Flashback Economics
More than eight years into the Internet economy, we need to seriously
review our lessons. Re-thinking the Network Economy by Stan Liebowitz
wants to be that daring post-mortem book with an "I told you so"
attitude. Hindsight is always 20/20, and assuming there was death, an
autopsy is always revealing.
The book forces us to think harder on certain fundamental truths of Internet
commerce, but it doesn't deliver on shedding new light on the "true
forces that drive the digital marketplace", a tall order disguised
by the catchy sub-title.
Was the Internet over-hyped between 1998 and 2000? Of course, yes. Were
the resulting benefits greater than the drawbacks? Of course, yes. That
doesn't make the Network Economy such a bad phenomenon.
Several well-covered lessons: 1) Being first doesn't guarantee
success, 2) There is no winner-take-it-all or customer lock-in, 3) Not
all products are impacted by Internet commerce, 4) Prices are not shattered
as a result of product availability on the Internet, 5) Established companies'
profits are not eroded because of Internet competition and 6) Advertising
revenues alone aren't enough.
Unless you were an active participant in, and not just an observer of
the Internet economy, these truths were probably visible by the end of
1999. Nonetheless, Liebowitz's analysis is useful.
There is a brilliant chapter entitled "The value-profit paradox"
that dives into why products sold over the Internet aren't perfect
substitutes for their equivalent at bricks-and-mortar stores. Liebowitz
explains why he doesn't believe Internet companies will be able
to generate above-normal profits with their below-normal operating margins
because competition forces them to spend above-normal expenses which is
not good for profits, in the long term.
The author provides an eloquent crash course on Internet advertising,
shattering the old myth of reliance on the advertising model as the sole
revenue source. He even goes as far as noting that the advertising cost
per viewer for the Internet is still four times higher than for television,
prompting the following observation: "The real question is whether
the advertising value of an hour's contact with an internet user
is worth more or less than the value of an hour's contact with a
television viewer." The basis for this astute observation is grounded
by the irrefutable fact that the average person in the U.S. spends 1633
hours per year in front of a television set versus 124 hours on the Internet.
The author offers exquisite candor while taking pleasure at calling off
the aberrations uttered by so-called prescient Internet experts such as
Mary Meeker (Morgan Stanley), Kevin Kelly (author), Bill Gross (entrepreneur)
and other infamous people by pulling quotes that catch them saying nonsensical
statements such as "information wants to be free", "we
have first-mover advantage" or "most of these are winner-take-most
or winner-take-all markets". Although there has been very little
mea culpa from old experts, this trial by absentia is a welcome alternative.
But too much economic theory and reliance on academically proven principles
plagues this book which pegs economic theory as the Bible or foundation
for any discussion. How about the real marketplace? Although the author
is solidly grounded in economic theory and goes at great length to linking
age-old economic theory to Internet characteristics, any business executive
or entrepreneur will tell you that you learn from mistakes and failures
or by pushing the envelope often more than by merely following economic
theory. Part of the entrepreneurial spirit and intent is to refuse to
admit there are boundaries.
Academic disputes are interesting, but not all of them are relevant to
the way business operates. But maybe, if the Internet has graduated to
the academic dispute level, it must be a good thing.
Still, there are many instances where you can't dispute the logic.
"At its height, practically everyone was headed for the fabled gold,
but they were looking for it in the ether instead of in yonder hills."
This makes us wonder whether the Internet crash might have been substituted
by a soft landing had more of these voices been heard when they were needed
the most.
The book falls short by focusing solely on Internet consumer commerce.
The business-to-business impact of the Internet may have been intentionally
absent, but it is an essential part of the Internet economy. And it is
where you will find real value and meaningful lessons. Ask General Electric,
Cisco, or Dell if their company would be different or not without business-to-business
e-commerce.
There is also very little coverage of Internet services. Financial and
travel services today would be very different without the Internet and
are providing value on both sides, to buyers and sellers. I can't
imagine starting a pleasure or even business trip without checking Internet
fares. And the volume of Internet-enabled financial transactions easily
rivals activity on private networks.
Liebowitz has mastered the art of deductive theory, but sometimes, the
book drifts into esoteric analogies such as the Dvorak versus QWERTY keyboard
conundrum, BIG MAC pricing theories, the diamond-water paradox and - yes
again - the Betamax versus VHS story.
The last quarter of the book is a random but detailed walk into the uncertainties
of copyright laws and the role of peer-to-peer networks in enabling digital
reproduction. The conclusions are tough to draw out, but the issues are
well laid out.
Although many of us would like these ugly Internet crash years to be
stricken from the history records, the memories are still with us. Pick-up
this book if you have sobered up from the Internet party (or never attended),
or it may awaken flashbacks.
William Mougayar is the author of Opening Digital Markets (1998) and
a business consultant.
* Re-thinking the network economy: the true forces that drive the digital
marketplace, by Stan J. Liebowitz. Published by AMACOM, 2002. Mr Stan
Liebowitz is a professor of managerial economics at the University of
Texas at Dallas and coauthor of Winners, Losers & Microsoft.
Copyright 2003 Yale Center for the Study of Globalization
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