Re­source Re­or­ga­ni­za­tion and Ser­vice Sec­tor Growth in Highly In­ter­con­nected So­ci­ety

China Economist - - Articles - JiangXiao­juan(江小娟)

Ab­stract:

This pa­per demon­strates how modern tech­nolo­gies, es­pe­cially the In­ter­net, are trans­form­ing the na­ture of the ser­vice sec­tor, lead­ing to ex­ten­sive re­source re­or­ga­ni­za­tions and in­te­gra­tions, and fun­da­men­tally chal­leng­ing tra­di­tional the­o­ries on ser­vice-based econ­omy, e.g., the as­sump­tion that the ser­vice sec­tor is in­ef­fi­cient no longer holds true, it is dif­fi­cult for the neo­clas­si­cal price the­ory to ex­plain ser­vice price for­ma­tion and peo­ple’s con­sump­tion ra­tio­nal­ity has changed. Mean­while, eco­nomic is­sues associated with the In­ter­net, such as In­ter­net eco­nom­ics, plat­form eco­nom­ics and in­for­ma­tion prod­uct pric­ing, also need to be in­ves­ti­gated. The­o­ret­i­cal re­search and in­no­va­tions also need to be car­ried out to in­ves­ti­gate ques­tions like how to pro­tect pri­vacy with­out pre­vent­ing the use of data, as well as the com­plex­i­ties of “cul­tural and psy­cho­log­i­cal con­sump­tion.”

Key­words:

ser­vice sec­tor, In­ter­net, re­source re­or­ga­ni­za­tion, the­o­ret­i­cal in­no­va­tion JEL Clas­si­fi­ca­tion Codes: L83; L86; O47

DOI: 1 0.19602/j .chi­nae­conomist.2018.09.01

In 2015, the ser­vice sec­tor ac­counted for over 50% of the Chi­nese econ­omy for the first time, open­ing a new chap­ter for ser­vice- based econ­omy. Given the tech­no­log­i­cal, eco­nomic and so­cial trans­for­ma­tions, tra­di­tional an­a­lyt­i­cal meth­ods like cul­tural change, trend ex­trap­o­la­tion and in­ter­na­tional com­par­i­son are far from be­ing suf­fi­cient to re­veal China’s ser­vice sec­tor trends, and many new im­por­tant fac­tors need to be in­cor­po­rated into the an­a­lyt­i­cal frame­work.

Among var­i­ous new fac­tors, the in­flu­ence of the In­ter­net is the most im­por­tant. Fea­tur­ing a high de­gree of eco­nomic and so­cial in­ter­con­nec­tions, new-type ser­vices have emerged as main­stream ser­vices in the mar­ket with trans­for­ma­tive ef­fect on tra­di­tional ser­vices. In to­day’s world, the ser­vice sec­tor ex­hibits new pat­terns of busi­ness model, com­pe­ti­tion, in­cen­tives and eval­u­a­tive per­spec­tive. Ser­vices are in­creas­ingly em­bed­ded into agri­cul­tural and man­u­fac­tur­ing sec­tors, and more broadly into ev­ery as­pect of life and so­ci­ety. How­ever, new prob­lems and chal­lenges have also emerged. Since tra­di­tional ser­vice the­o­ries can­not ef­fec­tively ex­plain re­al­is­tic ques­tions, the­o­ret­i­cal in­no­va­tion be­comes ur­gent and im­por­tant.

1. Con­sump­tion Char­ac­ter­is­tics and Ser­vice Sup­ply in the In­ter­net Era

In the cur­rent stage, Chi­nese peo­ple’s con­sump­tion de­mand is con­tin­u­ously ex­panded from ma­te­rial to non- ma­te­rial de­mand, par­tic­u­larly cul­tural and psy­cho­log­i­cal de­mand. Such de­mand is greatly

un­leashed by rapidly grow­ing In­ter­net con­sump­tion and in­no­va­tions. For in­stance, on­line gam­ing, which is more en­ter­tain­ing and ex­cit­ing than off-line gam­ing prod­ucts, has en­joyed rapid de­vel­op­ment. In 2015, China’s on­line gam­ing in­dus­try ex­ceeded 120 bil­lion yuan in out­put value. Launched in 2011, China’s most pop­u­lar in­stant mes­sag­ing app WeChat had had 500 mil­lion ac­tive users by the end of 2015. En­ter­tain­ment made up 53.6% of con­sumer spend­ing through WeChat pay­ments. The mu­sic mar­ket also has a sim­i­lar pat­tern. Dig­i­tal mu­sic sup­ported by the In­ter­net has be­come the main­stream mar­ket for mu­sic con­sump­tion, which far ex­ceeds the three tra­di­tional mar­kets of mu­sic per­for­mances, records and mu­sic books com­bined. See the fol­low­ing Ta­ble 1.

The In­ter­net has trans­formed the ba­sic na­ture of the ser­vice sec­tor. Ac­cord­ing to tra­di­tional eco­nomic the­o­ries, the ser­vice sec­tor is a low-pro­duc­tiv­ity sec­tor, as many ser­vice pro­cesses re­quire pro­duc­tion and con­sump­tion to take place at the same time and the same place. These ser­vice sec­tors in­clude ed­u­ca­tion, health care, on-site art per­for­mance and se­cu­rity ser­vices. In these pro­cesses, hu­man cap­i­tal is the pri­mary fac­tor of sup­ply. With­out us­ing ef­fi­ciency-en­hanc­ing ma­chin­ery, economies of 1 scale are lack­ing, and la­bor pro­duc­tiv­ity re­mains con­stant on a long-term ba­sis.

