Archive for the ‘Network Effects’ Category.

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 About.com) 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 http://searchsecurity.techtarget.com/tip/1,289483,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, http://www.darkreading.com/document.asp?doc_id=164126

“Hacking Email: 99 Tips to Make you More Secure and Productive”, IT Security Staff, http://www.itsecurity.com/features/99-email-security-tips-112006/ 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 http://www.michaelhorowitz.com/securesubmit.html

“Think your e-mail is secure? Think again”, Frederick Avolio, 2/9/2001, http://searchsecurity.techtarget.com/tip/1,289483,sid14_gci521107,00.html

“Email Encryption Gets Easier”, September 13, 2007, Kelly Jackson Higgins
http://www.darkreading.com/document.asp?doc_id=133830&WT.svl=news1_1

“Keep it Classified: E-mail Encryption for Small Business”, Drew Robb, June 5, 2007, http://www.smallbusinesscomputing.com/buyersguide/article.php/3681486

“Why You Should Encrypt Your Email And Some Tips For How To Do It”, Tony Bradley, CISSP-ISSAP, About.com, Accessed 9/28/08, http://netsecurity.about.com/cs/emailsecurity/a/aa051004.htm.

“How Many Email Users Are There?”, Heinz Tschabitscher, About.com, accessed 9/28/2008, http://email.about.com/od/emailtrivia/f/how_many_email.htm

“Email at Work”, Deborah Fallows, 12/08/2002, http://www.pewinternet.org/pdfs/PIP_Work_Email_Report.pdf

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 (http://www.toprankblog.com/2008/05/top-10-twitter-uses/), 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. (http://twitter.com/BarackObama). 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. (http://blog.twitter.com/2008/07/twitter-as-news-wire.html). Businesses like Dell (http://twitter.com/DellOutlet), JetBlue (http://twitter.com/JetBlue), Zappos (http://twitter.com/zappos) and Whole Foods (http://twitter.com/WholeFoodsLA) 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 (http://search.twitter.com/) 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 (http://archives.cnn.com/2000/TECH/computing/09/05/picture.phones.ap/); 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 (http://blog.twitter.com/search?q=sms+costs) 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. (http://blog.twitter.com/2008/06/welcoming-bijan-and-jeff.html) 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 (http://www.technewsworld.com/rsstory/64258.html?wlc=1220381088). This same article speculates that Twitter may be gearing up to put advertising in search results since the recent acquisition of Summize.com. 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.” (http://www.wired.com/techbiz/people/news/2008/08/portfolio_0804) 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.

Conclusion

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:
http://www.attentionmax.com/blog/2008/05/psychographics_of_the_twitterati.php, 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, http://www.toprankblog.com/2008/05/top-10-twitter-uses/, online Marketing Blog
Information Rules, Carl Shapiro and Hal Varian, Harvard Business School Press, 1999

Where is the Free Lunch on the Internet?

I begin working on this post with the image of a waiter dressed up as a pirate playing a snappy little tune on his guitar touting “freecreditreport.com… I should have seen it coming at me like…” Fantastic commercial, but what does “free” really mean?* During the first week or so of my economics classes I usually get around to writing the acronym TANSTAAFL on the board. TANSTAAFL means “There ain’t no such thing as a free lunch.” That is when occasionally someone points to all the “freebies” on the Internet. So what does it mean to be “free” on the Internet? Is that any different from “free” in the non-Internet world? When is something really “free”? And why do I keep putting the word “free” in quotation marks? Economic principles hold even on the Internet and this post will explain a few reasons why.

What Does It Mean to Be Free?

Type in the word “free” into the “free” Google search engine and you’ll get an estimate of 4.5 million sites. Who gets the top honors? FREE –Federal Resources for Education Excellence (http://free.ed.gov/) FREE is a site that “makes it easier to find teaching and learning resources from the federal government” with “More than 1,500 federally supported teaching and learning resources are included from dozens of federal agencies”. Who pays for this “free” service? The taxpayer.

Next is TheFreeSite.com (http://thefreesite.com), a site dedicated to listing “all the top free products, services and offers available on the Web.” This is actually a great resource, and I’ll recommend it to my students. Who pays? The site itself seems to be supported by revenue from Google’s AdSense. There are also some hand-coded links to other “free” sites like the Freebiedirectory.com, which may be paid advertising.

A little further down the page is the Free Software Foundation http://www.fsf.org/licensing/essays/free-sw.html. According to the Free Software Foundation, free software has the characteristics found on http://www.fsf.org/licensing/essays/free-sw.html. Essentially, they suggest that free software gives you, the user, the right to use, adapt, redistribute, and improve the software. They assert that the purpose of free software is to enhance learning and knowledge in the area, and that using it constitutes a “political and ethical choice asserting the right to learn and share what we learn” (http://www.fsf.org/about/what-is-free-software). If there is any case where the developer has the right to revoke the software, then it isn’t truly free software (as is the case with nearly all of the free resources that I may recommend). Since real resources go into its production, it must be funded in some way. Often funding is initially by the developer who later accepts donations for his/her time, and then may even begin charging for the final, stable version of the product. Funding could be indirect through the universities or corporations employing the services of those experimenting at your risk (note the warnings when you download betas) and profiting from the knowledge learned or shared. Unfortunately, most software distributed on the web isn’t truly free.

