Chapter Two

Net Economy Rules

The race doesn't always go to the swift, nor the battle
to the strong, but that's the way to bet. —Anonymous

THE NET ECONOMY

If your goal is to get a job in the Net Economy, it’s good to get a good grasp of the rules or principles by which the Net Economy operates. This chapter articu-lates a few of those rules.

While it’s elusive to pin down a definition of the Net Economy, its operating principles are a little easier to describe. You’ll always be better off choosing job or project opportunities that are aligned with the strategic movement of the Net Economy. If you can get ahead of the curve, so much the better. So if you under-stand the following principles of the Net Economy, you will be in a much better position to identify and define job or project opportunities that fit your mission statement and can leverage the tectonic movements of this environment.

First, let’s define the Net Economy:

The Net Economy, with its relentlessly real-time attributes, demands a new mindset to embrace it. As it imposes a new order, the old industrial view of 12 Chapter Two the world is found to be wholly inadequate to the task of understanding and anticipating the opportunities created by the Net Economy. The most difficult struggle is to forget definitions and practices that we have already learned. The hardest thing in the world is to give up practices that have made us rich. Yet this is exactly what success in the Net Economy demands.

TEN TRENDS OF THE NET ECONOMY

To date, the traditional economy has emphasized the manufacture and distribu-tion of tangible goods and services. This emphasis on static attributes of supply and demand is changing faster than our ability to describe it. Nevertheless, let’s try to articulate some of the strategic shifts the Net Economy imposes on those who would exploit it.

Every period of human history has been organized by sets of economic forces that have eventually yielded to new sets of forces. Before humans un-derstood the principles of agriculture, hunting-and-gathering economies domi-nated the world. The principles of hunting and gathering were simple and perfectly understood: people consumed what they hunted or gathered and then moved on. Economic planning, such as it was, restricted itself to considerations about the next meal.

The information era replaced the industrial age at some amorphous point in the 1950s. At first, the economics and assumptions of the industrial economy limited the possibilities of information processing. Computers were big, cen-tralized machines locked in glass-walled rooms to do long division under the ministrations of a new priesthood called MIS. The computers attacked back-office operations such as sorting and collating. They were administered by tech-nicians with their own language who promoted the idea that computers were complicated and somehow dangerous, like a blast furnace or refinery. It was only with the PC revolution in the early 1980s that the information economy was put into the hands of end users who, taking advantage of “insanely great” tools such as the Apple Macintosh, changed the world in an incredibly short pe-riod of time.

The Internet, finally, ties the industrial and information economies together to create the Net Economy, an environment with a brand new set of operating principles underscored by a whole new set of economic realities. The more you understand these principles and use them to leverage your job search, the more focused your agenda can be. Map the opportunities that are presented to you against these trends. The Net can deliver impressive rewards or undermine am-bitious plans. It’s up to you to be on the winning side of the equation. Ensuring that the positions you choose are aligned with these trends doesn’t guarantee success. But choosing a position that goes against the grain of these trends dooms any initiative. The ten trends are:

There is no status quo. Every day is a new competitive arena, and the pace of change is now running at Internet speed. Consider the ways internal business structures, industry boundaries, and customer outcomes and expectations morph when subject to the vagaries of the Net Economy. Do the attributes of the enterprises or opportunities you are considering align with the traditional econ-omy or the Net Economy? Add it up. If the score comes down too far to the left, you are playing with the deck stacked against you.

1. Net Jobs Advance Either Content or Infrastructure

All jobs in the Internet fall into one of two major classifications: content and in-frastructure. It’s useful to understand how the Net combines content and infra-structure to create value. You can improve your chances of finding a rewarding career by being clear on which side of the content-infrastructure continuum you want to be. Let’s define our terms.

Content is commonly understood to be the “message” in Marshall McLuhan’s famous dictum, “the medium is the message.” On the most granular level, con-tent is anything that people create to impart information. Commonly it takes the forms of writing, illustration, animation, music, video, photography, and other graphic or multimedia representations of the human experience. But let’s define content from a more abstract and powerful perspective:

This definition suits our purposes better because it underscores the deep op-portunities in the Net Economy for people to generate, edit, revise, assemble, and otherwise manipulate content.

