients, suppliers, etc. on board with email security to make it work, but there is a learning curve and they may be resistant if no one else, other than you, uses it.

The state of email encryption is still fairly limited. “So far, email encryption is still mainly used by organizations with highly sensitive missions or information, or paranoid security types who know too much. But enterprises, especially those under the heaviest regulatory microscopes like healthcare and financial services, are starting to look more closely at email encryption. The recent epidemic of laptop thefts and customer data leaks has also spurred interest in giving email encryption a second look… many firms merely use secure VPN connections to their business partners when sending sensitive mail.” (Higgins, 2007)

As a side note, when you fill in a form on a web site that asks for sensitive personal information like a social security number, passwords or credit card information, do you know if the information is encrypted and stored securely on the server or delivered to the recipient via form-to-mail? If the information is sent via form-to-mail, it may suffer the same privacy exposure as the postcard example above. This may occur even if the page has a security certificate and uses https protocol.

What can you do to make your business email safer?

I will not pretend that I have expertise in business email security, but here are some things that I have learned that might help with business security.

(1) Find and implement email digital signing encryption software.
“Any e-mail should be encrypted if the contents are sensitive in nature. This can mean that the e-mail contains intellectual property, legal information or personally identifiable information such as health information, social security numbers or trade secrets.” (Robb 2007)

(2) Encourage business contacts to use encryption software as well.

(3) If you use webmail, download and remove any messages from the server. Then if you are hacked, there is nothing left for the perpetrator to see.

(4) Alert all employees to the danger of sending unsecure email. (It has been my experience that many individuals are completely unaware.)

(5) Choose answers to security questions which are not obvious and cannot be figured out by people close to your or easily researched on the web or through public records (e.g., wedding date, birthdate, pet’s name, etc.)

(6) Be certain to understand privacy laws in your particular industry when you use email to transact business.

Bibliography and Additional Reading:

“Palin’s ‘Hacker’ Tells How He Did It, Palin’s ‘Hacker’ Tells How He Did It”, September 18, 2008,

“Hacking Email: 99 Tips to Make you More Secure and Productive”, IT Security Staff, Accessed 9/28/08.

“How Secure Is That Web Page In The Window? What You Should Know About Submitting Secure Encrypted Data into a Web Page”, Michael Horowitz, January 2006

“Think your e-mail is secure? Think again”, Frederick Avolio, 2/9/2001,,289483,sid14_gci521107,00.html

“Email Encryption Gets Easier”, September 13, 2007, Kelly Jackson Higgins

“Keep it Classified: E-mail Encryption for Small Business”, Drew Robb, June 5, 2007,

“Why You Should Encrypt Your Email And Some Tips For How To Do It”, Tony Bradley, CISSP-ISSAP,, Accessed 9/28/08,

“How Many Email Users Are There?”, Heinz Tschabitscher,, accessed 9/28/2008,

“Email at Work”, Deborah Fallows, 12/08/2002,

Using Economies of Scale to Make the Sale

Exploiting economies of scale was a driving strategy during the dot com boom of the 1990s. Internet firms raced to get the right domain name, get to market first, and then capture the most market share regardless of cost. This first-mover strategy worked for some and failed miserably for others. Capturing the most market share as fast as possible would seem unreasonable for small businesses wanting to sell online. So how can they exploit economies of scale?

What Are Economies of Scale?

Economies of scale occur when a firm’s long run average costs per unit fall as its production output grows. For example, if a firm builds a factory to produce bunny slippers, and then only produces two pairs, the average cost of each pair is pretty high! However, if the factory produces hundreds of bunny slippers, the average cost per pair is pretty low. When long run average costs are falling as production increases, the factory is exhibiting increasing returns to scale. This continues until production reaches the level that achieves minimum efficient scale – an output level that generates the lowest average cost per unit. However, in most cases, there are limits to how big the factory can get before its average costs per unit actually begin to rise. This is when the firm encounters diseconomies of scale. For further understanding of the technical aspects of economies of scale, a good reading can be found here (

What Are Some Examples of Firms that Exploit Economies of Scale?

Firms from the early dot com era used size in an attempt to exploit economies of scale. Two such firms are described here. Webvan was a firm established in 1999 providing the convenience of online grocery shopping. In order to succeed, the firm felt the need to provide a vast delivery service. It raised $1.2 billion dollars from venture capitalists. The original plan was to create automated distribution centers in 26 target markets – with each being 350,000 square feet in size and about $30 million in cost. ( The idea was to grow large, take advantage of economies of scale, have reduced prices and convenience, and out sell the competition. Being big in size would allow them to spread out their high fixed costs over their large market share, obtain volume pricing from wholesalers, and speed delivery to the consumer. Ultimately, 10 distribution centers were built or purchased. But the firm way overestimated demand. Economies of scale could have been exploited if the demand had been there. Since it was not, they perhaps should have started out smaller even if it meant having higher average costs. Hodson and Laseter (2001) contrast Webvan’s failure with the success of Peapod, another online grocery service. They find that Peapod’s relative success was due to the fact that Peapod delivered groceries collected from local retail stores. Since they did not have their own distribution centers, their variable costs were high, yet their fixed costs were low. Peapod is still delivering groceries and increasing the number of markets they serve today.

