When formulating a plan to use the Internet for business, we must first fully understand how business has historically been transaction-oriented and how the Internet affects that orientation. Six primary business concepts have been uniquely combined by the existence of the Internet:
- The economics of information
- internet competition
- The "lane" network concept
- The virtual economy
- The e-lance economy
- The information infomediary
Once these concepts and how they relate to each other are understood, we can define for ourselves what we want from doing business on the Internet for decades to come.
The Economics of Information
Before we can make money, we need to know what it is that we're selling. The hallmark of the 20th century in terms of business in general was the leveraging of the industrial revolution and the economy's resulting rapid growth, relying on steadily improving "mechanized" technology. In just over a hundred years, most of the world went from agrarian, individualized economies based on close cooperation among farmers, landowners, and markets to an economy based on rapid movement of both information and goods. The growth of an industrial-based infrastructure redefined the main units of the agrarian economy from a farmer/landowner relationship to the consumer/firm relationship.
In an agrarian economy, a single farmer would work either independently or with a group of other farmers to sow, nurture, and reap basic foodstuffs and cash crops. Farmers provided labor, landowners supplied land, and merchants provided both farmers and landowners with access to internal and external markets. How the food was grown and harvested, how the farmers provided for themselves and their landlords, and how the goods reached outside markets was left entirely to whatever arrangements these groups decided best met their mutual needs. Of course, this led to highly regional economies scattered no more than a few miles apart. Intertwining these autonomous economies was difficult geographically. There was mass trade, but localized economies were the heart and soul of every national, religious, or social state for centuries. Feudal Europe is a prime historical example. A common landlord allowed tenant farmers access to land to grow foodstuffs and other useful items to trade at a centralized marketplace. As marketplaces grew, so did the communities. Today, the shopping mall is a prime example of a concentrated localized economy in a specific geographical region. The technology of the automobile has made it feasible to build a mall pretty much anywhere.
During the last century, the advent of wind cutters, steamboats, railroads, the telegraph, and the telephone meant that geographic barriers could be circumvented. Individual businessmen now found that they could maintain cause-and-effect relationships across mountains, rivers, and oceans that they themselves never crossed. The functions of trade and commerce were compartmentalized or absorbed. The hierarchical industrial corporation was born, subsuming a broad array of functions and often a broad array of businesses, quickly maturing to become the dominant organizational model of the 20th century.
Another hallmark of the 20th century was the subtle change of value from material goodsfood, clothing, shelter, and the liketo include a less tangible but no less basic item, information. As information has flown from region to region more freely and much more broadly, it has developed an economic value all its own, defining the Information Age. The economics of information provides the vast frontier of economic opportunity that gives life to the hype surrounding the Internet.
What Gives Information Its Initial Economic?
If the Internet is based on a free global network that's available to anybody, how can real economic value be extracted from the Internet directly?
The answer is simple. The economics of information are not the same as the traditional economics of goods and servicesthat is, so many units of one good (whether barter or money) for so many units of another good. Information, for the most part, has no units; the value of information is decided upon singularly, not collectively. One person may desperately need to know the latest bit of news or a stock quote and would gladly pay dearly for it; the next person wouldn't give a single penny for the same information. In a barter system, there is usually some universal sense of value for three pigs or two bushels of hay. With information, you're more likely to be dealing with a market of one, not the classical invisible hand of a free and more universally accepted market. With the business of information, the seller and buyer decide for themselves what's of value and what isn't.
The new economics of information can change the rules of competition, allowing new players and products to render obsolete traditional sources of competitive advantage, such as a sales force, a supreme brand, or the world's best content. The new economy more closely resembles the agrarian economic model than the industrial. The scale of value has returned to small groups and individuals.
Corporations taking a traditional view of the Internet will discover that the old methods of doing business don't work. You can't assume that a unit of information is going to provide $10 of value for each consumer. And you can't predict value using traditional economic indicators such as unit costs, marginal cost, or marginal utility. As more and more companies launch Internet sites for distinct services rather than for a new form of access for the buying and selling of goods and services, thousands of new business models have been created worldwide, not just in the U.S.
Selling information over the Internet is a whole new ballgame, but still a ballgame in which anyone can play. The catch is realizing that since there are no rules, the new game is to define the rules. In other words, if you want to move beyond simply allowing people to buy goods online (a noble and perhaps profitable goal in and of itself) to actually creating whole new businesses, you must first define and follow through on new rules based on old principles.
The traditional corporate structure depends on independent networks under one name and one system of management. These separate networks work together to gather, create, and distribute the materials that comprise a business. The automobile industry is a classic example of such a system. A single automobile corporation is divided into a number of divisions, each responsible for its own profitability. Each division, in turn, is broken down into various departments with their basic areas of responsibility and accountability. Each department, division, or business is ultimately judged as profitable depending on its economic performance over time. Collectively, they determine the economic value of the corporation as a whole.
