Posts tagged ‘Supply and Demand’

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 dailycal.org. 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, http://www.seobook.com/archives/002422.shtml, How to: Buy Links Without Being Called a Spammer, August 17, 2007

Jim Boykin’s Blog, http://www.jimboykin.com/site-backlinks/, Why That Site With 50 Backlinks Beats Your Site With 1000 Backlinks, September 2006.

Jim Boykin’s Blog, http://www.jimboykin.com/link-buying/, 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, http://googlewebmastercentral.blogspot.com/2007/12/information-about-buying-and-selling.html

Matt Cutts, Matt Cutts, Gadgets, Google, and SEO, “Text Links and PageRank”, http://www.mattcutts.com/blog/text-links-and-pagerank/, September 2005 (Read article and comments for a good debate.)

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 Socialtext.com, 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: http://www.socialtext.net/bizblogs/index.cgi. 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, http://www.sifry.com/alerts/archives/2008_09.html, September 2008

How to Blog Your Way to Small-Business Success, Matthew Bandyk, September 26, 2008, http://www.usnews.com/articles/business/small-business-entrepreneurs/2008/09/26/how-to-blog-your-way-to-small-business-success.html

All Technorati information comes from Technorati’s State of the Blogosphere 2008, http://www.technorati.com/blogging/state-of-the-blogosphere/

Blogging Is Bringing New Voices to the Online World: Most Bloggers Focus on Personal Experiences, Not Politics, 7/19/06, http://www.pewinternet.org/PPF/r/130/press_release.asp

About.com, What a Blog Can Do For Your Small Business, Darrell Zahorsky, http://sbinformation.about.com/cs/ecommerce/a/bblogs.htm

How to Use a Blog for Non-Diarists: A Blog Can Hellp Your Business Even if You Don’t “Blog”, Jennifer Kyrnin, http://webdesign.about.com/cs/weblogs/a/aa061603a.htm

The Worldwide What? Only 41% of Small Business Owners Have Websites, Warrillow & Company, 2008, http://www.warrillow.com/weeklyNews.aspx

Blogonomics, John Whitehead, http://www.env-econ.net/2008/10/blogonomics.html, October 2008

Article Farming - Food for Search Engine Optimization

While researching topics for the course that accompanies this blog I noticed a disturbing trend. I use Google Alerts fairly often to get practical applications of topics that I want to present. However, I noticed that I was coming across an abundance of low quality short article posts on various topics. Many of the them began with titles like the “Top 10 Reasons…” or “The Top 7 Ways…”, etc. Others were short how-to articles. Often the same article could be found on different web sites. Many were laden with spelling and grammatical errors. Most were replete with advertising. Eventually I began to see through the fog known as article marketing. I ran across ads for freelancers to write blog posts – by the hundreds. I found volume discounts offered to companies who purchase large numbers of articles written by bloggers. What is this strange market and from where did it come? For every good idea created on the Internet there is a market to exploit it, and that is fine. As an academic, the origins of this market seem to have come from a source surprisingly close to home.

Origins of article farming

I believe the origins of what I call “article farming” on the Internet, otherwise known as article marketing, has risen with the advent of Google’s PageRank and other determinants of SERPs (Search Engine Results Pages). An anonymous author on Wikipedia suggests these origins go farther back. This author suggests that it has been common practice over the years for newspapers, magazines, etc., to accept “How To” articles from companies in exchange for acknowledgement of the company’s authorship. This provides free content for the newspaper and free advertising for the company - an arrangement that works out well for both parties. However, this would not entirely explain the watering down of content that is occurring on the Internet. In our non-Internet newspaper example, poor content would lead to lower sales of newspapers and thus would not be tolerated. There must be more, and I believe the explanation lies in search engine optimization. On the Internet, positioning in SERPs, or Search Engine Results Pages, can make or break a small business selling online. Participating in the market for articles is a way to achieve better positioning. To see, let’s look at the idea behind PageRank.