On the other hand, is another online store with humble basement beginnings that grew rapidly and massively in the early 1990s. Originally selling only books, it now sells music, videos, electronics, toys, and more. Jeff Bezos began in 1994 and began attracting venture capital by 1995. Amazon’s strategy was to “Get Big Fast”. By 1999 the company’s sales had exceeded $1.6 billion, but the company was still generating losses. Not only had the company become large, it had clearly become too large and began facing diseconomies of scale. This led Mr. Bezos to order the firm to “get the crap out” and reduce the scale of business (Frey and Cook, 2004). Over the next few years, Amazon began teaming up with other retailers, such as Toys R Us, and later allowed additional smaller third parties to begin selling via the online store. It was not until 2002 that the firm finally reported a quarterly profit. is a success story that supports the “Get Big Fast” theory; however, even Amazon learned that there is minimum efficient scale and a point beyond which diseconomies kick in.

What can we learn from this for selling online?

As will become evident over the course of this study, reaching and driving traffic to your site will become increasingly important. As the early dot com firms learned, being first to market, having the great domain name, or having the largest production or distribution capabilities does not guarantee success. The familiar phrase “if you build it they will come” does not apply to most online business. I did a quick Google search on digital cameras for sale and turned up over 700,000 results. Without sufficient investment, you very well could be the seller in result 699,999. For an online small business, sources of economies of scale include large fixed costs such as wharehouses or advertising campaigns, set up costs such as a quality website, ownership of specialized resources, division of labor or learning by doing, or purchases of large indivisible containers of inventory or other forms of volume purchasing. Setting up a quality online site and business model that can handle the fluctuations in demand may be quite expensive, but the benefits could be well worth the investment. A small business needs to study their potential market well. The managers need to understand and not overestimate the potential demand for their product. But it is important to not think too small either. Many parents have not forgotten the debacle of Toys R Us in 1999 when many Christmas toys could not be delivered in time for Christmas. “During 1999, Toys R Us did not have adequate inventory and fulfillment capabilities to meet the online demand for its products.” (

Bibliography and Further Reading:, Inc Webvan Group, Sweeping Webvan into the Dustbin of History, Nicholas Hodson and Tim Laseter, 8/13/01, How survived, thrived and turned a profit: E-tailer defied predictions it would do none of those, CHRISTINE FREY AND JOHN COOK,, January 28, 2004.;jsessionid=KQBQI1NDDUQN4CQBD0WCFEQ, Company History,, Toys R, LLC v., Docket No. C-96-04 (Superior Ct. N.J., March 1, 2006), Internet Library of Law and Court Decisions., Essential Economics: Economies of Scale and Scope

Sweet Tweets for Selling Online

Twitter is a rising new potential tool on the horizon for small business. With Twitter, a small business owner can send short messages, or “tweets”, concerning product specials, important links, information, discounts, events, news, polls, etc., to the mobile phones of consenting customers, through RSS feeds, and to its own website or blog with one short post. According to (, the top three uses of Twitter are sharing links to items of interest to a user’s network (34%), networking for new contacts (18%), reinforcing current network contacts (16%) – all relevant activities for small business.

Twitter was launched in 2006 by Jack Dorsey, Evan Williams, and Biz Stone as part of a podcasting company called Odeo. Twitter is a free service where originally users were to post the answer to the question “What are you doing?” in 140 characters or less – a number just shy of that allowed by most mobile phone carriers for texting services. Designed for users to report the day to day fuss of everyday life to family and friends, Twitter has evolved into a communication tool with a variety of uses. For example, Democratic Presidential candidate Barak Obama announced his vice presidential running mate, Joe Biden, using Twitter’s free text messaging capability to over 60,000 Twitter followers on August 23 at 2:22 a.m. ( Seconds after the July 22 earthquake that hit southern California, the first tweet by “thevixy” that simply stated “earthquake” beat the news media reports by four minutes. The search term “Earthquake” already had thousands of updates on Twitter Search before the AP came out with a report 9 minutes after that first tweet. ( Businesses like Dell (, JetBlue (, Zappos ( and Whole Foods ( use Twitter to make announcements to interested customers who have signed up to receive their updates.

What is Twitter?

Twitter is a social online network that is part of today’s Web 2.0. It is a mixture of blogging and texting – known as micro blogging. Twitter is a system that sends messages (tweets) from members to followers (tweeple) who subscribe to receive them. Interested individuals who do not wish to receive messages via text messages to their mobile phones can follow tweets via feeds, instant messages, and the member’s twitter page. They can also conduct searches ( on various Twitter keywords and even subscribe to the feed of the query.

Currently, the service is offered for free to its users and produces no revenue stream for its investors. So how does a company operate with no revenue stream or known business plan? Twitter is funded (to the tune of about $22 million) by venture capitalists Bijan Sabet with Spark Capital, Jeff Bezos of Bezos Expeditions, Union Square Ventures and Tokyo-based Digital Garage who believe that once Twitter reaches an undetermined critical mass it can be monetized (i.e., some sort of revenue stream can be created). The investors are relying on the power of network effects. Other Web 2.0 companies that began without a business model that also rely on network effects are Google, Facebook, and YouTube.

