ECONOMICS AND MANAGEMENT OF APPLICATIONS AND SERVICES

Radical and disruptive Internet technologies require appropriate business models and strategies to fully utilize their potential. This is the common theme of the chapters in Part IV.

Internet search is one of the most successful, highly profitable, generic Internet busi­nesses. It is an example of a two-sided market supported by advertising, as Hal R. Varian explains in Chapter 18. He describes the history of information retrieval and the business model of Internet search. Selling advertisements that are related to the search queries is the primary source of revenues for this business, characterized by high fixed costs, low marginal costs and low switching costs. The author rates learning-by-doing as the most important economic factor determining search engine success, and he foresees much progress in the field of marketing based on the massive amounts of data generated, among others, by search engines.

Search engines are an indicator of how algorithms on the Internet increasingly shape our lives and realities. They are the most prominent example of a fast-growing Internet phenomenon called algorithmic selection, which is defined by automated selection of information elements and the assignment of relevance to them. Applications range from recommender systems to social scoring and predictive policing. In Chapter 19, Michael Latzer, Katharina Hollnbuchner, Natascha Just and Florian Saurwein explain their economics, the operational model, market structures and business models. They also show how economic benefits and social risks of algorithmic selection co-evolve, and indicate governance choices for business and political strategies that boost economic and social welfare effects.

Computational advertising is another example of advanced algorithmic selection markets, yet only one example of the massive changes in the economics of advertising. In Chapter 20 Wenjuan Ma and Steven S. Wildman review the economic literature on Internet advertising. While advertising was present on the Internet early on, the rapid expansion started with the commercialization of the Internet since the mid-1990s. After a brief historical review, the chapter focuses on the two main bodies of research - targeted advertising and search advertising. The chapter concludes with a critical assessment of the state of research and possible future research trajectories.

These massive changes in advertising contributed to a substantial crisis and shake up of the news business, which went online with the diffusion of the World Wide Web in the early 1990s. In Chapter 21 Lucy Kung, Nic Newman and Robert G. Picard ana­lytically distinguish between two eras of online news, ‘Digital Publishing - Web 1.0’ and ‘Participation and Multimedia’, and three subsectors of the media: print, broadcast­ing and pure players. Based on selected cases, they provide an overview of strategic, organizational and editorial implications of online news in these industries. The authors conclude with a discussion of the challenging combination of increasing competition, a bleak financial outlook for online news and the associated threats to high-quality news journalism.

The next three chapters take a closer look at the economics of online entertainment. Ryland Sherman and David Waterman focus in Chapter 22 on the fast-growing ‘over- the-top’ (OTT) markets for streaming and downloading professionally produced and user-generated videos to Internet-connected devices. The authors compare the economics and technology of online and offline media delivery systems, explore the empirical devel­opment of online video, and analyze business models and programming.

Business strategies of OTT services are also the focus of Chapter 23 by Yu-li Liu.

Online video games are another important and fast-growing part of Internet enter­tainment. They create virtual worlds, and their specific systems of production, distribu­tion and trade can be analyzed as virtual economies. In Chapter 24 Isaac Knowles and Edward Castronova review the history of virtual worlds and explain their economics. They emphasize the catalyzing role of real-money trade - the exchange of virtual goods, currencies and services for real money. Further, the authors discuss the possibilities of using virtual worlds as large-scale laboratories for (political) experiments.

The final chapter in this part examines the economics of big data, a topic that is rapidly attracting considerable attention in politics and research. Chapter 25 by Claudio Feijoo, Jose-Luis Gomez-Barroso and Shivom Aggarwal is an introduction to the economic issues raised by the big data ecosystem, pointing out that big data is a field with more challenges than answers. The authors explain the relationships between players, discuss the economic value of data, and assess their impact on growth and jobs. They conclude with potential avenues for further research, highlighting the importance of governance options for future developments.

1.6