Old and new monopolies: the Internet, the bubble and the "Over-the-top"
The birth of the Internet
A little history may come in handy. As known, the Internet was conceived between the end of the fifties and the 1957s, at the height of the Cold War. In response to the launch of Sputnik in XNUMX and the increasingly widespread opinion that the growing scientific and technical knowledge and skills of the Soviet Union could jeopardize US defense capabilities, the US Department of Defense gave birth to the Arpa project (Advanced Research Projects Agency), with the aim of restoring to the United States world leadership in science and technologies applicable to the military.
Thus ARPAnet (where NET stood for network), a network designed to guarantee continuity of military command and control structures even in the event of nuclear war. In 1969 they went into operation the first four "nodes" of the newborn network (University of California Los Angeles, Stanford Research Institute, University of California Santa Barbara, University of Utah): two years later the knots had become 15.
Between the end of the XNUMXs and the beginning of the XNUMXs, the technologies used to create the ARPAnet network were progressively transferred to the university environment to allow for more effective forms of collaboration. Then, through the RFC mechanism (Request for Comment), a number of new protocols and key applications were introduced: in 1971, the first FTP was proposed (File Transfer Protocol), the first email service was created in 1973, encrypted in its current form in 1982. The next steps, at the beginning of the XNUMXs, were the development of hypertext information sharing technology and the creation of the HTTP protocol (Hypertext Transfer Protocol) by Sir Timothy John Berners-Lee.
The technologies used until then within restricted professional communities spread among the public of computer users above all thanks to the creation - by Marc Andreessen - of the browser Mosaic, then called Netscape Navigator, which exploited the potential of the HTML language to create a simple and intuitive navigation interface.
The browser of the Netscape Communications Corporation was considered for years the only means of accessing the Internet until it represented 80% of the market in 1996. More or less in the same period the programming language known as Java was born (created by the company Californian Sun Microsystem) and with its applet (literally "small application": a program that provides a basic function to be implemented in a more complex context) proved to be particularly suitable for the creation of web applications. The success of Java for programming and delivering services on the Internet and Netscape to access the network they configured a new scenario that threatened the undisputed leader of operating systems: Microsoft. The Seattle company sensed, albeit late, the impact of the browser and the web on native applications and decided to launch their own browser Internet Explorer, which later, together with the Java suite, was integrated into the operating system Windows. In this way all computers automatically became Internet access systems.
The internet bubble
For over thirty years the Internet had been directed towards military and scientific purposes with limited objectives of a commercial nature, and had taken on a utopian connotation of service to progress and dissemination of knowledge. But during the XNUMXs it changed its nature. The ever-increasing diffusion of online e the growth prospects of the network-based economy created the conditions for greater attention from part of the financial community, which he made available to anyone with plans for development and use of these new technologies huge financial resources to invest. The last years of the twentieth century thus became the years of the Internet bubble and the so-called new economy, whose beginning is traced back to the listing on the NASDAQ stock market in New York of companies such as Netscape and Yahoo, which in the first days of trading reached very high valuations.
In a period of just over six years (from 1996 to 2001) millions of kilometers of backbones were laid of fiber and hundreds of new companies (o startup) were quoted on the stock exchange, snatching dizzying valuations. In 1998 two students of Stanford University, Larry Page and Sergey Brin, starting from the work that Page had started to develop the doctorate – which will not end – and to which Brin will give the mathematical foundations, they founded Google, which in a few years would become the first search engine in the world.
1998 is also the year in which the process of liberalization of the markets for goods formally opens in Europe fixed network telecommunications services, i.e. the year in which the independent regulatory authorities take office. To a context of growth of the Internet world characterized by a framework inspired by the values of liberalism and the laissez-fairecontrasts with an antithetical context for the traditional telecommunications companies, in which the newly established national regulatory authorities intervene decisively on the structure of the sector, directing its evolution towards a reduction in prices and a transfer of the market shares held by the operators history in favor of new entrants.