In re­cent years, net­work- based ser­vices demon­strate three new im­por­tant char­ac­ter­is­tics that trans­form the ba­sic na­ture of ser­vices. First, sig­nif­i­cant economies of scale. This stems from the ex­or­bi­tant ini­tial cost of on­line ser­vices and very low mar­ginal cost, par­tic­u­larly for re­pro­ducible cul­tural and in­for­ma­tion ser­vices. For in­stance, whether an on­line drama is watched by one viewer or a hun­dred mil­lion view­ers, the cost of pro­duc­tion re­mains the same, while the mar­ginal cost for ad­di­tional

view­ers is min­i­mal. Sec­ond, sig­nif­i­cant economies of scope. Af­ter a huge plat­form takes shape, it will be able to dis­trib­ute var­i­ous prod­ucts and ser­vices and ex­plore new prod­ucts and ser­vices with its brand ad­van­tage. By log­ging onto a plat­form, con­sumers will have ac­cess to al­most every­thing they want. One-stop ac­cess pro­vides com­pa­nies with op­por­tu­ni­ties to max­i­mize their use of plat­form as­sets, re­duce cost, and im­prove ef­fi­ciency. Third, sig­nif­i­cant long-tail ef­fect. “Long-tail ef­fect” is a spe­cial aca­demic term de­vel­oped in the In­ter­net era and may be clas­si­fied as a type of economies of scale with dis­tinct In­ter­net char­ac­ter­is­tics. Long-tail ef­fect (Anderson, 2006) means that when the cost of prod­uct and ser­vice di­ver­si­fi­ca­tion is small enough, in­di­vid­u­al­ized prod­ucts and ser­vices in lim­ited de­mand and sales vol­umes still man­age to find their way to the mar­ket. The ag­gre­gate mar­ket share of these niche de­mands may even be on a par with the mar­ket share of a few prod­ucts with boom­ing sales.

2. A Highly Con­nected So­ci­ety and Ex­ten­sive Re­source Re­or­ga­ni­za­tion

The In­ter­net era is char­ac­ter­ized by rapid in­for­ma­tion com­mu­ni­ca­tion, a high de­gree of eco­nomic and so­cial in­ter­con­nec­tions, and low costs of trans­ac­tion and re­source al­lo­ca­tion. These fun­da­men­tal changes will lead to ex­ten­sive re­source re­or­ga­ni­za­tions and in­te­gra­tions.

2.1 In­te­grat­ing De­mand Re­sources: Fight­ing for At­ten­tion

In the In­ter­net so­ci­ety, peo­ple are in­un­dated with tremen­dous vol­umes of in­for­ma­tion, and com­pa­nies com­pete for their at­ten­tion. New busi­ness mod­els also emerge to at­tract users.

(1) Free use. In­ter­net ser­vice meth­ods are easy to im­i­tate, and in­no­va­tive busi­ness mod­els need to be ap­plied rapidly on an ex­ten­sive scale. Oth­er­wise, early op­por­tu­ni­ties will be lost if the user base in­creases slowly. When a new ser­vice ap­pears on the In­ter­net plat­form, its ba­sic func­tions can be used free of charge to gain a large user base in a short time and gen­er­ate pos­i­tive feed­back: More users means greater at­ten­tion and busi­ness op­por­tu­ni­ties that come with free ser­vices. WeChat is a typ­i­cal ex­am­ple. At the be­gin­ning, WeChat was launched as a so­cial net­work­ing tool for free down­load and use. Af­ter ac­quir­ing a large num­ber of users, its com­mer­cial func­tions were de­vel­oped, such as mo­bile pay­ment, wealth man­age­ment, gam­ing, map and e-com­merce, thus cre­at­ing an ecosys­tem of ser­vices. By the end of 2015, the num­ber of ac­tive WeChat users had reached 560 mil­lion who were from over 200 coun­tries and speak more than 20 languages. By the same time, WeChat pay­ment users had reached about 400 mil­lion.

(2) Fans, In­ter­net celebrities and live stream­ers. In fight­ing for at­ten­tion, the key is to de­velop loyal con­sumers or fans. Fans re­fer to loyal fol­low­ers of a celebrity, prod­uct or ser­vice (Wu and Zhang, 2014). The num­ber of fans de­ter­mines the view­ing rate of a pro­gram, while the view­ing rate in turn de­ter­mines ad­ver­tis­ing rev­enues. Af­ter Yao Ming joined the NBA, a large group of Chi­nese fans started to fol­low the Hous­ton Rock­ets and the NBA. As a re­sult, the NBA’s rev­enues in the Chi­nese mar­ket in­creased to 1.2 bil­lion US dol­lars. In ad­di­tion to big data, fans also gen­er­ate tremen­dous de­rived com­mer­cial value. Through data min­ing, In­ter­net firms push all types of in­for­ma­tion to po­ten­tial con­sumers, thus evolv­ing new busi­ness sys­tems and mod­els.

Fight­ing for at­ten­tion also leads to the emer­gence of cy­ber celebrities, who mon­e­tize their well­known­ness by show­ing and mar­ket­ing prod­ucts to their fans or sell­ing so­cial net­work­ing traf­fic to ad­ver­tis­ers. On May 20, 2016, Lancôme con­ducted an in­ter­ac­tive photo cam­paign on WeChat fea­tur­ing Lu Han, a pop­u­lar Chi­nese singer and ac­tor, which re­sulted in an in­crease in sales by 30% on the same day. While brands used to be rep­re­sented by com­pa­nies and com­modi­ties, the emer­gence of cy­ber celebrities means that in­di­vid­u­als are also de­vel­op­ing brand names that oc­cupy the mar­ket. Cy­ber celebrities en­ter­tain their fans by in­ter­act­ing with them and shar­ing their life­styles, emo­tions, fash­ions and dreams.

