B6014 TECH & E-BUSINESS

Tech & e-Business Concepts

A compendium of technical jargons

Subramanian Mohan G1202907C

Tech & e-Business Concepts TABLE OF CONTENTS

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May 24, 2013

Google (concepts Derived from Microsoft Case) ....................................................................................... 1 Page Rank Simplified algorithm ......................................................................................................................... 1 Online Advertising Click-Through Rate .......................................................................................................... 2 Customer Acquisition Cost Formula .................................................................................................................... 3 Googles Database management ............................................................................................................................ 4 3 ways to build data ............................................................................................................................................... 4 Winner-Take-All: Google and the Third Age of Computing ....................................................................... 5 Googles Long tail ......................................................................................................................................................... 7

2.

ABACUS (Online travel) ........................................................................................................................................ 8 Disintermediation........................................................................................................................................................ 8 Transaction Cost .......................................................................................................................................................... 8 Search Cost ..................................................................................................................................................................... 8 Bricks and mortar vs Online.................................................................................................................................... 9 Channel Conflict an aftermath of Disintermediation ..................................................................... 9 Law of Diminishing Firms ........................................................................................................................................ 9 ITA Software Vertical Search vs Google Horizontally Integrated Search ...................................... 9

3.

Alibabas TaobAo .............................................................................................................................................. 10 How Taobao achieve critical mass to HUMBLE Ebay in China .............................................................. 10 Escrow Service ........................................................................................................................................................... 11 Cooperation Theory or Paradox of Backward Induction ......................................................................... 11 Cross-selling vs Upselling .............................................................................................................................. 13

4.

Apple ......................................................................................................................................................................... 13 Exponential Power of Combinatorial Innovation ........................................................................................ 13 The Razor and Blade Business Model .............................................................................................................. 13 Why allow competition? ................................................................................................................................... 14 Gillette's Razors and Blades - The classical example ............................................................................ 14 The Reverse Razor and Blade Model ........................................................................................................... 15 Is Apple getting commoditized? ......................................................................................................................... 15 Selling Spades to App Gold Diggers ................................................................................................................... 15 Digital Convergence ................................................................................................................................................. 15

5. 6.

Facebook.................................................................................................................................................................. 16 Exponential Power of Combinatorial Innovation ........................................................................................ 16 Newspaper Industry ........................................................................................................................................... 16 Search Good ................................................................................................................................................................ 16 Experience Good ....................................................................................................................................................... 16 Credence Good ........................................................................................................................................................... 17 ii

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Skype ......................................................................................................................................................................... 17 Disruptive Technology ........................................................................................................................................... 17 Metcalfes Law Valuation of Network (N2) ................................................................................................. 18 How did Skype achieve Critical Mass SkypeOut ....................................................................................... 19 Smart phones cannibalize Skypes own market ........................................................................................... 19

8.

Wikipedia ................................................................................................................................................................ 19 Disruptive Technology ........................................................................................................................................... 19 Perpetual beta ............................................................................................................................................................ 20 Wikipedias Long Tail .............................................................................................................................................. 20 The Cathedral and the bazaar Model ................................................................................................................ 20 Wikinomics: Commons-based peer production........................................................................................... 21 Cognitive Surplus ...................................................................................................................................................... 22 Wikipedia A Public Good .................................................................................................................................... 22 Free rider problem ................................................................................................................................................... 23

9. 10.

Netflix........................................................................................................................................................................ 23 Collaborative Filtering ............................................................................................................................................ 23 Google Prediction Markets ...................................................................................................................... 24 Wisdom of Crowds ................................................................................................................................................... 24

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1. GOOGLE (CONCEPTS DERIVED FROM MICROSOFT CASE)

PAGE RANK SIMPLIFIED ALGORITHM
Assume a small universe of four web pages: A, B, C and D. Links from a page to itself, or multiple outbound links from one single page to another single page, are ignored. PageRank is initialized to the same value for all pages. In the original form of PageRank, the sum of PageRank over all pages was the total number of pages on the web at that time, so each page in this example would have an initial PageRank of 1. However, later versions of PageRank, and the remainder of this section, assume a probability distribution between 0 and 1. Hence the initial value for each page is 0.25. The PageRank transferred from a given page to the targets of its outbound links upon the next iteration is divided equally among all outbound links. If the only links in the system were from pages B, C, and D to A, each link would transfer 0.25 PageRank to A upon the next iteration, for a total of 0.75.

Suppose instead that page B had a link to pages C and A, while page D had links to all three pages. Thus, upon the next iteration, page B would transfer half of its existing value, or 0.125, to page A and the other half, or 0.125, to page C. Since D had three outbound links, it would transfer one third of its existing value, or approximately 0.083, to A.

In other words, the PageRank conferred by an outbound link is equal to the document's own PageRank score divided by the number of outbound links L( ).

In the general case, the PageRank value for any page u can be expressed as:

, i.e. the PageRank value for a page u is dependent on the PageRank values for each page v contained in the set Bu (the set containing all pages linking to page u), divided by the number L(v) of links from page v.

Tech & e-Business Concepts ONLINE ADVERTISING CLICK-THROUGH RATE

May 24, 2013

Organic search results are listings on search engine results pages that appear because of their relevance to the search terms, as opposed to their being advertisements. In contrast, non-organic search results may include pay per click advertising. Search engine optimization (SEO) is the process of affecting the visibility of a website or aweb page in a search engine's "natural" or un-paid ("organic") search results. Search engine marketing (SEM) is a form of internet marketing that involves the promotion of websites by increasing their visibility in search engine results pages (SERPs) through optimization and advertising Click-through rate (CTR) Click-through rate (CTR) is a way of measuring the success of an online advertising campaign for a particular website as well as the effectiveness of an email campaign by the number of users that clicked on a specific link The click-through rate is the number of times a click is made on the advertisement divided by the total impressions (the times an advertisement was served): Click-through rate (%) = Click-throughs (#) / Impressions (#)

Online Advertising CTR

The click-through rate of an advertisement is defined as the number of clicks on an ad divided by the number of times the ad is shown (impressions), expressed as a percentage. For example, if a banner ad is delivered 100 times (100 impressions) and receives one click, then the click-through rate for the advertisement would be 1%.

Click-through rates for banner ads have fallen over time. When banner ads first started to appear, it was not uncommon to have rates above five percent. They have fallen since then, currently averaging closer to 0.2 or 0.3 percent. In most cases, a 2% click-through rate would be considered very successful, though the exact number is hotly debated and would vary depending on the situation. The average click-through rate of 3% in the 1990s declined to 0.1%-0.3% by 2011. Since advertisers typically pay more for a high click-through rate, getting many click-throughs with few purchases is undesirable to advertisers. Similarly, by selecting an appropriate advertising site with high affinity (e.g., a movie magazine for a movie advertisement), the same banner can achieve a substantially higher CTR. Though personalized ads, unusual formats, and more obtrusive ads typically result in higher click-through rates than standard banner ads, overly intrusive ads are often avoided by viewers.

