Mark Twain humorously noted that reports of his death were exaggerated, much like the initial overhyped expectations of the Internet transforming every economic principle. The initial belief that the Internet would create a completely new economy has been replaced by the understanding that traditional economic laws still hold, even online. What needs to adapt are our expectations, recognizing that while the Internet remains a crucial business tool, it won't upend basic economic concepts like supply and demand or economies of scale. Instead of expecting the Internet to revolutionize markets, we should anticipate it to bring about evolutionary changes that still respect longstanding economic laws, which have previously absorbed the impact of numerous technological advancements without fundamental alteration.
Despite the initial hype and the complex jargon that often surrounds discussions of the Internet, its core value lies in offering a more efficient method for the exchange of information. This efficiency is crucial because the transmission and retrieval of information are foundational to the economy. However, the Internet represents more of an evolutionary step than a revolutionary leap. It enhances the functions previously served by telephones, television, newspapers, and radio by adding the capability for two-way communication, allowing users to specify the information they desire. Given these characteristics, there's no inherent economic reason why an Internet-based business should be inherently more profitable than its traditional counterparts. In fact, the ease with which customers can find alternative suppliers online suggests that Internet-based companies will need to maintain competitive pricing. Ultimately, success in the digital marketplace, much like in the traditional one, boils down to a simple economic principle: companies that offer the best products at the best prices will thrive. Many analysts initially believed the Internet would be defined by three special economic characteristics: network effects, economies of scale, and winner-takes-all markets. Network effects, where a product becomes more valuable as more people use it, were assumed to apply broadly to e-commerce due to the Internet's nature as a large network. This assumption led many early e-commerce ventures to invest heavily in market share, expecting to reap benefits from network effects that, for most, never materialized. Economies of scale, the concept that costs per unit decrease as production volume increases, are indeed present in many high-tech products due to the significant initial development costs and relatively low costs of duplication and distribution. This principle is more likely to provide a long-term benefit than network effects. The expectation of winner-takes-all markets, where one company dominates a market niche due to network effects and economies of scale, has also not consistently held true. While certain products, like Microsoft's operating system software and Intel's computer chips, exhibit these characteristics, most Internet-based companies face the same logistical challenges as traditional businesses in areas like warehousing, shipping, and customer relations. Consequently, the online retail landscape often mirrors that of the physical world, with multiple dominant companies catering to different market segments. The belief that "the Internet changes everything" has waned, revealing that the fundamental rules of business and economics remain largely unchanged by technological advancements. The enduring nature of these principles underscores that technological progress alone cannot alter the basic economic forces at play. This realization serves as a reminder of the limits of our technological hubris and the importance of adhering to time-tested business strategies in the digital age.
book.moreChapters