What are network effects?

In economics, these are also known as “demand side economies of scale” popularized by Carl Shapiro and Hal Varian in their book Information Rules. The idea is that demand for products with potential network effects does not have the traditional downward slope. In fact, it initially slopes upward and then downward. This is because the value of connecting to a network depends on the number of other people already connected to it. In other words, willingness to pay increases as more users join the network, but it then decreases as the network gets very large.

As an example, a few years ago we bought our first phone with caller ID. I told my son that he would be able to see who was calling. He was so excited about caller ID that I began to suspect his excitement. I asked why it was so interesting to him. He said, “I can’t wait to see Jerry the next time he calls, but that screen sure is small!” He had confused caller ID with a video phone. While video phones would have been cool, why haven’t they taken off? I would not purchase a video phone unless I knew that a majority of people that I call also had video phones. Otherwise, that feature of the phone is useless. Therefore, the more people I know that have video phones, the more I am willing to pay – TO A POINT. There is some point where its value to me does not exceed the value of the next best alternative. And would that value be enough to cover the costs? The videophone (or picturephone) has been around as far back as 1964 (; however, the demand has never been such that willingness to pay by users covered the cost to allow the market to reach a critical mass for success.

With network markets like Twitter, there is a critical mass to be reached, as well, which is the smallest size of the market that can be sustained at a particular price. For those who like a graphical image, this is illustrated below. The graph plots willingness to pay with the size of the market. The market will continue to grow after the critical mass point as more people who value a larger network more than price join the network, but there will be some point when willingness to pay by additional users to enter the large network begins to fall and may even fall to zero. The question for Twitter is to determine at which point, as the price is raised from zero to some positive amount, will the willingness to pay at least remain high enough to cover the marginal (additional) costs of providing the service. They want to find the network size such that most of those who highly value the service have already joined, n*. If Twitter begins to charge users, membership will decline. Thus it is in Twitter’s interest to have reached a market size greater than n* before it begins charging. Then the question becomes to choose the P where the associated n* generates a revenue sufficient to cover costs and maximize profit.

Graphical Illustration of a Market with Network Effects

Graphical Illustration of a Market with Network Effects

What will Twitter’s profits look like?

Twitter currently covers the SMS charges on its end for the services provided by Twitter (however, it does not cover the costs of members to update their accounts from their mobile devices or the costs of receiving messages on their mobile devices.) On August 13, Twitter stopped sending “tweets” via SMS to countries other than the U.S., Canada, and India ( due to the “disproportionate” operational costs of using foreign billing services. Twitter has also limited the number of people that a member could follow to 2000. While a good portion of Twitter’s costs are due to charges for SMS messaging (a.k.a., texting), there are also the costs of server space, bandwidth, programming, database management, employees, etc.

It is not believed that Twitter will begin charging personal users. In their own blog, Mr. Stone reports that Twitter will not pursue a revenue supported business model until it can provide a “reliable and robust” service, thereby acknowledging the many troubles of a network growing faster than its infrastructure can currently support. ( If Twitter does not begin charging users directly, its other potential revenue streams can come from advertising revenue on individual web pages or in search results, advertising in text messages, charging corporations and businesses that use Twitter to communicate to a large commercial audience. Advertising on individual pages is not likely to generate sufficient revenue since many consumers don’t go to the Twitter homepages. They receive and post from cell phones via text messaging. This has been test marketed in Japanese markets ( This same article speculates that Twitter may be gearing up to put advertising in search results since the recent acquisition of Customers who search are looking for information on a specific topic and may be more responsive to targeted advertising. Advertising in text messages on cell phones would not be permitted and sending an advertisement as a text message might alienate consumers – especially those that pay per text message. Then there is the “freemium” model which includes continuing the free service for the smaller users, but charging a premium to users with large followings. “Dell says that it made well over $500,000 in sales from sending special offers from its Dell Outlet store to its Twitter group, which began in June 2007.” ( Yet Bob Pearson, Dell’s VP for Communities and Conversations, says that it would “probably not” be willing to pay for use of Twitters services. Dell has about 1500 followers.


The final message of using Twitter for businesses selling online is that eventually Twitter WILL need a profitable business model. The investment of $22 million is based on the bet that a large market will ultimately be a huge money maker. Expect that businesses with large followings will ultimately pay something and therefore subsidize personal use; however, if its use in business becomes popular, this will become just the cost of a marketing alternative.

Additional Reading:, Psychographics of Twitterati, AttentionMax
The True Meaning of Twitter, Lashinsky, Adam; Burke, Doris. Fortune, 8/18/2008, Vol. 158 Issue 3, p39-42, 3p
Top 10 Uses of Twitter, Lee Odden, May 15, 2008,, online Marketing Blog
Information Rules, Carl Shapiro and Hal Varian, Harvard Business School Press, 1999