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May 24, 2013

CUSTOMER ACQUISITION COST FORMULA

When growing a new business, getting new customers and making sales is your number one priority. The only thing you should be concerned about is reaching profitability before you run out of money. It doesnt matter if you are bootstrapping or youve raised millions of dollars in venture capital, making sales is all that matters. Business is not about getting a lot of web traffic, twitter followers, facebook likes, or good PR. Business is about trading value for money, and acquiring customers is the only thing that is going to keep your business alive. Since customer acquisition is so critical, you need to find ways of measuring your progress. The information in this post will give you tested methods for maximizing your investment in customer acquisition. First, a few definitions.

Lifetime Customer Value (LTV): This is the amount of revenue that you expect to earn for a single
customer over the life of your business. Business can increase this number by offering back end product offers, and subscription plans for their services.

Monthly Recurring Revenue (MRR): This is how much money your customer is billed every month. For example, the MRR of a Netflix account is $7.99. Customer Acquisition Cost (CAC): This is how much money you spend to actually acquire a new paying
customer for your business.

Marketing Funnel (no fancy acronym): This is the journey of potential new customers for your
business. It starts with awareness, then opinion formation, consideration, and eventual purchase.

Conversion Rate (CR): The percentage of people that enter your marking funnel that actually become
paying customers. Usually only 1-2%.

Cost Per Click (CPC): The amount of money you need to spend to get people to the top of your marketing
funnel, or in other words to make people aware of your business. Often businesses use services like AdWords to drive CPC traffic. These terms can apply to many different industries, as all businesses need to acquire customers. While the specific assumptions I use in the following formulas are geared towards web based companies, the formulas themselves can apply to all sorts of businesses. Lets begin by establishing the LTV for our business.

Lifetime Customer Value is the assumed lifetime times monthly revenue per customer. Here we assume that the customer lifetime is at least 20 months. If through testing you find that customers end their contact with you before 20 months, you need to do everything you can to change that. Ideally, you want to make this number as high as possible. It is far cheaper to sell to an existing customer than having to find a brand new one, so extending the amount of time existing customers continue to use your product can turn a fledgling company into a cash machine. Use this next rule of them to use LTV to gauge the total amount you can spend on customer acquisition.

CAC should be between 1/5 and 1/3 of LTV Whoa inequalities?? All this expression says is that you customer acquisition cost should be between a fifth and a third of the total amount of money a customer will make you during the life of your business. Ideally,

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you want to minimize this value. For example, if you think on average each new customer you get will spend $75 with you during their lives, youd want to spent anywhere from $15 to $25 at the most to make that person a customer. In a perfect world you would like your front end sale to exceed your CAC, but many business take a loss on their first sale because they know that on average you will spend more money with them in the future. To figure out how much MRR should be spent to acquire a new customer, lets use LTV/5=CAC. If you plug this equation into LTV=20(MRR), you have a new formula pricing CAC in terms of the monthly revenue per customer.

CAC in terms of monthly revenue per customer This means that if you assume a 20 month customer lifetime, it would be ok to spend 4 months of revenue/customer on the acquisition of that customer. This equation works well for subscription models like Netflix. If Netflix had a 20 month customer lifetime and they charge $7.99 per month, they could spend $31.96 on marketing and other CAC in order to get a new customer. As you can see, all of the equations are

assumption driven, so its absolutely critical in the early stages of a business to talk to customers and test your products to improve the accuracy of your assumptions. You dont know if you have a viable business until you TEST!
Now lets figure out how much money you can spend on making people aware of your business. If you are doing a web based business, this is called CPC. To figure this out, you need to assume a conversion rate for your customer acquisition funnel. Lets assume that of every person who finds out about your business, 1% actually buy your product. Again, this is a hand-wavy starting number that needs to be tested for your specific business. To figure out how much you should pay for CPC, or how much you are paying in advertising to get a person to click through to your website, use this formula.

CR is conversion rate percentage (in the case 1%). If we continue with the Netflix example, lets use a 1% CR and their $31.96 CAC to figure out what we can spend on each click. If we use this formula, their recommended CPC would be $0.32. Notice you plug in the actual percentage nominal value into the formula, not the decimal conversion. Putting your customer acquisition activities in terms of these formulas is much better than just guessing before launching an advertising campaign. Without data, you have no idea how to measure your progress. Play around with these numbers, test assumptions against your specific business results, and iterate accordingly to polish your customer acquisition strategy. If you are not currently profitable, make this a key priority! Once you crack this code, its time to think about scaling your business.

GOOGLES DATABASE MA NAGEMENT

The value of the software is proportional to the scale of the dynamism of the data it helps to manage - Delivered as a service not a product

3 WAYS TO BUILD DATA

Yahoo pay people to do it Get volunteers to perform the task (open-source) Every user automatically helps to build value (Google)

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WINNER-TAKE-ALL: GOOGLE AND THE THIRD AGE OF COMPUTING

Google has won both the online search and advertising markets. They hold a considerable technological lead, both with algorithms as well as their astonishing web-scale computing platform. Beyond this, however, network effects around their industry position and brand will prevent any competitor from capturing market share from them -- even if it were possible to match their technology platform. To paraphrase an old comment about IBM, made during its 30 year dominance of the enterprise mainframe market, Google is not your competition, Google is the environment. Online businesses which struggle against this new reality will pay opportunity costs both in online advertising revenue as well as product success. Competitors such as Yahoo should quickly move to align themselves with this inevitability. Yahoo could add an extra $1.5B to their revenue overnight by conceding monetization to Google and becoming a distribution partner for Adwords, as Ask Jeeves did. Google is the start page for the Internet The net isn't a directed graph. It's not a tree. It's a single point labeled G connected to 10 billion destination pages. If the Internet were a monolithic product, say the work of some alternate-future AT&T that hadn't been broken up, then you'd turn it on and it would have a start page. From there you'd be able to reach all of the destination services, however many there were. Well, that's how the net has organized itself after all. From this position, Google derives immense and amazing power. And they make money, but not only for themselves. Google makes advertisers money. Google makes publishers money. Google drives multi-billion dollar industries profiting from Google SEM/SEO. Most businesses on the net get 70% of their traffic from Google. These business are not competitors with Google, they are its partners, and have an interest in driving Google's success. Google has made partners of us all. Why does Google make so much money? It turns out that owning the starting point on the Internet is really, really valuable. Not just because it gets a lot of traffic. It's because that traffic is so much more valuable than the rest of the page views bouncing around the net. Google's CPMs are $90-120, vs. $4-5 for an average browse page view elsewhere. This value premium on search vs. content is because of the massive concentration of choice potential which exists on the decision point, Google. John Battelle calls this power behind user search queries "intent". This is why the ROI of a click-though bought from Google is so much higher than a click-through bought from a banner ad impression. It represents a higher likelihood that someone is going to take action if they came from a search instead of a mouse click. No one wants to be on a search engine, they want to be on one of the 10 billion destination or application pages of the net. They may navigate "directly" to these pages because they know the name and/or have been there before. And they may move between pages by following links - say, from a blog like Valleywag to an interesting article. But these are 1:100 fan-out effects. Google is a 1:10,000,000,000 fan-out effect. When you need to find a new page, or perhaps even to navigate to one you've been to before, you go back to the starting point -- Google. To reconstitute Google's full value on the destination pages, you'd have to have a network which participated in a majority of the destination landings. Such a network would also participate in repeat visits which G does not see; but it would hit users after a decision point, and so might still have less overall value; it will be harder to distract someone to go elsewhere from the sidebar than when you're on the locator service.