Fight­ing for at­ten­tion also gives rise to a new pro­fes­sion: live stream­ers. Live stream­ers spe­cial­ize

in fields like news, sports or en­ter­tain­ment. For in­stance, Six Rooms (6.cn) is a Chi­nese live stream­ing broad­cast plat­form where peo­ple show their tal­ents, knowl­edge and wit and in­ter­act with their fans. More than 40,000 live stream­ers have signed agree­ments with Six Rooms. On the Six Rooms live stream­ing plat­form, singers and live stream­ers stage per­for­mances, give speeches and an­swer ques­tions from their fans and re­ceive vir­tual gifts. These vir­tual gifts and re­wards are the sources of prof­its for live stream­ing plat­forms and live stream­ers. Some in­flu­en­tial live stream­ers may run ad­ver­tise­ments in var­i­ous ways.

(3) Search. As the most im­por­tant and widely used In­ter­net func­tion, search en­gines help peo­ple find in­for­ma­tion at zero cost from an ocean of web­pages about prod­ucts and ser­vices. Search en­gines at­tract users by pro­vid­ing di­verse sources of in­for­ma­tion with just a few clicks, and the mar­ket is dom­i­nated by a few suc­cess­ful search en­gine com­pa­nies like Google and Baidu. When peo­ple want to know more about some­thing, they tend to search it on the In­ter­net. Search en­gines pro­vide a key chan­nel for com­pa­nies to get the at­ten­tion of users, thus giv­ing rise to var­i­ous busi­ness mod­els like paid list­ings. The more com­pa­nies pay search en­gine com­pa­nies, the higher they are listed in the search re­sults. Paid list­ings are the equiv­a­lent of ad­ver­tise­ment auc­tions on TVs and in news­pa­pers. But the list­ings have mis­guided users in some key sec­tors such as the phar­ma­ceu­ti­cal sec­tor. In 2015, a Chi­nese young man named Wei Zexi searched on Baidu af­ter be­ing di­ag­nosed with a rare type of can­cer and chose to go to a hospi­tal ranked the high­est on the list of search re­sults. Af­ter his med­i­cal treat­ment failed, he re­al­ized that the rank­ing was paid for. This case trig­gered pub­lic out­cry against paid list­ings. We will dis­cuss this is­sue in the fol­low­ing sec­tion.

(4) In­for­ma­tion push. In an en­vi­ron­ment of in­for­ma­tion over­flow, each and ev­ery con­sumer faces the dilemma of in­for­ma­tion fil­ter­ing and se­lec­tion, and per­son­al­ized ac­cess to in­for­ma­tion has be­come a uni­ver­sal de­mand. Me­dia or­ga­ni­za­tions that pre­cisely match the con­tent of trans­mis­sion with pub­lic at­ten­tion will be able to gain mar­ket share and cre­ate value. By trac­ing the In­ter­net be­hav­ior of users, on­line ad­ver­tis­ing agen­cies push in­di­vid­u­al­ized ser­vices to con­sumers, which is a busi­ness model in­no­va­tion. In the era of mo­bile de­vices, “push” ser­vices com­bine con­tent dis­tri­bu­tion net­works with lo­ca­tion-based ser­vices. For ex­am­ple, any­where in China, one may ac­cess Dian­ping.com, China’s on­line re­view web­site, to look for the near­est restau­rants or cafes.

2.2 In­te­grat­ing Mar­ket­ing Re­sources: Plat­form Com­pa­nies

In the In­ter­net era, large firms may op­er­ate as “plat­forms.” These plat­forms in­te­grate mu­tu­ally in­de­pen­dent groups to form point- to- point con­nec­tions at low cost and with high ef­fi­ciency ( Wu and Zhang, 2012). US firms Ama­zon and eBay and Chi­nese firms Taobao and JD.com are all typ­i­cal ex­am­ples. Plat­form com­pa­nies are noth­ing new. In fact, they even pre­ceded many In­ter­net ser­vices. Large su­per­mar­kets and shop­ping malls are all plat­form com­pa­nies, where buy­ers and sell­ers en­gage in point-to-point trans­ac­tions. Un­like brick-and-mor­tar plat­forms that are lim­ited in size, In­ter­net-based plat­forms can be very large and in­ter­con­nected at low cost. They boast tech­ni­cal sup­port of au­to­matic match­ing al­go­rithm based on the prin­ci­ple of de­cen­tral­iza­tion and are very com­pet­i­tive (Ro­chet, Ti­role, 2003).

China has a tremen­dous mar­ket and rapidly grow­ing plat­form or­ga­ni­za­tions. In 2015, more than 40,000 T-mall mer­chants, 30,000 brands and over six mil­lion com­modi­ties were in­volved in China’s Sin­gles Day e-com­merce car­ni­val (Tang, 2015). On the Sin­gles Day (Novem­ber 11) in 2015, on­line ne­ti­zens peaked at 45 mil­lion and 468 mil­lion ex­press parcels were gen­er­ated. Trans­ac­tion vol­ume hit 91.2 bil­lion yuan (13.5 bil­lion US dol­lars), ex­ceed­ing the sin­gle-day sales vol­ume of all con­sumer goods in China in 2014, or 1.57 times the sales vol­ume of 9.1 bil­lion US dol­lars on Black Fri­day in the US in 2014. This stag­ger­ing sales per­for­mance has re­freshed the world’s big­gest shop­ping day trans­ac­tion record.

