presentation - Columbia Institute for Tele
Transcription
presentation - Columbia Institute for Tele
Self-Image: “You can’t tell a dog on the Internet” Internet Concentration and What it Tells Us About the Problems of the Information Economy Eli M. Noam Professor of Finance and Economics Columbia University Graduate School of Business Director April 2004 Columbia Institute for Tele-Information ©2003 Eli M. Noam 1 Questions: • Has the Internet sector become more concentrated? • More concentrated than other information and media industries? • Causes and implications for the information sector generally ©2003 Eli M. Noam 3 Industries of the Internet Sector: Basic Instrumentalities • Backbones • ISPs • Portals • Broadband Providers • Internetworking Equipment • Browsers • Search Engines • Modems • Media Player Software • IP Telephony ©2003 Eli M. Noam ©2003 Eli M. Noam 2 • No past empirical study to answer the question of concentration • My study looks at 95 US information sector industries – backbones, ISPs, long-distance telecom, broadcast TV, micro-computers, ISPs, mobile telecom, PBXs etc. • Over the past 20 years • Thousands of company reports and other sources over a 20 year period ©2003 Eli M. Noam 4 Not Included • Telecom conduits • Applications • Content • Computer Hardware and OS 5 ©2003 Eli M. Noam 6 1 Concentration index #1: • Herfindahl-Hirschman Index (HHI) f HHI = ∑ S i =1 2 i 90 Percent of Market 2000 70 C4 60 1500 HHI 50 40 1000 30 20 WC 4 sec tor 52 =∑ j =1 m M j 4 ∑S i =1 ij j = a sub-industry (e.g mobile handsets) within an industry (e.g. telecom equipment) mj = total revenue of a sub-industry M = total revenue for the information sector i = firm in a sub-industry ©2003 Eli M. Noam 2500 80 i = firm in a sub-industry Si = market share of firm given in a given sub-industry 7 Backbones Where: SI = firm's market share of a given sub-industry Where: HHI < 1,000 Unconcentrated Market 1,000 < HHI, Moderately Concentrated Market 1,800 < HHI, Highly Concentrated Market 100 C4 Index 4 C4 = ∑ S i i A weighted aggregate C4 for the entire information sector then is: Antitrust enforcement guidelines classify markets ©2003 Eli M. Noam Concentration Index #2: 8 Backbones 2002 WorldCom AT&T Genuity C4 HHI US Total Revenues ($ mil) 41 13 11 74.0 2174 10,500 500 10 0 0 1984 1984 1988 1992 C4 1996 2001 2001 HHI 9 ©2003 Eli M. Noam ISPs 100 ©2003 Eli M. Noam 7000 90 6000 C4 Percent of Market 80 5000 70 60 HHI 4000 50 3000 40 30 2000 20 1000 10 0 1984 1984 1988 1992 C4 1996 0 2001 2001 10 ISPs 2002 AOL Time Warner MSN United Online Earthlink Prodigy (SBC) AT&T WorldNet Other C4 HHI Total Subscribers 44.2 11.5 8.1 6.9 5.2 2.0 22.1 70.7 2226 69.4 HHI ©2003 Eli M. Noam 11 ©2003 Eli M. Noam 12 2 Portals 100 90 Percent of Market 6000 C4 80 5000 70 60 4000 HHI 50 3000 40 30 2000 20 1000 10 0 1984 1984 1988 1992 C4 Portals (% users 2002) 7000 1996 AOL Time Warner Yahoo MSN* (Microsoft) Other US Total Revenues (in millions) C4 HHI 29.5 22.6 21.7 28.9 2908 85.6 2036 0 2001 2001 HHI 13 ©2003 Eli M. Noam Media Player Software 2002 49.8 27.6 13.5 6.2 2.9 153 97.1 3462 Browser Software 100 9000 80 7000 60 6000 50 5000 40 4000 30 3000 20 2000 10 1000 1 1995 2 1996 3 1997 4 1999 C4 15 5 2000 0 6 2001 HHI 16 ©2003 Eli M. Noam Browser Software 2001 Internetworking Equipment 3000 100 13.0 86.0 300.0 100 7565 90 Percent of Market Netscape (AOL TimeWarner) Microsoft Total Revenue ($ mil) C2 HHI 8000 HHI 70 0 ©2003 Eli M. Noam 10000 C4 90 Percent of Market RealNetworks Microsoft Windows Media Apple Quick Time AOL Winamp Other Revenue ($ mil) C4 HHI 14 ©2003 Eli M. Noam C4 80 2500 70 2000 60 50 1500 HHI 40 1000 30 20 500 10 0 1984 1984 1988 1992 C4 ©2003 Eli M. Noam 17 1996 0 2001 2001 HHI ©2003 Eli M. Noam 18 3 Internetworking Equip 2001 Cisco Avaya Marconi Nortel Alcatel IBM (USA) Siemens Industry Revenue US ($mil) C4 HHI 48 20 8 7 5 5 2 14,840 83.0 2871 19 ©2003 Eli M. Noam Aggregate Concentration (weighted by size) 21 ©2003 Eli M. Noam 3500 3000 2500 2000 1500 1000 500 0 1988 1992 1996 2001/2 Internet Industries 1984 - 2001/2 ©2003 Eli M. Noam DSL SBC Verizon Bell South Qwest (US West) Broadwing (Cincinnati Bell) 12.8 11.5 6.0 4.3 0.6 Cable AOL Time Warner Comcast Corporation Cox Communications Charter Communications Cablevision Systems Aldelphia Communications 18.4 23.6 8.5 5.8 4.9 3.6 Total Revenues (mil) C4 HHI 4,762 66.3 1389 20 ©2003 Eli M. Noam Weighted Aggregate HHI n WAHHI = ∑ j =1 mj ∑m f ∑S j i =1 2 ij Where: • j = an industry • mj = total revenue of an industry • Si = each firm’s market share of an industry • n = number of industries • f = number of firms in an industry ©2003 Eli M. Noam 22 Comparison #1: Internet vs Other Media Internet Industries 1984 - 2002 1984 Broadband Providers 2002 23 • Print • Film • Broadcasting • Internet • Broadband Internet ©2003 Eli M. Noam 24 4 Media Concentration Trends: Old Media to Internet 1984 - 2002 6,000 Print Sector Media Concentration Trends: Old Media to Internet 1984 - 2002 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 - - 1984 1988 1992 1996 1984 2001/2 Print Sector 1988 1992 Film Sector 25 ©2003 Eli M. Noam Media Concentration Trends: Old Media to Internet 1984 - 2002 1996 2001/2 Print Sector 26 ©2003 Eli M. Noam Media Concentration Trends: Old Media to Internet 1984 - 2002 6,000 6000 5,000 5000 4,000 4000 3,000 3000 2,000 2000 1,000 1000 0 - 1984 1988 Broadcast Sector 1992 1996 Film Sector 1984 2001/2 1988 New media Sector Print Sector 27 ©2003 Eli M. Noam Media Concentration Trends: Old Media to Internet 1984 - 2002 1996 Film Sector 2001/2 Print Sector 28 ©2003 Eli M. Noam Media Concentration Trends: Old Media to Internet 1984 - 2002 6000 6000 5000 5000 4000 4000 3000 3000 2000 2000 1000 1000 0 1992 Broadcast Sector 0 1984 Internet Sector Film Sector 1988 1992 New media Sector 1996 2001/2 Print Sector ©2003 Eli M. Noam 1984 1988 1992 Internet Sector Broadcast Sector Print Sector Broadcast Sector 29 1996 2001/2 New media Sector Film Sector Broadband Providers, Local ©2003 Eli M. Noam 30 5 Findings Reasons? • The younger the medium Higher investment needs, greater economies of scale, greater network effects, greater risk from competition –the more concentrated –The stronger concentration trend after 1996 – 31 ©2003 Eli M. Noam Comparison #2: Internet vs. Other Info Sectors Internet concentration likely to increase in near term – – Economies of scale Profitability potential of oligopoly • Internet • Telecom • Mass Media • IT 33 ©2003 Eli M. Noam 34 ©2003 Eli M. Noam Concentration of the Four Major Segments of the Information Sector Concentration of the Four Major Segments of the Information Sector 4000 HHI 4000 32 ©2003 Eli M. Noam HHI M a s s M e d ia 3500 3500 3000 3000 2500 2500 2000 2000 1500 1500 1000 1000 500 500 0 0 1983 1984 1 1 1983 1984 1988 1992 