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Tuesday, November 08, 2005

Network Economics & Web 2.0

As the reach and functionality of the Net grow, more and more industries are becoming network industries. Network industries are dominated by network economics, which are radically different from the industrial or knowledge-based economics of traditional industries.

Network economics are not a bubble-era figment of analysts� and economists� imaginations. Bubblegen�s recent work shows quantitatively that value creation in network industries is closely tied to the ability of firms to realize network scale economics in the real world.

This should be intuitive: the very real $200 billion plus in market cap made up of the collective incumbents of today�s consumer internet market is real-world value that has been created according to and obeys the laws of network economics. Google� emerging dominance of the advertising market, in a very short 5 years, is largely due to it�s deep understanding of how to leverage network economics to maximize value creation through hyperefficient market mechanisms.

At the same time, new technologies and models � lightweight standards like RSS, and the rise of open-access and open-source peer production models � are creating revolutions in network economics itself. They make new kinds of network scale economies possible, which deliver even stronger forms of increasing returns to players who can leverage them.

Translating a network-centric competitive position to realizing network scale economies in the real world is a formidable task. Even incumbents with strong resources and capabilities have recently struggled to maximize the potential of their business models and position themselves to realize strong returns to scale. For example, eBay is in fact realizing no network scale economies, and that Yahoo is only realizing mild returns to scale.

What are some of the key issues players in network industries must successfully resolve to realize strong returns to scale? Fundamentally, they must make sure that their operating models generate network effects, and that their business models capture a share of these returns.

Neither of these tasks is straightforward, even for resource and capability rich players � as the eBay example demonstrates. For example, on eBay, users realize the lion�s share of value from the network, leaving eBay with little.

Creating and capturing network value requires a deep understanding of both industry structures and economics, transaction models, and network models. Bubblegen�s leading-edge work on network economics is detailed in this presentation.

To get started, ask yourself:

If you are competing in a network industry, are you demonstrably realizing simple network scale economies?

If you are realizing simple network scale economies, how are your returns scaling? Are you realizing weak Metcalfe economies, or stronger Reed economies?

Are these the optimal returns aligned with your strategy and business model? Can you reposition to realize stronger network scale economies?

If you are competing in the markets touched by 2.0 technologies and models, can you leverage them to realize 2.0 network scale economies, and amplify increasing returns? How can you operationally achieve this kind of demand-side leverage?

-- umair // 11:27 PM //


How is it that you have had no comment on this??

I don't really grok economics, but the general concepts are brilliant.

// Anonymous farlane // 12:46 AM

simply genius!
// Anonymous Anonymous // 6:21 PM

Hi Umair,

when I first came across this stuff on your blog 2 years ago I thought it was amazing. However now that I have been reading your blog and lots of others like Publishing 2.0 for the last 2 years it comes across as rather academic and old hat.

Im finding that the big problem is the implementation not the thinking. Everyone always says that web 2.0 implementation is easy but it's not unless you already have very strong web 2.0 capabilities.

For the last 6 months I have found your blog rather boring and you dont seem to be posting much anymore.

Anyway, let me throw out a challenge to you to start posting something more interesting, inspiring and concrete.
// Anonymous Murray // 3:49 AM

Hi Umair

Just taken a look through your Network Economics slides - really useful insights - just shows how the world's definition / creation of value is changing. I see the same changes happening in the knowledge / consulting industries.
// Anonymous Web2Consultant // 12:50 PM
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