The emergence of networked commerce and a new wave of business models

The networked world we live in is still in its infancy. The mass adoption of digital networked technology is transformative, but we are still only scratching the surface of what is possible. The behaviours that the network enables – like sharing, communicating, collaborating and learning – come naturally to people. The organization which operates closed, scarcity-based business models has found, or will find, the open and abundant nature of the network disruptive.

THE PAST: MASS INDUSTRIALIZATION

When Henry Ford put automobiles into mass production, he had not only re-imagined a new method of transport that was far superior to the horse and carriage, he had also pioneered a disruptive new way to operate a business on a large scale and with huge revenue and profit. This method has changed and evolved over time but it is the model that most businesses follow. Taking a very simplistic view, there are two important elements to this shift into the era of mass industrialization.

Firstly, the products are based on finite materials which have a unit cost. Operating on a large scale creates cost efficiencies which allow for healthy price competition. The manufacturing process has been optimized over the years and, in most cases, the production and material costs have continually declined. The final product – however cost efficient – is finite and thus straightforward to monetize.

Secondly, the organization has developed structures and hierarchies that employ and provide an income to the large majority of the population. This has fuelled the capitalist system over the past century, facilitating the flow of capital that has created growth, innovation, and progress around the world.

THE PRESENT: THE EMERGING NETWORKED ECONOMY

Over the past 20 years as the web has developed, networked technologies have challenged the economics of the business born out of the mass industrialization era. Two early, and very different examples, are Napster and Amazon. Amazon was one of the first successful early examples of a company developing a commercial business solely on the web. Launched in 1995, Jeff Bezos, founder of Amazon, talks enthusiastically about how he has developed a superior bookstore by utilizing the web. There are two main reasons: an abundant book inventory (using a network of warehouses and suppliers) and abundant customers. Amazon removed the scarcity of space in bookstores on the high street and the limitations that geography place on the addressable market. Napster, which first launched in 1999, leveraged peer-to-peer network technology to link personal computers and facilitate the sharing of music files. Music digitized into MP3 files resulted in the music industry moving from a model of scarcity (CDs, cassettes, vinyl) to a world of abundance. Napster was the platform that gave everyone with an internet connection free access to a shared library of music.

Of course both of these early business models have evolved a lot since their inception. Napster is now a music streaming service and Amazon now sells e-books (among many other product categories). Both have competitors and both are still exploring how best to commercialize abundant products and ensure that all stakeholders get a fair share of the revenues.

Monetizing information goods like music and e-books is difficult because once produced it costs almost nothing to replicate and distribute. The price erosion as a result of easily accessible, abundant goods threatens the ways in which businesses from the mass industrialization era generate revenue. Paul Mason argues that capitalism is metamorphosing through waves of technology innovation. He argues that the price mechanism that capitalism relies on is being eroded:

“The key contradiction in modern capitalism is between this emerging possibility of free, socially produced abundant goods, and a system of monopolies, banks and governments forced to behave desperately to maintain ‘information asymmetry’.”

This tension is currently playing out in the markets for intangible goods like music and e-books. In the future however, this tension will pervade elsewhere with, for example, the democratization of the means of production of tangible goods through 3D printing. While there is obvious scope for greater disruption ahead, the power of the network opens up new opportunities and business models to those eager to make the shift.

THE FUTURE

Kevin Kelly stated back in 1996 that the “…network is the innovation”, and thus, the opportunities for new business models require us to think in new and creative ways. There are three core examples emerging today that will impact on business in the future:

The first opportunity is for organizations to focus on creating platforms that enable people to trade or share with other people. In a recent blog post I discussed JP Rangaswami’s view that new business opportunities can be exploited by managing ‘flows’ through a network. The idea is that there are lots of inefficiencies in the current world where the products we own are under-utilized. This could refer to automobiles, bicycles or lawnmowers which generally cost a lot to purchase. The cost of ownership could be reduced by maximizing utilization under a shared ownership system. There are lots of examples beginning to emerge that address the opportunities in the so-called ‘sharing economy’ or ‘peer-to-peer economy’, with Airbnb being a prime example. The returns are potentially huge, with the market for peer-to-peer commerce being estimated at US$26 billion.

Secondly, the proliferation of an interconnected network of ideas, people, hardware and software will facilitate the mass personalization of everything we use and purchase. The explosion of personal data collection and usage will empower the individual to customize products and services to their own preferences and personal context. According to GfK Global Trends, the demand for personalization is at 47% globally. Furthermore, this trend is likely to be driven by Asian markets such as India and Indonesia where the appetite for personalized goods is extremely high (76% and 75% respectively) [1]. This is beginning to become a reality with digital services through intelligent software. Chris Anderson, in his book Makers [2], contends that this will become a reality with physical products when the use of 3D printers becomes more mainstream:

“The Internet democratized publishing, broadcasting, and communications, and the consequence was a massive increase in the range of both participation and participants in everything digital—the Long Tail of bits. Now the same is happening to manufacturing—the Long Tail of things.”

With mass personalization becoming more of a reality, new business models need to adapt and stretch across the ‘Long Tail’ rather than just mass producing one or two popular products at the apex of the demand curve.

Finally, networks of people will impact on the way that we organize labour within the organization. The maker movement is based on an open network of people with varying skill sets and expertise. Project teams are organized through forums, reputation and previous experience rather than through qualifications and a formal CV. This is also becoming the norm for software programers with platforms like GitHub being the place for them to network and to share their experiences with each other. An article in the Harvard Business Review argues that the ‘degree is doomed’ for two main reasons. Firstly, the certification of higher education qualifications is no longer a guarantee that the person can do the job. Secondly, higher education is becoming freely accessible online with unbundled courses, allowing for a ‘pick and mix’ education, Coursera being a great example. With the rapid creation of new job roles and skills, life-long education is critical and the education and recruitment systems need to change to accommodate the demands of the new networked business.

As we continue to transition from the mass industrialization era to the networked era, business leaders and innovators need to think in a new way. This is easier said than done as Einstein once said that: “No problem can be solved from the same consciousness that created it”. Einstein was talking within the context of physics but the idea should be applied to the business world as network technology is changing the context within which we do business.

BUSINESS IMPLICATIONS

The network is allowing new and existing brands to engineer innovative ways of facilitating networked commerce. Opportunities in this area can be unearthed through identifying inefficient flows of resources. Coursera and Airbnb are not producing anything; they are matching existing resources with latent demand. The difficultly in establishing trust, which if left unresolved, will hold back growth. Existing businesses with strong, trusted brands should therefore view this as fertile ground and differentiate their offering through leveraging their strong brand assets.

Those companies manufacturing products should embrace the opportunities that 3D printers offer to deeply personalize their products. Building communities around their customers’ personalization of physical products will drive engagement with the brand and generate new ideas for future product development.

NOTES

This was originally written for GfK TechTrends 2014 publication.

[1] GfK Global Trends. Roper Reports Worldwide 2013 (single year, 25 countries), QM1h

[2] Chris Anderson (2012), “Makers, The New Industrial Revolution” Random House Business Books, London

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