2.26.2008

Why Everything is Free on the Web
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One time when I was in Korea, an enterprising merchant extolled his collection of leather coats and handbags, striding in front of his store in the crisp winter air, declaiming expansively with a dollop of exuberance and showmanship: "Everything is Free!" He did not fail to get attention. It's the kind of statement you would not hear in Japan.

Web Economics work much the same way. The truth is the web sunders the relationship between markets and hierarchies in the area of theory known as Transaction cost Economics, which seeks to explicate the seemingly rational behavior of actors and agonists in the Economy that march in lockstep to the status quo, even if the tune is flat and overwrought and the relationship dysfunctional.

When an Internet provocateur emerges, endemic industry inefficiencies are revealed like a Hollywood actor sans make-up. Digital economics are driven by increasing returns - at least on the way up, until an alternate appears to steal the thunder, which nevertheless also will operate under the principle of increasing returns. An incumbent's comfortable and predictable profit margins can vanish just like the revenues from classified advertising have.

What should an incumbent do? Adapt as soon as possible to the methods and technologies of businesses that have scale and cost leadership, since it's likely that efficiencies removed from the system will not be recovered or rolled back.



More on the Free Revolution from Chris Anderson (Wired)

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