Explicit Information Is Becoming a Commodity

Computer and Internet technology are making it increasingly easy to copy standardised information, technical knowledge, data and software at virtually zero cost and instantly transmit them anywhere in the world. In so doing, every industry is becoming part of a global network in which companies’ once-privileged access to and supply of explicit information is eroding. In consequence, this information – which was once closely guarded and hoarded – is becoming a commodity. Just few years ago, for example, companies such as Reuters could charge a small fortune for a “live” feed of stock quotes; today, almost all financial Websites provide them (albeit delayed by a few minutes) free of charge.

Financial services more generally provide an excellent example (there are several others) of how the Internet can transform an industry’s prospects. In the past, brokers justified their high fees by pointing to the quality of their advice. But now amateurs and experts alike can exchange tips at no charge in popular Websites, and can execute trades on-line at a fraction of the cost charged by “full service” brokers. In the U.S., more than 30 discount brokers are offering on-line trading accounts that match or undercut the market leader. Financial transactions, once the preserve of an elite profession, are rapidly becoming a commodity. Providers must therefore either survive on razor-thin margins or find another way to add value.

Rapid and Profound Changes to Businesses and Their Plans

Given the low barriers to entry, not just books, CDs and software but any product which can be produced and transmitted in an electronic format may be rapidly and profoundly affected by the Internet. The same applies to goods and services which used to benefit from the public’s limited access to explicit information. These industries include financial services, investment and insurance; TV, radio, film, publishing, advertising and music; education; transport (somebody has to deliver all of Amazon’s books to consumers); travel services; retail; and Information Technology.

As one commonly-cited example of this rapid and profound change, in 1993 the Encyclopaedia Britannica was often sold door-to-door, and exclusively in a bulky multi-volume print version, for approximately $2,000. By 1998 (after Microsoft launched Encarta) it was typically sold as a CD-ROM, often over the Internet, and for as little as $300 (today it can be purchased for as little as $60). Because Britannica neither recognised nor embraced Internet, IT and CD technologies quickly, it squandering its leading position in the market and narrowly averted financial collapse.

For media and entertainment companies, the Internet has equally destabilising implications. For newspapers and magazines, it is a potential tidal wave for which some will not prepare adequately. To decide whether to deliver news and entertainment in a digitised or traditional (print) format is to undertake totally different strategies and tactics. Further, if the Internet reduces the (traditionally very high) barriers to entry into these industries, it will encourage a further dispersion and fragmentation of sources of explicit information – making the market share on which media companies have traditionally based their profit margins virtually impossible to achieve.

Commodities Do Not Command Fat Margins

The development and explosive growth of a communications network opens new markets and entrepreneurial opportunities to conduct new kinds of business. But if the Internet puts an unprecedented amount of explicit information into consumers’ hands (which it does), and if barriers to entry are low (which they are), then the economics of e-commerce will not be favourable. The basic problem is that profit margins from advertising, retailing, merchandising, subscriptions and the like are often low, and that the volumes and customer base required to derive sustainable profits from them are usually quite large. Customers may sometimes be prepared to pay a small premium for particular companies’ services. But if they can use “bots” (search engines which scour the Web for the latest offers, cheapest prices and so on), and if rivals are only a click of the mouse away, then even well-known firms with respected brands may be obliged to accept thin margins.

In what may be a harbinger, two American e-commerce firms, Onsale and Buy.com, are deliberately selling to consumers at and below wholesale prices. Both firms have implicitly acknowledged the obvious point that these activities can never be profitable; instead, they expect to make money by selling advertising aimed at the customers who visit their Websites. This strategy has prompted The Economist to quip: “is it too implausible to imagine Dollar.com – a company that sells dollar bills for 90 cents and makes money from advertising?” If so, then leading e-commerce firms such as Amazon.com may become businesses with billions in revenue but the profits of a corner shop.

Don’t Sell Commodities, Provide Packages of Services

In a range of industries, businesses which once survived and prospered because they were conveniently located, had privileged access to information or provided information which consumers could not easily find are now threatened with shrinking margins and must therefore find other raisons d’être. These include the provision of packages of specialised services tailored to the customer rather than single, undifferentiated commodities.

Airlines’ Websites, for example, are becoming conduits for selling travel-related services (such as hotel bookings, car rentals and travel insurance) rather than simply seats on a plane. As they collect more information about their customers’ preferences, e-commerce firms can offer other things of interest to them. For a business traveller to London, for example, an e-travel Website could suggest a theatre performance, book the tickets and arrange limousine transport. It could also order flowers for delivery before arrival and reserve a table at a favourite restaurant after the end of the show. The e-commerce firm has no need to own the companies which actually provide these services: it simply brings them together under its brand umbrella. (It is significant that Microsoft’s on-line car, travel and finance service delegates final transactions to third parties, but through its “brand” retains “ownership” of the consumer).

