Exploring Network Economics

[via Abhay Bhagat] Michael Mauboussin writes:

Economists have successfully described the economics of both information and networks. These economic principles appear durable. It is the combination of information and network properties that creates opportunities for businesses and investors. Most investors have not internalized these ideas.

We believe the importance of information-based networks is increasing in todays global economy for four reasons:

1. Physical capital needs are lower than they were in the past. Information-based networks require less capital as they grow than physical networks do.

2. Networks demonstrate increasing returns. Most industries benefit from supply-side increasing returns to scale: higher volume leads to lower unit costs, up to a point. In contrast, successful networks generate increasing returns from the demand-side as users beget users.

3. Networks can form faster and more frequently than in the past. Because of plummeting communication and computing costs, the barriers to creating a network are declining. But even though the barriers to entry are low, the barriers to success remain high.

4. Networks can spread globally. Because many networks have high upfront costs and low incremental costs, they can expand rapidly within countries and across borders.

This report focuses on how to categorize networks, how they affect economic value, and how they form.

Barrett on Business Models

InfoWorld writes about a talk given by Intel’s CEO when he was in India recently:

Peer-to-peer (P2P) sharing would never have gathered momentum if the music industry had adopted models for distribution over the Internet, said Intel Corp. Chief Executive Officer Craig Barrett.

“The music industry absolutely stonewalled the distribution method associated with the Internet to the point that peer-to-peer sharing became so prevalent, that it didn’t make much difference,” Barrett said.

“Five to eight years too late we are starting to see distribution models set up for distributing music over the Internet, where actually somebody gets paid for it,” he said. “People are inherently honest and want to pay for goods and services and that would have happened if the music industry had adopted the technology and come up with commercial distribution models a lot earlier.”

The film industry faces a similar challenge as bandwidth increases enable downloading movies over the Internet. “It would be interesting to watch whether the movie industry will in fact rapidly and aggressively adopt a distribution model consistent with the new technology,” he said.

A number of companies have benefited by changing the rules, said Barrett, citing retailer Wal-Mart Stores Inc. and Dell Inc., which sells configured-to-order computers direct to customers. Wal-Mart uses IT to control inventory and point-of-sale information, to know exactly what is selling at any of its locations, how to price a product, how to price it by region, and how to replenish inventory automatically.

“Wal-Mart is really an IT company in disguise,” Barrett said. “They just happen to sell products to the consumer.”

Intel changed the rules to its advantage using four key strategies, according to Barrett. These included its “Intel Inside” branding program, shifting the definition of computer architecture from computer makers to companies like Intel, creating a new distribution channel of about 180,000 system integrators that build computers with Intel technology, and setting up a venture capital business that invested in companies with technologies supporting or compatible with Intel’s own technologies.

Interview with Prof. Jhunjhunwala

Rediff has an interview with Prof. Ashok Jhunjhunwala of IIT-Madras, with whom I am working on our thin clients project. Prof. Jhunjhunwala talks about his vision for rural India:

Although I don’t dream only for rural India, rural India comes first in our dreams. Rural India is where 700 million people live. India cannot be fully enabled unless these people get enabled.

In the eighties, till companies like Hindustan Lever after being beaten by Nirma decided to go to rural India and make FMCG products work there, the market for such products was only urban India. But after that, everything changed.

In the same way, the telecom market is largely in urban India, and in the minds of most of the operators, money cannot be made in rural India. We, on the other hand believe that it is possible to not just provide telephone and Internet connections in every village profitably but use that connection to drive not just health and education in the village but also the rural economy.

We believe that telephones and the Internet can have a larger impact in rural India than in the urban areas.

We strongly believe that the per capita GDP of rural India can be doubled in the next 8-10 years using Internet as the starting point.

What is needed for rural micro enterprises to flourish are four very important components. One is finance. Here, what we are planning is using the Internet kiosks in the village to bring banks to rural India. That is our first job, and that is where our ATM machines costing just Rs 40,000 as against the ones available in the market now for about Rs 900,000, will play a role.

Second important thing for any micro enterprise to flourish is, training, information and support. Here, our video-based training can be used to train rural youth.

The third thing that they need is, buying, selling and delivery of goods; that is, logistics. We are looking at using the Internet again to not just buy and sell, but provide logistics support.

The fourth thing that is required is sharing of risks. It is here that insurance schemes that share risks will play a major role. I will give you an example. ICICI has developed a product which links repayment of loans based on measurement of only rainfall in a district.

These four components will significantly enhance rural India. So, all that we are developing now, the Internet kiosks, the ATM machines, the medical diagnostic kit, etc. are directed towards achieving what we dream of; that is doubling the rural GDP by providing education, health facilities and promoting entrepreneurship.

Also take a look at some of Prof. Jhunjhunwala’s presentations.