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But it's a lot easier to monetize G's 1:10B branching point than to participate in 10B destination pages. And once you own it, you can have the rest of the net too. :-) Google's next step: owning the rest of the page views on the net Just as Microsoft used their platform monopoly to push into vertical apps, expect Google to continue to push into lucrative destination verticals -- shopping searches, finance, photos, mail, social media, etc. They are being haphazard about this now but will likely refine their thinking and execution over time. It's actually not inconceivable that they could eventually own all of the destination page views too. Crazy as it sounds, it's conceivable that they could actually end up owning the entire net, or most of what counts. Complaints are already being heard about Google using their starting point power to muscle into verticals. My 70% market share number was conservative so as to be believable; others report that Google is more like 78-80%. Competitors who want to dethrone Google need to fight a two-front war. They have to build a killer consumer search service as well as a successful advertising network. Building one of these is difficult, but doing both simultaneously is nearly impossible. Google's dominance in both of these areas gives them an unfair advantage, and allows them to easily parry any attacks. How zero switching costs paradoxically yield a winner-take-all market Search engines have zero user switching costs. Unlike switching email providers, there is no user data to move over, or addresses which need to be forwarded or communicated to peers. You just type in a new name and go to the new place. If switching costs are zero, the first thought is that it should be easy for a worthy challenger to take some share away from the leader. Paradoxically, it's the reverse that happens.

Zero switching costs lead to a winner-take-all market for the leader. Even a modest initial lead will snowball until majority market share is reached and maintained. This is because, faced with a choice between two products, in the absence of switching costs users will choose the better one, even if it is only slightly better.
Google had a vastly better product than any other search engine for a number of years. Competitors have closed the gap somewhat, but Google is still better. Everyone (70-80%) knows this now, and so the Googlehas-better-search concept is now built into Google's brand. Even if a competitor such as Yahoo, MSN or Ask were to fully close the gap at this point, they would still have to overcome the final brand perception gap. This is the effect where market research shows that users who see Google's logo on top of Yahoo's results perceive the results to be of higher quality; users looking at Google's results with Yahoo's logo on top view them as having less relevance. Brand perception effects have been measured to account for about 8% in things like beer. A few years ago an AOL researcher replicated this study in a shopping mall in Virginia with AOL Search results vs. Google.

Let us go back to the zero switching cost and winner-takes-all. Suppose the product gap has been closed, and the two products are now identical. But one product has a powerful brand perception that it is better. In the marketing analysis, that's the same as being better. Users will stick with the leader.
Economic and social forces reinforce a feedback loop of success for the leader. The best programmers will leave the losers to work for the winning team. Major online sites will invest in organizing their sites to appeal to the winning search engine. Advertisers will be drawn to the leader, giving it a greater share of resources to invest in continuing and strengthening its lead. Yahoo is leaving a lot of money on the table Everybody wants to own their own advertisers. Talk to newspaper execs if you want to get an earful about ceding sales to the online giant. Controlling sales is a point of pride, and of some perceived strategic value. But

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quantifying the opportunity cost throws a stark light on the huge cost of opting out of Google's winning monetization platform. This story has played out before. In 2001, Ask Jeeves was on the ropes. Battered by the dot-com crash, its ticker symbol was in danger of being de-listed from the Nasdaq. Skip forward to 2003, and they're flying highagain. The magic in between was doing a deal with Google to have Adwords take over monetization. Google quickly become responsible for 70% of Ask Jeeves revenue, and Ask Jeeves stock rose 1,685% in the year following that deal. Yahoo should accept Google's search and monetization dominance. Yahoo will not recover the search application, and browse views are not competitive and cannot be made to be so. They should do a deal with Google for Adwords/Adsense across their entire network, as Ask Jeeves did. They should be able to obtain at least an 85% rev share; that would take them from $0.10/search to $0.17, a 70% increase in search revenue overnight. That's an extra $1.5B or so of yearly revenue being left on while they try to build a copy of Google's revenue platform. Such a deal could even see Google's triumphant return to powering Yahoo's search results, which would provide superior results for users. In a way, this is simply rolling back Yahoo's configuration a few years, to the point where Yahoo used third parties -- Google and Overture -- for both search and monetization. Yahoo's effort to vertically integrate these functions has failed; it hasn't yielded a winning consumer product, and it's leaving billions of dollars in potential revenue on the table. What about Microsoft? Microsoft isn't a player online any more than IBM is. IBM? IBM still has a great business, inhabiting the business enterprise market where they've been since they started. When the PC era arose, the popular question was why IBM couldn't own that new market too. Sad requiems were printed the day IBM finally gave up and exited the PC business. Stodgy old IBM was perfect to selling to Fortune 1000 CIOs and the government, but wasn't configured to deliver PCs to consumers. The winner of that game was Microsoft. Surprise...the winner of the PC market didn't actually sell PCs! How could IBM have known... The PC market isn't going away either. Microsoft has a great business too. But now the question everyone asks is why Microsoft doesn't own this new thing, the Internet. Surely with all those resources it could own any new market that arose. But it shouldn't be surprising that huge successful companies can't make the leap into owning a completely new and different market. New markets bring with them new rules, and require different skills to win. Microsoft has the same shot as any well-funded venture at knocking off Google's crown. But they don't get a special pass just because they make a lot of money selling Word and Excel and have their logo on keyboards. We get used to seeing the giant squash everything it steps on as it strides through the domain of its market dominance. But sooner or later, the terrain changes, and the old leader can go no further. Nobody even bothers asking why IBM isn't a player in consumer search. IBM and consumer websites just don't have anything to do with one another. PC software and websites don't have anything to do with each other either. All Hail the New King Google The interregnum between the end of the PC era and the rise of the online world has concluded, and Google is the new king of forward market growth in computing and software technology. Major companies will succeed by working within the framework of Google's industry dominance, and smaller players will operate in niches or in service to the giant.

GOOGLES LONG TAIL

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Googles Long tail is the collective power of the small sites that make up the bulk of the web content. Leverage customer self-service and algorithmic data management to reach out to the entire web, (i.e) to the edges not just the center, in other words, to the long tail not just the head.

2. ABACUS (ONLINE TRAVEL)

DISINTERMEDIATION
In economics, disintermediation is the removal of intermediaries in a supply chain, or "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly. This can also happen in other industries where distributors or resellers operate and the manufacturer wants to increase profit margins, therefore missing out intermediaries to increase their margins. Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass the middlemen (wholesalers and retailers) to buy directly from the manufacturer, and pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a business-to-consumer electronic commerce (B2C) company functions as the bridge between buyer and manufacturer. It has been argued that the Internet modifies the supply chain due to market transparency

TRANSACTION COST
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market). Search and information costs are costs such as those incurred in determining that the required good is available on the market, which has the lowest price, etc.