Balancing the concept of content in this discussion is the concept of infra-structure:

The Net Economy creates exciting opportunities for those who recognize that the Net is transforming traditional concepts of products and services into new measures of economic value in terms of content and infrastructure. If an orga-nization wants to make significant money in the Net Economy, it must provide a compelling proposition that adds value either to the content or the infrastruc-ture. The traditional marketplace makes a durable distinction between content providers and infrastructure providers. It’s generally either one or the other, and it can be traumatic for people and organizations to be forced to migrate from one to the other. For example, in the traditional economy, you can either be a content provider, such as a book writer, or an infrastructure provider, such as a pub-lisher. It’s rare to be both. But in the Net Economy, the distinctions between the two strategic areas are much more slippery and dynamic. Today, it is common for writers to use the attributes of the Net to publish their work. The essence of competing in the Net Economy is a function of the nimbleness a company dis-plays in navigating the relationship between content and infrastructure.

In general, infrastructure jobs are most appealing in the earliest stages of de-ployment of an architecture. This is when innovation and value are at their high-est. For example, a job building America Online’s infrastructure probably paid off big-time in terms of stock options. Today America Online is squarely a me-dia company, more attentive to acquiring content and “eyeballs” (a combination nicely provided by Netscape) than creating new infrastructure. AOL offers jobs in both areas, but in which area do you think your career would advance most? At this point in the evolution of the Net Economy, most of the juice has been squeezed out of building infrastructure. Now it’s mostly deployment, mainte-nance, and incremental design. Revolutionary developments are more likely on the content end of the spectrum.

2. Industries Are Shifting from Static to Dynamic as Products and Services Mutate from Tangible to Intangible

By eradicating the distinctions between global and local businesses, the Net Economy shifts industrial boundaries from the static to the dynamic. The result is global competition of a uniquely furious and unpredictable nature. Enter-prises that formerly competed or partnered in different spaces now find them-selves confronting each other.

Our lives are filled with examples of the mutation of formerly tangible prod-ucts and services to intangible ones. The process is often so seamless and natural as to be transparent. This is a process as old as humanity. At first there was barter, a mutual exchange of tangibles. Money, with all the benefits of intangi-bility, quickly replaced barter. Today, electronic commerce is turning the coun-try into a cashless economy. So the process is hardly new, just accelerated. Here are just a few examples:

Where do the opportunities that you are considering fall on the tangible-intangible continuum?

3. Customization: Customers Are Becoming Less Forgiving and More Discerning

Mass customization is the organizing principle of business in the Net Economy, just as mass production was the organizing principle of the traditional economy. Mass producers dictate a one-to-many relationship. Mass customizers take ad-vantage of information technologies that create the type of products and services that cannot be compared to a competitor’s. Why? Because each product and service is unique, as a result of an ongoing, one-on-one dialogue with each of its customers. The results often take our breath away. We all knowabout Dell, a com-pany that has a one-on-one relationship with customers, both companies and in-dividuals, and builds only PCs that have actually been ordered. The range of possibilities for Net Economy entities built around customization are limitless.

Customization allows organizations the power to give every customer a unique view of the organization. Services such as “My Yahoo!” or “My eBay” allow each user to configure a unique relationship with the company, based on the unique interests and desires of the customer. Millions of people have not only the illusion, but the reality, of a customized encounter. A core theme of customization is the assumption that everyone should have the equivalent of a My Yahoo! across the spectrum of products and services. Consumers increasingly want more power to produce what they consume. In that way, each of us strives to create a unique and custom-tailored point of encounter with the parties that supply products and services for our personal consumption. In the Net Econ-omy, every company should consider this concept as an invitation—no, a de-mand!— to create a “personalized” version of their product or service offering.

The Net Economy also eliminates asymmetries of information. In other words, it promotes a transactional environment in which every buyer and seller has perfect information. The Net Economy can no longer sustain enterprises whose value proposition assumes better information than the next guy. Look at the opportunities presented to you. Do they give each customer an individual value proposition? Do they take advantage of a world of perfect information? If so, they are with the grain of the Net Economy.

4. New Infomediaries Are Extracting Value

One of the most durable myths of the Net Economy is that the Web systemati-cally eliminates all infomediaries by squeezing out of the economy the ineffi-ciencies that middlemen such as brokers now exploit. Disintermediation, a nice piece of jargon, refers to the eradication of a layer or function that exists between two other layers or functions. There’s just one problem: it’s not going to happen. At least not in the way some experts believe. While some infomediaries may dis-appear, the very nature of the Web opens up new niches to add value. Compa-nies quick and agile enough to detect opportunities in complex markets will prosper as infomediaries. The new niches thus created are part of the value web. If you can find a niche, you can be a storefront in a new value web.

