1. 10/9/08
Aims and Objectives
The Network Economy:  Provide definitions and relevant examples
 Structure presentation using chapterʼs framework
New Rules of the Game
 Conclude with our individual critiques
Alexander Horre
Grant Austin
Colin de Mello
Aussiegall - flickr
Managerial Capitalism
Economic transformation
➪
Industrial Network Economy = E-Business
 What is managerial capitalism?
(Zuboff, 2005)
 How is value obtained?
“New”  Firm before the customer
Support
 What are these transaction costs?
Information
Knowledge  The “value chasm”
“Kevin [Kelly] argued that the era of computation is over, we are
entering the age of communication.” (Li, 55) “The company centric value system no longer works. Customers have
more choices and less satisfaction.” (Pradalad, Ramaswamy 2004)
1

2. 10/9/08
Distributed Capitalism
Co-Creation
(Zuboff, Maxmin 2002)
(Prahalad, Ramaswamy 2004)
 What is distributed capitalism?
 Co-creating unique value
 “Brewing of a perfect storm of 3 forces”
 Customers now define and create value
 Itʼs about the intangibles
 Connect customers than isolate
 “Value is realized through advocacy and trust”
 Stems through five forces
Managerial capitalism is transaction economics, and it’s replaced
with relationship economics, dependent not on optimization, but
on the individuals paying for deep support. (Carter, 2004)
Co-creation: D.A.R.T. Model
Migrating to co-creation diagram
Dialogue
Transparency Access
Risk assessment
(Prahalad, Ramaswamy 2004)
2

3. 10/9/08
What are these transaction costs?
So…have basic rules changed?
 Industrial economy
 Network economy
 Ronald Coase
 high transaction costs
 lowering of transaction costs
 Discovered 1937
 high vertical integration
 high horizontal integration
 Due to market inefficiency
 ownership of value chain
 specialized partner value chain
 Firms organized to reduce
 physical assets = value
 intangible assets = value
 law of diminishing returns
 law of increasing returns
costs in value / supply
 high market entry barriers
 low market entry barriers
chain
 information asymmetry
 information symmetry
The market is improving
ICT Proliferation: “Itʼs Everywhere!”
 The World Wide Web became the ʻkiller appʼ
“Today the market is improving its efficiency at the speed of
Moore’s Law and Metcalfe’s Law.” (Downes, Mui 1998: 7)
“The pervasive diffusion of new ICTs into many
“Due to Moore’s Law making digital devices cheaper and
areas of economic and social activity is enabling
powerful, a new way was found to share their content. [A] more extensive flows of information.”
project called the internet.” (Downes, Mui 1998: 6) (Roberts, Andersen, Hull, 2000: 28)
3

4. 10/9/08
Twelve new rules (but now ten)
 Kevin Kelly
 Information or network?
 Discontinuities
 Profound implications
 New rules must be applied
Axes of the New Rules
Rule 1: Embrace the Swarm
 Jelly beans
 What about computers?
Agility
 The pervasive net; complexity from simplicity
 Strategy: move technology to invisibility
Wealth Undo
Quicker “No one is as smart as everyone.” (Keely cited by Kelly, 1998)
1
4

5. 10/9/08
(Gordon) Mooreʼs Law
Example: Embrace the Swarm
 1965 paper
 Transistors double every two years
 Powerful, cheaper
 Embrace dumb power?
 Nanotechnology?
Dave Ward - flickr
Projectarchive.net - flickr
“We are connecting everything to
everything.” (Kelly, 1998)
Itʼs about invisibility
Or….Embrace the Swarm
“Information is easily accessible to anyone, and knowledge
consumers can make informed decisions.”
“Advances in the internet and in messaging and mobile phone
technologies mean that consumers can easily communicate
with one another in various communities…”
(Li, 53)
Todbot - flicker Sk3 - flicker
5

6. 10/9/08
How do politics fit into this?
Kevin Kelly says…
 Political Blog: Barack Obama
 Internet fundraisers
“As technology becomes ubiquitous it
also becomes invisible. The more chips  $5.01
proliferate, the less we will notice them.  Blog posts, widgets, e-mail,
The more networking succeeds, the less
youtube videos, facebook pages,
we’ll be aware of it.” (1998)
Twitter, digg links, flickr photos!
Google images
Kevin Kelly
Embrace Dumb Power: Politics!
Rule 2: Plentitude
 Metcalfeʼs Law: n(n-1)/2
 Value: abundance, not scarcity
“We're going to do it the right way, with small
donations from people like you…” (Plouffe, 2008)  N2 is actually not fast enough
 Reedʼs law: 2n - n - 1
“Like Kelly for the economy…lobbyists pale in
comparison to the power brought by an organised
voter constituency.” (Rosenblatt, 2000)
Google images
Robert Metcalfe
6

7. 10/9/08
Example: Plentitude
Rule 2: Plentitude
Fax Machine
“Once a standard reaches critical mass, its value to
everyone multiples exponentially…1993 critical mass was
reached…since then the value of each additional node and
user was so great it began to exert something like a
?
gravitational pull…” (Downes, Mui 1998: 5-6)
Does this remind you of anything today? ….
Why?
Plentitude: Social Networks
7

8. 10/9/08
Rule 3: Exponential Value
Rule 3: Exponential Value
 Itʼs about Metcalfeʼs law
“…industrial economies of scale increase value gradually and
 Itʼs also about Mooreʼs law
linearly. Small efforts yield small results; large efforts give large
 Increasing returns
results. Networks…increase value exponentially—small efforts
reinforce one another so that results can quickly snowball into
quot;The value of Windows increases exponentially as its
an avalanche.” (Kelly, 1998)
users increase arithmetically” (Kelly, 1998)
“Networks encourage the successful to be yet
more successful.” (Arthur cited by Kelly, 1998)
Example: Exponential Value
Rule 4: Tipping Points
 Industrial vs. Network Economy
“Moore’s Law makes it possible, while Metcalfe’s
 Lower tipping points to the “knee”
law makes it profitable.” (Downes, Mui 1998: 12)
 The famous ʻlily pondʼ example
“How long can you hold out not having a phone?” (Li, 57)
8