SEARCH COST
Search costs are one facet of transaction costs or switching costs. Rational consumers will continue to search for a better product or service until the marginal cost of searching exceeds the marginal benefit. Search theory is a branch of microeconomics that studies decisions of this type. The costs of searching are divided into external and internal costs (Smith et al. 1999). External costs include the monetary costs of acquiring the information, and the opportunity cost of the time taken up in searching. External costs are not under the consumer's control, and all he or she can do is choose whether or not to incur them. Internal costs include the mental effort given over to undertaking the search, sorting the incoming information, and integrating it with what the consumer already knows. Internal costs are determined by the consumer's ability to undertake the search, and this in turn depends on intelligence, prior knowledge, education and training. These internal costs are the background to the study of bounded rationality. The Internet was expected to eliminate search costs. For example, electronic commerce was

predicted to cause disintermediation as search costs become low enou gh for endconsumers to incur them directly instead of employing retailers to do this for them. This would in turn lead to lower prices and less variation between prices quoted by different sellers. 8

Tech & e-Business Concepts Bricks and mortar vs Online

May 24, 2013

Bricks and Mortar refers to businesses that have physical (rather than virtual or online) presences - in other words, stores (built of physical material such as bricks and mortar) that you can drive to and enter physically to see, touch, and purchase merchandise. This term is used as the basis for the term clicks and mortar, a business that sells products and services on the Web as well as from physical locations. CHANNEL CONFLICT AN AFTERMATH OF DISINTERMEDIATION

As manufacturers change their business strategy toward direct online sales, however, the relationship between manufacturers and intermediaries can deteriorate. This is called Internet channel conflict, a conflict that occurs when Internet and traditional bricks-and-mortar channels destructively compete against each other when selling to the same markets. The prior balance of the power structure between the channel members may break down, increasing the risk of financial losses, lawsuits, protective legislation, trust destruction, and market shrinkage]. Intermediaries that fear the negative effects of disintermediation may fight back against manufacturers. For instance, Wal-Mart and Home Depot warned Black & Decker that they would take its products off their shelves should Black & Decker start selling its products through the Internet. CONFLICT OCCURS WHEN PARTIES DISAGREE OVER SUBSTANTIVE ISSUES OR WHEN EMOTIONAL ANTAGONISM CREATES FRICTION BETWEEN PARTIES. CONFLICT THAT IS DETRIMENTAL MUST BE REDUCED OR ELIMINATED. CHANNEL POWER, THE ABILITY TO CONTROL THE DECISION VARIABLES OF THE MARKETING STRATEGIES OF CHANNEL MEMBERS AT DIFFERENT DISTRIBUTION LEVELS, IS THE MOST FREQUENTLY RECOGNIZED CAUSATIVE FACTOR OF CHANNEL CONFLICTS. IT IS CLEAR THAT FIRMS MUST INVENT A NEW CHANNEL STRATEGY TO EXPLOIT [INTERNET] OPPORTUNITY, WHILE MINIMIZING CHANNEL CONFLICT PROBLEMS WITH THEIR EXISTING INTERMEDIARIES.

LAW OF DIMINISHING FIRMS

The Law of Diminishing Firms suggests that as transaction costs decrease, as in the case of technology and communication advances, the size of the firm will also decrease. Trends toward downsizing, outsourcing, and otherwise distributing activities support this view. The "diminished" firms will reside in a complex relationship network of customers, suppliers and regulators.

ITA SOFTWARE VERTICAL SEARCH VS GOOGLE HORIZONTALLY INTEGRATED SEARCH

A vertical search engine, as distinct from a general web search engine, focuses on a specific segment of online content. They are also called specialty or topical search engines. The vertical content area may be based on topicality, media type, or genre of content. Common verticals include shopping, the automotive industry, legal information, medical information, scholarly literature, and travel. Examples of vertical search engines include Indeed.com and Yelp. In contrast to general Web search engines, which attempt to index large portions of the World Wide Web using a web crawler, vertical search engines typically use a focused crawler that attempts to index only Web pages that are relevant to a pre-defined topic or set of topics.

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Some vertical search sites focus on individual verticals (ITA Software), while other sites include multiple vertical searches within one search engine (in some ways, Google). Vertical search offers several potential benefits over general search engines: Greater precision due to limited scope, Leverage domain knowledge including taxonomies and ontologies, Support of specific unique user tasks.

Vertical search can be viewed as similar to enterprise search where the domain of focus is the enterprise, such as a company, government or other organization. In 2013, consumer price comparison websites with integrated vertical search engines such as FindTheBest drew large rounds of venture capital funding, indicating a growth trend for these applications of vertical search technology. All travel search engines are running on ITA software. So, ITA software has all data. Remember Google is HORIZONTALLY INTEGRATED and ITA is a VERTICAL SEARCH, focused on specialized domain. Hence Google has acquired ITA software. Google is playing the game!

3.

A LIBABAS TAOBAO

HOW TAOBAO ACHIEVE CRITICAL MASS TO HUMBLE EBAY IN CHINA

The story. Taobao.com was founded in 2003 by Alibaba, the Chinese e-commerce company, as a defensive move against its US rival Ebay, which had set up in China the previous year. The challenge. When Ebay launched in China it had global revenues of more than $2bn. As a young, domestic entity, Taobao was taking on a huge rival while also fending off many similar small competitors in the sector, where barriers to entry were low. The strategic response. Noting that Ebay in China was charging users to list products and services, Taobao allowed them to list for free in order to build a big cohort of sellers and buyers. Critical mass would eventually attract revenue-generating activities, such as online advertisements. Taobao also presented itself as very much a Chinese enterprise. For instance, the screen names of online moderators were derived from characters in popular Chinese kung-fu novels. Next, Taobao aimed to be more innovative than Ebay in customer service. In 2003 Taobao started Aliwangwang, its instant communication tool, to help buyers and sellers interact. It also introduced the online payment system Alipay a year later. Online credit card or debit card payment was very rare in China and customers usually paid cash on delivery. Alipay formed partnerships with leading Chinese banks and signed a long-term agreement with China Post, which meant customers without a debit or bank card could fund their Alipay accounts at any of its 66,000 offices. What happened? Taobao developed into a diverse e-commerce platform where businesses sell a very wide range of items to online shop owners who then sell on to consumers. At the end of 2006, Ebay shut its main website in China and formed a joint venture with Hong Kongheadquartered Tom Online. Taobao continued to build a network of ventures around its core operations. In 2007 it set up Alisoft.com, where small Taobao sellers could buy customized software from independent vendors to help with functions such as customer relations or managing inventory. In 2008 Taobao integrated Alimama.com, an online ad company with a network of more than 400,000 specialised websites where Taobao sellers could affordably post ads to reach their target audiences. These complementary ventures formed a network, with Taobao at the centre surrounded by interlinked companies. All cross-sold and cross-marketed each others services and offered packaged deals to Taobao sellers. As this ecosystem developed it attracted other businesses to use Taobao, Alipay, Alisoft and Alimamas platforms to provide further customised services to Taobao sellers.