Wait a minute, you say. What about all those celebrated examples of disin-termediation that we’ve read about in Business Week? Doesn’t Amazon eliminate the layer between consumer and bookseller? The answer is an unequivocal “no.” Although Amazon has changed the way certain segments of the market consume books, it is a case of a new channel replacing old channels, not disin-termediation. Amazon is a perfect example of how the Web has added another value-added retail channel. Real disintermediation occurs when Viking, McGraw-Hill, or Random House start making a major effort to sell their books directly to consumers. While it’s possible to order books directly from the Web-sites of publishers such as McGraw-Hill or Prentice Hall, the orders are processed through an infomediary, a book dealer transparent to the buyer, but nevertheless an infomediary. Similarly, Amazon uses a book distributor to ful-fill its distribution services. Amazon offers customers many compelling bene-fits, but they are not in the area of disintermediation.

Don’t be concerned if the initiative you are offered acts as an infomediary. Well-considered infomediaries are poised to transform every industry, from travel to insurance to real estate.

5. Convergence: Value Chains Are Becoming More Integrated

Convergence describes the phenomenon of two or more existing technologies, markets, producers, boundaries, or value chains combining to create a new force that is more powerful and more efficient than the sum of its parts. Convergence is not a new dynamic; it has been going on as long as human beings have been developing and refining technologies, roles, and markets.

The outcome of any significant convergence is never really predictable. People sometimes believe that convergence operates by combining technology A with technology B and getting some hybrid that has some reasonably obvious elements of both. But that’s not the way convergence works. When the tech-nologies of the automobile and road building converged to create the interstate highway system, no one could have predicted the massive social disruptions— from fast food to population shifts—that a mobile society created. In the same way, when the technologies of radio and cinema converged to create television, no one could have predicted the unifying and disconnecting forces that we still do not fully understand today. The law of unintended consequences has a field day whenever significant technologies converge.

Deconstruct the opportunity before you to see how it exploits convergence. The more powerful the forces that are converging, the more opportunities there may be.

6. Digitization: Electronic Relationships Are Emerging

In the simplest sense, digitization refers to representing content in ones and ze-ros, the language of computers. But the ability to represent content—text, video, audio, images—in this way opens up the door to unprecedented opportunities. Digitization and the other themes enabled by the Internet collectively bring society into a culture of speed (compression), marketing to units of one (cus-tomization), a brand new world that blends products and services (informati-zation), and manufacturing in lots of one (convergence).

Digitization by itself is not very useful. Only when it is combined with one of the other themes does it usually create value. For example, customization is impossible without digitization. Once customer information is digitized, it is ready for databasing, sorting, and broadcasting over the Internet. The Internet makes it possible for companies to move data from an online order form to the factory floor.

The biggest implication of digitization is how it enables the separation of form from function. Separation of function and form involves the delivery of a given function by different means. Digitization enables service companies to separate the functions of their services from their traditional forms or packag-ing, creating new markets and opportunities in the process.

If the function of the opportunity you are considering can be separated from its form, be cautious. The fundamental value proposition of the business is at risk. For example, selling CDs on the Net is a risky business now because digi-tization and the MP3 format make it inviting to download music (the function) without buying the disk (the form). Same thing with test equipment. Why should anyone buy a test hardware such as a heart monitor when the function can be delivered on the Net? The lesson: make sure the value proposition of your opportunity leverages function, not form.

7. Informatization: Smart Products Are Proliferating

Call it penetrating intelligence. If you can’t find a way to put “smartness” into your products, your competitor will. In the Net Economy, products are “infor-mated.” Technology is embedded in and around products in ways that facilitate a steady stream of information about transactions and the use to which products and services are put. As in the case of most network software, customers turn features on or off depending on their preferences. The product itself is a primary interface between the end user, the manufacturer, distributors, and other parties with whom the customer wants to communicate.

Products that communicate with manufacturers or infomediaries, also known as “smart products,” will improve performance, reduce costs, and in-crease revenues. The most obvious example of the proliferation of smart prod-ucts is the addition of embedded computer chips to virtually every mechanical device in our lives. Most people are aware of the role of embedded computer chips in automobiles. Today, the dollar value of a car’s smart electronics is over-taking the value of its steel body. We suspect that chips inhabit electronic gear such as microwave ovens and stereos. But embedded chips also proliferate in such ubiquitous appliances as elevators, air conditioners, garage door openers, hotel door locks, ATMs, refrigerators, and soft drink machines.