9. 10/9/08
Example: Tipping Points
The knee
Luv to travel - flickr
(Kelly, 1998)
Marketplace vs. Marketspace
Rule 5: Increasing returns
 Economist Brian Arthur: Law of Increasing returns
 Law of diminishing returns
 Marketplace vs. marketspace (Rayport, Sviokla 1994)
 Virtuous circle
“It’s a non-zero sum game.” (Anderson, 2006)
(Rayport, Sviokla 1994)
9

10. 10/9/08
Example: Virtuous Circle
Rule 6: Inverse pricing
…with Bit Torrents
 Inverse pricing
 Moore, Metcalfe, Gilder
Membership Value  Is this bad news for profit?
The driving force behind this transformation is Moore’s law,
Gilder’s law and Metcalfe’s law. (Downes, Mui 1998: 5)
Value Membership
Example: Inverse Pricing
Rule 7: Follow the free
…with Gilder’s Law
 Netscape vs. Microsoft
 XBOX 360
 Printers and ink
 Java - $10,000 manual
 Openness
“Only factor becoming scarce in a world of
abundance is human attention …” (Li, 59)
George Gilder
10

11. 10/9/08
Example: “Open Enterprise”
Example: “Open Enterprise” chart
Active Dumb
Capture Discover
Smart
value value
Destroy X
“The Web is Agreement” (Downey, 2008) Dumb value
Open Source Awareness Day, 2007
Rule 8: Allegiance - feed the web
Example: feeding the web
 Web Strategy
 Value is in the network, not the firm!
 Transaction costs, again!
VS.
 “The perpetual beta” (Downey, 2008)
“walled garden”
Google images
John Hagel III
“Feed the web first to establish and grow
“Sony…controlled the music business.
the market.” (Li, 60)”
They paid scant attention to
mp3…” (Tapscott and Williams, 2007: Google images
57)
11

12. 10/9/08
Rule 9: Law of Devolution
Example: Fast Company
Abandon what is profitable today for what will be
profitable tomorrow.
Rule 10: Law of Displacement
Example: Oil, Music, Automobiles
“…[the] displacement of materials by information.” (Li, 60)
“In the Network Economy, the net wins. All transactions and
objects will tend to obey network logic.” (Kelly, 1998)
12

13. 10/9/08
Rule 11: Sustain disequilibrium
Example: Google
Whatʼs the unifying business strategy
behind these services?
Maintain a delicate balance of order with
disorder
“Innovation is a disruption; constant innovation is a perpetual
disruption; and the goal of a well-made network is to sustain a
perpetual disequilibrium.” (Li, 61)
Rule 12: Inefficiencies
Example: StandoutJobs
 The right job is more critical than improving
established processes.
 Solving problems is investing in weakness; seeking
opportunity is relying on the network.
“Stop Losing Out on Great Talent”
13

14. 10/9/08
Future scenario? … Probably not.
What is the future scenario?
Jhhwild - flickr
digg
Network Economy: future scenarios
Closing comments
 It this an evolution or revolution?
 Future scenarios:
 1. Yes, this is a new economy
 2. Sort of…incremental changes
 3. Itʼs an illusion - productivity?
 4. Itʼs all hype! Crash and burn!
14

15. 10/9/08
Any questions?
References
Anderson, B., Hull, R., & Roberts, J. et al. (2000)
 We recommend the following books:
Knowledge and Innovation in the New
 Wikinomics (2007) - Tapscott & Williams
Economy, Camberley: Edward Elgar
Service
 The Long Tail (2006) - Chris Anderson
Publishing Ltd
 Unleashing the Killer App (1998) - Downes & Mui
Anderson, Chris. (2006) The Long Tail: Why Future
Business is Selling Less of More, New
York: Hyperion
Carter, Locke. (2007) The Support Economy: Why
Corporations Are Failing Individuals
and the Next Episode of Capitalism, by Zuboff, S. &
Maxmin, J. Reviewed in: Technical Communications
Quarterly 3:365
References
References
Downes, L., & Mui, C. (1998) Unleashing the Killer Prahalad, C.K. & Ramaswmay Venkat. (2004) Co-creating
App, Boston: Harvard Press value with customers, Strategy & Leadership, 3, 4-9
Downey, Paul. & Codeworks Connect. (2008) Web 2.0
Rayport, J. & Sviokia J. (1994) Managing in the
Conference. Life Center Conference
Marketspace, Harvard Business Review, 141-150
Center, Newcastle upon Tyne, 7 Feb.
Rosenblatt, Alan J. (2000) Techno-Cultural integration,
Kelly, Kevin. (1999) New Rules for the New Economy,
GeoPolitics, 5:3, 177-184
http://kk.org/newrules/contents.php
Accessed 12 Feb
Li, Feng. (2007) What is E-Business? How the
Internet Transforms
Organizations, Oxford: Blackwell Publishing
15

16. 10/9/08
References
Tapscott, Don & Williams, Anthony. (2007)
Wikinomics: How Mass
Collaboration Changes Everything, London:
Atlantic Books
Zuboff, Shoshana. (2005) Moving into the Support
Economy,
http://www.thesupporteconomy.com/admin/assets/
GDI_Impuls_1_05.pdf Accessed: 13 Feb
16