Audience Match Network

Fred Wilson writes about Tacoda:

The idea is to build a cooperative network among publishers where the data about what people are interested in can be used to target advertising. If you’ve recently been researching voice over internet services on the Internet, then USA Today can offer you Vonage phone service when you are reading the sports page. If you’ve recently been visiting sites to find a new mortgage, The Tampa Tribune can offer you a better low cost mortgage when you are reading the front page.

The big trick is to do this without violating anyone’s privacy. That is the reason why previous attempts to do this by Doubleclick and Engage failed.

Tacoda built the Audience Match Network with privacy concerns at the forefront. The Audience Match Network doesn’t store any data, it just makes real-time matches to serve targeted ads. No personally indentified information is used in the network. It’s all anonymous. And Tacoda is committed to keeping it that way.

China’s Semiconductor Industry

WSJ writes about China’s efforts to build its semiconductor industry ground-up:

Semiconductor design has potentially huge benefits for China. Chip-design companies can create valuable intellectual property and help determine global technology standards. Qualcomm Inc., for example, the world’s largest independent chip designer, earns most of its revenue, which totaled $4.9 billion in its latest fiscal year, from chip designs using its CDMA wireless technology. And whereas profit margins at the companies that assemble computers and other gadgets are often around 5%, margins at successful design companies are frequently well into double digits.

China is still years behind more advanced economies like the U.S. and Taiwan in chip design. But its rapid takeoff is attracting attention from some established heavyweights. Companies such as Germany’s Infineon Technologies AG and Philips Electronics NV of the Netherlands have set up chip-design operations in China. Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co., the world’s biggest contract manufacturer of chips, compares China’s design industry to an object with “zero speed but infinite acceleration.” His company this year opened a nearly $1 billion plant in Shanghai, its first in China, in part to cater to local design companies.

“If you look at the large number of small design companies created here, you are seeing the foundation of an industry created,” Craig Barrett, Intel’s chief executive, said in an interview during a trip to China this month.

China’s main attraction for chip-design entrepreneurs is the country’s vast domestic demand for semiconductors, most of which are now imported. Operating in China also puts them in proximity to the electronics manufacturers who buy chips for their products, and who are increasingly concentrated in China.

TECH TALK: Tomorrow’s World: Happenings

There is a lot happening in the world of technology. Even as we think about how we can leverage these changes, let us take at some of the unfolding events first globally, then in India.

Om Malik wrote, in a new column entitled Coverge Sense for Business 2.0:

Though a slow starter, a new era of convergence is upon us, and it is the driving force of change and growth for the entire electronics industry. We’re no longer talking about the PC vs. TV debate, mind you. Think about this: Always-on Internet connections of both the wired and the wireless kind have become commonplace even in the farthest corners of the world. At the same time, Internet speeds are inexorably increasing, in some places topping 50 megabits per second, enough to download programming from three television channels simultaneously. The upshot: Cable companies want to sell voice and wireless services along with their current products, video and data. Phone companies want to add video streams to their package of offerings.

And if that is not enough confluence for you, we’re seeing the continued digitization of media. Folks are buying new music by virtual truckloads from Apple’s iTunes store, while companies like Vodafone are offering television streams on their 3G cell-phone networks. TiVo has entered the popular vernacular, if not the annals of profitability, as it streams cable programming and, soon, Internet programming throughout the home. Radio is leaving its terrestrial roots and is being replaced by signals from the big birds in the sky. Video-on-demand, long an expense item for adventurous cable chief executives, is now as commonplace as a cable set-top box. Microsoft and Intel, two big proponents of personal computers, are betting the farm on the digitization trend.

David Kirkpatrick of Fortune wrote about the challenges faced by the big companies in an article entitled Technology in Turmoil:

It’s no secret that Microsoft is struggling to justify its business model in the face of an open-source onslaught. The newly released open source Firefox shows continued signs of taking market share from Microsoft in the critical browser businesspotentially the software giant’s most valuable chokepoint.

Intel, the other duopoly partner at the top of the industry, also seems suddenly weakened. While some recent articles overstate the scale of threat that AMD poses to Intel, that danger is real nonetheless.

Look at Sunit wasn’t long ago that everyone assumed the company was toast. Now nobody seems sure either way. What does it mean that Sun is making its crown jewel, the Solaris operating system, open source?..Now with Solaris, they can get the same thing with an industrial-strength operating system. And Sun, which was a proprietary hardware company only yesterday it seems, is now one of AMD’s most important allies.

Then over in the enterprise software business, dogged little Salesforce.com continues to define an entirely new approach to using technologyso customers can merely think of what they’re getting as functionality. Who cares if it’s called software or not?

Let’s not leave out servicesThe new globalized business model poses gigantic threats to incumbent services players, particularly those that aren’t sufficiently diversified, like Cap Gemini, Ernst & Young, EDS, and Accenture. As Infosys CEO Nandan Nilekani asks, how will these players compete in a world where their customers have the option of vastly lower prices for comparable services from Indian companies? How quickly can they shift their own employee base to the lower-cost model?

Tomorrow: Happenings (continued)

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