Clicks and Mortar

This “bundling” of goods and services need not be the preserve of “e-commerce” companies, and its growth points to the blurring of e-commerce and e-business. Home Depot, for example, an American retail chain which serves building contractors and Do-It-Yourselfers, is using the Internet to transform itself from a (low-margin) retailer and merchandiser into a (higher-margin) provider of bundles of renovation and building services. Small contractors, who are Home Depot’s most valuable customers, are given a userid and password to its Website. The contractor enters details about his job; and the Website tells him what materials he needs, how to schedule the work and what glitches might be encountered. Home Depot’s Website will also ask whether the builder wants the materials to be delivered on-site and whether they should arrive all at once or on a “just in time” basis. And if the builder needs a plumber or an electrician, then the Website can arrange that too.

The use of Home Depot’s Website has clear advantages for the builder: he saves time, has immediate access to expert advice, no longer needs to over-order materials, need not carry unnecessary stock and can find help quickly when required. As a result, the builder may be able to bid more competitively for work – and stands a better chance of completing jobs on budget and on time.

The Website also benefits Home Depot. It can carry far less inventory, gains a wealth of information about its customers and, by deepening relations with them, improves its chances of “building its brand” and turning them into repeat customers. If Home Depot forwards customer information to its suppliers, it takes much of the guesswork out of their production runs and thereby helps them to become more efficient. In doing these things, Home Depot ceases to be simply a retailer and instead becomes a provider of “virtual services.”

E-business and the Fully Integrated Value Chain

Businesses can reduce their costs by rationalising, automating and consolidating their purchases of goods and services from suppliers; providing better information about their purchase requirements to their suppliers; reducing the amount of inventory on hand and the time which it rests on their shelves; and learning more about their customer’s preferences. The creation of a “fully integrated value chain” via e-business has the potential to contribute to each of these objectives.

Through its on-line Trading Process Network, for example, General Electric purchased $1 billion from its suppliers in 1997 and almost $8 billion in 1998. Using TPN, GE has achieved supply price reductions of 15 percent and purchasing cycle decreases of 50 percent. So far TPN has been used just by GE; but because it spends $30 billion a year on supplies, it can pull many potential suppliers into its orbit. Indeed, perhaps more than any other American company GE can use its purchasing power to pull entire industries into e-business. Similarly, American auto manufacturers have established the Automotive Network Exchange, an on-line logistics system, in order to link manufacturers and their suppliers. ANE has decreased inventory lead times from 11.5 days to as little as 6.5 hours and has generated at least $1 billion in cost savings.

The Internet has enabled Dell Computer to create a three-way “information partnership” with suppliers and customers. Dell treats them as collaborators who, together, find ways of improving efficiency across the company’s chain of supply and demand. And in Britain, Safeway, a leading supermarket chain, has constructed a Web-based system which is revolutionising the way it does business. On the buying side of its operations, it allows hundreds of its suppliers access to its data warehouse on the Web, thereby giving them real-time information about how each of their products is selling in every one of Safeway’s stores. This access enables suppliers to tailor production to both current demand and shifting tastes, and to ensure that Safeway’s inventories remain lean but are never exhausted. On the selling side, Safeway uses its Website for “standard” e-commerce, as well as collecting and extracting data about customers’ preferences.

These innovations tend not to be visible to consumers. Evidence is mounting, however, that significant improvements in productivity can be attributed to them. Joel Stern, the American management consultant best known for the creation and popularisation of economic value-added analysis (E.V.), says that “the coming revolution” in e-business will (through the reduction and in some cases elimination of inventory and labour costs) reduce the prices of some goods and services by at least 5% and as much as 25-40%.

New Business Models

Home Depot’s and Safeway’s approaches blend e-commerce and e-business and harness implicit knowledge as well as explicit information. In so doing they suggest that three of the Internet’s unique characteristics can be used to create niches for “Infomediaries” (specialists who position themselves as brokers between buyers and sellers, are uniquely placed to collect local or specialised information, add value to it and disseminate it to those who value it most).

First and perhaps foremost of these unique characteristics is the speed, range and accessibility of the explicit information on the Internet. The breadth and depth of the available information may be so great that it overwhelms users and poses significant search costs upon them. Second, however, for users so inclined the Internet reduces the cost of switching vendors and suppliers (another may be no more than a mouse-click away). By freely distributing a huge amount of price and product information, it shifts power from sellers to buyers. Again, however, this power can overwhelm some buyers. They want to reduce their search costs and rely upon accurate information and advice. Sellers are in no position to offer disinterested information and advice. That opens up opportunities for a third party, the “Infomediary to provide a one-stop-shop.

