The rise of Online Industry Networks

By Marcus Cake • February 12, 2007

The internet emerged in the early nineties. The internet is slowly transforming how businesses, consumers and people interact. The global economy is at a very early stage in realising the full benefits of the internet. The community is only just beginning to grasp the potential of the system which links any point with any other point at neglible cost.

Industry development and technology adoption
New technologies are typically adopted in an S shaped curve (see A technology boom through to 2010 ). At the time of the first technology boom ending in 2010, approximately 10-15% of people in first world economies were online. Today, we are approaching 70% of first world economies have broadband internet access.

As written in The rise of online social networks? Wny now? Which industries?, the internet and online social networks have the opportunity to transform industry now because of the following factors:-

the maturation of key technologies which allow every individual to capture, store, process and transmit information like a multi-national corporation
the penetration of broadband internet to the home and business
the increasing proportion of economic activity and everyday life that is information based
the comfort with which the vast majority of consumer use computers and the internet
the stronger desire by many works to work from home and business opportunities to reduce costs through teleworking and the use of freelancers

The three companies which dominate a market when usage of a technology reaches 90% are highly likely to dominate the market for subsequent decades. Perhaps, this is what motivates major companies to pay seemingly unrealistic valuations for internet companies. The adoption of internet in first world economies is expected to reach 90% in 2010. In the following sections, I will provide a quick guide to the development of the internet. The internet has evolved through successive waves each achieving 90% penetration at different times - email (1990’s), Business to consumer (B2C), Business to Business (B2B), Person to person (P2P) and Online social networks (OSN). The next wave will be include Online Industry Networks (OIN). To put these in their proper context, I will provide a brief overview of the development of the internet and then highlight the attributes of online industry networks.
Early applications of the internet

Email and web sites
Email is an online social network. It is also considered the “killer application” and has become universal. It remains the dominant use of the internet. Video-conferencing and application sharing may also become universal.

Business to consumer (B2C)
In the late nineties, early models of B2C emerged. B2C is the exchange of information and transactions over the internet. The internet bubble provided significant capital to some companies that allowed them to fund their operations for many years while they refined business models and waiting for the arrival of more online consumers.

Business to business (B2B)
Business has always used electronic networks to exchange information with customers and suppliers. In its earliest incarnation, companies exchanged information, order and invoices over private networks and could be described as EDI (Electronic Data interchange). This has happened for decades. The ownership of electronic networks became a source of competitive advantage. The internet rendered some of these large private networks redundant. The corporates could use the internet to reduce their costs significantly and extend their reach to smaller companies and customers that did not join the private network. The costs of distributing the information fell, but they also lost a source of competitive advantage by restricting access to the network. Anyone with access to the internet could conduct business with the corporates, or set up business in competition.

Person to person (P2P)
In early 2000, person to person technology emerged. This has included instant messaging and internet telephony. It also included file sharing technology pioneered by Napster which allowed people to exchange file. This breached copyright and many web sites were shut down. However, the most interesting aspect is that people from around the world were sharing knowledge directly and searching for it from each others computers. People unknown to each other from anywhere in the world were communicating and sharing. Ofcourse, this event was overshadowed by the illegality of what the individuals were sharing. The potential for individuals to share information was harnessed by Online Social Networks.

Online social networks (P2P)
Online social networks allow people to share their personal information to a social network. They are a person to person activity. Broadband penetration now provides access to a significant audience. New technologies allow rich media to be created. Greater bandwidth on the internet allows it to be distributed. Online social networks have emerged to allow individuals to exchange “information”. This information includes personal profiles, videos, stories, photographs and other personal information. The information is social in its nature and is of low commercial value. The individuals that create or distribute the information do not want to pay to have it distributed. After it is published, other individuals do not want to pay to see it. The publishers won’t pay for distribution and the readers won’t pay for to see the content. The business that provides the forum for exchange must seek another source of revenue. The source of revenue is advertisers. This model is very similar to a free to air TV station which broadcasts free content and advertisers pay to send their message. It is very difficult to obtain quality information on the demographics on online social network audiences. It may be even harder to see a clear link between placing an advertisement and revenue to the advertiser. In some networks, the placement of advertising may result in audiences discontinuing use of the network. In the open system of the internet, users can get their content from somewhere else. They are not captive to a closed system. The achilles heel of online social networks is that the information being shared has minimal value to the market participants.

Online social networks are a part of the person to person sector of the internet. Personal information is unlikely to have a high commercial value. Business must create, distribute value to survive. Only information which is exchanged between businesses and people has commercial value.

The next wave of internet companies are likely to target the distribution of information with a commercial value. Intermediaries are unwilling to sacrifice the high economic rents for distribution and implement the new business models to take full advantage of the internet. These new models are likely to result in significantly less revenues

Online industry networks (P2B - Person to business)
Industrial use of the internet is at an early stage. Existing corporates have used the internet to reduce costs by distributing information in a lower cost means. However, there are few examples of industries that have been completely transformed. The primary purpose of some major industries is distribution of information between market participants. They have significant economic rents for taking information from one market participant, mildly transforming it and delivering it to another market participant. The internet offers free (almost) distribution and the ability to find other market participants. These significant economic rents for distribution seem redundant in an age of the internet.

The industry that is most advanced in its transformation is the music industry. Music is now distributed online direct to the devices that play them. However, the fundamental structure of the music industry remains the same. High economic rents continue to be paid for access to a closed system of record companies, producers and retail stores. The ultimate expression of the internet would be that each producer of content would sell directly to each consumer of content. For the music industry, each ban would sell their music direct to the consumers over the internet. Perhaps, some of the free and subscription models will be adopted by bands.

The next wave of internet companies are likely to target the distribution of information with a commercial value. These are Online Industry Networks. These networks will simply break down existing labour intensive interactions and coordinate them in the internet. They will rely significantly on user generated content and each user assuming responsibility for the distribution of that information. The current intermediaries are unwilling to sacrifice the high economic rents for distribution by adopting new business models. Only new entrants will apply new business models to take advantage of the internet to deliver products and services at significantly less cost, in less time and without needing to visit a specific retail location. These businesses will facilitate the exchange of information from people to business. Freelancers from all around the world will manufacture the information and deliver it directly to the end user. An online industry network promote products and services of the community. Service providers can find customers and customers can search for service providers. The consumers of the information may have access to products and services previously denied by closed distribution channels.

Online Industry Networks may flourish. Many will argue the benefits, costs and risks of the new business models. Some of these arguments will be valid, some will be blatent attempts to protect existing economic rents. These issues need to be carefully considered by the entrepreneurs, government, industry and the consumer. The opportunity for the internet to deliver a superior product or service at less cost is real. Only time will tell the extent to which a new way of doing things is allowed to emerge.