From an aca­demic view, In­ter­net plat­forms have the fol­low­ing char­ac­ter­is­tics.

First, plat­form com­pa­nies change the con­di­tions for firms to gen­er­ate economies of scale (Jay,

2015). Through the In­ter­net, pro­duc­ers and con­sumers en­gage in di­rect trans­ac­tions with each other, thus elim­i­nat­ing the multi-layer mar­ket­ing sys­tems from pro­duc­tion to con­sump­tion in the tra­di­tional busi­ness model. This has sig­nif­i­cantly re­duced the cost of trans­ac­tion. Small and mi­cro busi­nesses, in par­tic­u­lar, may over­come the ad­verse im­pact of be­ing small, and pro­vide ser­vices to con­sumers world­wide through ex­ten­sive plat­forms free from ge­o­graph­i­cal lim­i­ta­tions. For ex­am­ple, while small com­pa­nies de­velop mo­bile games for niche mar­kets, the ag­gre­gate num­ber of play­ers around China and the world at large is still rather sig­nif­i­cant.

Sec­ond, plat­form com­pa­nies asym­met­ri­cally share costs. Fees charged by plat­form com­pa­nies to con­sumers and sup­pli­ers are usu­ally asymmetrical. In most cases, the cost of plat­forms is en­tirely covered by sup­pli­ers for con­sumers to use free of charge and even with sub­si­dies. This is true for most e-com­merce web­sites. How­ever, ex­am­ples to the con­trary also ex­ist, i.e. some plat­form com­pa­nies col­lect fees from con­sumers but pro­vide sup­pli­ers with free ac­cess. An ex­am­ple is CNKI, a Chi­nese web­site that pro­vides aca­demic pa­per search and down­load ser­vices. De­spite free up­load, users have to pay a fee to down­load pa­pers. Un­der cap­i­tal mar­ket op­er­a­tions, in­vestors are some­times not sen­si­tive to whether or not large plat­form com­pa­nies are profit-mak­ing and can be ex­tremely pa­tient. While JD.com made no prof­its over the decade since its in­cep­tion, it still man­aged to raise tremen­dous cap­i­tal to main­tain op­er­a­tions, rather than us­ing its own prof­its to off­set op­er­at­ing costs.

Third, plat­form com­pa­nies adopt a four-party busi­ness op­er­a­tion model. Real-econ­omy com­pa­nies fol­low a two-party busi­ness model fea­tur­ing sup­ply and de­mand re­la­tions, where sup­ply chain and mar­ket­ing are con­sid­ered part of the whole process of busi­ness op­er­a­tion (Koren, 2016). In com­par­i­son, In­ter­net firms, es­pe­cially search en­gines, mainly pro­vide free search ser­vices, and both par­ties of sup­ply and de­mand are not typ­i­cal buy­ers and sell­ers (Wang, 2013). Be­cause ad­ver­tise­ments are the pri­mary source of rev­enues for those com­pa­nies, ad­ver­tis­ers are con­sid­ered the fourth party. All large search com­pa­nies achieve an ef­fec­tive four-party busi­ness model con­sist­ing of the search com­pany, free users, sup­pli­ers and ad­ver­tis­ers.

2.3 In­te­grat­ing Qual­ity Sig­nals: Feed­back Mech­a­nism and Big Data

For com­modi­ties with repet­i­tive trans­ac­tions on a long-term ba­sis, price is a fun­da­men­tal qual­ity sig­nal. In ad­di­tion, there are many other qual­ity sig­nals, such as war­ranty, re­fund and re­place­ment and qual­ity in­spec­tion. But many ser­vices are one-on-one and of­fered on a one-time ba­sis as a process, which con­tains a lot of in­for­ma­tion and makes it dif­fi­cult to as­sess ser­vice qual­ity. The In­ter­net pro­vides a myr­iad of new qual­ity sig­nals, or in other words, in­te­grates scat­tered and in­di­vid­u­al­ized sig­nals (David and Henry, eds, 2011). For in­stance, many web­sites have cre­ated user re­view, rat­ing, credit in­quiry and ac­count­abil­ity sys­tems to ad­dress in­for­ma­tion asym­me­try, help con­sumers make in­formed choices, and pro­vide good com­pa­nies with more op­por­tu­ni­ties. Big data can pro­vide more qual­ity sig­nals (Dong and Zhao, 2012). The used car mar­ket and la­bor mar­ket are both typ­i­cal ex­am­ples. Be­fore a used car is sold, a large amount of in­for­ma­tion such as mileage, oil con­sump­tion, main­te­nance, traf­fic vi­o­la­tions, in­sur­ance cost and claim set­tle­ment is gen­er­ated. With min­i­mal cost, buy­ers are able to ac­quire such in­for­ma­tion from a pro­fes­sional com­pany to as­sess the car’s con­di­tions and bid a price ac­cord­ingly.