So what does “free” mean? First, the economics explanation. Something that is free is available in unlimited quantities. In other words, supply exceeds demand which produces a price equal to zero. Is this saying that information and goods offered for “free” on the Internet are essentially worthless? No. Read on… Resources have value, so anytime these resources are used in the production of a good, whether offered for “free” or not, an opportunity cost is incurred. For example, I am offering this explanation at some cost to myself (i.e., my time that could be spent doing something else – perhaps earning income selling web design); however, as an academic, part of my job is to impart knowledge on the waiting world, so my compensation is my salary. I could attempt to put this information under a password allowing only paying members to read it, but there is plenty of competition willing to provide the information for “free” or, perhaps, this information really is worthless.

What is “Free” on the Internet?

So in what other ways is the concept “free” used on the Internet? I will discuss these briefly so as to leave something to talk about later! (This is by no means an exhaustive list.)

(1) “Free” but with strings attached – e.g., product “bundling” or “tying”. You agree to sign up for something (maybe a trial period) or it accompanies the purchase of another good (free paper with purchase of printer ink) or it requires the subsequent purchase of a tied product (a “free” printer that uses only a specific kind of ink cartridge). Or perhaps you are giving up personal information, such as your e-mail address or phone number.

(2) “Free” as in information sharing - Perhaps you simply agree to a link back to the copyright holder for use of information. This raises page rank – perhaps necessary for higher advertising revenue - or increases the goodwill (reputation) of the writer. Or perhaps this information is shared alongside non-free services or products. I find this to be the case on FreeLunch.com – a self-proclaimed “free” resource for economic data. The actual “free” service here is being a central place to find both “free” data (that can also be accessed directly freely from its original source) and plenty of non-free services and products. It is essentially a form of advertising.

(3) “Free” as a carrot on a stick – e.g., product “crimping”. Some “free” software is distributed freely, but is actually “proprietary” software meaning that it is subject to limitations and you usually have none of the rights listed above by the Free Software Foundation. Certain features are turned off or not included unless you upgrade. This is called “crimping” the product. The idea is to provide just enough of a carrot on a stick to lead you to buy the whole product. An example is the NetObjects Fusion Essentials software. While you can build a decent simple site, you are enticed to want more, and the NetObjects Fusion 11 has it. For more examples of this, see http://www.venchar.com/2003/12/product_crimpin.html.

(4) “Free” to build a network – Goods or services that require network effects for success. For example, ebay.com, MySpace.com, CraigsList.com. For the network to reach what is known as a “critical mass”, the level where membership takes off, “free” membership may be critical (excuse the pun). A new fun rising network is called “Twitter” (at Twitter.com. See news story at http://www.youtube.com/watch?v=6kj6OGsfSG0&eurl=http://sfist.com/2008/06/30/would_you_pay_to_use_twitter.php). In many cases, building the network is essential to increase advertising revenues or increase the financial value of the network.

(5) “Free” as in the case of a “public good”– it is prohibitively expensive to collect fees from all individuals who receive and use the information or to exclude all individuals who do not pay. Examples include research findings, news reports, or weather reports. These sites are often paid through advertising or tax revenue.

(6) “Free” for the public interest – as in the case of net neutrality (see http://www.savetheinternet.com/). “Freedom of connection, with any application, to any party, is the fundamental social basis of the Internet, and, now, the society based on it.” (Read http://dig.csail.mit.edu/breadcrumbs/node/144 and http://dig.csail.mit.edu/2006/06/neutralnet.html by Daniel Weitzner. The term “free” here means equal access. “Free” is through legislation, but the cost is still born by users who pay to access it (ultimately, the consumer). In this case, legislation is limiting market power that might otherwise develop.

(7) “Free” for malicious purposes – as in the case of downloaded viruses or annoying adware (whether in the fine print or not) attached to items downloaded for “free” from the Internet. Your pursuit of the ability to avoid paying could lead to a much higher cost later.

With all this said, I am encouraging my students to build websites, and as a rule of thumb, I am using as many “free” resources as I can. I used a “free” site building software called NetObjects Fusion Essentials to build my own course website – even though I actually own NOF 10. I used a “free” blog on Blogger.com to build this blog. I used the “free” Google Analytics to record your visit to either site. And I am using my “free” server space at my university to host my campus website.

Is There Such Thing as a Free Lunch?

As an economist, I am still bound to my conviction that “there ain’t no such thing as a free lunch”. I am very skeptical whenever I even see or hear the word “free”. Read the fine print. Ask yourself, how is it that they can offer it for free? Post any truly free lunches in the comment section here – that is, something produced and consumed without using any valuable resources and with no strings attached. It must have value and yet it must not be scarce – i.e., it can’t be the case that some individuals will scoop it up and try to resell it for a price or provide it for some economic advantage of their own.

Perhaps the most useful “free” lunch I found on the Internet while researching this article can be found at www.freerice.com. Help this organization donate rice to hungry people for each word you get correct. Build your English vocabulary while helping to end world hunger. The site and donations are advertising supported.

Other Readings:
“Free! Why $0.00 Is the Future of Business”, Chris Anderson, Wired.com, http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all, posted 2/25/08.

“TANSTAAFL: In Search of the Free Lunch and No-Cost/Low-Cost Full-Text Archives”, Mary Ellen Bates, Searcher; Jun2000, Vol. 8 Issue 6, p 55-59.

*freecreditreport.com obtains a “free” credit report while offering a trial period for credit monitoring service. By law, everyone can receive a free credit report without signing up for any other products once per year. For more information on this topic, including the federal law suit against Consumerinfo.com regarding deceptive marketing practices, see http://www.ftc.gov/bcp/conline/edcams/freereports/index.html.