Finally, the Internet is reducing the cost of bulk (or “standardised transactions” and thereby stimulating economic activity. A banking transaction via the Internet costs a few pennies, 27 cents at an ATM and 52 cents over the telephone. But such savings may be available only to large businesses, such as banks and airlines, which serve mass markets and can reach consumers directly. Infomediaries, by linking specialist buyers and sellers via the Internet, can achieve similar savings in niche markets.

Aggregators

Forester Research has identified three business models which the Internet makes possible. The first is the “aggregator”: the firm which helps buyers in fragmented markets to select products. Aggregators provide up-to-the minute price and product information and a single contact point for service. An example is Chemdex Corporation, which provides a one-stop shop for both academic researchers and companies in the pharmaceuticals and biotechnology industries. The market for biological chemicals is fragmented and inefficient. No fewer than 250,000 laboratory scientists waste valuable research time struggling to purchase their supplies, using dozens of catalogues and making many fruitless telephone calls. Market fragmentation extends the R&D cycle and increases the costs of the industry’s 2,500 life-science companies; and hundreds of suppliers are hamstrung by the logistical inefficiencies inherent in paper-catalogue distribution.

Chemdex creates a less fragmented and more efficient marketplace on the Internet for the three groups it serves. For researchers, it has created a Web-based catalogue with powerful search engines and the information they require to make purchases much more rapidly; for suppliers, it offers supply-chain automation which lowers costs; and for life-science companies it provides detailed sales and customer data which shortens the R&D cycle.

Auctioneers

A second type of e-business, the on-line auctioneer, provides a means for sellers to dispose of perishable or surplus goods or services at the best possible prices (and for buyers to get bargain prices). The advertising industry provides a typical example. No matter the medium (print, poster or broadcast), advertising sales staff spend a disproportionate amount of time trying to sell “remnant space at very short notice – and sometimes for as little as 20% of the normal full price.

Enter Aduction.com, an “on-line media marketplace which conducts Web-based auctions in which buyers of ads can bid for what they want without time-consuming negotiating with publishers’ sales representatives.” Adauction.com is attractive to sellers of ads because it offers a simple solution which does not undermine rates (to offload remnants, sales teams must often return to clients to whom they have already sold ads at a higher price, which risks spoiling the market and loses goodwill). And it is attractive to buyers because it provides a low-cost alternative to standard means of acquiring ad space.

Exchanges

As a third e-business model, there are on-line exchanges. These firms create liquidity in otherwise fragmented markets, lower average stock levels by matching bids and offers, act as neutral third parties and enforce market rules and settlement terms. A good example is National Transportation Exchange. In the road haulage industry, lorries tend to be full in outbound journeys but partially or completely empty on return trips. (According to one industry estimate, 50% of the lorries on American roads at any given time carry no cargo).

The problem is that there exists no mechanism to link buyers of lorry space with empty vehicles. Enter NTE, which uses the Internet to connect shippers who have loads they want to move cheaply with fleet managers who have space to fill. NTE creates a spot-market by setting daily prices based upon information from several hundred fleet managers about the destinations of their vehicles and the amount of space available. It then ascertains the best deals. When terms are agreed, NTE issues the contract, handles payment and collects a commission based upon the dollar amount of each deal. This spot market benefits both parties: the fleet manager obtains extra revenue which would otherwise be unavailable; and the shipper gets a bargain price for transport.

Conclusion

Despite the sector’s problematic fundamentals, the prospects of particular e-commerce and e-business firms need not be unfavourable. Indeed, of the entirely new business models made possible by the Internet, e-business “Infomediaries have the potential to be both highly and sustainably profitable. They might also improve significantly the efficiency of even low-tech vertical markets such as road haulage or steel.Infomediaries use the Internet to create markets, change the way markets operate and improve markets’ efficiency. Despite their many differences, they have an important common feature: in one way or another they consolidate buyers and sellers in fragmented markets. They do so by utilising implicit knowledge. In Friedrich Hayek’s words (written more than 50 years ago): “the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences in commodity prices – all are performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others [i.e., implicit knowledge].”

It was thought initially that the Internet would mainly be an e-commerce phenomenon, and that it would make money from its rapid dissemination of explicit information and sale of physical goods. It has long been fashionable to disparage the relevance of the knowledge of the particular circumstances of person, time and place. But it now appears that e-businesses, thanks to their recognition and use of implicit knowledge, possess the ability to provide services which will reorganise entire industries. The (market) mechanism by which implicit knowledge can be disseminated is, according to Austrian School economists such as Hayek and Ludwig von Mises, the central problem to which economics should be devoted. It is apt that the Internet, an unintended consequence of advances in computing and telecommunications technology, is providing one such mechanism.

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