Although separate and sometimes unique, each department ultimately depends on exchanging information with the departments, business units, vendors, and clients with which it interacts. In doing so, these individual units create internal networks that expedite goods and services internally and externally. This defines the organizational value chain of the modern corporation.
Information, like any product, can be manufactured, packaged, and distributed. Once distributed, it can be marketed, and the traditional business concepts of marginal and unit cost and value are in effect once again. What changes with the Internet is the network defining the distribution of information. We no longer have to rely on transportation routes and shelf space to get the product to market. We simply "post" it on a server, and it's made available to anyone with access to cyberspace. Once everyone is connected electronically, information can travel by itself.
What's truly revolutionary about Internet connectivity is the possibility of "unbundling" information from its physical carrier. We can now define a direct value-relationship between the information offered and whoever is interested in the information. In other words, there's no middleman to consider. Information can be split into two simple categories: information interesting to a few, and information interesting to many. Most information falls somewhere between, but can be valued using the following definitions:
Reach describes who and how many receive the information. Information can be extremely valuable to one person and completely useless to another. Some information can have little value to any one individual but can be extremely valuable to large groups. For example, commodity traders specialize in the buying and selling of soybeans. One of the largest soybean farms in the world just lost half of its crop due to fire. This kind of information would have vast implications to all soybean traders, particularly the one who hears the news first. Anticipating an inevitable rise in soybean prices, any trader can buy up soybeans at the current price before the news becomes widespread. When the news reaches the public, the trader could expect a considerable profit. But for me or you, except for possible empathy for the soybean farmer losing his crop, the news means very little in terms of personal gain, at least for now.
Richness describes what kind of information is being networked and in what form it can be delivered. Richness can be grouped into two general categories: Customized information is tailored to specific or general audiences. Interactivity describes how the information is targeted for those audiences. For example, a dialogue defines information interactivity by small groups; a monologue defines interactivity directed to large groups. In a dialogue, two people find the exchange of ideas, knowledge, or feelings valuable when shared only with each other. To these two, the information network is "rich" in value. In a monologue, certain information is extremely valuable only when disseminated to large groups, and thus offers "reach" as its value.
Information economics is the tradeoff of richness and reach. If graphed, its mathematical representation looks strikingly similar to the classical supply-and-demand curve, as shown in Figure 1.
Figure 1 The traditional network richness/reach curve.
Mathematically, this diagram infers that the relationship is exponentially inversely proportional; the higher the reach, the lower the richness, and vice versa.
Traditionally, it was thought that the following axiom applied to all networks: Communication cannot be rich and broad simultaneously. Loosely translated, this is the reason why a cable network company provides valueeveryone on a very broad scale wanting access can have access, as long they're willing to pay. A cable network has reach. Conversely, the Reuters news service is more or less limited by price and accessibility to financial professionals. Since Reuters concentrates solely on financial information, it's valued for its richness.
But what happens when that rule no longer holds true? What if cable companies could broadcast specific shows to specific audiences at very specific times? Conversely, what if Reuters could provide financial information to anyone, regardless of whether they were in the world of finance or not? Part of the economic value of the corporate structure is that its internal structure provides the basic network required to do business less expensively than external networks. External networks, in turn, are composed of corporate entities providing their own internal networks as an external service or good to parties willing to pay.
The boundaries of the corporation are set by the economics of exchanging information: Organizations enable the exchange of rich information among a narrow, internal group; markets enable the exchange of thinner information among a larger, external group. The point at which one mode becomes less cost-effective than the other determines the boundaries of the corporation. However, through the Internet, this tradeoff is being blown up!
How does a corporation regain cost control of the information exchange between organizations and markets? By defining the rules of the exchange. Technical standards underlie the so-called Internet technologies and their growth. Most of these standards are "open," meaning that anyone can access, support, and expand the Internet and its content according to those standards. This is how the Internet can send very specific information to a very broad audience. Over time, organizations and individuals will be able to extend their reach by many orders of magnitude, often with a negligible sacrifice of richness. Picture a multichannel world, in which knowledge, entertainment, and services are reachable from a single location, 24 hours a day. At your desk at work, you can pay your phone bill, renew your driver's license, watch the opening round of the Masters, follow stocks on Bloomberg, and talk to your spouse, business associates, and friends, all on one device.
More importantly, companies will no longer have to maintain an expensive and closed infrastructure to support their own information value chains. The replacement of expensive, proprietary legacy systems with inexpensive, open extranets will make it easier and cheaper for companies to, for example, bid for supply contracts, comprise a virtual factory, or form competing supply chains nationally and internationally at a fraction of the cost.