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The extent and reach of the ecosystem became too hard for rivals to replicate. By 2010 Taobao served more than 80 per cent of Chinas e-commerce market, with 170m registered users and revenues of more than Rmb20bn from online advertising and fee-paying services such as shop design and sales training. Meanwhile, Ebay moved its business focus to cross-border e-commerce, where Chinese consumers sell to overseas consumers. It holds a leading position in that segment. Key lessons. How Taobao kept Ebay out of the market and became Chinas dominant e-commerce platform in a relatively short space of time holds lessons for Chinese and western companies alike. First, Taobao provided services and solved problems for the smaller businesses that are the driving force behind Chinas economic boom. For instance, Alipay enabled people to pay for goods and services easily. Second, Taobao set up or integrated services that complemented each other and used this ecosystem to create a bar to competition. Third, Taobao identified how to help people buy and sell. By making online shopping easy, safe and fun it helped many first-time online buyers build confidence in e-commerce.

ESCROW SERVICE
An escrow is an account established by a broker, under the provisions of license law, for the purpose of holding funds on behalf of the broker's principal or some other person until the consummation or termination of a transaction As with traditional escrow, Internet escrow works by placing money in the control of an independent and licensed third party in order to protect both buyer and seller in a transaction. When both parties verify the transaction has been completed per terms set, the money is released. If at any point there is a dispute between the parties in the transaction, the process moves along to dispute resolution. The outcome of the dispute resolution process will decide what happens to money in escrow. To counter eBays expansion, Taobao offered free listings to sellers and introduced website features designed to better cater to local consumers, such as an instant messaging tool for facilitating buyer-seller communication and an escrow-based payment tool, Alipay. As a result, Taobao became the undisputed market leader in mainland China within two years.

COOPERATION THEORY OR PARADOX OF BACKWARD INDUCTION

Seller Ship Pay Buyer Dont Pay 0 + Don't Ship 0 Prisoner 2 Win (coop) Lose (compete) Prisoner 1 Win (co-op) + 0 Lose (compete) 0 -

Achieving positive sum or win-win strategy by cooperation theory where both win more than by competing. This is also called "paradox of backward induction". Taobao change the rule of the Auction Space by introducing a TWO-WAY rating system to create a differentiation in order to establish mutual trust . Taobao came with a TWO-WAY rating system where

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both buyers and sellers can rate each other. Or else the auction space will collapse due to lack of trust when Buyers and Sellers will end-up in a classic prisoner's dilemma due to the following reasons: When everyone acts as they are expected to according to the logic of the system, the dynamics inherent in the system's design will cause it to collapse. Situations in which individual rationality adds up to collective irrationality. That is, individually responsible behavior leads to a situation in which everyone is worse off than they might have been otherwise

Situations that arise from the tension between self-interest and collective gain. Acting in one's self interest ends up damaging or failing to provide for the interest of everybody.

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Cross-selling vs Upselling
An upsell is to get the customer to spend more money buy a more expensive model of the same type of product, or add features / warranties that relate to the product in question. A cross-sell is to get the customer to spend more money buy/adding more products from other categories than the product being viewed or purchased. The terms cross-sell and upsell are often used interchangeably because, lets face it, this gets confusing. Say the customer is viewing a 4GB iPod Nano for $169. 8 GB iPod Nano, $229 -> Upsell, same product family, more expensive 8 GB iPod Touch, $299 -> Upsell, same product family, more expensive 16 GP iPod Touch, $399 -> Upsell, same product family, more expensive Apple In-Ear Headphones with Remote and Mic , $79 -> Cross-sell. Skull Candy headphones, $69, -> Cross-sell $25 iTunes card -> Cross-sell 8 GB Microsoft Zune, $249 -> Upsell, more expensive, same category 4 GB Creative Zen mp3 player, $159 -> Neither cross-sell or upsell, rather an alternative product suggestion Portable DVD player, $299 -> Cross-sell. Cool gadget, customer may also like but not related to mp3 player. Griffin FM transmitter for car, $79 -> Cross-sell

4.

APPLE

EXPONENTIAL POWER OF COMBINATORIAL INNOVATION

Every now and then a set of technologies becomes available that sets off a period of combinatorial innovation. Think of standardized mechanical parts in the 1800s, the gasoline engine in the early 1900s, electronics in the 1920s, integrated circuits in the 1970s, and the Internet in the last few decades. The component parts of these technologies can be combined and recombined by innovators to create new devices and applications. Since these innovators are working in parallel with similar components, it is common to see simultaneous invention. There are many well-known examples such as the electric light, the airplane, the automobile, and the telephone. Many scholars have described such periods of innovation using terms such as recombinant growth, general purpose technologies, cumulative synthesis and clusters of innovation. The Internet and the Web are wonderful examples of combinatorial innovation. In the last 15 years we have seen a huge proliferation of Web applications, all built from a basic set of component technologies. In 1999 came Napster, which changed the face of the music industry. It used Peer-to-Peer technology to do file sharing and pursued digitization of audio through mp3 technology.

THE RAZOR AND BLADE BUSINESS MODEL

The razor and blade business model (or "tied products model") is based on providing durables that can only be used in combination with, and are unusable without, complementary consumables. The purpose is to tie a customer to an ongoing stream of supplies over time. In the basic form a durable is sold at a discount or given

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away for free, while the dependent consumables are sold with a considerable higher margin recouping lost profits.

Examples of tied products:

Printers and ink cartridges Mobile phones and air time iPod and iTunes Free computers with tied Internet services Pdf readers and PDF tools Cameras and interchangeable lenses Instant cameras and film Game consoles and games Electric toothbrushes and brush heads Coffee machines and coffee pods Open or Closed System

Different control mechanisms, such as trademarks, product design, design protection, patents and contracts are often used in combination to control the compatibility from other companies' products. Depending on the competitive setting, the developed control position and chosen business strategy, the company offering both durables and consumables can either compete or be a monopolist in the market for durables and/or consumables. This creates four simplified razor-and-blade models: 1. 2. 3. 4. Monopolist in durables, monopolist in consumables (Polaroid camera & Polaroid Films) Monopolist in durables, competition in consumables (iPod & iTunes) Competition in durables, monopolist in consumables (Razor & Blades) Competition in durables, competition in consumables (Senseo Coffee maker & Coffee Pods)

With strong value propositions and strong control mechanisms, a company may have the choice to keep the durables and/or consumables, closed or open in various different ways such as "free for everyone to manufacture and sell", "free in certain geographic regions", "free for licensees signing away certain rights", "license to manufacture and sell with royalty", "license to further develop the technology and IP with grantbacks" etc.

WHY ALLOW COMPETITION?

Companies may for various reasons choose to allow competition and allow customers to choose durables or consumable offered by a competing or complementary firm. One such example can be in the case of value propositions with network externalities, i.e. when the increasing number of users increases the value of the value proposition for each customer. (The more people that own telephones, the more valuable the telephone is to each owner). One classic example is the Betamax versus VHS videotape format. Sony lanched its proprietary videotape format Betamax in the 1970s, controlling both recorders and videotapes, and got an early lead but flopped when several other electronics companies formed a strategic alliance to offer the alternative VHS standard, creating and sharing a bigger pie. Another reason to open up either the durables or the consumables for competition can be if the customers demand variety when purchasing a product. To take the coffee machine example, you could take the approach to have a closed system and provide all pods yourself (Nespresso) or have an "open" system allowing other companies to provide a variety of different brands on coffee pods (Philips' Senseo).

