MBA 604 Macroenvironment: The Economic Environment

Money and Spending

How much money do people have to spend?

	upper-class	consumers are not affected by current economic events
	middle-class	consumers can afford the "good life" most of the time but are careful about spending
	working-class	consumers must budget carefully
	underclass	consumers are often unable to participate fully in the marketing system

What do they spend it on?

Engel's Law

Engel's Law is based on a budget study of 153 Belgian families. Does it fit your personal experience?

As income rises, the percentage spent on

food

housing

savings | luxuries

Harvard economist Hendrik Houthakker: "Of all the empirical regularities observed in economic data, Engel's Law is probably the best established."

optic fiber Photo from Lucent Archives
Spending on utilities -- gas, water, electricity -- is included with housing and also stays constant. Within my lifetime, telephone service has been added to that list. Within my children's lifetime, cable service has been added. Personally, I put Internet service on that list.

Do you?

Yes, I consider my Internet service a utility.

No, I do not consider my Internet service a utility. I consider it a ...

Peter Cochrane of BT Laboratories in Ipswich, England, predicts that "photonics will transform the telecom industry by effectively making bandwidth free and distance irrelevant." Joel Birnbaum, director of Hewlett-Packard Laboratories, expects that this will relegate telephone companies to the role of digital utilities. "You will buy computing like you now buy water or power," he says.

W. Wayt Gibbs, "Bandwidth, Unlimited," Scientific American, January 1997

What forces affect spending?
Nations vary greatly in gross national product and distribution of wealth, often as a result of their stage of economic development.

Subsistence Economies These nations consume most of their own agricultural and industrial output. They are poor targets for most products. Before gaining independence, the American colonies were like this. Most of the five billion humans alive today still live in these economies. For example, 80% of us have never used a telephone -- and probably never will.

Industrial Economies These nations are rich markets for many different kinds of goods. From the early 1800's, the U.S. built the world's largest industrial power and recently re-built the other two, Germany and Japan. The rest of the Industrial World (the First World compared to the Third World), especially Canada and Europe, is not far behind. If you study a map of Internet usage, the richer industrial economies have more usage than the poorer industrial economies.

Service Economies These nations are even richer markets for goods because they make less of their own. Note the uneasy jokes in the U.S. about made in Japan and made in China.

Economics for the Information Age

Magna Carta Debate Assignment
due May 5, 1999

Born 25 years ago, the microchip has conquered the world. Today it's smarter and faster than ever -- and more dangerous. Fail to learn its ways and you'll be out of luck damn quick.

Cover of Forbes ASAP, February 26, 1996

Webonomics

"The Web's colorful entanglement of words, pictures, sound, and motion is briskly becoming more than just a new medium. It's more like a parallel universe that mirrors the real world in some ways but exhibits unique properties in others. And if you hang out there long enough, you will slowly discover that nothing less than an entirely new publishing and advertising economy is taking shape in this man-made, information-based terrain. Call it Webonomics."

Evan I. Schwartz, "Advertising Webonomics 101," Wired 4.02

That article is over three years old. The examples and the statistics are no longer true. But Schwartz' five principles of Webonomics are still valid.

Consumers will rarely pay a fee for access to a Web site

In an online world flooded with free information, users will treat information charges as damage, and route around them.
Forrester Research's Bernoff

On the Web, everything we knew about advertising is out the window.
Chrysler's Everett

You must throw out all traditional thinking and start from scratch.

AT&T's Floyd

The old models of selling advertising do not apply

Marketers are not on the Web for exposure, but results

The most important thing the Web can deliver is a fully qualified lead or customer.
Forrester's Emily Green

Customers must be rewarded when they disclose information about themselves

Many consumers are beyond worrying about data spies invading their privacy and are willing to make a trade-off - if the deal is a good one. ... More common is rewarding customers by providing entertaining activities in exchange for information. ... Ultimately, such a site can turn into "an online focus group," says Eric Marcus, an Internet strategy advisor with CSC Index's Vanguard research program. The idea, Marcus says, is to engage your customers in an interesting, ongoing dialog about how you can improve your products and services.

