TRENDS

How the rules are changing in a network economy

Early adopters are showing the way

Tony Waltham

New expressions are entering the English language as we struggle for metaphors to fit the radically new set of rules engendered by the so-called network economy.

Here are two examples overheard in a presentation on industry trends: "Compaq was `Delled' in its PC sales business," and "Barnes and Noble is losing out in an Amazon economy".

Both remarks referred to how massive sales have been achieved over the Internet by early adopters (Dell Computer and Amazon Books) and benefited these firms immensely _ and at the expense of traditional suppliers.

The phrase "network economy" refers to a set of new rules as they apply to the business world that is emerging around the Internet, which is an environment that is entirely different from the conventional world around us.

It differs from the physical world in several fundamental ways, the most significant being the one that is the most tangible: any digital product, that is to say software _ be it a computer program, music or other content _ effectively costs nothing to produce once it has been created.

And, unlike in the analogue world, the copy is perfect and as good as the original.

With the Internet, you also have a delivery mechanism that means that it effectively costs nothing to deliver such a product to a customer _ and the cost is still the same (effectively nothing) whether there is a single customer or a million customers.

And the more people or customers that use or buy such a digital product, the more valuable that product becomes because of the shared experience.

If we look at software, we can see how Microsoft has gained from having the majority of PC users use its office suite _ or its Internet Explorer browser, which recently overtook Netscape Navigator in market share.

It is not only the revenue (this helps, of course). It is by having such a huge user base that the company gains in power and influence, and the ability to turn this into new revenue streams.

Indeed, the phenomenon of software sales and distribution and the associated economics of the business gives us an early insight into how the network economy works.

The fact that Bill Gates, CEO of Microsoft, is the richest man in the world (and getting richer) is no accident. He has been a direct beneficiary of the rules of the network economy or, if you like, of what has been called the law of increasing returns.

And if you look at the huge wealth that Internet-focussed companies and their stakeholders are being able to attain by stock market IPOs in the US, you are looking at the shared perception of investors that there is a huge amount of money out there for those who succeed in the network economy.

PC software was probably the first product to follow the largely-unwritten rules of the network economy, with the early "network" that was used being the physical distribution of floppy disks or CD-ROMs and dealers around the world.

But as this network has been superseded by the Internet, so many other services have sprung up _ and are springing up _ around this remarkable new environment.

Software is a relatively simple example of how, the more a product is sold, the cheaper it costs to make each unit (because you only have the one-time development cost). But there are many other services springing up in the network economy that follow the same or similar rules.

These are where the expressions "Delled" or "Amazon economy" come from. Both refer to companies that have pioneered selling products over the web that were traditionally sold in conventional ways (computers and books). They have clearly backed a winner, and others are following suit.

It is also fair to predict that many more products will be sold in this way _ using the Internet as a medium or through electronic commerce _ and there will doubtless be many other categories of products that will be added to the list (and many more companies that will benefit).

We also need to look at how or why the Internet exploded upon us and caught so many people by surprise.

For this we need to remind ourselves that it was the rapid pace of technology that enabled this, with the dramatic improvements in computer hardware that were made possible by what is known in the industry as "Moore's Law."

Moore's Law states that microchip circuitry doubles in capacity every 18 months, and it has fuelled the IT revolution for the past 30 years or so. It has enabled the processor chips, the memory chips and the modems and other circuitry to become both more complex and faster and also to shrink in size.

And it is this that has mostly brought us the rapid increases in bandwidth, data storage and processing power that we enjoy today. Without it a communications medium like the Internet could never have attained the popularity that it now enjoys.

One should never under-estimate the impact when something doubles over a fixed period of time, for invariably this kind of exponential growth will catch us by surprise.

But, what happens if we take this principle and then apply it to other forces that are driving the electronic economy?

Andersen Consulting's managing partner for worldwide research, Joe Carter, believes that we can apply the dynamics of Moore's Law to three other forces that are driving the electronic economy _ and that this will have wide-ranging ramifications.

He argued recently that a rapid increase in bandwidth that allows content to move faster will mean that transportation, real estate and labour will all be subject to similar dynamics.

At the Sun Microsystems JavaOne conference in San Francisco recently, he said that an electronic storefront was the equivalent of real estate, an electronic agent searching for information and better content (making people smarter) was the labour component, while video conferencing would replace travel in many situations.

If we link labour, real estate and transportation to high technology, which itself is undergoing remarkable evolution and change, then these aspects of the economy would come under the same fundamental rules that have influenced and continue to influence the computer and communications industry, he said.

He argues that as these sectors become more closely tied to continuing advances in bandwidth and storage capacity, so these important aspects of businesses and economies today will undergo fundamental changes that will have far-reaching significance.

Along with this prediction, he also believes that the nature of business will change. When buyers have perfect information, Carter believes that we might move from a sales environment that is centered around the seller, such as a shop or bazaar, to one that is buyer-centric. Buyers would then announce what they wanted, and sellers would bid to provide the product.

What if doing business between companies was cheaper than doing business within a company? What if the velocity of information doubled? Already, the delay between an event and the reporting of it is dropping rapidly, and he said that this was influencing the rate of corporate change. Business executives would need to be prepared to change, and as the pace of change becomes faster, being a "first follower" in adopting a business idea would not be enough _ companies would have to be "first movers".

With such a scenario, electronic commerce as we know it today is probably just a humble beginning.

Finally, for those interested in a definition of e-commerce, here's one from the US Department of Commerce:

"Electronic commerce is a means of conducting transactions that, prior to the evolution of the Internet as a business tool in 1995, would have been completed in more traditional ways _ by telephone, mail, facsimile, proprietary electronic data interchange systems, or face-to-face contact. Indicators gathered from a variety of private sources show rapid growth, not only in current e-commerce, but in the infrastructure that will support future e-commerce development."