As part of Curtin University – Internet Communications degree subject Net205, students were divided into groups to evaluate an e-commerce business to define and explain:
What is the fundamental economic basis of Internet commerce?
The Oranges Team consists of the Curtin students studying remotely across Australia and New Zealand. Having never met or worked together on projects previously, we are working together to build this website and associated video presentations to a tight deadline. This site details how via e-commerce and Internet technologies, Apple iTunes changed the music industry and the way we listen and purchase our music.
Overview of Internet e-Commerce
There are basics of internet commerce that underpin the success of companies such as iTunes Store. Liebowitz (2002) describes the different challenges for companies trying to make a living out of selling on the internet and the importance of understanding that the rules are now different. On one hand, he describes how the internet creates value by the reducing the transmission costs of information and speeding up that transmission, but on the other, he describes how this isn’t enough to ensure that a profit is made. One only needs to look at the dot.com bust of the early 2000’s to see that the using the internet alone for your business does not necessarily mean a profit; there are some core aspects of internet e-commerce that need to be understood in order to make that profit. Some of these core aspects are known to make up the ‘network economy’, or the ‘new rules’ (Kelly, 1997) that define e-commerce carried out over the internet.
The case study concentrates on these concepts and how Apple have applied them to rise to the top of the digital music business, and how they intend to stay there.
Some of the key concepts pertaining to internet commerce are as follows:
Knowledge Economy:
In the Knowledge Economy it is the ability of businesses to bring together the combined intellect of many to solve problems and build solutions. Rather than relying on materials and labour and traditional manufacturing processes, it’s the importance of and the ability to gather and concentrate the power of a distributed workforce of knowledge and creativity of many, that makes a truly valuable business in a Global Knowledge Economy.
Attention Economy:
The most valuable aspect in a network economy and internet e-commerce businesses is attention, because attention translates to profit. However, in the internet age consumer attention is limited and fragmented (Dharmesh, S, 2009) and difficult to attain. The quest for this attention and the lengths that companies go to in an attempt acquire it make up what is known as the ‘attention economy’. This includes giving away products for free to gain this attention and this ties into the gift economy below.
Gift Economy:
The gift economy also known as the free economy is based upon the idea of businesses giving away products and/or services in exchange for consumer attention. The idea is that while the majority of customers pay for nothing, they are subsidised by the minority who pay for a premium version. (Harvey, 2009)
Network Economy:
Described as: “An enterprise based system of developing, producing and marketing goods, in which a substantial amount of amount of business activities is carried out between firms”. (de Man, A., 2004). Obviously this is a very broad view of the network economy, and relates to businesses conducted both on and offline. However, the internet has hugely exascerbated the driving forces of the network economy by making the connection between companies much easier to achieve.
De Man describes the drivers behind the network economy:
- Free-trade (internationalisation and liberalization): allows access to knowledge, resources and markets in other countries (p.9) .
- Competition: The need for companies to constantly strive to stay on top.
- New management techniques: to stay on top of the changing networked environment, with the constant need to adapt to new partnerships and allegiances.
- The demand for solutions and individualised products : Generated by the level of wealth in modern economies and forces partnerships as few companies can achieve the level of individualisation required by themselves.
- The rapid level of technological progress: Technology is advancing and indeed converging so rapidly that companies need to pull resources to compete so as not to miss out on a new technology (p.10)
The case study also discusses The Age of Access i.e. Rifkin’s notion “Ownership too slow an institution in the internet age” (2001), which requires companies (such as iTunes) to adapt and adopt different business models to make money – i.e. subscription/advertising.
Other key concepts and terms that relate to the network economy and e-commerce fundamentals, as covered in this case study are described in the terms section and include: Network effects, Winner Takes All, Economies of Scale, The Long Tail, The Long Tail Aggregator, Disruptive Technology, The Law of Churn, Tipping Point.
Go to the next section: iTunes Case Study to find out about the intersection of these e-commerce fundamentals and the Apple iTunes Store.
References
Image: sjoerdwjins “apple_orange” July 25 via Flickr, Attribution 2.0, Generic
Dharmesh, S.. (2009, May 08). The Attention Economy vs the Wallet Economy. [weblog message] Retrieved June 12, 2010 from: http://onstartups.com/home/tabid/3339/bid/9347/The-Attention-Economy-vs-The-Wallet-Economy.aspx.
de Man, A.P. (2004). The Network Economy: Networks Past and Present. In, The Network Economy, Strategy, Structure and Management (pp. 1-18). Cheltenham, Glos UK: Edward Elgar Publishing Ltd.
Harvey, M (2009). Chris Anderson: web creating free economy. Retrieved July 25, 2010 from http://technology.timesonline.co.uk/tol/news/tech_and_web/article5939331.ece
Kelly, K. (1997, September). New Rules for the New Economy: Twelve Dependable Principles for Thriving in a Turbulent World. Wired. Retrieved May 23, 2010 from: http://www.wired.com/wired/archive/5.09/newrules_pr.html
Leibowitz, S.J. (2002). Basic economics of the internet from Re-Thinking the Network Economy: The True Forces that Drive the Digital Marketplace. New York: Amacom. (pp. 9 – 24). Retrieved June 12 from e-Reserve. Curtin University.
Net205 Oranges Team - iTunes Review 