The world is
growing increasingly digital. Some twenty five years ago, the dotcom boom
flourished on a premise that buyers would not want to go shopping and instead
prefer to be delivered of their needs in the comforts of their home. Not surprisingly,
the idea seem to have failed then. Numerous dotcom firms simply collapsed.
Hardly one or two survived and it was they who went on to redefine the
industry. Today, these ideas hardly look outlandish. There is growing traction
among the buyers who want to order online from groceries to vegetables to
fruits to toiletries to what not. In the earlier days, many writers and
scholars viewed internet as an extension of the distribution medium. To them,
the distribution, instead of happening in physical stores would happen in
virtual stores. Yet with passage of time, the notions of internet and the
accompanying business models have significantly expanded. As the internet based
business models morph into something radically new, it would be pertinent to
understand some jargons that have become common place in the current digital
business lexicon. A few will be illustrated below
One of the most
popular lingos in the digital lexicon is Chris Anderson’s Long Tail. In the physical brick and mortar stores, there is limit
on the inventory that can be held. Inventory entails using physical space and
therefore, every additional assortment held in the inventory entails a positive
marginal cost. The marginal costs starts to rise with the increase in
inventory. As with any economic agent, it is about the cost benefit analysis. With
Pareto’s law at play, 80% of the firm
revenues are garnered from only around 20% of the products and therefore, it
would make little sense for the firms to store the ‘non-hits’ or the ‘tail’. This
explained perhaps the lack of assortment diversity in Blockbuster as opposed to
Netflix. In the digital world, the inventory space is infinite. Adding information
about a product in the inventory would cost virtually zero. This leads to a
possibilities of virtually infinite inventory in place. This distinguished
Amazon or Netflix from their brick and mortar competitors. When a customer
orders an item, all the firm needs to do is direct them to the inventory warehouse
where the good is available and dispatch the good from the warehouse to the
customer point. This allows firms to reap significant revenues from the tail. While
the heads will continue to dominate, cumulatively, the tails will yield
significant proportion of revenue. In the cost benefit analysis, given
virtually negligible marginal costs, the benefits are positive, it makes sense
for firms to adopt Long Tail on the web and discard the Pareto physical.
Another popular
term that gets discussed around is again to do with Chris Anderson. Following
the success of the Long Tail, he came up with an idea called ‘Freemium’. The idea was simple. For long,
economics has functioned on a simple paradigm. The profit maximising output is
set at where marginal costs equal marginal revenue. Yet in the digital economy,
this principle posed a challenge. In a brick and mortar economy, there are
positive marginal costs and positive marginal revenues. Hence the principle
would be sound. There are industries like airlines where marginal costs are
negligible for every additional passenger flown, yet the principle was
maximising marginal revenue. In the digital world, instantiation costs are
extremely high while reproduction costs are negligible or often close to zero. In
this context, the standard economics prescription might not stand test of time.
Hence implied in economic language was a shift from equation marginal revenue
to marginal costs, equate marginal revenue with marginal utility. The product can
be debundled and offered based on the marginal utility it offers. For personal
use, a free version of antivirus is sufficient, yet for corporate use, they
need additional features and thus pay for the same. Similarly, email accounts
for personal use are free while emails with specific domain given the additional
utility they offer to their clients are priced extra based on the features, the
customers are likely to subscribe to. The
marginal utility that a firm gets by possessing any additional feature will
determine their willingness to pay. Therefore, freemium in contrast to standard
economics, is about change in thinking. Price the good in relation with the
marginal utility it offers to the prospective consumer rather than linking with
marginal costs wherein marginal costs are close to zero.
The digital
economy was made possible by emergence of tools that commanded certain
properties. There was modularization
possible. Tasks could be broken into modules, assigned to different teams, they
would execute their modules before all the modules were integrated to form the
whole chain. This modularizing the activities in the IT chain enabled the firms
to relocate part or all of their activities abroad thus leading to the
emergence of the ITES industry in India among other places. To add to the same
was the nature of the product. It was lumpy
or in other words indivisible. Whether it was the PC or the laptop or further
evolution into the mobile, the handsets were indivisible. So were the
processing capacity, memory, among other things. This meant a large percentage
of capacity lay idle. The usage of this idle capacity led to the rise in
business models like Wikipedia, Kaggle among many others. To boost it further,
the products soon morphed into granularity.
There were no longer elite. Anybody could afford a personal computer or a
mobile and using the connectivity, become a part of the production models
themselves.
Digital economy
has led to numerous jargons. Yet, it would be difficult to touch upon all of
them. This post has only touched two-three terms in the digital lexicon. These terms
too are dealt in brief and of course need an engagement at length to examine
their validity of otherwise. As mentioned in the beginning of the post, it is
not just about changes in production or consumption or distribution it is about
reinventing the business itself as a whole. As the world navigates in the
digital era, the way we have come to do business is virtually dead. The current
defintions might turn obsolete. It is pertinent to be prepared for the radical
changes that are likely to arise on the horizon on an exponential pace.
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