The In­ter­net also helps con­sumers learn about very spe­cial­ized dis­ci­plines ( Ed­ward, 2006). Take medicine for in­stance. The In­ter­net al­lows pa­tients to par­tic­i­pate in di­ag­no­sis and treat­ment by ex­chang­ing ther­a­peu­tic meth­ods and ex­pe­ri­ences about drug ef­fi­cacy through the In­ter­net. Launched in 2004, Pa­tientsLikeMe is a so­cial net­work­ing web­site specif­i­cally for pa­tients. It was funded by the Robert Wood John­son Foun­da­tion with an in­vest­ment of 1.9 mil­lion US dol­lars and pro­vides mu­tu­alas­sis­tance on­line con­sul­ta­tions among pa­tients. Cur­rently, about 200,000 users have cre­ated and shared their med­i­cal records at Pa­tientsLikeMe. Nor­mally, they con­duct self-ex­am­i­na­tions through stan­dard ques­tions and tests. Through this web­site, pa­tients are able to find other pa­tients with sim­i­lar con­di­tions and ex­change views. Their dis­cus­sions cover 1,800 dis­eases, and for each of those dis­eases, they may

learn from hun­dreds or thou­sands of other pa­tients with sim­i­lar con­di­tions and their treat­ment meth­ods and ad­verse drug re­ac­tions.

2.4 In­te­grat­ing Pro­duc­tion Re­sources: All-In­clu­sive In­dus­trial Chain

In re­cent years, the In­ter­net in­dus­trial chain has ex­panded to all man­u­fac­tur­ing, ser­vice and in­for­ma­tion feed­back pro­cesses. In a typ­i­cal sit­u­a­tion, a con­sumer places an or­der with his mo­bile phone, and the In­ter­net au­to­mat­i­cally trans­mits the or­der and cus­tom­ized re­quire­ments to a smart fac­tory, which will pur­chase raw ma­te­ri­als and con­duct de­sign and man­u­fac­tur­ing. In each and ev­ery stage, con­sumers will be in­formed about the process and ex­press their sug­ges­tions. Af­ter the fi­nal prod­uct is made, it will be de­liv­ered to the con­sumer through the In­ter­net, and con­sumer feed­back will be given to the in­dus­trial chain pro­cesses. In this man­ner, the In­ter­net cre­ates a net­work-based man­u­fac­tur­ing or­ga­ni­za­tion en­com­pass­ing de­mand in­for­ma­tion, raw ma­te­rial pro­cure­ment, in­tel­li­gent man­u­fac­tur­ing, IoT dis­tri­bu­tion and cus­tomer ex­pe­ri­ence, which can be re­ferred to as an all-in­clu­sive in­dus­trial chain. Such all-in­clu­sive­ness is also man­i­fested in the ser­vice pro­vi­sion process. Take health­care ser­vices for in­stance. Health­care ser­vice providers of­fer wear­able health mon­i­tor­ing de­vices, and data is au­to­mat­i­cally an­a­lyzed. Any prob­lems iden­ti­fied will be re­ported to con­sumers, who may opt for re­mote di­ag­no­sis or make an ap­point­ment with their physi­cians. Pre­scrip­tion is­sued by a physi­cian will be au­to­mat­i­cally up­loaded and de­liv­ered by the phar­ma­ceu­ti­cal com­pany to the con­sumer’s home. If the con­di­tion is com­plex and re­quires long-term treat­ment, the pa­tient may pur­chase re­mote mon­i­tor­ing ser­vices, up­load his med­i­cal con­di­tions and seek timely guid­ance. By re­shap­ing the de­liv­ery of goods and ser­vices, the all-in­clu­sive in­dus­trial chain has greatly in­creased re­source al­lo­ca­tion ef­fi­ciency.

2.5 In­te­grat­ing Frag­mented Re­sources: The Shar­ing Econ­omy

The shar­ing econ­omy refers to a spe­cial type of plat­forms where in­di­vid­ual and cor­po­rate con­sumers sell their time, ser­vices or idle funds. The In­ter­net brings to­gether these frag­mented re­sources at al­most zero cost to cre­ate value and max­i­mize re­source uti­liza­tion ef­fi­ciency (Cao and Chai, eds, 2015). The ex­am­ples of Uber and Airbnb are well known to all. The shar­ing econ­omy emerged in a short pe­riod of time but has de­vel­oped rapidly thanks to its brand-new busi­ness model that brings ad­di­tional rev­enues to ser­vice providers. When some­one drives a car and there is an empty seat, he may ac­cept a pas­sen­ger to make money. The shar­ing econ­omy also pro­vides con­sumers with low-cost ser­vices, as those who share their be­long­ings, ser­vice ca­pa­bil­i­ties or idle time usu­ally charge less. In ad­di­tion, the shar­ing econ­omy also saves so­cial re­sources. In Bei­jing, there is only one per­son in over 80% of the cars on the road and seek­ing a pas­sen­ger to share the ride helps re­duce en­ergy and con­ges­tion. China en­joys spe­cial ad­van­tages in de­vel­op­ing the shar­ing econ­omy: China’s mo­bile In­ter­net pen­e­tra­tion rate is among the high­est in the world, and the smart­phone pay­ment func­tion is widely used among the av­er­age Chi­nese cit­i­zens. China has a huge pop­u­la­tion with a tremen­dous do­mes­tic tourism mar­ket, short-term rental mar­ket and other sharable mar­ket. Chi­nese in­vestors are en­thu­si­as­tic about the shar­ing econ­omy. In 2015 alone, a few shar­ing econ­omy start-ups such as Tiantian Yongche (rideshar­ing) and Tu­ji­awang (tu­jia.com) each raised funds worth over 100 mil­lion yuan. Given the sig­nif­i­cant in­come gaps be­tween ur­ban and ru­ral ar­eas, there is a large group of peo­ple who are will­ing to share their spare time, al­low­ing shop­ping agent and goods de­liv­ery ser­vices to be of­fered at low costs.