GILLETTE'S RAZORS AND BLADES - THE CLASSICAL EXAMPLE

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The name Razor and Blade business model refers to Gillette's use of razor handles, sometimes given away for free, and high margin disposable blades. Gillette has used the razor-and-blade business model since the first model with disposable blades was launched in 1902, with granted patents in 1904. Since then several different generations of razors have been developed, patented and released and razors has become one of the most heavily patented consumer products with more than 1000 granted patents. Gillette's success with its razors and blades is a story about superior technology, design and the use of control mechanisms, foremost patents, to ensure market dominance. Gillette who spends huge amounts on R&D and patenting, has fine tuned its business model and patenting activities, and never releases a new razor until the next generation is already in development. It has continuously developed and heavily patented its products, replacing old models just when patents have started to expire. As patents per definition becomes publicly available, and is used for competitive intelligence, Gillette, instead of filing own patents when inventions are discovered, awaits the right time to file large batches of patents to be published in perfect timing for the launching of new products. In 1998, after more than $750 million of research and testing, Gillette introduced Mach3, with innovations such as the triple blade, the single-point cartridge docking, the indicator lubricating strip to signal when to replace cartridge and the diamond-like carbon-coated DLC blade edge (three times stronger than stainless steel, made with chip-making technology). The company made sure to patent every design and engineering feature resulting in a wall of more than 50 patents surrounding the product. Seven years later the Gillette Fusion was launched with new inventions protected by more than 70 patents.

THE REVERSE RAZOR AND BLADE MODEL

When consumables are sold at low margin and durables at high margins (e.g. iPods and songs) the model is sometimes referred to as the Reverse Razor and Blade business model.

IS APPLE GETTING COMMODITIZED?

In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. This is not to be confused with commodification, which is a Marxist term for things being assigned economic value which they (according to Marxist theory) did not previously possess, by their being produced and presented sale, as opposed to personal use.

SELLING SPADES TO APP GOLD DIGGERS

With the launch of the Apple Developer Kit (SDK), new garage developers with little experience in mobile content and application development rushed into the market. Most of them initially developed their own applications but soon found out that developing for third parties generates a more secure revenue stream than becoming a publisher themselves. They make the majority of their business revenue with application development.

DIGITAL CONVERGENCE
The term "digital convergence" means the ability to view the same multimedia content from different types devices and thanks to the digitization of content (movies, pictures, music, voice, text) and the development of

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connections methods. Reading emails on your TV via a connected smartphone, watch a streaming movie on the home theater connected to the Internet ... Digital convergence simplifies our life into our living room. Formerly, each unit operated independently and networks were not interconnected. Today, information flows on the same network and are stored, read, viewed or listened via same types of equipment. Networks, technologies and content converge on a single device. Result: it saves time and simplifies life.

5.

FACEBOOK

EXPONENTIAL POWER OF COMBINATORIAL INNOVATION

Even if technology froze today, we have more possible ways to configure the different applications, machines, tasks, and distribution channels to create new processes and products than we could ever exhaust. "An MIT student created a simple Facebook application for sharing photos. Although he had very little formal training in programming, he created a robust and professional-looking app in a few days using standard tools. Within a year, he had over 1 million users. This was possible because his application leveraged the Facebook user base, which in turn leveraged the broader World Wide Web, which in turn leveraged the Internet protocols, which in turn leveraged the cheap computers of Moores Law and many other innovations. Because the process of innovation often relies heavily on combining and recombining previous innovations, the broader and deeper the pool of accessible ideas and individuals, the more opportunities there are for innovation.

6.
Newspaper is experiential product.

NEWSPAPER INDUSTRY

SEARCH GOOD
In economics, a search good is a product or service with features and characteristics easily evaluated before purchase. In a distinction originally due to Philip Nelson, a search good is contrasted with an experience good. Search goods are more subject to substitution and price competition, as consumers can easily verify the price of the product and alternatives at other outlets and make sure that the products are comparable. Branding and detailed product specifications act to transform a product from an experience good into a search good.

EXPERIENCE GOOD
In economics, an experience good is a product or service where product characteristics, such as quality or price are difficult to observe in advance, but these characteristics can be ascertained upon consumption. The concept is originally due to Philip Nelson, who contrasted an experience good with a search good. Experience goods pose difficulties for consumers in accurately making consumption choices. In service areas, such as healthcare, they reward reputation and create inertia. Experience goods typically have lower price elasticity than search goods, as consumers fear that lower prices may be due to unobservable problems or quality issues.

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Post-experience goods, also called credence goods, are goods for which it is difficult for consumers to ascertain the quality even after they have consumed them, such as vitamin supplements. Potential consumers of these goods may require third-party information, provided by private rating agencies or government bodies.

CREDENCE GOOD
A credence good is a good whose utility impact is difficult or impossible for the consumer to ascertain. In contrast to experience goods, the utility gain or loss of credence goods is difficult to measure after consumption as well. The seller of the good knows the utility impact of the good, creating a situation of asymmetric information. Examples of credence goods include; Vitamin supplements Education Car repairs Many forms of medical treatment Home maintenance services, such as plumbing and electricity.

Credence goods may display a direct (rather than inverse) relationship between price and demand, similar to Veblen goods, when price is the only possible indicator of quality. The least expensive products might be avoided in order to avoid suspected fraud and poor quality. So a restaurant customer may avoid the cheapest wine on the menu, but instead purchase something slightly more expensive. However, even after drinking it the buyer is unable to evaluate its relative value compared to all the wines they have not tried (unless they are a wine expert). This course of actionbuying the second cheapest optionis observable by the restaurateur, who can manipulate the pricing on the menu to maximize their margin, i.e. ensuring that the second cheapest wine is actually the least good value. Another practical application of this principle would be for competing job applicants not to propose too low a wage when asked, lest the employer think that the employee has something to hide or does not have the necessary qualification for the job. In an unregulated market, prices of credence goods tend to converge, i.e. the same flat rate is charged for high and low value goods. The reason is that suppliers of credence goods tend to overcharge for low value goods, since the customers are not aware of the low value, while competitive pressures force down the price of high value goods. Another reason for price convergence is that customers become aware of the possibility of being overcharged, and compensate by favoring more expensive goods over cheaper ones. For example, a customer may ask for a complete replacement of a broken car part with a new one, irrespective of whether the damage is small or large (which the customer doesn't know). In this case the new part is "proof" that the customer hasn't been overcharged.

7.

SKYPE

DISRUPTIVE TECHNOLOGY
Managers must beware of ignoring new technologies that don't initially meet the needs of their mainstream customers.

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The technological changes that damage established companies are usually not radically new or difficult from a technological point of view. They do, however, have two important characteristics: 1) First, they typically present a different package of performance attributes - ones that, at least at the outset, are not valued by existing customers. 2) Second, the performance attributes that existing customers do value improve at such a rapid rate that the new technology can later invade those established markets. Only at this point will mainstream customers want the technology. Unfortunately for the established suppliers, by then it is often too late: the pioneers of the new technology dominate the market.