PageRank is an algorithm used by the search engine Google to rank websites in its search results. Craven explains the mathematics behind the algorithm*, but more interesting to me is the philosophy behind it. This is explained in amazing intuitive detail using laymen’s terms in Battelle (2005). Battelle tells the story how Larry Page and Sergey Brin developed the PageRank concept (named after Page) and the early Google search engine as part of a graduate school project at Stanford. Being in academia, they had a pretty good understanding of the concept behind publishing in academia. Professors gain recognition by publishing in leading peer-reviewed academic journals. The higher the journal ranks and the more citations from ranking journals that an article receives, the more important the publication. Page and Brin developed PageRank based on this concept. A site’s “peer review” was assumed through the quality of sites that find it worth linking to.

Page and Brin sought through PageRank to reduce the ability of spammers to rise to the top of search engines and to provide more relevant results. They built in the importance of backlinks into their search engine. E.g., let’s say that your site is Site A. A backlink is a link from another site (Say, Site B) that links to your website (Site A). A backlink would be the equivalent of a vote for your website. (Likewise, your vote for Site B through linking to it is its backlink.) In other words, the more websites that linked to a website, the more important that website must be. But they didn’t stop there. That concept would be easily manipulated – just get lots of folks to link to your website. Instead they built into PageRank a way to rank the backlinks such that higher ranked websites that link to a website have more weight than lower ranked websites that link to it. So a website’s position in Google’s search engine results depend, in part, on the quantity and the quality of sites that link to it. PageRank is also affected by sites a website links to, as well (so be wary who you link to, as well as, who links to you). So on the Internet, site relevance is, in part, determined by the number of votes a site receives through links to it, as well as, by the company it keeps through sites to which it links.

So how does PageRank lead to article farming? An author writes an article rich in keyword content and posts it in an article directory, a website that specifically hosts articles for dissemination. The article contains a resource box which contains such things as the article’s author, the author’s company, and a link to the author’s website. This creates a backlink to the author raising the author’s site’s PageRank. The article directory places relevant ads on the article giving it some advertising revenue while also increasing its content (which raises its position in SERPs). A company that uses the article places the article on their own site creating new content (which raises its position in SERPs), as well as, creating a backlink to the article directory further raising its PageRank. So it’s a win-win situation for all, right? Not so fast.

The market for articles – or keyword rich content

This is a classic example of supply and demand in a very competitive market with very low barriers to entry and exit. As I see it, two closely tied markets have developed which could be seen as part of the infamous “circular flow” diagram. First, there is the market for articles and second, there is the market for resources to produce the articles.

The supply for the market for articles is produced by freelance bloggers building a name for themselves, companies trying to get their websites noticed by search engines by providing “advice”, stay-at-home workers earning a little money on the side, etc. The main barrier to entry is knowing how to market yourself online and the reputations of established bloggers. Often these articles are supplied to the market via article intermediaries, otherwise known as article directories. The main requirement for the articles is that they be rich in popular keywords or search terms.

The demand for the market for articles are time or expertise strapped companies looking for new keyword rich content to produce a steady flow of traffic to the site. SERPs change often, so fresh content helps a company maintain, as well as, raise their positions in online search results. Companies will seek articles from article directories or hire writers to create content.

In researching this article, I came across advertisements requesting authors’ services and selling authors’ services. The market price for keyword rich content is relatively low. In many cases, articles are provided for “free” as authors build reputations for themselves or their sites. The going rate for services seems to be anywhere from $10 to $50 per article, and of course, this depends on the length of the article and experience of the author. If an author is really good he/she may break out of the article farming mold. Some sites offer volume discounts to companies purchasing articles. 1-5 articles may be $45 per article, but 8-10 may be $35. Small companies hoping to build page rank need lots of articles at low cost. They can get these articles for “free” from article directories if they are willing to accept the advertising terms. The article directory is getting advertising revenue which increases with the number of articles they support and their ranking in SERPs.

The way I see it, this market produces more articles, less pay per article, and lower quality work per article. The market is being flooded with blog/article posts. One website boasts “We are looking for expert Freelance Bloggers who can write on any given topics with little research.” A major health magazine advertises “magazine for work-at-home writers / bloggers – anybody interested in writing about health, even casually, with no experience required.”

