Network Economy
One term used to describe the emerging economic order within the Information Society is the Network economy. This stems from a key attribute - products and services are created and value is added through social networks operating on large or global scales. This is in sharp contrast to industrial-era economies, in which ownership of physical or intellectual property stems from its development by a single enterprise. Business models for capturing ownership rights for value embedded in products and services created by social networks are being explored.
The Network Economy may be viewed from a number of perspectives: transition from the industrial economy, digital and information infrastructure, global scale, value networks, and intellectual property rights.
From a transitional point of view, Malone and Laubacher (1998) indicate that the Information Revolution has changed the nature of business activity. Because information can be shared instantly and inexpensively on a global scale, the value of centralized decision making and expensive bureaucracies is greatly diminished. Brand (1999) points out that commerce is being accelerated by the digital and network revolutions and that the role of commerce is to both exploit and absorb these shocks. Some effort must focus on developing new infrastructure while other activity will emphasize governance and evolving culture. Rifkin (2000) notes that real estate has become a business burden in network-based markets.
From an infrastructure perspective, Tapscott (1996) compares information networks of the new economy to highways and the power grid of the industrial economy. He suggests that no country can succeed without state-of-the-art electronic infrastructure. Schwartz (1999) writes that in the future, large companies will manage their purchasing, invoicing, document exchange, and logistics through global networks that connect a billion computing devices.
At global scales, Tapscott (1996) indicates that companies can provide 24-hour service as customer requests are transferred from one time zone to another without customers being aware that the work is being done on the other side of the world. Boyett and Boyett (2001) point out that the larger the network, the greater its value and desirability. In a networked economy, success begets more success.
Kelley (1998) states that in a network economy, value is created and shared by all members of a network rather than by individual companies and that economies of scale stem from the size of the network - not the enterprise. Similarly, because value flows from connectivity, Boyett and Boyett (2001) point out that an open system is preferable to a closed system because the former typically have more nodes. They also indicate that such networks are blurring the boundaries between a company and its environment.
A network economy raises important issues with respect to intellectual property. Shapiro and Varian (1999) explain that once a first copy of information has been produced, producing additional copies costs virtually nothing. Rifkin (2000) proposes that as markets make way for networks, ownership is being replaced by access rights because ownership becomes increasingly marginal to business success and economic progress.
In a groundbreaking article in Wired (5th September, 1997) Kevin Kelly described the Twelve Principles of the Network Economy. According to Kelly, the emerging new economy represents a tectonic upheaval in our commonwealth, a social shift that reorders our lives more than mere hardware or software ever can. It has its own distinct opportunities and its own new rules. Those who play by the new rules will prosper; those who ignore them will not.
Kelly argues the new rules governing the global restructuring revolve around 4 axes:
- First, wealth in this new regime flows directly from innovation, not optimization; that is, wealth is not gained by perfecting the known, but by imperfectly seizing the unknown.
- Second, the ideal environment for cultivating the unknown is to nurture the supreme agility and nimbleness of networks.
- Third, the domestication of the unknown inevitably means abandoning the highly successful known - undoing the perfected.
- And last, in the thickening web of the Network Economy, the cycle of "find, nurture, destroy" happens faster and more intensely than ever before.
The following 12 principles of the Network (New) Economy were supposed to provide New Rules for the Internet Age:
1. The Law of Connection - Embrace the dumb power: Of the collapsing microcosm of chips and the exploding telecosm of connections
2. The Law of Plentitude - More gives more: Mathematicians have proven that the sum of a network increases as the square of the number of members. In other words, as the number of nodes in a network increases arithmetically, the value of the network increases exponentially.
3. The Law of Exponential Value - Success is nonlinear: During its first 10 years, Microsoft's profits were negligible. Its profits rose above the background noise only around 1985. But once they began to rise, they exploded.
4. The Law of Tipping Points - Significance precedes momentum: In epidemiology, the point at which a disease has infected enough hosts that the infection moves from local illness to raging epidemic can be thought of as the tipping point. The contagion's momentum has tipped from pushing uphill against all odds to rolling downhill with all odds behind it. In biology, the tipping points of fatal diseases are fairly high, but in technology, they seem to trigger at much lower percentages of victims or members.
5. The Law of Increasing Returns - Make virtuous circles: Value explodes with membership, and the value explosion sucks in more members, compounding the result. An old saying puts it more succinctly: Them that's got shall get.
6. The Law of Inverse Pricing - Anticipate the cheap: Through most of the industrial age, consumers experienced slight improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the information age, consumers quickly came to count on drastically superior quality for less price over time. The price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost.
7. The Law of Generosity - Follow the free: Now, giving away the store for free is an applauded, level-headed strategy that banks on the network's new rules. Because compounding network knowledge inverts prices, the marginal cost of an additional copy (intangible or tangible) is near zero. Because value appreciates in proportion to abundance, a flood of copies increases the value of all the copies. Because the more value the copies accrue, the more desirable they become, the spread of the product becomes self-fulfilling. Once the product's worth and indispensability is established, the company sells auxiliary services or upgrades, enabling it to continue its generosity and maintaining this marvelous circle.
8. The Law of the Allegiance - Feed the web first: The distinguishing characteristic of networks is that they have no clear center and no clear outer boundaries. The vital distinction between the self (us) and the nonself (them) - once exemplified by the allegiance of the industrial-era organization man - becomes less meaningful in a Network Economy. The only "inside" now is whether you are on the network or off.
9. The Law of Devolution - Let go at the top: The biological nature of this era means that the sudden disintegration of established domains will be as certain as the sudden appearance of the new. In the Network Economy, the ability to relinquish a product or occupation or industry at its peak will be priceless.
10. The Law of Displacement - The net wins: The question "How big will online commerce be?" will have diminishing relevance, because all commerce is jumping onto the Internet.
11. The Law of Churn - Seek sustainable disequilibrium: The Network Economy moves from change to churn. Change, even in its toxic form, is rapid difference. Churn, on the other hand, is more like the Hindu god Shiva, a creative force of destruction and genesis. Churn topples the incumbent and creates a platform ideal for more innovation and birth. It is "compounded rebirth." And this genesis hovers on the edge of chaos.
12. The Law of Inefficiencies - Don't solve problems: In the Network Economy, productivity is not our bottleneck. Our ability to solve our social and economic problems will be limited primarily by our lack of imagination in seizing opportunities, rather than trying to optimize solutions. In the words of Peter Drucker, as echoed recently by George Gilder, "Don't solve problems, seek opportunities."