One approach to identifying disruptive technologies is to examine internal disagreements over the development of new products or technologies. Who supports the project and who doesn't? Marketing and financial managers, because of their managerial and financial incentives, will rarely support a disruptive technology. On the other hand, technical personnel with outstanding track records will often persist in arguing that a new market for the technology will emerge-even in the face of opposition from key customers and marketing and financial staff. Disagreement between the two groups often signals a disruptive technology that top-level managers should explore.

METCALFES LAW VALUATION OF NETWORK (N 2 )

Robert Metcalfe was the founder of 3Com Corporation. Metcalfes Law states: The usefulness or utility of a network equals the number of users squared (N2). In other words, the usefulness of any device connected to a network increases exponentially as more devices are connected. Just one telephone is not much use, but as more and more people have telephones, they become increasingly useful. Metcalfes Law explains why once a technology reaches a point known as critical mass, it gathers so much momentum in the marketplace it can create killer apps. A dramatic illustration of Metcalfes Law is the growth of the Internet. In June 1993, there were no web sites on the world wide web. By

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June 1996, there were 200,000 web sites. By September 1997, there were 1.4 million web sites, and almost every advertisement now seen on network television or in major publications now includes a companys web site address.

HOW DID SKYPE ACHIEVE CRITICAL MASS SKYPEOUT

If software is allowed interoperability with a larger network, then that software will take-off. In the case of Skype, it allowed for interoperability with a PSTN which is a larger network through the launching of SkypeOut. SkypeOut allows Skype users to call phone numbers, including landline and mobile phones for a fee through Skype Credit or a calling subscription. Additionally, users can purchase Online Numbers (previously called SkypeIn) that lets contacts call their Skype client from a landline or mobile phone. Skype technology became VIRAL.

SMART PHONES CANNIBA LIZE SKYPES OWN MAR KET

Ever since its inception, Skype and other VoIP applications have long been healed to the end of telco dominance of long distance and overseas calling. Utilizing the internet instead of traditional methods of routing your call, Skype can offer much lower calling rates, or even free PC-to-PC calls, striking fear into the hearts of every telecommunications company. Skype's success has only increased as we moved away from dial-up internet into cheap availability of broadband, removing the last barrier to crystal clear calls. This period saw the emergence of Skype handsets, making Skype a permanent, non-PC experience for the first time - going as far as to replace the land line for some. With the widespread availability of 3G mobile internet, the immense number of smartphones being sold with Skype being a downloadable app, as the deep integration of Skype into Windows Phone 8, the company's technology is now literally accessible by anyone, anywhere. Within a few years, smartphones are expected to overtake the sales of feature phones, meaning that smartphones will become the new normal. Ironically, Skype's own success may lead to them cannibalizing their own market. With the ubiquity of smartphones with Skype, their paid user base may shrink: those who buy Skype credit to call traditional land and mobile phones. If you and your friend both have Skype enabled smartphones, which are now mostly always-on, and they can be used to make free calls via the internet (VoIP), why would any of you need to buy credit again? One of the ways that Skype is looking to increase revenues is the development of "Conversations Ads", which is a marketing-spin on normal square ads during audit conversations. Skype probably has figured out that during a Skype call, they pretty much have a captive audience, and hope to captivate callers into discussing or clicking on their ads. Will this be enough to off-set the inevitable decrease in paid calling, as a result of cannibalization? Ads have served Google well, and it may just be enough to keep Skype going.

8.

WIKIPEDIA

DISRUPTIVE TECHNOLOGY
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Microsofts Encarta could not compete when Wikipedia came in. Hence Wikipedia is also a disruptive Technology.

PERPETUAL BETA
Perpetual beta is the keeping of software or a system at the beta development stage for an extended or indefinite period of time. It is often used by developers when they continue to release new features that might not be fully tested. Perpetual beta software is not recommended for mission critical machines. However, many operational systems find this to be a much more rapid and agile approach to development, staging, and deployment. Wikipedia keeps its development at perpetual beta. Perpetual beta has come to be associated with the development and release of a service in which constant updates are the foundation for the habitability or usability of a service. According to publisher and open source advocate Tim O'Reilly: "Users must be treated as co-developers, in a reflection of open source development practices (even if the software in question is unlikely to be released under an open source license.) The open source dictum, 'release early and release often', in fact has morphed into an even more radical position, 'the perpetual beta', in which the product is developed in the open, with new features slipstreamed in on a monthly, weekly, or even daily basis. It's no accident that services such as Gmail, Google Maps, Flickr, del.icio.us, and the like may be expected to bear a 'Beta' logo for years at a time. O'Reilly described the concept of perpetual beta as part of a customized Internet environment with these applications as distinguishing characteristics: Services, not packaged software, with cost-effective scalability Control over unique, hard-to-recreate data sources that get richer as more people use them Trusting users as co-developers Harnessing collective intelligence Leveraging the long tail through customer self-service Software above the level of a single device Lightweight user interfaces, development models, and business models.

WIKIPEDIAS LONG TAI L

Wikipedia focused on breadth of the data, (i.e) the vast number of diverse articles at are not so popular and at a shallow level, while Britannica cover the depth of data (i.e) deeper insights on popular articles.

THE CATHEDRAL AND THE BAZAAR MODEL

The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary is an essay by Eric S. Raymond on software engineering methods, based on his observations of the Linux kernel development process and his experiences managing an open source project, fetchmail.

The Cathedral model , in which source code is available with each software release, but code developed
between releases is restricted to an exclusive group of software developers. GNU Emacs and GCC are presented as examples.

The Bazaar model , in which the code is developed over the Internet in view of the public. Raymond
credits Linus Torvalds, leader of the Linux kernel project, as the inventor of this process. Raymond also provides anecdotal accounts of his own implementation of this model for the Fetchmail project.

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The essay's central thesis is Raymond's proposition that "given enough eyeballs, all bugs are shallow" (which he terms Linus's Law): the more widely available the source code is for public testing, scrutiny, and experimentation, the more rapidly all forms of bugs will be discovered. In contrast, Raymond claims that an inordinate amount of time and energy must be spent hunting for bugs in the Cathedral model, since the working version of the code is available only to a few developers.