Among the tools on which the regulatory authorities leverage with the aim of promoting competition, the entry and consolidation of new entities, there are above all asymmetries in termination prices in the traffic on both fixed and mobile networks. The price that the new entrant pays the incumbent to terminate a call is significantly lower than the price that the incumbent pays for termination on the new entrant's network. This measure, designed to compensate the new entrant's effort in acquiring customers, becomes the basis for offering Internet access in dial-up: by connecting to the Internet access server through a number of an alternative operator, Internet access is offered through a normal telephone call in analogue mode.
The per-minute fee that the incumbent operator pays to the alternative operator guarantees a level of income as a result of which the latter has great flexibility in defining the offer to end customers, going as far as - as in the case of the Italian Tiscali - to offer free Internet access services (at no additional cost to that of the telephone call). The success of Internet services is, in many cases, inextricably linked to the free offer. The immediate transition from paid services to services free represents a process that brings together all the components of the Internet system in its many facets:
- email service quickly replaces expensive EDI (Electronic Data Interchange) and after the first ones paid services become free;
- the software for accessing and managing services becomes free in a short period of time;
- access, thanks to the asymmetrical interconnection tariff, becomes free.
Internet services, in short, are synonymous with free. To define its spirit, the term is coined Freelosophy. Gratuity proves to be an element of continuity also for a second generation of services, such as services of entertainment (texts, music, films and audiovisual contents in general), of personal communication, of data storage and social networking. The technical tool is represented by data sharing systems mode content Peer-to-peer (also abbreviated to P2P) which indicates the direct connection between the nodes of a computer network bypassing the hierarchical structure of server e client, thus obtaining a connection between “peers” (peer in English).
Actually even before the appearance of systems Peer-to-peer it was possible to record a disc, photocopying a book or "burning" a friend's CD: yes, copyright rules were being broken, but the scale of the phenomenon did not affect the copyright-based industry. With the Internet, the schemes: each user can connect with thousands of other users/friends and exchange digital copies of books, music tracks, videos, without any qualitative difference between the copy itself and the original. In 1999 it was launched Napster, a software of File sharing which allows the exchange of music tracks in a similar way to the Peer-to-peer.
Users and usage grow exponentially, triggering the reaction of record companies who denounce the portal and force it to close in 2001. Already in those years the proponents of Napster argued that the closure would not stop the phenomenon, in how much the File sharing free represents one of the foundations of the Internet. The birth of other connectivity software Peer-to-peer like KaZaA Media Desktop, WinMX ed eMule he would soon prove it.
After 2000 the bubble begins to deflate. Many ideas and business models go into crisis and many young companies with healthy businesses they find themselves deprived of the financial resources necessary to carry out their projects. Yes triggers a very strong natural selection which leads to a consolidation of the sector and the prevalence of web companiesin small numbers, but of global dimensions.
The “Over-the-Top players”
It is in this context that the business model of Over-the-Top operators using the Internet explodes as a single undifferentiated platform and build their services "above" the network (this is the meaning of the English expression commonly used by insiders). The birth and affirmation of Over-the-Top represents one of the most important social, economic and financial phenomena of the post-war period. The possibility of conveying one's own services, bearing only the costs of connection and access to the big Internet and using – in fact – a distribution system without having to recognize any type of compensation to the manager of the network through which end users receive the service, introduces an element of profound innovation, a real paradigm shift that would be unthinkable for any other network service (e.g. water, energy and gas).
The global size of an ever-growing market of Internet users and a level of production costs and drastically reduced distribution compared to the past, allow the main Over-the- Top to generate large cash flows in a short time. At this point, we have to ask ourselves what the factors are key to Over-the-Top's success. The first real enabler is the growth of the Internet and in number of users: today the Internet is used by over 4 billion individuals, considering both availability of direct access, at home or in the office, and the availability of indirect access through third parties (for example in public posts). This growth is mainly attributable to the following factors:
- low prices: from the initial dial-up essentially free, we moved on to broadband access services large on the infrastructures of fixed and mobile network operators and cable TV, with constantly falling prices thanks also to the heated competition between operators;
- growing performance: the evolution of access technologies (xDSL, Cable Modem, Fiber Optic) and investments by operators have constantly increased access speed. According to NetIndex, one of the most accredited sources of speed detection, in the last four years the average speed of the connection in the world has tripled;
- the evolution of terminals: the transformation of personal computers and the birth of smartphones and tablets have multiplied users and ways of using the network.
