To Have and to Hold
It’s revealing that all of these examples, with the exception of eBay, are tied into physical, real-world products. Windows ships on a physical PC. AOL either ships on a PC or, rarely now, comes on CD-ROM or diskette. The Palm OS comes on a PDA, built by Palm, Handspring, or companies like Kyocera, which makes hybrid PDA/cell phones. ICQ, if it hadn’t been for its acquisition by AOL, was probably doomed to a death spiral, as it had no sources of revenues other than rapidly falling banner ad CPMs.
What’s new in the New Economy is the ability to combine a proprietary standard that serves as a barrier to entry (be it the Nintendo operating system or the AOL application) with easy economies of scale and a proven revenue source from a physical object (Game Boy units and cartridges; Dell laptops with Windows on them; Visors with the Palm OS). People like to pay for atoms. They’ll pay for bits, but those bits are best tied to a physical object, as the audio CD versus MP3 battle demonstrates: A kid will pay $16.99 for Madonna’s new CD, but won’t pay anything close to that for its MP3 equivalent. Why? Because with an MP3, there’s nothing to hold.
Ultimately, eBay is the most interesting phenomenon of all. If there is one true New Economy company that only the Internet could have created, it is eBay. It embodies all the elements that every business student has ever aspired to: minimal production costs that stay effectively flat in proportion to escalating demand; no inventory or distribution costs; inherent word-of-mouth marketing; pricing decisions managed entirely by its customers. What is there to do at eBay? I’m sure managers there would tell me that they have lots to do. But compared with Microsoft or General Motors, or just about any other profitable company on the planet, it seems that aliens could swoop down and kidnap all of eBay’s work force, and the place could just run itself on auto-pilot for a long while, until someone noticed the return of guns and human organs for sale. Other than that, we’d never be the wiser.
How do we make more successful companies like that? For some reason it’s very hard. Information Rules doesn’t have the secret formula for success, but it comes closest to giving us a primer on how to think about these issues. Especially today, as emphasis has shifted from the completely virtual company to hybrid atoms-and-bits companies that sell something tangible, Information Rules’s emphasis on linking traditional business models to the opportunities and challenges of a networked economy remain insightful. If there is one New Economy business book that has the shelf life to make it through these economic times, that’s the one. Of course, if you’re looking for the magic potion that will solve all your Internet problems, there isn’t a book out there with the recipe. If there were, one thing is certain: The author wouldn’t be in the book business.
David S. Bennahum, Davidb@newthingsvc.com
David S. Bennahum is a partner at New Things LLC, a New York–based venture-capital group that finances mobile telecommunications infrastructure and software. He is the author of Extra Life: Coming of Age in Cyberspace (Basic Books, 1998) and a contributing editor to Wired. His article “The Biggest Myth of the New Economy” appeared in the First Quarter 2000 issue of s+b.