Predicting the behaviour of consumers has become crucial for the internet giants as they develop strategies. That is why economists are suddenly in demand.
Silicon Valley goes on recruitment drive
The internet giants Yahoo, eBay and Google are racing to hire economists from the world's best universities. The new love affair between silicon geeks and bespectacled academics is motivated by the need to predict consumer behaviour more accurately.
Yahoo was one of the first Silicon Valley behemoths to view economists as technology's secret weapon. Preston McAfee, the Yahoo chief economist, joined the company in 2007 and now leads a seven-member team of PhD economists and algorithmic scientists.
"Engineers are pretty nice people, and they assume the rest of the world is pretty nice like them," Mr McAfee says. "But that's not the way most people are."
He believes that economists will bring a much-needed dose of cynicism to internet companies' strategies. Yahoo and its rivals are trying to outbid one another to tempt economists away from their university ivory towers to work on specific technology projects.
"If you build software assuming that's the way people are, it will get heavily spammed. So one of the roles that economics plays at Yahoo and other tech companies is to [make us] be just a little more suspicious about human nature," Mr McAfee says.
Hal Varian, an economist, is also believed to have helped Google to develop the auction process that powers its multibillion-dollar search advertising revenue stream.
Eric Brill, eBay's vice president of research, says executives are excited about how economists can help untangle and commercialise the intricacies of the company's vast online market.
"What a lot of us are realising more and more is that the ecosystem is much, much more complicated than what we had thought," Mr Brill says.
But analysts believe the reason that internet giants are acquiring economists is to crunch the oceans of data their websites generate about customers and their spending habits.
"Google, Yahoo and eBay generate vast amounts of granular behavioural data across a broad set of demographics and price conditions," said Adrian Drury, an analyst at the research company Ovum. "This is a rich seam for economists and econometricians.
"If they are increasing their investment in economists, it may be because they are looking to extract additional insight from the vast seas of consumer data they are generating with a view to feeding this into product and pricing strategy."
But there is a growing scepticism among some industry watchers concerning the ability of economists to accurately forecast the behaviour of online customers, given that economists did not foresee the current financial crisis.
The Anthem Press paperback Why the Economists Got It Wrong: The Crisis and Its Cultural Roots, published in August, illustrates the development of the financial crisis and traces its cultural origins in mainstream economics. There is a growing feeling of irony among some industry watchers at the prospect of seeing IT companies hire economists to try to extricate themselves from a crisis originally caused by wildly over-optimistic predictions.
A bitter joke doing the rounds in Silicon Valley emphasises this view: a physicist, a chemist and an economist are stranded on an island with nothing to eat, when a can of soup washes ashore. The physicist says: "Let's smash the can open with a rock." The chemist says: "Let's build a fire and heat the can first." The economist says: "Let's assume that we have a can-opener."
There is little doubt that if economists could make accurate predictions they would be a huge asset to internet companies. But that is a very big "if". There is a growing cynicism in Silicon Valley about the ability of economists to make scientifically accurate predictions and a belief that economics is not a real science in the way that designing microchips or writing computer programmes is.
But as the financial industry knows well, complex predictions and data analysis are useful marketing tools, whether for convincing shareholders a specific strategy is the only rational course available or simply telling advertising clients how successful a particular strategy is. The hiring of economists at Yahoo is a way of generating the kind of data likely to appeal to advertisers.
Yahoo declined to give hard details on the number of economists it is hiring or on their new role in the company. But Dana Lengkeek, a Yahoo spokeswoman, confirmed that the company wants to prove to big-brand advertisers such as Procter & Gamble that its display advertising is effective. Yahoo believes that the best way to achieve this is to analyse some of its vast quantity consumer data. Silicon Valley economists claim that by creating what are essentially spreadsheets forecasting consumer behaviour, they can enable IT companies to predict the commercial effect of any specific proposed strategy change.
This also offers a way for internet companies to try to prove to advertisers that their online advertisements also make a difference to their retail sales.
David Reiley, a Yahoo economist, recently studied more than 1 million Yahoo users who, matched by their e-mail addresses, were also shoppers at a major national retailer. Total revenue increased by about 5 per cent for the retailer among shoppers exposed to an online advertisement.
However, scientists in general and software engineers in particular are wary of a "science" that deals in assumptions more than in tested facts. They point to the way in which Rupert Murdoch, swayed by over-optimistic economic predictions of consumer behaviour, tried to charge for the previously free website MySpace and inadvertently encouraged users to switch Facebook, at the time a social-networking newcomer.
A possible repercussion of the hiring of economists could be further attempts to charge for certain internet services while using privileged customer data, an area in which the internet industry has already had its knuckles rapped for new marketing and advertising strategies. The danger is that a combination of what many already see as unacceptable invasions of privacy by internet companies and an increase in the number of paid-for services online could ultimately be annoying for many previously loyal users.