Rethinking the Network Economy: The True Forces That Drive the Digital Marketplace

Overview

"Once upon a time, it was widely thought that Internet commerce could exist apart from traditional business strategy, and that all the known financial models previously relied on could be disregarded.

What has become eminently apparent since the dot-com collapse is that standard economic theories apply to Internet business just as much as they do to any other enterprise. Many dot-coms have failed, but e-commerce isn’t going away, and business leaders need to understand what went wrong in order to dominate in the ...

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Overview

"Once upon a time, it was widely thought that Internet commerce could exist apart from traditional business strategy, and that all the known financial models previously relied on could be disregarded.

What has become eminently apparent since the dot-com collapse is that standard economic theories apply to Internet business just as much as they do to any other enterprise. Many dot-coms have failed, but e-commerce isn’t going away, and business leaders need to understand what went wrong in order to dominate in the real new economy. Rethinking the Network Economy examines exactly where, how, and why so many e-commerce firms went wrong, and how, utilizing traditional economic concepts, businesses can build the foundation for success in the future. The book analyzes issues such as:

• How tried-and-true formulas such as network effects, first-mover-wins, and supply-and-demand relate to e-businesses

• Why companies counting on locking in consumers will need to rethink their strategies

• When selling products over the Internet makes sense (and when it doesn’t)

• The dangers of comparing profits of brick-and-mortar firms with Internet firms"

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Editorial Reviews

Publisher
It is the best book to date on the fallacies of the e-commerce craze.
Customer Relationship Management
author analyzes such issues...as how companies can use traditional economic concepts to build a foundation for e-business success.
Yale Global Online
provides an eloquent crash course on internet advertising...Liebowitz's analysis is useful
New Architect
Re-Thinking the Network Economy will enlighten investors and managers alike.
Soundview Executive Book Summaries
The Internet changes everything! Or so claimed the legions of over-excited Internet boosters who saw in the new technology the overthrow of all the old rules of economics and business.

In Re-Thinking the Network Economy, Stan Liebowitz, an economist and a professor of managerial economics at the University of Texas at Dallas, explains why the dot.com bust was inevitable. The theme of his book, however, is not, "I told you so!" but rather, "Here's what will work." The Internet does offer many incredible business opportunities, Liebowitz writes, as long as businesspeople and their advisors don't ignore the traditional, fundamental concepts and strategies of commerce and economics. The laws of supply and demand still hold true. Economies of scale are still pertinent.

The rules, in sum, still apply.

In Re-Thinking the Network Economy, Liebowitz examines the economic forces relevant to Internet commerce, thus identifying the models and strategies that have the greatest chance of success.

The Internet provides advantages and disadvantages to the consumer. The advantages include a large selection, no lines at the register and perhaps lower costs. The disadvantages include the inability to see and touch what you are buying and the lack of instant gratification — you have to wait to receive your product.

To know which products are more likely to sell on the Internet, you have to take the following product characteristics into consideration:

  1. Size and Bulk Relative to Value. Some products, such as cement, are large and bulky compared to their value. Others, such as diamonds, have a very high value compared to their bulk. Obviously, the products with a high value to bulk ratio are more likely to be shipped over long distances than products with a low value to bulk ratio.
  2. The Immediate Gratification Factor. Many products are bought on impulse, with the buyer wanting to enjoy that impulse purchase immediately. The built-in delay of e-commerce doesn't offer this immediate gratification.
  3. Perishability. Perishable items, such as many foods, are not made to be shipped over long distances.
  4. Experience Products. Some products need to be experienced — for example, you want to sit in a car and test drive before you buy it. The Internet does not offer this experience opportunity.
  5. Thin Markets. Some niche products have very few buyers in a market. For example, very few people in Virginia want the food products to make Algerian desserts. Internet-based companies, for whom the geographic massing of customers is irrelevant, have an advantage if they are selling to thin markets.
  6. Taxes. The Internet offers a tax-free haven for out-of-state customers. Eventually, however, this tax protection will probably disappear.


Given the characteristics above, three types of products are most compatible with full-fledged e-tailing.

The first is digitized products — that is, products that are inherently digital, such as computer programs, or that can be digitized, such as music, movies and other pure-information products. Digitized products have no bulk but high value, and don't have to be "touched" before the purchase. Internet delivery of music and movies — the latter to be downloaded onto DVDs — will replace the traditional delivery channels.