3. The­o­ret­i­cal Chal­lenges and In­no­va­tive De­vel­op­ment 3.1 Chal­lenges Fac­ing Tra­di­tional The­o­ries of Ser­vice-Based Econ­omy

(1) The ser­vice sec­tor is not a low-pro­duc­tiv­ity sec­tor. Cul­tural and psy­cho­log­i­cal de­mands are nat­u­ral de­mands of hu­man be­ings. But the cul­tural and en­ter­tain­ment in­dus­try did not emerge un­til af­ter the con­tem­po­rary era. A fun­da­men­tal rea­son is that the In­ter­net pro­vides di­verse and low-cost forms of

en­ter­tain­ment, un­leash­ing great con­sumer de­mand through sup­ply in­no­va­tion. Ac­cord­ing to tra­di­tional eco­nom­ics, mid­dle- and high-in­come peo­ple will more of­ten at­tend mu­sic con­certs, watch films or the­atri­cal per­for­mances, subscribe to books, etc., and their con­sumer be­hav­ior will lead to the rapid growth of cul­tural con­sump­tion. With the In­ter­net, mid­dle- and low-in­come con­sumers will have ac­cess to tremen­dous en­ter­tain­ment con­sump­tion at very low costs, and ser­vice providers have also de­vel­oped a busi­ness model based on click rate to in­cen­tivize ser­vice pro­vi­sion.

The tra­di­tional ser­vice sec­tor was a low-pro­duc­tiv­ity sec­tor since many ser­vice pro­cesses re­quired face-to-face pro­duc­tion and con­sump­tion at the same time and the same place and can­not be stored or traded over a long dis­tance. For in­stance, ed­u­ca­tion, health­care ser­vices, art per­for­mances and se­cu­rity ser­vices all needed to be pro­vided face- to- face and at the same time and place. Since ef­fi­cien­cyen­hanc­ing ma­chines and equip­ment can­not be em­ployed to in­crease the economies of scale, ser­vice sec­tor pro­duc­tiv­ity stag­nated at a con­stant level over the years. How­ever, the In­ter­net has trans­formed the method of ser­vice pro­vi­sion as well as the na­ture of ser­vices ( Kevin, 2015). Many tra­di­tional ser­vice sec­tors have de­vel­oped new busi­ness mod­els and are able to pro­vide ser­vices on a large scale. Long- dis­tance ed­u­ca­tion, MOOC ( mas­sive open on­line course), telemedicine, video­con­fer­enc­ing and elec­tronic se­cu­rity sys­tem en­able the ser­vices that could only be pro­vided at the same place to be pro­vided across time, space and even coun­tries. Over­all, pro­duc­tiv­ity of the ser­vice sec­tor as a whole has im­proved sig­nif­i­cantly and even out­paced the level of modern man­u­fac­tur­ing sec­tor in some cases. For in­stance, on­line video pro­grams and text in­for­ma­tion can be repli­cated nu­mer­ous times at min­i­mal cost with re­mark­able economies of scale and in­creased ben­e­fits al­most with­out bound­aries. No man­u­fac­tur­ing prod­uct man­aged to achieve such re­mark­able ef­fi­ciency gains.

As shown in the above anal­y­sis, the de­vel­op­ment of in­for­ma­tion and In­ter­net tech­nolo­gies has trans­formed ser­vice sec­tor pro­duc­tiv­ity. From the per­spec­tive of aca­demic re­search, how­ever, it en­tails com­pre­hen­sive and sys­tem­atic data ac­cu­mu­la­tion and quan­ti­ta­tive anal­y­sis to ver­ify the con­clu­sion that “the ser­vice sec­tor is not in­ef­fi­cient.” In­ter­ested schol­ars are en­cour­aged to pur­sue in-depth re­search.

(2) Pric­ing of in­for­ma­tion prod­ucts. Ac­cord­ing to the neo­clas­si­cal price the­ory, prod­uct price is de­ter­mined by a mul­ti­tude of fac­tors such as util­ity, av­er­age cost, mar­ginal cost and the sup­ply-de­mand re­la­tion­ship. Price will fluc­tu­ate within a cer­tain band ac­cord­ing to the sup­ply-de­mand re­la­tion­ship and grad­u­ally reach the “equi­lib­rium price,” i.e. the price when sup­ply and de­mand are equal. In the In­ter­net econ­omy, the con­di­tions of the tra­di­tional price the­ory have trans­formed. For in­stance, in tra­di­tional busi­ness ac­tiv­i­ties, the av­er­age costs of prod­ucts and ser­vices can be cal­cu­lated through to­tal in­put and to­tal out­put. Yet such cal­cu­la­tion is dif­fi­cult for in­for­ma­tion ser­vices. In­for­ma­tion ser­vices are usu­ally associated with high fixed costs, while mar­ginal cost is ex­tremely low and even close to zero. Given the dif­fi­cul­ties to es­ti­mate the av­er­age cost, mar­ginal cost and to­tal de­mand, as well as rapid mar­ket up­date, price volatil­ity will be fre­quent, and con­ver­gence to the equi­lib­rium point is dif­fi­cult to ob­serve. Hence, it is dif­fi­cult for the tra­di­tional price the­ory to ex­plain the real­ity of in­for­ma­tion ser­vices.