Are the opportunities you are considering constantly adding intelligence to existing products or services? If not, someone else will insert themselves in your value chain and capture value that will no longer go to you.

8. Compression: Transaction Costs Are Being Slashed

Perhaps the Net Economy’s most dramatic impact on commerce is its role in sys-tematically reducing transaction costs. By steadily squeezing transaction costs out of the virtual value chain, compression will continue to transform every as-pect of interacting with customers. In the traditional economy, it cost about one dollar to keep information about an individual customer. Today, it costs consid-erably less than one cent per customer. Lower transaction costs allow companies to control and track information that would have been too costly to capture and process just a few years ago. Any assessment of the true impact of the Net Econ-omy must include the lower transaction costs that are unleashing network ef-fects, increasing returns, and creating economies of scope and scale. In this way, the Net Economy is remaking the structure of companies and industries alike.

Compression and the other trends discussed in this chapter work together to squeeze out many of the traditional costs of interactions—the searching, coor-dinating, and monitoring that customers and companies must do when they exchange goods, services, or ideas. Compression comes in a multitude of shapes and forms. In its most powerful form, it is not even recognizable as a separate force. But whatever shape it assumes, compression squeezes out or eliminates the most costly pieces of the marketing, fulfillment, and customer service processes. The more commodity-oriented the service and support components are, the more ruthlessly compression consigns them to history.

Compression, the Net Economy trend that squeezes distance and time out of the equation, eliminates most of the costs that the traditional economy has long assumed to be more or less fixed. Compression is the force that makes distance irrelevant. Geography, the consideration that until now has played a key role in determining who competed with whom, is massively expensive. In the Net Economy, your business can connect instantly with customers all over the globe. Of course, compression enables the flipside of this benefit as well: you’re ex-posed to worldwide competitors who have just as easy access to your customers as you have to theirs.

Take a good look at the job or initiative you are considering in terms of its cycle times and transaction costs. Rest assured that potential competitors are do-ing the same thing. If you can see opportunities for compression, they can, too.

9. Time Is Money: Why Speed Matters

It’s all about velocity. The quicker you can move, the more advantage you have. The faster you can go, the more you can leave the competition playing catch-up. Speed reduces friction and costs. By collapsing time and breeding accelerated change, the Net Economy has succeeded in further reducing transaction costs. Successful Net Economy players accept a culture of constant change and are will-ing to break down and continually reconstruct their products and processes— even the most successful ones. In a world of instantaneous connection, there is a huge premium on instant response and the ability to learn from and adapt to the marketplace in real time.

Let’s hope the process underlying the position you are considering has al-ready been re-engineered to eliminate every redundancy and unnecessary op-eration. If not, let’s hope you can suggest what can be eliminated to speed up the cycle times.

10. Advantage Is Becoming More Temporary

How does one create advantage in the Net Economy? First, let’s distinguish be-tween old and new ways of conceptualizing advantage. Throughout the indus-trial age, it was rational for managers to focus on achieving competitive advantage, and once having achieved it, to sustain it. When the basic building blocks of success were measured in the scarcity of raw materials, markets, capi-tal, and labor, organizing these elements better than your competitors created 20 Chapter Two value. When the economy is a zero-sum game (“if we have one more of these, you have one less”), competitive advantage is probably something worth pro-tecting. Unfortunately, the energy and resources spent protecting advantage can-not be applied where it really counts: innovating on behalf of your customers.

As we entered the information age, our mistake was to assume that informa-tion technology (IT) by itself could drive sustainable competitive advantage. It doesn’t work that way, even though some IT initiatives move companies for-ward and help create value. Relying on technology to generate competitive ad-vantage is counterproductive for a number of reasons. First, it places way too much emphasis on technology at a time when technology can be quickly and easily duplicated. There’s no advantage to having something that can be easily duplicated. Second, aiming toward competitive advantage misses the point. Competitive advantage should not be the goal. It should be the result of some-thing much more basic: offering customers a product or service that saves them time, makes their lives easier, or enriches their relationships. We derive com-petitive advantage from doing that well.

The Net delivers magnificent rewards to its earliest adopters—stratospheric market caps, unlimited revenue streams, broad communities of customers, limitless opportunities for virtual partnerships. But don’t make the mistake of thinking that the advantages are anything more than transitory. Is the leadership of the organization you are considering joining content to rest on first mover ad-vantage? If so, give it a pass. By the time you get up to speed, the advantage will be with someone else. Who will that be? Your challenge is to find that train and get onboard.