It's not the quantity of people you attract to your site that counts most but the quality of their experience there

A Web site that attracts just a few thousand loyal consumers will ultimately be more valuable than one in which a million new people visit each month but never return.

All the goods of the Information Age - all of the expressions once contained in books or film strips or newsletters - will exist either as pure thought or something very much like thought: voltage conditions darting around the Net at the speed of light, in conditions that one might behold in effect, as glowing pixels or transmitted sounds, but never touch or claim to "own" in the old sense of the word.

John Perry Barlow
The Economy of Ideas

Three Laws

"The Internet phenomena is profoundly puzzling to the traditional business world. As the network frenzy increases, and the so-called anarchic nature of this new meta-medium starts to influence our cultural, political and economic practices, many of the established business commentators keep wishing that it will all go away, and that the anomalous practices on the Internet, such practices of freely giving away information and software, are just a temporary phenomenon.

"I argue here that these "anomalous" business practices are not transitory, but comprise the new way things are being done in the online world. Let me expand on precisely how the Internet is changing the business paradigms.

Law 1 The Price of Information Will Tend Towards Zero

Law 2 The Price of Communication Will Tend Towards Zero

Law 3 The Price of Transactions Will Tend Towards Zero"

Michel Bauwens, "The Three Laws of the Cyber-Economy,"
CMC Magazine, June 1996

Previously Unobtainable Knowledge

"Most technical advances lead to only minor improvements in products and slight changes in the organization of work. ... But, in rare cases, an especially potent new technology will trigger a restructuring that ripples throughout the entire economy -- from the lowliest work cells to the largest organizations.

"Today, as the twentieth century draws to a close, we are in the midst of precisely this kind of massive structural transformation. Because we lack the benefit of hindsight, we cannot fully appreciate the magnitude of the economic restructuring we are now experiencing. But our descendants will almost certainly judge the ‘computer-on-a-chip’ to be the most economically significant technical achievement of the previous 500 years.

"The microprocessor ranks at the very pinnacle of human invention -- like the printing press -- it slashed the cost of encoding, copying, and communicating information. And by doing so, it has brought vast areas of previously unattainable knowledge within human grasp and has made possible a staggering array of new products."

Michael Rothschild (President, Bionomics Institute), Bionomics: The Inevitability
of Capitalism, Henry Holt and Company, 1990, p. 99.

Three examples of Rothschild's "previously unattainable knowledge":

the photos from Mars last summer, the single biggest event in the Internet's short history

the human genome project, a major number-cruncher

the growing number of museum collections on the Web

?? (Email Doug or Bruce with your additions to this list)

Resources

Do you want more...

... quotations about digital economics?

... quotations about new media?

... background resources in economics from England and from the United States?

The Internet and the Future of Money
Will the Internet be a new medium for the exchange of money? Or will it change the very nature of money? Howard Rheingold has some answers.

You might want to go to First Monday and click your way to their list of back articles on economics. Here are some that I found interesting:

read these
three together The Attention Economy and the Net
by Michael H. Goldhaber
Economics is dead. Long live economics! A Commentary on Michael Goldhaber's "The Attention Economy"
by Rishab Aiyer Ghosh

What's the Right Economics for Cyberspace?
by Michael H. Goldhaber

Attention, Media, Value and Economics
by Philipe Aigrain

Possible Economic Consequences of Digital Cash
by Tatsuo Tanaka

The Economics of Electronic Journals
by Andrew Odlyzko

Trust in Electronic Markets
by Joseph M. Reagle, Jr.

Corporate Metamorphosis: The Effects of the New Media
by Sean Murphy

Can you add to this reading list? What articles have you seen that would enhance our understanding of the economic impact of this dynamic environment?

Last update: July 22, 2000
http://toLearn.net/marketing/econ.htm