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Tuesday, 31 December 2013

Multi-homing on social networks

As last post of the year I'd like to cite this FT article, which talks about a recent Pew survey confirming that about 40% of adults divide their time between Facebook and another social networking platform. Professionals tend to spend a significant amount of time on LinkedIn besides Facebook (not a surprise) and a large proportion of women tend to use Pinterest besides Facebook. This is totally consistent with economic theory applied to platform competition in the presence of local (as opposed to global) network effects. Our paper with Kaifu Zhang, currently at CKGSB, describes exactly this phenomenon and analyzes how it may manifest itself in the presence of a 'dominant site' such as Facebook. If time spent on a platform relative to that spent on others is the relevant measure of market power, then worrying about Facebook's dominance has always been misplaced. Can Facebook really be anything to anyone over the Internet? Not really... Similarly, I find silly the recent arguments that Facebook is becoming increasingly irrelevant because young people spend more time on chatting sites and less time liking each others' posts. People seem to look for another big thing to which everyone is likely to migrate. But the dynamics of the Web are strongly influenced by local network effects meaning that it is an ecosystem of strong platforms rather than one big site that is likely to dominate social networking. Facebook, with its billion plus active members is certainly a strong candidate to be part of this ecosystem. However, worries about adequate revenue models for the firms in the ecosystem are well justified: it is still not clear how such a fragmented attention base can be efficiently monetized.

Monday, 16 December 2013

Will the cable bundle survive?

A recent article in The Economist about Comcast, nicely describes the challenges faced by the cable giant at a time when a hoard of start-ups challenge the traditional cable subscription model. People talk of "cord-cutters" (and increasingly of "cord-nevers") and there is a general sense that the traditional model needs to change somehow even if there is little consensus on what model(s) will emerge eventually. In all discussions however, the idea that the cable bundle has to break apart seems to come up and people quickly point to the experience of the music industry. Unbundled services over the Internet exist already (e.g. AppleTV) but it is too early to say if they will take over the cable bundle. Cord-cutting is still slow and the prices of cable subscriptions have kept increasing at 4-5% over the last years despite the slow recovery from the recession, which indicates that coach potatoes still see value in it. With the purchase of NBCUniversal, Comcast clearly bet on the future of the cable bundle. In fact, it tries to increase the value of the bundle by packing in even more services in it and making them more convenient in terms of search and access. It is a big bet but one should never under-estimate how lazy coach potatoes are.

Just today a great article in the FT complements the picture. It analyzes the cable operator market and how it is likely to consolidate.

Tuesday, 3 December 2013

Recent Evidence on 'Forecasting'

Forecasting is important in every aspect of life and in business in particular. Grossly simplifying, the last two decades' academic research came to the general conclusion that crowds do better than individuals, the so-called "wisdom of crowds (WOC)" hypothesis. One of the resulting 'innovations' is the idea of prediction markets where people trade securities whose payoffs are tied to specific outcomes/events. Market prices provide 'superior' forecasts for the likelihood of the events in question. With social media broadly available to large and distributed populations, prediction markets are thriving...
    Recent research conducted by IARPA seems to indicate that the WOC insight might be challenged - at least to some degree. Clearly, prediction markets do much better than the average expert participating in them. But it also seems to be the case that the top 2% of forecasters can beat the market by a relatively large margin. First, it seems that the elite forecasters do seem to do better systematically over time, so their performance is not just luck. Moreover, if you team them up, then together, they can beat prediction markets by 20-35%.
    Prediction markets are cool forecasting tools but their weakness is that they give away the forecast, so in business where one wants to generate superior insights it is hard to discover proprietary information this way. But what if firms ran forecasting tournaments to discover the few experts that can provide sustainable advantage for them? Of course, the question then becomes: at what price will these experts share their views with the firm!