1996 2001 ©2003 Eli M. Noam 1988 1992 Mass Media Mass Media 35 1996 2001 Information Technology ©2003 Eli M. Noam 36 6 Concentration of the Four Major Segments of the Information Sector 4000 HHI HHI 4000 3500 3500 3000 3000 2500 2500 2000 2000 1500 1500 1000 1000 500 500 0 1 1983 1984 1988 Mass Media 1992 Information Technology 1996 2001 Telecommunications 37 ©2003 Eli M. Noam Concentration of Total Information Sector 3000 HHI In f or ma t oi n Se c t o r In c ul d in g IT 0 1983 1984 1 Mass Media 1988 1992 Information Technology 1996 2001 Telecommunications ©2003 Eli M. Noam Internet 38 Findings • Mass Media concentration, though receiving much attention, and while growing, is the lowest of the 4 infoindustry sub-sectors • Internet (and telecom) are the most concentrated sub-sectors 2500 2000 1500 1000 500 0 Concentration of the Four Major Segments of the Information Sector 1983 1984 1 1988 1992 1996 –Only ones above DoJ threshold of “highly concentrated” 2001 Information Sector Including IT ©2003 Eli M. Noam 39 3. Internet (and Mass Media) have highest growth in concentration 4. After 1996, telecom & Internet concentration up sharply – Mass Media steady up ©2003 Eli M. Noam 41 ©2003 Eli M. Noam 40 Trends of Vertical Integration in the Internet ©2003 Eli M. Noam 42 7 Vertical Measure I: The Participation Index (PI) shows extent of top firm n Even if a firm does not dominate any specific market, its presence in several markets might, in combination, become powerful 1 1 PIn = ∑ PI i = ∑ 0,1 n 43 ©2003 Eli M. Noam n j =1 i Where: • i = firm (top n firms in terms of information revenues) • j = sub-industries • n = number of sub-markets in which a firm participates 44 ©2003 Eli M. Noam Participation Index Top 10 Internet Companies in Total Information Sector 1984 - 2001/2 Vertical Measure II: 70 The Sector Share Index (SSI) 60 SSI =∑ SSI = ∑ s m M Where: 50 j 40 sector 30 i firmi j j • sj = Firm i’s Share in Market j, in percent • mj = Market revenues of sub-industry j • M = Revenues of Total Sector 20 10 - 1984 1988 1992 1996 2001/2 Participation Index ©2003 Eli M. Noam 45 Percentage of Top 10 Companies in Internet Industries' Revenue of Total Information Industry 50.0 Revenue 1984 - 2001/2 45.0 Mind the Scale ©2003 Eli M. Noam 46 Percentage of Top 10 Companies in Internet Industries' Revenue of Total Internet Industry Revenue 1984 - 2001/2 100 90 40.0 80 35.0 70 30.0 60 25.0 50 20.0 40 15.0 30 10.0 20 5.0 10 - 1984 1988 1992 1996 2001/2 Percentage of Top 10 Companies in Internet Industries' Revenue of Total Information Industry Revenue 1984 - 2001/2 ©2003 Eli M. Noam 47 0 1984 1988 1992 1996 2001/2 Percentage of Top 10 Companies in Internet Industries' Revenue of Total Internet Industries Revenue 1984 - 2001/2 ©2003 Eli M. Noam 48 8 Share of Total revenue of Top 10 Companies in Internet Companies, of total information sector 1984 100.0% - 2001/2 90.0% • Internet sector increasingly part of 80.0% 70.0% 60.0% 50.0% –Telecom industry –Cable TV –Mass Media conglomerates 40.0% 30.0% 20.0% 10.0% 0.0% 1984 1988 1992 1996 2001/2 Percentage of Top 10 Companies in Internet Industries' Revenue of Total Information Industry Revenue 1984 - 2001/2 49 ©2003 Eli M. Noam Vertical Measure III: 1200 The Company Power Index (CPI) 50 ©2003 Eli M. Noam Company Power Index of Top 10 Internet Companies 1984 - 2001/2 1000 2 CPI = ∑ CPI = ∑ s m j j 800 M Where: • sj = firm’s share