Traditional Business
In the traditional economy factories produce goods for consumption. Let us take for example a carton of milk. The cost of producing this item is made up of fixed overhead costs, such as the cost of the factory and of the machines and variable costs, such as the ingredients. Thus in order to produce a single unit of milk a large amount of capital is required. As more of the product is produced, the cost per unit reduces. This is known as economies of scale.
This is typical of a geographically based business where buyers and sellers exchange physical goods and services. In the cyber world “servers and clients are more likely to exchange information, knowledge, experience and even fantasies (Rifkin, 2001).
The Network Economy
The feature of a cyber economy is the notion of being connected. In a paper for Wired.com, Kevin Kelly wrote that “all the most promising technologies making their debut now are chiefly due to communications between computers – that is, to connections rather than computations”(Kelly, 2001)
Kelly in fact foresaw a future where “ all matter, big and small will be linked into vast webs of networks at many levels” (as cited in Rifkin, 2001, p. 19)
In the traditional economy value is created by companies, in a network economy on the other hand value is created by the size of the network. (Kelly, 2001)
How does the Network economy work?
To explain how this works, we can use the example of a telephone.
A single telephone is not worth anything.
If there is another telephone connected to the phone lines, the value of the first machine increases, because now there is someone else to talk to.
As more are added the value of the telephones increase as users is able to communicate.
Diagram on the right shows the network effect in a few simple phone networks. The lines represent potential calls between phones.
Created by Derrick Coetzee in Adobe Illustrator and Photoshop. Its creator irrevocably releases all rights to the image and grants it into the public domain.
Source:http://en.wikipedia.org/wiki/Image:Network_effect.png
(Network Effect [image]. (n.d))
In short value is added by the increasing size of the network.
This is actually opposite to what traditional economic theory suggests where scarcity increases the value of an item. As Kelly puts it “the logic of the network flips these industrial lessons upside down. In a Network Economy value is derived from plentitude.”(Kelly, 2001)
Some Views about Network Economies
Barabasi highlights the various and expansiveness of networks within businesses and the economy and argues that the collaborative, marketing, policy and organisational networks alone are not invincible to the elements of the diverse global economic environment. Network effects do however facilitate businesses to adapt rapidly to changing market conditions (2002). This is demonstrated by reflecting on the bursting of the dot com bubble in 2001, and the many Internet businesses such as MVP, Lycos, Alta Vista which failed to stay afloat contrasted against the small percentage of early start-ups like Amazon, eBay and Google, which did. What prevailed from this crisis and the early stages of the internet was not the vast emergence of new businesses but instead, the transformation of existing business and their transition online (Barabasi, 2002).
Leibowitz’s argument takes this a step further and describes the Internet’s effect on the economy as simply a mechanism for reducing the cost of data transmission and information sharing and the basic laws of economics are not changed by the rapid transmission facilitated by the Internet (Leibowitz's, 2002).
At the time Leibowitz’s book was written, the bridging and connectedness of web 2.0 was only just beginning to emerge and the topic is only briefly touched on when discussing Amazon in context with its product reviews feature, the network effect of this has the potential to impact a consumers decision to purchase a product based on the feedback from other users within the network. An issue that arises is that Amazon cannot ensure the products they sell will actually be purchased from their online store because nothing can prevent a customer from reading a review about a product and then finding it cheaper somewhere else, on or offline (Leibowitz, 2002).
The key to a strong network economy is creating exclusivity of the service or product and ensuring its accessibility only to its network. The “winner takes all” concept is an example of this and describes the impact of network effects and economies of scale and how consumers of a product or service favour large networks over small ones.
YouTube and the Network Economy
The value of YouTube lies in it being made up of a community of users who, create, share and watch videos. As the diagram above explains, if there is only one video and one user there is no value. On the other hand more videos, leads to more users and more users upload more videos. Penenberge discusses that human behaviour is predictable in large numbers and we tend to share online memes, interesting content or products within our social circles, the act of this form of content distribution has been coined a viral loop and advertisers and marketers take advantage of this (Penenberg, 2009).
A viral loop can be thought of as positive expansion or awareness, and if successful, it results in self-replication with exponential growth, spreading across the internet like a computer virus from one person to another. Currently they are the most advanced direct marketing strategies to date and YouTube has effectively created an underlying platform which facilitates it (Penenberg, 2009). With broadband and digital video recording equipment becoming relatively affordable, this only accelerates the pace of viral loops and expands their greater reach. YouTube also allows for its video content to be embedded within other applications such as Facebook, blogs, wikis in addition to the firmware of many smart phone devices, including Apple's iPhone. This in turn creates a cross over and bridging of Web 2.0 services, opening up YouTube's reach to larger social networking connections and web communities (Penenberg, 2009).