The ques­tion is how to price in­for­ma­tion prod­ucts. Af­ter the 1980s, this ques­tion be­came a ma­jor topic of re­search for in­for­ma­tion and In­ter­net eco­nom­ics. A com­mon view is that the unique cost struc­ture of in­for­ma­tion prod­ucts means that the pric­ing method in clas­si­cal eco­nom­ics no longer ap­plies (King, 1983; Lam­ber­ton, 1996; Hu­ber and Ru­bin, 1986). In his Eco­nom­ics of Net­work In­dus­tries, Shy (2001) clearly in­di­cated that given the neg­li­gi­ble mar­ginal cost of In­ter­net in­for­ma­tion prod­ucts, it makes no sense for In­ter­net in­for­ma­tion prod­ucts to be priced on the ba­sis of their cost and adopt­ing dif­fer­en­ti­ated pric­ing or sell­ing prod­ucts at low prices may yield higher prof­its. Af­ter­wards, peo­ple started to in­ves­ti­gate the pric­ing strate­gies of dif­fer­ent types of In­ter­net prod­ucts. Stud­ies in this field reached the fol­low­ing con­clu­sions. First, the price of the fi­nal prod­uct is sub­ject to the in­flu­ence of value, cost, and mar­ket sup­ply and de­mand, and In­ter­net in­for­ma­tion prod­ucts are no ex­cep­tion. Hence, they are sub­ject to sim­i­lar pric­ing fac­tors with other prod­ucts. Sec­ond, the price of In­ter­net in­for­ma­tion prod­uct is sub­ject to unique fac­tors of in­flu­ence, in­clud­ing prod­uct life­cy­cle, con­sumer pref­er­ences, sales meth­ods,

long-tail struc­ture, de­rived in­dus­try chain and dif­fer­ences in per­ceived value. Third, pric­ing strate­gies vary for dif­fer­ent in­for­ma­tion prod­ucts. While a few “pric­ing rules” can be fol­lowed, the pric­ing of each prod­uct is un­cer­tain and re­lated to the un­der­stand­ings of firms on the mar­ket, risk tol­er­ance, long-term de­vel­op­ment strate­gies and mar­ket­ing strate­gies.

(3) Trade-off be­tween pri­vacy pro­tec­tion and data use. In Au­gust 2016, the col­lege ad­mis­sion in­for­ma­tion of a girl in Shan­dong named Xu Yuyu was leaked to a tele­com fraud group, re­sult­ing in her death in an­guish. This in­ci­dent aroused strong pub­lic con­dem­na­tions. In the big data era, peo­ple’s in­for­ma­tion gets up­loaded to the In­ter­net whether they are aware or not. Such in­for­ma­tion cre­ates great busi­ness op­por­tu­ni­ties for com­pa­nies. But even if such in­for­ma­tion is not used to make a profit, most peo­ple do not want their pri­vate in­for­ma­tion to be leaked to the pub­lic. Pri­vacy pro­tec­tion thus be­comes a com­mon so­cial con­cern. Per­sonal med­i­cal in­for­ma­tion, for in­stance, is highly pri­vate in­for­ma­tion that pa­tients do not want to share with oth­ers, and still less do they tol­er­ate the use of such in­for­ma­tion by oth­ers to make a profit. Baidu sold the mod­er­a­tor po­si­tions of some Baidu Tieba pa­tient mu­tu­alas­sis­tance fo­rums such as Hae­mophilia Bar to phar­ma­ceu­ti­cal com­pa­nies, and the lat­ter posted dis­guised forms of med­i­cal and phar­ma­ceu­ti­cal ad­ver­tise­ments in the fo­rums. Since such in­for­ma­tion could mis­lead pa­tients, the fact that Baidu prof­ited from its on­line fo­rums be­came a scan­dal. Although Baidu made a for­mal apol­ogy by the end of 2015 and promised not to make any profit from its on­line fo­rums, its pub­lic rep­u­ta­tion and im­age has suf­fered great dam­ages.

As can be seen from sim­i­lar cases, per­sonal in­for­ma­tion from the In­ter­net must be strictly pro­tected and can­not be used with­out per­mis­sion. This is what reg­u­la­tory au­thor­i­ties are striv­ing to achieve as well. In 2012, the Euro­pean Union un­der­scored the right of data own­ers to delete their per­sonal data (“right to be for­got­ten”). This clause gives data own­ers the right to con­trol their on­line in­for­ma­tion. When they do not want their per­sonal data to ap­pear on the In­ter­net, it has to be deleted by the rel­e­vant com­pa­nies or or­ga­ni­za­tions. How­ever, the “right to be for­got­ten” also trig­gered a great deal of con­tro­versy among le­gal ex­perts, In­ter­net firms, schol­ars and the pub­lic. The value of big data lies in the fact that data can be shared. Cap­tur­ing and ag­gre­gat­ing huge vol­umes of data are the foun­da­tion of big data. Big data can­not de­velop if data collection is pro­hib­ited. For in­stance, drug man­u­fac­tur­ers need to learn about drug ef­fec­tive­ness through in­quiries and pur­chase in­for­ma­tion of pa­tients, and health au­thor­i­ties need to know about the in­ci­dence of a com­mu­ni­ca­ble disease through pub­lic on­line in­quiries. These “data cap­ture” ac­tiv­i­ties are con­ducted with­out in­form­ing the per­sons whose in­for­ma­tion is ac­quired by oth­ers. In a nut­shell, how to pro­tect data and pri­vacy with­out sti­fling the big data in­dus­try is a dilemma. Amid the con­tro­ver­sies, the Euro­pean Com­mis­sion en­acted the Gen­eral Data Pro­tec­tion Reg­u­la­tion (GDPR), which sets forth the prin­ci­ples and reg­u­la­tory meth­ods for the pro­tec­tion of per­sonal data. It in­cludes the right of data own­ers (users) to delete per­sonal data. This re­flects an ef­fort of the pub­lic and reg­u­la­tory au­thor­i­ties to pro­tect data pri­vacy with­out pre­vent­ing the use of data.

