Re-Thinking the Network Economy:The True Forces That Drive the Digital Marketplace

Stan Liebowitz
New York: Amacom
A Review by William Mougayar

Flashback Economics

More than eight years into the Internet economy, we need to seriously review our lessons. Re-thinking the Network Economy by Stan Liebowitz wants to be that daring post-mortem book with an “I told you so” attitude. Hindsight is always 20/20, and assuming there was death, an autopsy is always revealing.

The book forces us to think harder on certain fundamental truths of Internet commerce, but it doesn’t deliver on shedding new light on the “true forces that drive the digital marketplace”, a tall order disguised by the catchy sub-title.

Was the Internet over-hyped between 1998 and 2000? Of course, yes. Were the resulting benefits greater than the drawbacks? Of course, yes. That doesn’t make the Network Economy such a bad phenomenon.

Several well-covered lessons: 1) Being first doesn’t guarantee success, 2) There is no winner-take-it-all or customer lock-in, 3) Not all products are impacted by Internet commerce, 4) Prices are not shattered as a result of product availability on the Internet, 5) Established companies’ profits are not eroded because of Internet competition and 6) Advertising revenues alone aren’t enough.

Unless you were an active participant in, and not just an observer of the Internet economy, these truths were probably visible by the end of 1999. Nonetheless, Liebowitz’s analysis is useful.

There is a brilliant chapter entitled “The value-profit paradox” that dives into why products sold over the Internet aren’t perfect substitutes for their equivalent at bricks-and-mortar stores. Liebowitz explains why he doesn’t believe Internet companies will be able to generate above-normal profits with their below-normal operating margins because competition forces them to spend above-normal expenses which is not good for profits, in the long term.

The author provides an eloquent crash course on Internet advertising, shattering the old myth of reliance on the advertising model as the sole revenue source. He even goes as far as noting that the advertising cost per viewer for the Internet is still four times higher than for television, prompting the following observation: “The real question is whether the advertising value of an hour’s contact with an internet user is worth more or less than the value of an hour’s contact with a television viewer.” The basis for this astute observation is grounded by the irrefutable fact that the average person in the U.S. spends 1633 hours per year in front of a television set versus 124 hours on the Internet.

The author offers exquisite candor while taking pleasure at calling off the aberrations uttered by so-called prescient Internet experts such as Mary Meeker (Morgan Stanley), Kevin Kelly (author), Bill Gross (entrepreneur) and other infamous people by pulling quotes that catch them saying nonsensical statements such as “information wants to be free”, “we have first-mover advantage” or “most of these are winner-take-most or winner-take-all markets”. Although there has been very little mea culpa from old experts, this trial by absentia is a welcome alternative.

But too much economic theory and reliance on academically proven principles plagues this book which pegs economic theory as the Bible or foundation for any discussion. How about the real marketplace? Although the author is solidly grounded in economic theory and goes at great length to linking age-old economic theory to Internet characteristics, any business executive or entrepreneur will tell you that you learn from mistakes and failures or by pushing the envelope often more than by merely following economic theory. Part of the entrepreneurial spirit and intent is to refuse to admit there are boundaries.

Academic disputes are interesting, but not all of them are relevant to the way business operates. But maybe, if the Internet has graduated to the academic dispute level, it must be a good thing.

Still, there are many instances where you can’t dispute the logic. “At its height, practically everyone was headed for the fabled gold, but they were looking for it in the ether instead of in yonder hills.” This makes us wonder whether the Internet crash might have been substituted by a soft landing had more of these voices been heard when they were needed the most.

The book falls short by focusing solely on Internet consumer commerce. The business-to-business impact of the Internet may have been intentionally absent, but it is an essential part of the Internet economy. And it is where you will find real value and meaningful lessons. Ask General Electric, Cisco, or Dell if their company would be different or not without business-to-business e-commerce.

There is also very little coverage of Internet services. Financial and travel services today would be very different without the Internet and are providing value on both sides, to buyers and sellers. I can’t imagine starting a pleasure or even business trip without checking Internet fares. And the volume of Internet-enabled financial transactions easily rivals activity on private networks.

Liebowitz has mastered the art of deductive theory, but sometimes, the book drifts into esoteric analogies such as the Dvorak versus QWERTY keyboard conundrum, BIG MAC pricing theories, the diamond-water paradox and - yes again - the Betamax versus VHS story.

The last quarter of the book is a random but detailed walk into the uncertainties of copyright laws and the role of peer-to-peer networks in enabling digital reproduction. The conclusions are tough to draw out, but the issues are well laid out.

Although many of us would like these ugly Internet crash years to be stricken from the history records, the memories are still with us. Pick-up this book if you have sobered up from the Internet party (or never attended), or it may awaken flashbacks.

William Mougayar is the author of Opening Digital Markets (1998) and a business consultant.

* Re-thinking the network economy: the true forces that drive the digital marketplace, by Stan J. Liebowitz. Published by AMACOM, 2002. Mr Stan Liebowitz is a professor of managerial economics at the University of Texas at Dallas and coauthor of Winners, Losers & Microsoft.

The book examines exactly why so many e-commerce firms went wrong, and how, utilizing traditional economic concepts, businesses can build the foundation for success in the future.
Copyright 2003 Yale Center for the Study of Globalization