in market j • mj = total revenue of sub-market j • j = sub-industries, ranging from 1 to 52 (consisting of the 52 sub-industries) •M = Revenues of total information sector industry i firm ©2003 Eli M. Noam j 600 400 200 0 1984 51 Company Power Index Top 10 Internet Companies Internet Activities Only, within Internet Industry 2500 Revenue 1984 - 2001/2 1988 1992 1996 2001/2 Company Power Index of Top 10 Companies in Internet Industries, including PCs, Microprocessors (MPUs) & Operating System Software ©2003 Eli M. Noam 60 52 Company Power Index Top 10 Companies in Internet Industry 1984 - 2001/2 (Internet only) 50 2000 40 1500 30 1000 20 500 10 0 0 1984 1988 1992 1996 2001/2 Company Power Index Top 10 Internet Companies - Internet Activities Only, within Internet Industry Revenue 1984 - 2001/2 ©2003 Eli M. Noam 53 1984 1988 1992 1996 2001/2 Company Power Index Top 10 Internet Companies - Internet Activities Only 1984 2001/2 ©2003 Eli M. Noam 54 9 800 700 Company Power Index of Top 10 Internet Companies in Internet Industry 1984 - 2001/2 (including activities in other industries). Related Industries 600 500 400 300 200 100 0 1984 1988 1992 1996 2001/2 Company Power Index Top 10 Internet Companies - Total Activities 1984 - 2001/2 55 ©2003 Eli M. Noam 56 ©2003 Eli M. Noam Future: Similar trends: • Broadband: even greater trend to concentration –Cost high –Already prices high in US duopoly DSL-Cable • Applications –eBay –Amazon • Major software –Microsoft • Key hardware –Intel 57 ©2003 Eli M. Noam Operating System Software 100 10000 90 Percent of Market 8000 70 7000 60 6000 5000 HHI 40 4000 30 3000 20 2000 10 1000 0 0 1984 1984 Microcomputers 3000 9000 C4 80 50 58 ©2003 Eli M. Noam 1988 1992 C4 1996 2001 2001 2000 1500 1000 500 0 1984 HHI ©2003 Eli M. Noam 2500 59 1988 1992 Microcomputers ©2003 Eli M. Noam 1996 2001/2 60 10 Applications: Online Book Retailing 100 10000 90 9000 C4 Percent of Market 80 8000 70 7000 60 6000 50 5000 40 4000 HHI 30 3000 20 2000 10 1000 0 1984 1984 1988 1992 C4 1996 2001 Likely Implications • Slowing of innovation & upgrade • Higher consumer prices, higher profits • Restrictiveness on content and applications (cable TV model) and content access pricing • Global strength and presence 0 2001 HHI ©2003 Eli M. Noam 61 • Greater vulnerability to disruption • More proprietary standards and protocols? • Internet governance replaced by cartel • Cross-subsidies and vertical extension of market power • Gov regulation to deal with such problems of market power ©2003 Eli M. Noam 63 ©2003 Eli M. Noam 62 Internet Past ©2003 Eli M. Noam 64 Internet Future? Why Concentration? http://www.gocollect.com/product_display/products/product_page.asp?id=28126&refcode=affiliate-929 ©2003 Eli M. Noam 65 ©2003 Eli M. Noam 66 11 Response to structural instability of many information industries ©2003 Eli M. Noam 67 Information Economy will be • Volatile • Cyclical • Unstable • Needed: Macro-economics of the information society ©2003 Eli M. Noam 69 Price Problems • • • • • • Music industry Online publishers Phone calls Cell phone Web advertising TV and radio • Software • Academic articles • Newspaper • Digital photos • Semiconductors ©2003 Eli M. Noam 71 • • • • • • • • • Information Sector Crisis Dot com bubble Telecom crash Music bust E-publishing stagnation PC drop Wireless saturation Semi-conductor slump Newspaper recession R&D crisis ©2003 Eli M. Noam 