As I write this article, I am aware that my opportunity costs rise with each article per week that I put together. To write more for industry, I would demand higher pay per article – which is why I would never make it in the business. Serious writers will likely move on to other writing venues rather than continuing to participate in this market. The market does provide a good opportunity for less experienced writers with lower opportunity costs. As such, the market appears to be quite oversupplied leading to low priced, low quality articles providing content largely to fool search engines into thinking the site has more relevance than it actually does – article farming.

So in the end, this is likely a win-win situation for many of the parties involved. The potential loser is the consumer searching for information who will increasingly find low quality information available for free on the Internet. In this case I remind the consumer, you often get what you pay for, and this free lunch may leave you a little hungry.

*If you would like to play with the PageRank algorithm, try Google’s PageRank Calculator from WebWorkshop. To calculate your website’s PageRank, try this PageRank Calculator.

Articles Cited and Further Reading

Article Marketing, http://en.wikipedia.org/wiki/Article_marketing

“Google’s PageRank Explained and how to make the most of it”, Phil Craven, Webworkshop.net, http://www.webworkshop.net/pagerank.html

“The Anatomy of a Large-Scale Hypertextual Web Search Engine”, Sergey Brin and Lawrence Page, 1998, http://infolab.stanford.edu/~backrub/google.html

Batelle, John. The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture, Penguin Books Ltd. 2005.

Common Article Directories:

http://www.articledashboard.com/

http://www.articledirectory.com/

http://www.articlegold.com/

http://www.goarticles.com/

Examples of Authors for Hire Sites:

http://www.freelancers-wanted.com/

http://www.ifreelance.com/

Tips for Authors for Hire

11 Skills That A Freelance Blogger Should Have,Raj Dash, March 9, 2008 http://performancing.com/freelance-blogging/11-skills-freelance-blogger-should-really-have

“Problogging Tips: Get Smart, Leverage Your Research”, Raj Dash, March 6, 2008 http://performancing.com/problogging-tips-get-smart-leverage-your-research

“Freelance Blogging for Side Income: My Top 10 Tips”, Skellie, Feb. 26, 2008, AnyWired.com, http://www.anywired.com/freelance-blogging-for-side-income-my-top-10-tips/59/

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.

IP Address Shortage - A Looming Crisis?

I have spent the better part of the last week preparing for my fall Internet Economics class - a class that applies economic principles to online selling. It is my intention to use this blog to present the laymen’s terms of what we’ll discuss in class.

What better topic on which to begin than the rising “crisis” of the impending shortage of IP addresses? What does it mean and how will it affect selling online? The analysis is a bit like a combination of the oil crisis and Y2K.

First, what is an IP address and why is it important to you? IP stands for Internet Protocol. The oft used analogy is that of a phone number. Every computer connected to the internet has one, and this allows computers to talk specifically to each other. If you want to find out yours, try clicking on http://whatismyipaddress.com/. Sort of surprising, isn’t it? You have an IP address and the map on the site very possibly points near to where you live if you have not taken steps to hide it. The wireless router in my home also assigns dynamic IP addresses (DHCP) to each computer connected to it within a small range of addresses. Nothing drives my kids more crazy than when the router goofs and assigns two computers in the home the same IP address. The latter computer responds with “IP conflict” and will not access the internet. This can and does happen when Internet Service Providers (ISPs) make the same mistakes with customers. Perhaps with the growing shortage of IP addresses, this may occur more often? (In economics, we call that an “empirical question”.) Even more interesting is that the IP address you just looked up is really just a “dotted decimal number” and not your computer’s address in binary form - which is a series of 0s and 1s. These 0s and 1s are represented in groups of four with eight binary numbers in each (called octets). (These are called IPv4 addresses.) These octets can be arranged in just shy of 4.3 billion combinations. (That is NOT an empirical question. It’s a fact. And we have used nearly 85% as of May 2008.*)

So what does this mean? Well, it’s a simple case of supply and demand. It has been known since the beginning that we could potentially run out of IP addresses. Remember, we started with the knowledge that we could create only 4.3 billion. Starting to sound a bit like Y2K? In that case, programmers knew for years that using two digit dates (e.g., 95, 96, 97) would cause a problem when the year 2000 (i.e., 00) rolled around. So we started with a finite supply of IP addresses, but the supply seemed so vast that there seems to have been little concern. Now, as the assignment of IP addresses is growing exponentially as developing countries like China and India come online and expanding technology in developed countries requires more IP addresses, there is a looming shortage. The OECD issued a report about this in May http://www.oecd.org/dataoecd/7/1/40605942.pdf stirring up concern that finally hit the major news media.