In short, the Internet has structurally and irreversibly changed the logic of providing communications services. Before its advent, electronic communication services could only be provided to users reached by the infrastructure owned by the network operator and each new potential customer was therefore associated with investments in terms of development and management of the corresponding network infrastructures. Through complex and lengthy processes of technical and organizational standardization and economic negotiation and regulatory definition, an interconnection system was gradually consolidated which allowed operators to offer the services also to users not directly reached by their own infrastructures (for example the roaming international or virtual operators).
The Over-the-Top, on the other hand, manage to reach millions of users with their services with practically zero incremental investments. But what services do Over-the-Top operators offer? We can identify some main categories:
- search engine;
- distribution of digital content and software;
- e-commerce;
- "virtual" communication services;
- social networks.
Let's see what it is.
Search engine.
One of the first Over-the-Top models is search engines (data searching). The main player in the segment of the data searching it's Google. But there are also others, such as Yahoo, Bing or the Chinese Baidu, which have a large following. In addition to general search engines (Google, Yahoo, Bing, Altavista, Excite, Lycos, Baidu…) there is an ecosystem of data searching specialize in specific topics, such as blogs, books, business, accounting, enterprise, games, human resources, maps, health, multimedia, news, home sales and rentals, science, shopping and possibly any topic that may be of interest. These realities that restrict their field of action to particular areas are flanked by the tools used by online retailers, such as Amazon or Expedia, which use "internal" search engines to help their customers find their way around their endless offer.
Finally, there is a third sub-category, that of the so-called search engine aggregators (or metasearch engines) that take results from multiple search engines and integrate them into a single response. Importantly, some search engines, such as Duck Duck Go, are gaining interest as they do not collect information on searches made by users. But what is the operation of search engines based on? Essentially on two aspects: the availability of a "copy" of everything available on the net, combined with an in-depth knowledge of the research object (what users are looking for) and search methods (how users search). The effectiveness of a search engine largely depends on this knowledge, built through the observation, collection and processing of the millions of searches carried out daily by users.
This is an element that has a strong self-perpetuating scale effect: the more the number of searches grows, the more the accuracy of the answers provided improves as the search engine "learns" and gets better" with each additional research. The increased accuracy of the answers in turn stimulates more intensive use by an ever-larger number of users resulting in a further improvement in the accuracy of the answers, and so on. Google was the first site to break the barrier of one billion unique visitors per month, and it is precisely the approximately three billion daily searches that allow it to constantly improve. Just think that the algorithms that determine the ranking (“ranking”) responses are also reviewed and improved on a daily basis!
The first solid business model that establishes itself starting from data searching is that of monetizing the audience in terms of advertising. It is a known model, made by commercial televisions, in which advertising revenues pay for the service that is provided free to customers. All sites - whatever their nature - focus on revenues from advertising, but Google manages to intercept over 45% of worldwide Internet advertising revenues due to its audience and user knowledge of its search engine. But let's see where this profound knowledge, which represents the truth, comes from driver (or "determinant") of revenues and margins of the group based in Mountain View, focusing in particular on the issue of data collection and customer profiling.
To improve the accuracy of the answers, search engines don't just use previous searches, but they also try to identify what kind of person the searcher is and to know their needs. This is because the relevance and correctness of the answers provided have a strong subjective component and are linked to the characteristics of the user. Let's clarify with an example: the relevance of the search engine's response to the word "Ibiza" depends on as and thing it is known about the user who is carrying out the search and, more specifically, if the latter is planning to change cars or is looking for a place to spend a holiday. This simple example, in which the keyword entered has different meanings, demonstrates how the answers can be satisfactory and relevant to the needs of a specific category of users, but not to other classes of users.
