The Concentration in the Content and Infomediary Industry: The New Gatekeepers

According to Shapiro and Varian (1998) the economic impact of the Internet and corporate computer networks is similar to that of earlier networks such as the railways, telephones and bank machines. The authors claim that "information rules" are simply more radical versions of the rules that have always applied to high-fixed-cost, low-marginal-cost industries. Information industries in general — media companies, Internet companies, software companies — all have in common the combination of high "fixed costs," low "marginal costs" and "network externalities" (the more people use the network service, the more people will find it worth using). This generates huge economies of scale at the supply side, that is in the production and distribution of information, that Neuman (1991) calls the first-copy economies. At the demand level economies of scale are benefits, for the individual members of the network are dependent on the size of the network itself, as well as huge economies of scope (the more the same customer buys from, you the less is the unitary cost of your relationship with her).

The rules of the information economy, plus the scarcity of the attention resources at the node level (their bounded rationality), drive market concentration, not distributed market power. This information economy creates not only emergent information hierarchies, but also explicit strategies for controlling the navigation options and information diversity accessible by customers. Price discrimination, product versioning ^[3] and lock-in strategies ^[4], though hurting the interests of the customers because they reduce their access to diversity, generate higher profits for the company. The world of the information economy, from this standpoint, is made by huge corporations and trapped customers. The result can be a second-level digital divide: a democratic divide (Norris, 2000).

"Small foundations and educational institutions simply can not compete with the vast production budgets of major commercial portals like Yahoo and Excite. Further, if people want to find such non-commercial spaces, they may find it difficult due to search engines that steer people to the continually growing number of commercial websites" (Neuman, Zimmer, Stromer-Galley, Hunter & Montero, 1999). This drive toward concentration is accelerated by the more diffused business model on the net: the advertising-based business model. Since the infomediaries (portals of all sorts) need advertising revenues, they tend to build big audiences and this — along with the economies of scale — makes the competition for shares of web traffic very intense. On the other side, the economies of scope and the business models based on affiliation commercial agreements drive the development of the so-called, walled-garden model of the information assortment. This means that the big portals tend to reduce the number of information sources accessible and to control the rules of search results in order to respond to the expectations of commercial partners, for example such as big manufacturing firms or retailing and information brands on the net.

The resulted concentration of what we call the activated navigation options on the World Wide Web is clear from the following chart (Figure 2). It refers to the distribution of the total attention invested by the users on the web in Europe, measured in monthly usage minutes.

Figure 2: Concentration in European Internet Infomediation

Online consumers respond to overload of information by dedicating their attention to a very limited fraction of online shops. They select and give up diversity. Netratings in September 2002 calculated that the average Internet user accesses only 49 domains in a month. We know that the number of available domains on the web were more than 36 million already in 2001 (Coley consultancy, 2002). This does not sound new for students of mass communication. From media economics we know that information economies drive concentration. This is true for the interactive networks as it was true in the old content and information industries (Neuman, 1991).

We also add another reason, often disregarded, why we should be aware of the potential increase of economic concentration specific to the era of the Internet; we first studied this phenomenon applied to marketing (Mandelli, 1998). The Internet not only decreases connection costs. It also decreases coordination costs. Digital technologies not only foster the efficiency of cooperation processes (knowledge conversion through electronic socialization), they also increase the efficiency of the explicit and codified forms of knowledge conversion (Mandelli, 1998): knowledge externalization and recombination using Nonaka and Takeuchi's(1995) words. It is like to say that, if it is true that the Internet technology reduces the transaction costs concerned with the distant and dynamic cooperation (therefore, fostering the market-type coordination of the interdependencies), it is also true that it reduces the cost of organizational hierarchy-based coordination based on structures and standards of infomediation. The trade-off that generates new institutions does not disappear. It moves at a new and lower absolute cost level.

This helps also explain why the predicted disintermediation on the Internet is not in sight. Carr (2000) writes that like many of the early assumptions about electronic commerce, this one has proved "laughably wrong." It is now becoming clear that business is undergoing precisely the opposite phenomenon — what Carr (2000) calls hypermediation. Transactions over the Web involve all sorts of intermediaries, not just the familiar wholesalers and retailers, but content providers, affiliate sites, search engines, portals, Internet service providers, software makers, and many others (Mandelli, 1998). It is these middle men that are capturing most of the profit (Carr, 2000). You could easily imagine this outcome of the Internet changes, if you studied the different but contemporary changes in transaction costs and coordination added value for both distributed-direct relationships and for hierarchical and intermediated links brought about by digital network technologies (Mandelli, 1998).

^[3]The production of several versions of the same product in order to apply differential prices.

^[4]A lock-in occurs when a consumer is faced by switching costs, costs he will incurr only if he decides to switch supplier and brand. Among the lock-in strategies: loyalty programs, penetration pricing (free initial versions of the product with expensive upgrades).