Research note

The dynamics of web economics

In The World is Flat, Thomas Friedman described the new ‘flat’ business environment in which, thanks to digital communications, globalization is a reality and we now work in a turbo-charged environment where competition is global, business goes where the talent is, and lifetime employment has been replaced by life employability. (Thomas Friedman, The World is Flat, 2006)

The stress on digital communications in creating this new ‘flat world’ means that the Internet has become one of the primary ways of engaging in the new global economy. What does it mean to design strategy in a hyperlinked world? In particular, what are the economics of doing this? Various authors have offered descriptions of the new dynamics of information economics and how they flip previous strategic assumptions. Here is an outline of some of the most significant of the principles they identify.

Information wants to be free. In the digitally connected world, information and information-based products such as software, entirely unlike man ufactured physical products such as cars, can be replicated at zero marginal cost once the initial investment to create them has been made. This can mean, as the music industry has discovered, serious disruption to existing ways of doing business. The tendency with zero cost reproduction is that information breaks free of existing business models and often becomes free in monetary terms as well, an effect that Stewart Brand described as ‘information wants to be free.’ Although the initial effect may be to make the in formation content free, this does not mean that commercial opportunities for content disappear. Instead they transform. Although some musicians such as Radiohead found Napster, the free music file sharing service, useful as a form of promotion, the established music business fought it vigorously in the courts, leading to its bankruptcy and closure. Meanwhile, Apple made use of exactly the same information technology principles to rein vent the music business in the form of iTunes and the iPod.

To create this kind of transformative innovation means resolving a central dilemma presciently described by Stewart Brand in the late 1980s:

‘Information wants to be free because it has become so cheap to dis tribute, copy and recombine—too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away. It leads to endless wrenching debate about price, copyright, “intellectual property,” the moral rightness of casual distribution, because each round of new (technological) devices makes the tension worse, not better.’ (Stewart Brand, The Media Lab, 1987)

The answer, in part, is expressed succinctly by Chris Anderson in his blog, ‘Free is more complicated than you think.’ He says, ‘Unlike simply selling what we make, free requires creative thinking about how to make moneyaround what we make.’

The Long Tail. This phrase was coined by Chris Anderson in a Wired Magazine article in 2004, later extended into a book, The Long Tail (2006). The ‘long tail’ refers to a well-known feature of statistical distributions in which a high-frequency or high-amplitude population is followed by a low-frequency or low-amplitude population which gradually tails off. The infrequent or low-amplitude events—the long tail—can make up the ma jority of the graph. Anderson’s message was that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough.

Anderson points to research by E. Brynjolfsson, Y. Hu, and M. D. Smith, who analyzed the relationship between Amazon sales and Amazon sales ranking and found a large proportion of’s book sales come from obscure books that are not available in bricks-and-mortar stores. In a 2003 article these authors showed that, while most of the discussion about the value of the Internet to consumers has revolved around lower prices, consumer benefit from access to increased product variety in online book stores is ten times larger than their benefit from access to lower prices online. Thus, the primary value of the Internet to consumers comes from releasing new sources of value by providing access to products in the long tail.

The main Long Tail themes for business are:

• There are far more niche goods than ‘hits’

• The cost of reaching the niches is falling dramatically

• A massively expanded variety of products can now be offered

• Consumers need ‘filters’– tools that drive demand into the tail

• With variety and filters the demand curve flattens

• Total niche sales rival a market of hits

• All this reveals the natural long tail shape of demand

And Long Tail opportunities are tapped by:

• Democratizing production

• Democratizing distribution

• Connecting supply and demand (reducing market friction)

Web-native information content is ‘miscellaneous.’ In his book Everything is Miscellaneous (2007), David Weinberger described new principles for the organization of digital content that depart from the usual assumptions about information. These assumptions are that all information needs to have a logical place where it can be found, in a category in a storage system, and that the management of information is essentially the management of categories, and that this requires expertise. Set against this, Weinberger argues that digital storage of information does away with the usefulness of categories, and that instead it becomes more useful when it is thrown into a big digital pile to be filtered and organized by the users themselves. This leads to what he calls four new strategic principles that break the similarity between the way we organize physical objects and ideas:

1 Filter on the way out [by user selection], not the way in [by expert alloca tion to categories].

2 Put [list] each leaf [of information] on as many branches [under as many categories] as possible. [In the physical world this would make things more disorganized and more difficult to find, but in the digital world it makes information more findable, usable and profitable.]

3 Everything is metadata and everything can be a label. [In the physical world there is a distinction between goods and their labels, but on the Web there is no distinction. Every word of content can act as a description, al­lowing a search for any sub-groups of those words to link to the rest of the content, for example a book.]

4 Give up control. [The range of combinations and associations that users will make between items of information cannot be foreseen, so it is more powerful to let them organize it themselves.]

Richness and Reach. In their 1997 HBR article (September-October) and their 1999 book Blown to Bits, Philip Evans & Thomas Wurster suggest some further insights into business logic in the information economy.

1) In the past, business strategy had to trade off ‘richness’ of information delivered—its bandwidth, degree of interactivity and customization, and its ‘reach’—the numbers of people able to access the information. Digital information technology now eliminates this traditional trade-off.

2) The end of this trade-off affects not only information products but also the way transactions are conducted internally and externally by companies. Previously, rich information was routed through hierarchically organized channels, which limited availability and degree of choice. Economic actors are now hyperlinked directly to each other, bypassing the constraints of hierarchical channels and forming a ‘hyperarchy’ that deconstructs tradi tional industry structures, business models and value chains.

3) The end of the trade-off allows lower transaction costs in very large social networks but only if trust is present. Traditionally trust was built up through direct personal experience of social reciprocity (reciprocal trust). It can now be based on social software that aggregates reputation (reputa tional trust). (Philip Evans, BCG Perspectives, 2004, 2005, 2006.)

Taken together, all these ‘new rules for the new economy’ (to borrow the phrase coined by Kevin Kelly) challenge many existing business concepts and must become an intrinsic part of almost all new business models. They therefore form an essential part of strategic thinking for the new ‘flat world.’