Economics of Digitization

February 24, 2012
Shane Greenstein of Northwestern University's Kellogg School of Management, Josh Lerner of the Harvard Business School, and Scott Stern of MIT's Sloan School, Organizers

Lesley Chiou, Occidental College, and Catherine Tucker, MIT and NBER

Copyright, Digitization, and Aggregation

The digital revolution means that consumers now can quickly and easily access content that is aggregated from many online sources. However, digital aggregation has tested the boundaries of copyright law. It is not clear whether allowing extracts of copyrighted works to be distributed by others benefits or harms copyright holders. Chiou and Tucker ask whether digital aggregation encourages users to "skim" or to investigate content in depth. They exploit a contract dispute that led a major aggregator to remove information from a content provider. They find that after the removal, users were less likely to investigate additional content in depth. The relaxation of copyright protection mostbenefited horizontally or vertically differentiated content.

Monic Sun, Stanford University, and Feng Zhu, University of Southern California

Ad Revenue and Content Commercialization: Evidence from Blogs

Many scholars argue that when ad revenue is an incentive, content providers are more likely to tailor their content to attract "eyeballs"; as a result, popular content may be supplied excessively. Sun and Zhu empirically test this prediction by taking advantage of the launch of an ad-revenue-sharing program initiated by a major Chinese portal site in September 2007. Participating bloggers allow the site to run ads on their blogs and receive half of the revenue generated by these ads. After analyzing 4.4 million blog posts, the authors find that, popular content increases by about 13 percentage points on participants' blogs relative to those of nonparticipants after this program takes effect. About half of this increase can be attributed to topics shifting toward three domains: the stock market, salacious content, and celebrities. Meanwhile, relative to nonparticipants, participants' content quality increases after the program takes effect. The program effects are are found to be more pronounced for participants with moderately popular blogs, and these effects seem to persist after participants enroll in the program.

Joo Hee Oh, MIT, and Il-Horn Hann, University of Maryland

Piracy Propagation of Information Goods: Demand and Supply-side Dynamics in P2P Networks

The extent of piracy for a specific digital good can be characterized by the laws of demand and supply. The music industry and its trade organization, the RIAA, have recognized this and taken aggressive steps to diminish demand as well as supply. Oh and Hann develop a model that describes the dynamics of the demand-and-supply-side of piracy propagation and then investigate the effect of these anti-piracy measures on piracy. The authors quantify the impact of anti-piracy measures that are administered prior to the official release of the song, and then analyze two anti-piracy measures: the reduction of file supply and the reduction of file demand. They find that the impact of a reduction of file supply is modest: the removal of 1 percent of file supply about six weeks prior to the official song release date leads to a reduction of about 0.7 percent of cumulative file demand and 0.6 percent of cumulative file supply at the release date. However, the impact of a demand reduction is significantly greater: a decrease of 1 percent of file demand about six weeks prior to the release will cut about 1.57 percent of cumulative file demand and 0.6 percent of cumulative file supply at the release date. From a policy point of view, these results suggest that taking anti-piracy measures early on is important. In addition, and potentially more controversial, these results provide support for the notion that in order to reduce piracy, punishing end-users is more effective than efforts to control the supply of unauthorized music files.

Susan Athey, Harvard University and NBER,and Markus Mobius, Iowa State University and NBER

The Effect of Localization on News Consumption

Athey and Mobius analyze the impact of news aggregators on the quantity and composition of internet news consumption. In principle, news aggregators can be a substitute or a complement to the news outlets that invest in the creation of news stories. A policy debate centers around the decrease in the incentives for news creation that results if readers choose to consume their news through aggregators without clicking through to the news websites or generating any revenue for the outlets. This paper provides a case analysis of one example where Google News added local content to their news home page for users who chose to enter their location. Using a dataset of user browsing behavior, the authors compare users who adopt the localization feature to a sample of control users who are similar to the treatment users in terms of recent internet news consumption. They find that users who adopt the localization feature subsequently increase their usage of Google News, which in turn leads to additional consumption of local news. Users also navigate directly to the new sites they have discovered, further increasing their local news consumption. The increase in local news consumption diminishes over time, however, and in the longer run most of the additional local news consumption derives from increased Google News usage. Patterns of news consumption change: users read a wider variety of outlets, more outlets that are new to them, and a larger fraction of their news "home page" views come from Google News rather than the home page of other news outlets. Thus, the inclusion of local content by Google News had mixed effects on local outlets: it increased their traffic, especially in the short run, but it also increased the reliance of users on Google News for their choices of news, and increased the dispersion of user attention across outlets.

Rachel Soloveichik and David Wasshausen, Bureau of Economic Analysis

Copyright-Protected Assets in the National Accounts

Soloveichik and Wasshausen estimate that in 2007 U.S. businesses and governments invested $278 billion in software and U.S. artists produced $54 billion worth of longā€lived entertainment originals. These copyrighted materials will yield useful services for years to come. Because of their long working life, the international guidelines for national accounts -- System of National Accounts 2008 -- recommends that countries classify production of software and long-lived entertainment originals as an investment activity and then depreciate the copyrighted assets over time. At the current time, the BEA capitalizes software in the national accounts, but does not capitalize entertainment originals. In this paper, the authors present data on nominal investment, prices, and capital stocks of software and long-lived entertainment originals from 1929 to 2009. They then show how capitalizing software and entertainment can influence GDP statistics. For reference, they also include estimates of short-lived entertainment from 1929 to 2009. They find that in 2007, software investment accounted for 2 percent of nominal GDP, while in 1959 software investment was close to zero. Accordingly, average GDP growth increases when software is classified as a capital asset. Second, entertainment investment accounts for approximately 0.3 percent of nominal GDP, and this share has remained relatively steady from 1929 to 2009. Accordingly, average GDP growth rates do not increase much when entertainment originals are classified as a capital asset. Third, software has a lifespan of 3-5 years and entertainment has a lifespan of 15-50 years. In 2007, the private capital stock of software was $486 billion and the capital stock of entertainment originals was $353 billion.

Erik Brynjolfsson, MIT and NBER, and Joo Hee Oh, MIT

The Attention Economy: Measuring the Value of Free Goods on the Internet

The Internet has given rise to an explosion of free information goods, from Wikipedia articles and Facebook photos to Google maps and YouTube videos. What is their value? Traditional approaches based on measuring prices and quantities do not work well for such goods. Brynjolfsson and Oh instead explore a framework for quantifying the value of online applications that have very low prices by using the insight that even when people do not pay cash, they must still pay "attention" or time when consuming information goods. Accordingly, the authors contrast the value of consumer surplus using two different methods, one based on the value of direct market expenditure and one based on the value of time spent consuming free goods. They provide a generalized model of household consumption and time use and then estimate the value of consuming information goods on the Internet without the traditional money-based measure of GDP. Their model of the "attention economy" yields an estimate of annual consumer surplus gain of around $21 billion between 2003 and 2010 created by free sites on the Internet. This corresponds to about 0.17 percent of average annual GDP during the relating period. The data imply that less than 7 percent of total welfare gain would be measured by approaches that rely solely on the variation in direct dollar expenditures. To identify the remaining 93 percent of value, one must consider time spent on consumption.

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