WIKINOMICS: COMMONS-BASED PEER PRODUCTION

Commons-based peer production is a term coined by Harvard Law School professor Yochai Benkler. It describes a new model of socio-economic production in which the creative energy of large numbers of people is coordinated (usually with the aid of the Internet) into large, meaningful projects mostly without traditional hierarchical organization. These projects are often, but not always, conceived without financial compensation for contributors. The term is often used interchangeably with the term social production. Yochai Benkler contrasts commons-based peer production with firm production (in which tasks are delegated based on a central decision-making process) and market-based production (in which tagging different prices to different tasks serves as an incentive to anyone interested in performing a task). The term was first introduced and described in Yochai Benkler's seminal paper "Coase's Penguin, or Linux and the Nature of the Firm". Yochai Benkler's 2006 book, The Wealth of Networks, expands significantly on these ideas. In the book, Benkler makes a distinction between commons-based peer production and peer production. The former is based on sharing resources among widely distributed individuals who cooperate with each other. The latter term is a subset of commons-based production practices.[contradictory] It refers to a production process that depends on individual action that is self-selected and decentralized. YouTube and Facebook, for example, are based on peer production. In Wikinomics: How Mass Collaboration Changes Everything, Don Tapscott and Anthony D. Williams suggest an incentive mechanism behind common-based peer production. "People participate in peer production communities," they write, "for a wide range of intrinsic and self-interested reasons....basically, people who participate in peer production communities love it. They feel passionate about their particular area of expertise and revel in creating something new or better." Aaron Krowne (Free Software Magazine), offers another definition: "commons-based peer production refers to any coordinated, (chiefly) internet-based effort whereby volunteers contribute project components, and there exists some process to combine them to produce a unified intellectual work. CBPP covers many different types of intellectual output, from software to libraries of quantitative data to human-readable documents (manuals, books, encyclopedias, reviews, blogs, periodicals, and more)." Three principles need to be followed: 1) First, the potential goals of peer production must be modular. That means, objectives must be divisible into components, or modules, each of which can be independently produced. This allows production to be cumulative and asynchronous, merging the individual efforts of many people, with diverse backgrounds and skills, who are available at various places and times. 2) Second, the granularity of the modules is essential. Granularity refers to the degree to which objects are broken down into smaller pieces (module size). Different levels of granularity will allow people with different levels of motivation to work together by contributing small or large grained modules, consistent with their level of interest in the project and their motivation. 3) Third, a successful peer-production enterprise must have low-cost integration the mechanism by which the modules are integrated into a whole end product.Thus,integration must

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include both quality controls over the modules and a mechanism for integrating the contributions into the finished product at relatively low cost.

COGNITIVE SURPLUS
Cognitive Surplus: Creativity and Generosity in a Connected Age is a 2010 non-fiction book by Clay Shirky Cognitive Surplus covers how people are now learning how to use more constructively the free time afforded to them since the 1940s for creative acts rather than consumptive ones, particularly with the advent of online tools that allow new forms of collaboration. Wikipedia represents the investment of 100 million hours (up to 2009), compared to 2 billion hours we spend watching TV every year.

WIKIPEDIA A PUBLIC GOOD

Paul A. Samuelson is usually credited as the first economist to develop the theory of public goods. In his classic 1954 paper The Pure Theory of Public Expenditure,[3] he defined a public good, or as he called it in the paper a "collective consumption good", as follows: ...[goods] which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good... This is the property that has become known as non-rivalry. In addition a pure public good exhibits a second property called non-excludability: that is, it is impossible to exclude any individuals from consuming the good. The opposite of a public good is a private good, which does not possess these properties. A loaf of bread, for example, is a private good: its owner can exclude others from using it, and once it has been consumed, it cannot be used again. A good which is rivalrous but non-excludable is sometimes called a common-pool resource. Such goods raise similar issues to public goods: the mirror to the public goods problem for this case is sometimes called the tragedy of the commons. For example, it is so difficult to enforce restrictions on deep sea fishing that the world's fish stocks can be seen as a non-excludable resource, but one which is finite and diminishing.

The definition of non-excludability states that it is impossible to exclude individuals from consumption. Technology now allows radio or TV broadcasts to be encrypted such that persons without a special decoder are excluded from the broadcast. Many forms of information goods have characteristics of public goods. For example, a poem can be read by many people without reducing the consumption of that good by others; in this sense, it is non-rivalrous. Similarly, the information in most patents can be used by any party without

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reducing consumption of that good by others. Creative works may be excludable in some circumstances, however: the individual who wrote the poem may decline to share it with others by not publishing it. Copyrights and patents both encourage the creation of such non-rival goods by providing temporary monopolies, or, in the terminology of public goods, providing a legal mechanism to enforce excludability for a limited period of time. For public goods, the "lost revenue" of the producer of the good is not part of the definition: a public good is a good whose consumption does not reduce any other's consumption of that good

FREE RIDER PROBLEM

Public goods provide a very important example of market failure, in which market-like behavior of individual gain-seeking does not produce efficient results. The production of public goods results in positive externalities which are not remunerated. If private organizations don't reap all the benefits of a public good which they have produced, their incentives to produce it voluntarily might be insufficient. Consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem" (because consumers' contributions will be small but nonzero). If too many consumers decide to 'free-ride', private costs exceed private benefits and the incentive to provide the good or service through the market disappears. The market thus fails to provide a good or service for which there is a need.

9.

NETFLIX

COLLABORATIVE FILTERING
The growth of the Internet has made it much more difficult to effectively extract useful information from all the available online information. The overwhelming amount of data necessitates mechanisms for efficient information filtering. One of the techniques used for dealing with this problem is called collaborative filtering. The motivation for collaborative filtering comes from the idea that people often get the best recommendation from someone with similar taste. Collaborative filtering explores techniques for matching people with similar interests and making recommendations on this basis. Collaborative filtering algorithms often require (1) users active participation, (2) an easy way to represent users interests to the system, and (3) algorithms that are able to match people with similar interests. Typically, the workflow of a collaborative filtering system is: 1. A user expresses his or her preferences by rating items (e.g. books, movies or CDs) of the system. These ratings can be viewed as an approximate representation of the user's interest in the corresponding domain. 2. The system matches this users ratings against other users and finds the people with most similar tastes. 3. With similar users, the system recommends items that the similar users have rated highly but not yet being rated by this user (presumably the absence of rating is often considered as the unfamiliarity of an item)

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A key problem of collaborative filtering is how to combine and weight the preferences of user neighbors. Sometimes, users can immediately rate the recommended items. As a result, the system gains an increasingly accurate representation of user preferences over time.

10.

GOOGLE PREDICTION MARKETS

WISDOM OF CROWDS

The aggregation of information in groups, resulting in decisions that, he argues, are often better than could have been made by any single member of the group. Its central thesis is that a diverse collection of independently deciding individuals is likely to make certain types of decisions and predictions better than individuals or even experts. The advantages in disorganized decisions can be put into three main types, which are, 1) Cognition: Market judgment, which he argues can be much faster, more reliable, and less subject to political forces than the deliberations of experts or expert committees. 2) Coordination: Coordination of behavior includes optimizing the utilization of a popular bar and not colliding in moving traffic flows. It explains how common understanding within a culture allows remarkably accurate judgments about specific reactions of other members of the culture. 3) Cooperation: How groups of people can form networks of trust without a central system controlling their behavior or directly enforcing their compliance. This section is especially pro free market.

Four elements required to form a wise crowd

Not all crowds (groups) are wise. Consider, for example, mobs or crazed investors in a stock market bubble. Four key criteria separate wise crowds from irrational ones: 1) Diversity of opinion: Each person should have private information even if it's just an eccentric interpretation of the known facts. 2) Independence: People's opinions aren't determined by the opinions of those around them. 3) Decentralization: People are able to specialize and draw on local knowledge. 4) Aggregation: Some mechanism exists for turning private judgments into a collective decision.

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