The second type of product compatible with e-tailing might involve what can simply be characterized as information. Examples include airline, car and hotel reservations, stock purchases, news retrieval and classified advertising. This type of information can be transmitted more quickly and economically by the Internet than by phone or mail. However, the service provided over the Internet must be equal to the service provided by a live operator.

The third type of products compatible with Internet retailing are books and CDs. Unlike music, digitized books will not replace the traditional paper product any time soon. However, the sale of books over the Internet is another story. Books do not have to be experienced, and most people can wait a few days for them to arrive by mail. Shipping costs can be a problem, but buying several books at a time can make the costs of shipping relative to value reasonable. CDs are less bulky and, for the same reasons as books, are good candidates for e-tailing.

It is unlikely that advertising revenue based on the broadcast television model can support all of the Web sites counting on it. A better solution is the cable television model, which is a hybrid of advertising and subscription. Magazines and newspapers also use the hybrid model. The advantage of the hybrid model is obvious: It is a dual revenue system, so you are not dependent on one source of revenue. Instead of counting on banner ads, Web sites should start experimenting with small subscription fees — these subscription fees are where the major revenue increases will come from in the future.

The issue at the core of copyright law (and any intellectual property law) is the degree to which the copyright holder can appropriate the value produced by the consumption of his or her work. In other words, what percentage of all the money made from a song should go to the copyright holder?

The issue of appropriation of value involves a tug-of-war between consumption efficiency (allowing consumers to enjoy the benefit of the copyrighted work) and production efficiency (ensuring that creators of copyrighted work have an incentive to create). For example, if creators get no or little revenue from the work, they will have less incentive to create. On the other hand, copying a work might bring that work to more people, thus increasing consumer efficiency — providing goods to consumers who want them.

Digital Rights Management (DRM) technologies, which prevent unauthorized copying on a large scale, should reduce any harm incurred by copyright holders as a result of copying technologies. As with the movie studios, music companies will find that the inexpensive copying made possible by the Internet (DRM attaches a price to the copying) will prove to be a boon to the industry. The distribution of music through the Internet will benefit both producers and consumers (to the detriment of bricks-and-mortars record stores). The industry just needs to find the right pricing strategies. For this, it should learn from the movie industry, which discovered that it could make much more money selling videos at $20 instead of $100. Copyright © 2003 Soundview Executive Book Summaries

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Product Details

  • ISBN-13: 9780814406496
  • Publisher: AMACOM Books
  • Publication date: 9/28/2002
  • Pages: 256
  • Product dimensions: 6.30 (w) x 9.10 (h) x 1.00 (d)

Meet the Author

Stan Liebowitz (Dallas, TX) is a respected economist and a professor of managerial economics at the University of Texas at Dallas. He is the coauthor of Winners, Losers & Microsoft.

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Table of Contents

"Chapter 1: Introduction

Chapter 2: Basic Economics of the Internet

Chapter 3: Racing to Be First: Faddish and Foolish

Chapter 4: The (Non-) Ubiquity of E-Tailing?

Chapter 5: The Value-Profit Paradox: The Cruelty of Competition and Internet

Chapter 6: Can Advertising Revenues Support the Net?

Chapter 7: Copyright and the Internet

Chapter 8: Conclusions: Whither Supply and Demand?"

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Sort by: Showing 1 Customer Reviews
  • Anonymous

    Posted October 5, 2002

    From Sept 28th Issue of The Economist

    From Economic Focus Column: IN THE late 1990s, firms bet billions of dollars on a theory that turned out to be wrong. It said that in e-commerce, what mattered most was being first. Don't worry about being best, if that slows you down. Sell your product at a loss, give it away, pay people to take it: just build your base of customers fast. Why? Because the weird economics of the Internet-network effects, enhanced economies of scale and lock-in-gave a decisive advantage to first-movers. Now that something approaching 100% of the Internet economy's first-movers have gone bust, this theory looks less plausible. Yet the logic once seemed persuasive. Where exactly did Internet economics go wrong? A new book by Stan Liebowitz, a professor of economics at the University of Texas at Dallas, and a long-time sceptic of the view that the Internet changes all the rules, gives the most thorough answer so far. "Re-Thinking the Network Economy" explains what the Internet did change and what it did not, so far as economics is concerned-and it does so in a witty and accessible way. Dr. Liebowitz covers a lot of issues: the exaggerated advantages of Internet retailing over conventional retailing; the false claim that the Internet's lower costs would give Internet firms bigger profits; the inadequacies of the broadcast -television model of advertising revenues; the poorly understood questions of copyright and digital-rights management. It is the best book to date on the fallacies of the e -commerce craze.

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