The supply/cost factors in this scenario seem to be upgrading to IPv6 compatibility, obtaining and distributing remaining IPv4 addresses, and/or better managing existing IPv4 addresses. The demand factors in this scenario are the growing demand for Internet access by developing countries as they come online and technological innovation in developed countries. (For example, just imagine that people are now clamoring to have internet access via their cell phones. When I first started teaching, none of my students had cell phones. Now I can’t find any that don’t. Soon, I won’t be able to find any that don’t have internet access via their cell phones. It may be as common as microwaves.)

Developers have known that there are ways to get more IP addresses. Conversion to an IPv6 system of allocating internet addresses (having six octets instead of four) is the solution that would provide trillions more addresses. But it is costly and until devices were compatible, demand was low. Now, many of the newest systems and devices are already IPv6 compatible; however, IPv6 devices are not backwards compatible to IPv4-only devices. And imagine the cost of reassigning billions of IP addresses… Without getting over my head in how these things work, the simple economic notion is that eventually everyone may have to upgrade to the new system. Sort of like how your analog tv will quit working next year (http://www.fcc.gov/cgb/consumerfacts/digitaltv.html). And then there are networks effects. Few want to make the investment until they see others getting on board as well. (Read the Cellular-News article below to see how Japan and China are innovating in this area.)

How is this like drilling for oil? Well, it is less profitable to drill for oil in some places until the price is high enough. We have been quite spoiled to have relatively low cost access to the internet and perhaps our demand elasticity (our quantity response to the change in price) will be similar to our demand for gas as we grow more dependent. When the market price of internet access rises, as could be the case when supply decreases due to higher costs and demand increases due to more desire for internet access, some folks will reduce their access, but how many? (Another empirical question.) If the answer is not many, we can expect the price to rise quite a bit.

And then there is supply elasticity. Some reporters (as reported on Fox News on July 7, 2008 titled “The End is Near: Less Than Three Years Until the End of the Net?”) would have us believe that the supply of IP addresses will become perfectly inelastic - i.e., there will be no more and the Internet will just fail. If there were no solution, then there would be no new users at some point and the cost of purchasing access will grow as those who have it are lured into giving it up by the higher price they can get to sell it. Some fear that companies will monopolize the industry by buying up all the IP addresses and selling them at a high price. This does not make sense to me when there is an alternative that could ultimately flood the market with trillions of IP addresses. There are also methods of sharing IP addresses, much like the wireless router in my house, that can, and are, being applied in larger measures to IPv4 addresses. (This is called Network Address Translation.) But again, if this were the case that the OECD fears, should the government regulate the distribution of the remaining IP addresses? Or should the market handle it? Should we “drill” where we currently know to find IPv4 addresses or explore to find a better, more efficient source? Or would drilling be a good short term solution while working on the longer term solution? Whew, the analogies could go on, and I don’t profess to have the answers.

I am going to recommend that my students read the OECD report for discussion in class. And while this blog is still incredibly new, any comments or suggestions posted here would be great. I don’t claim to be a computer expert, so any corrections to technical errors in this post would be appreciated.

Ok, so how many economic terms have we covered here that we will eventually discuss in class? Supply, demand, elasticity, market price, compatibility, monopolize, network effects, government regulation.

Other Sources:

“What Is An IP Address?”, How Stuff Works, http://computer.howstuffworks.com/question549.htm
*”Mobile Phones Could Be Affected by IP Address Shortage”, Cellular-News, http://www.cellular-news.com/story/31184.php, Posted to the site on 15th May 2008
“Internet Address Space: Economic Considerations in the Management of IPv4 and in the Deployment of IPv6, OECD, http://www.oecd.org/dataoecd/7/1/40605942.pdf, May 15, 2008
“IP address shortage to limit Internet access” USA Today, Posted 8/3/2007 12:37 PM, http://www.usatoday.com/tech/webguide/internetlife/2007-08-03-ip-shortage_N.htm