What has just been illustrated represents the main argument used by search engines to justify the identification and profiling activity that they carry out with absolute continuity, detail and accuracy. It's actually well known that search engines, as well as many other Over-the-Top entities, resort to this type of activity, not only to optimize their services, but also and above all for natural purposes commercial. The constant "monitoring" of the searches carried out by users and of the pages consequently visited allows you to acquire in-depth knowledge of both what the user usually looks for, both of his preferences, of his digital "habits" and therefore to increase the value of the advertising message. But it is precisely the "monetization" of the information collected, with its repercussions of an ethical nature, economy and also the protection of the individual's right to privacy, representing a crucial issue that we will address in the next chapters.
Distribution of digital content and software.
This Over-the-Top business model is all about the distribution of software, applications and digital content. Here the network essentially acts as a vehicle through which the service is proposed and delivered to the customer. We talked about Peer-to-peer earlier, but there are many subjects who use the network to produce and distribute digital content with different business models. The most relevant are certainly Apple's iTunes for music, videos and applications, Amazon for books and newspapers and Google with YouTube for video content. One of the contents that best lends itself to digital distribution is software, and this generates the so-called Application Stores: the App Store is Apple's official channel for iOS applications for mobile devices and personal computers, the Amazon Appstore and Google Play distribute applications for devices with Android system and Mac App Store distributes software for Mac OS X.
These services attract the interest of specific customer "niches" and their economic sustainability is linked to the global dimension of the market, to very streamlined production and distribution structures and to a level of quality of service and customer assistance in some cases not adequate. The subjects who commercialize the applications (owners of the Appstores) tend to delegate to the developers of the Apps both the compatibility checks with respect to the specifications of the platform on which they operate, and the guarantees on the correct functioning of the services. The role of the Appstores somewhat resembles that of a supermarket that does not bother certifying the quality of the products on sale. In this case, however, the quality is guaranteed by the reputation of the individual brand and by the fact that the product is in turn certified by a series of laws, rules and regulations which specify its origin, composition, any risks or limitations of use.
In other words, for the products on sale in any commercial establishment there is an implicit guarantee deriving from public regulations on the basic characteristics of the products, which allows the consumer to make his choices only on the basis of the attractiveness of the specific commercial offer of each producer. In the supermarkets of digital services, the Appstores, this does not happen: neither guarantees directly attributable to the manufacturer (i.e. the developer of the application) can be found - in general - nor guarantees represented by rules or laws that impose certain levels of reliability of the products marketed. In the world of Appstores, the guarantee on the functioning of an application is given exclusively by the reputation of the developer, usually obtainable only through the mechanism of "recommendations" and the judgments of other users. Unguaranteed quality is typical of this world: most developers, in fact, even the most famous ones, often use the mechanism of the first free offer to attract interest and make known a specific service, with reduced functionality and no guarantees of quality.
Once the consumer's interest has been captured, a second "premium" (paid) version of the same product is launched on the market - even by companies other than the one that had initially introduced the service - which, while continuing to not provide specific guarantees in terms of service or customer assistance, in any case offer higher quality (for example, a greater number of functions), better performance or simply limit the number and intrusiveness of advertising content.
E-commerce.
One of the most interesting evolutions of Over-the-Top business models is represented by eCommerce. The ease with which digital goods can be bought online is extended to physical goods with the creation of marketplaces (generic or niche) in which companies and individuals buy and sell products of any type and the manager of the virtual marketplace retains a minimum margin for the transaction. This is the model with which eBay and then Amazon developed first. An estimated $2011 billion in goods were sold online in 680. Amazon (with over 20% of transactions) and eBay (with 16%) have established themselves in this specific sector. In third place, and growing strongly, is the Chinese operator Alibaba with around 14%.
"Virtual" communication services.
These are services that connect two personal computers or any other type of electronic device and allow the transport from one end to the other of information of various kinds (voice, text, images, sounds, videos). Depending on whether it is voice or text, the service assumes different names (voice, instant messaging, etc.) In Over-the-Top communication services, the supplier and user of the service use the network infrastructure or ISP (Internet Service Provider, provider of the Internet access service) without this generating any additional revenue, in addition to the access fee, for the operator who owns the infrastructure. Internet access services generally do not have usage limits, or have very high limits with respect to the consumption of communication services, so that the virtual connectivity services do not involve any additional cost for the user with respect to the monthly subscription fee .