(4) Con­tra­dic­tions be­tween eco­nomic and so­cial values of “joy con­sump­tion.” In the In­ter­net era, “joy con­sump­tion” or con­sump­tion that meets cul­tural and psy­cho­log­i­cal needs has be­come an im­por­tant in­dus­try. But con­tro­ver­sies have al­ways ex­isted in re­spect of such con­sump­tion. First, peo­ple doubt whether it is worth­while to pay to get a sense of joy. Pur­suit of psy­cho­log­i­cal sat­is­fac­tion from lux­ury goods is con­sid­ered “van­ity” and detri­men­tal to fos­ter­ing a fru­gal way of life2. In many cases, peo­ple spend money to sat­isfy their psy­cho­log­i­cal needs, which may not be ra­tional needs. For in­stance, while it is eas­ier to find jobs with higher pays for grad­u­ates of vo­ca­tional schools and col­leges, par­ents are still send­ing their chil­dren to for­mal col­leges and uni­ver­si­ties. The rea­son is that Chi­nese cul­ture puts a great premium on get­ting a col­lege de­gree. Be­ing able to re­ceive a for­mal col­lege ed­u­ca­tion rep­re­sents

a psy­cho­log­i­cal need for many par­ents and stu­dents alike, be­cause they be­lieve that a for­mal col­lege ed­u­ca­tion will sat­isfy their in­tel­lec­tual pur­suit and pro­vide greater ca­reer po­ten­tials de­spite lim­ited ini­tial job prospects and in­comes upon grad­u­a­tion. This pa­per be­lieves that if goods and ser­vices are equally im­por­tant in eco­nomic de­vel­op­ment, cul­tural and psy­cho­log­i­cal con­sump­tion must be con­sid­ered equally im­por­tant with ma­te­rial con­sump­tion. While cars and home ap­pli­ances im­prove peo­ple’s qual­ity of life, on­line games give peo­ple a sense of joy, and higher lev­els of ed­u­ca­tion give peo­ple a sense of psy­cho­log­i­cal sat­is­fac­tion. Sat­is­fy­ing cul­tural and psy­cho­log­i­cal needs has be­come an im­por­tant pur­pose of con­sump­tion. Cul­tural and psy­cho­log­i­cal con­sump­tion will cre­ate value as long as con­sumers re­ceive a sat­is­fac­tory and joy­ful ex­pe­ri­ence and are will­ing to pay for it.

How­ever, peo­ple’s cul­tural and psy­cho­log­i­cal needs are highly com­plex. In ad­di­tion to the above­men­tioned pos­i­tive and con­tro­ver­sial needs, peo­ple like to show off their wealth, hunt for nov­elty, en­gage in con­spic­u­ous con­sump­tion and even be­come jeal­ous of oth­ers. Neg­a­tive psy­cho­log­i­cal needs in­duce peo­ple to pry into oth­ers’ pri­vacy, fab­ri­cate and dis­sem­i­nate ru­mors, and mock and vil­ify oth­ers. Whether peo­ple like it or not, such psy­cho­log­i­cal needs ex­ist ex­ten­sively. It is com­mon for ne­ti­zens to fol­low peo­ple who are wealthy, pow­er­ful and cel­e­brated. Ad­ver­tise­ments have been in­ten­sively placed to seek at­ten­tion, cre­at­ing all kinds of busi­ness op­er­a­tions, par­tic­u­larly in the en­ter­tain­ment in­dus­try (John­son and Chris­tensen, eds, 2008). How­ever, it is the­o­ret­i­cally dif­fi­cult and eth­i­cally doubt­ful to in­clude such in­for­ma­tion ser­vices in eco­nomic anal­y­sis and GDP ac­count­ing. How to deal with those needs in ser­vice sec­tor re­search and whether such out­put should be ex­cluded from ser­vice sec­tor statis­tics are con­tro­ver­sial ques­tions3.

This pa­per shows that the de­vel­op­ment of modern tech­nol­ogy, par­tic­u­larly In­ter­net tech­nol­ogy, is trans­form­ing the na­ture of the ser­vice sec­tor and pos­ing fun­da­men­tal chal­lenges to the the­ory on tra­di­tional ser­vice-based econ­omy. The the­ory it­self re­quires in­no­va­tion and de­vel­op­ment. In the big data era, peo­ple have ac­cess to tremen­dous sources of in­for­ma­tion, mak­ing it easy to carry out em­pir­i­cal stud­ies such as case anal­y­sis, sur­vey statis­tics and quan­ti­ta­tive anal­y­sis. In this field, nu­mer­ous stud­ies have been car­ried out with dif­fer­ent con­clu­sions. Many large firms cre­ated in-house re­search in­sti­tu­tions with their own re­search find­ings. It is by no means easy for the gov­ern­ment to judge whether new things and busi­ness mod­els are rea­son­able or not. In this sense, the­o­ret­i­cal re­search must be car­ried out to pro­vide assess­ment cri­te­ria, in­ter­pret the sig­nif­i­cance of events, iden­tify var­i­ous op­tions, re­veal pub­lic in­ter­ests and shed light on fu­ture trends. These rep­re­sent new re­quire­ments for the­o­ret­i­cal re­search in the in­for­ma­tion era.

Source: China’s Mu­sic In­dus­try De­vel­op­ment Re­port 2015.

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