68 Common Revenue Problem of Information Industries • Information has become cheaper for many a decade. • It is now becoming difficult to charge anything for it. ©2003 Eli M. Noam 70 Two Basic Explanations for Crises • “Perfect Storm” scenario • “Fundamental instability” ©2003 Eli M. Noam 72 12 “Fundamental Instability” The entire information sector is subject to a gigantic market failure in slow motion. ©2003 Eli M. Noam 73 Basic Structural Reasons 1. High fixed costs and low marginal costs 2. Network effects 3. More competitive 4. Commodification 5. Inelastic demand ©2003 Eli M. Noam 75 Exceptions: Market Power • Cable TV • Sports rights ©2003 Eli M. Noam 74 Consequence: a secular trend of price deflation in information products and services ©2003 Eli M. Noam 76 Reaction by providers • Price is marginal cost, which is close to zero • Most likely below average cost, which means that it does not cover total cost ©2003 Eli M. Noam 77 • Price discriminate • Innovate • Hedge • Cut cost • Industry consolidation ©2003 Eli M. Noam 78 13 Same economic factors lead again to a new cycle of investment overproduction and a new price collapse ©2003 Eli M. Noam 79 The information industries are becoming interdependent under digital convergence ©2003 Eli M. Noam 81 Cyclical instabilities common to other industries with similar characteristics of high fixed cost and low marginal costs –Airlines ©2003 Eli M. Noam 80 Price deflation in the information sector will drag down the rest of the economy, too, through a multiplier effect. ©2003 Eli M. Noam 82 Business Responses • As societies become information economies, they also become more volatile economies. ©2003 Eli M. Noam 83 • Try to consolidate and cartelize to create pricing power • Price discriminate • Technological innovation • Outsource and offshore • Protection of property rights to differentiate product ©2003 Eli M. Noam 84 14 The role of government ©2003 Eli M. Noam 85 Macroeconomic instruments of governments are based on the experience of the industrial economy ©2003 Eli M. Noam 87 Another policy approach: Assure a diversification of the economy • Reconsider emphasis towards information sector • Encourage industries outside of the information sector –Often low-tech industries • Back to the basics, the industrial sector and the basic industries • “Info-industrial” sector ©2003 Eli M. Noam 89 Finland, Nokia • 35% of all exports • 12% of GDP • Plus indirect contributions ©2003 Eli M. Noam 86 • Keynsian demand generation? • Industrial support policy? • Monetary policy? • Competition policy? ©2003 Eli M. Noam 88 Alternative: the Civil Society Sector? • Volunteerism has structural problems too, the classic “tragedy of the commons” problems ©2003 Eli M. Noam 90 15 Conclusion • In the information economy –1. Volunteerist activities are subject to the “tragedy of the commons” –2. Private information markets are likely to frequently fail in “the tragedy of the digital market” –3. Governments do not have many tools to deal with these failures ©2003 Eli M. Noam 91 Economics, the “dismal science” ©2003 Eli M. Noam 92 Next Questions: • What are the implications for –Innovation, business strategy, stability of the industry, public policy? • Discussed in my next books – “The Dark Side of the Internet” –“Media Concentration and Ownership in America” END OF PRESENTATION Thank You. ©2003 Eli M. Noam 93 ©2003 Eli M. Noam 94 16