The most widespread services of this type are Skype – with 250 million monthly users recorded in March 2011 – and Viber, respectively for landline and mobile telephony services; WhatsApp for sending and receiving text or audio messages, images and videos; Tango and Facetime for video calls; Vtok for video chat; Messenger for chat services and other applications (for example fring) which, unlike Skype and Viber, also allow users using different applications to communicate. To get an idea of the extent of this type of phenomenon, one can compare the traffic volumes developed by one of these entities with those produced by a traditional telecommunications operator. The traffic volumes managed by Skype in a quarter (119 billion minutes in the second quarter of 2012) are higher than those developed overall in Italy in a year (84 billion minutes). Over-the-Top communication services, initially limited to messaging, are gradually moving towards the offer of advanced and innovative services such as, for example, videoconferencing services capable of putting more than two users into communication simultaneously.
Social networks.
The best known and most successful Over-the-Tops belong to this segment. The largest social network is Facebook, whose name is often used as a synonym for the entire category. Facebook is present all over the world, even if in some geographical areas – Japan, South America and China – it is less widespread. Social networks, which were initially proposed as relationship systems, are becoming real facilitators of commercial activities, or rather virtual markets where supply and demand meet. For companies, in fact, they act as aggregators of individuals and interests (groups of people with the same hobby, fans of a football team, fans of a singer, a brand, a stylist, etc.), which easy to offer services and products in line with their preferences and consumption habits.
The new monopolies.
It is interesting to note how the large Over-the-Top are creating vertically integrated closed systems from the terminal to operating systems, to IT infrastructures (Information technology), to services, starting from their specific business: – Apple: starting from the user experience, it has managed to build a closed world of terminals, operating systems, clouds, contents and services. 90% of its revenues are related to the sale of terminals. – Google: starting from the search engine and its advertising-based business model, it has developed an integrated system that includes operating systems, digital content, the cloud and is also starting to position itself on terminals.
96% of its revenue comes from advertising. – Amazon: starting from the sale of books, it has gradually positioned itself on terminals and in the cloud. 96% of its revenues come from eCommerce. – Microsoft: with its repositioning on Windows mobile, on the cloud and with its partnership with Nokia, on terminals it protects its distinctive operating systems business. 89% of its revenues remain tied to the software. In summary, the large Over-the-Tops aim to create situations of hegemony in their specific business, effectively generating closed and non-communicating platforms. Even the simple migration from one supplier of a particular service – for example a social network – to another supplier of the same service is hindered by the fact that the platforms are not compatible and therefore it is not possible to transfer the material archived on a site (photo , contacts and messages) on a competing site.
In practice, the Over-the-Tops, who had also built their services "above" the network using the Internet as a single undifferentiated platform, are recreating - in contradiction with that "unifying" logic - the closed world of the monopolies of network operators that the early Internet intended to surpass. How? Taking advantage of the fact that, contrary to that world, which had characteristics of interoperability and standardization codified by international regulations, by laws, but also by industry practices, the new world of the Internet is made up of technical incommunicability and regulatory vacuum. In a sense, the very essence of the Internet is disappearing, ie being "the network of networks". Within the sector, however, there are some movements that could lead to overcoming, or at least calling into question, the new monopolies.
Let's see them:
- the standardization and diffusion of the new HTML5 language could in fact open any device, with any operating system, to the world of the web which would thus once again become the natural container of contents and applications;
- the success of the Mozilla Foundation's initiative for a completely open source browser-based operating system (ie free to distribute, use and develop) could challenge the established positions of operating system vendors;
- the initiative of some new players, who offer mash-up and over-Over-the-Top services capable of adding value by simplifying the complexity that has arisen. Examples of this line of evolution are the aforementioned fring (a smartphone application that allows you to manage communications between subjects belonging to different communities) and search engines that integrate the results of other search engines.
