Network Economy

Network Economy

The development of internet technology since 1990 has enabled us to exchange information and communicate with each other on a global scale. The internet plays a significant role in the way businesses are shifting from industrial (material) economics to network (immaterial) economics. We are shifting from an era of ownership to an era of access between servers and clients operating in a network relationship (Rifkin, 2001). Lu and Wang (2007) described the Network Economy as a complex new economic system involving the chains of input and output channels, connectivity and relationships between supplier, manufacturer, wholesaler, distributor, retailer and customer aided by the development of the globalisation market and information technology. The emphasis is on connectivity, flow of information and relationships (Lu & Wang, 2007). Kelly (1997) stated that there are 12 fundamental principles on Internet Commerce and those who follow these rules will prosper. In this case attention is being paid to the evolution of from a small online book retailer to become one of the major online business, to trade in multitude of merchandise. As well as strategies and rules adopted to survive in today's turbulent economy and remain one of the successful e-commerce businesses.

The Evolution is one of the most successful e-commerce businesses today, founded by Jeff Bezos in 1994 (Sardjana, 2009). In 1995 it commenced its e-commerce business trading in books using a humble 400 square foot garage in Seattle to distribute its books (Novel, 2011). To reduce its overhead costs, Amazon invested in a 93,000 square foot fulfilment centre in Seattle and then a 202,000 square foot in New Castle, Delaware in 1997 (MWPVL, 2012) to store and distribute its goods. It has steadily grown its distribution network to more than 50 fulfilment centres (Novel, 2011), located in America, U.K., Germany, China, Japan and India (MWPVL, 2012). Most of's merchandise is sold through its distribution centres. However, distribution centres are not classified as retail stores and are exempt from sales tax in many American States. This in turn has given Amazon significant advantage over conventional retailers. Amazon has now expanded its internet books retailing business to include a wide selection of products such as movies, music & games; digital downloads; electronics, computers and much more (Amazon, 2011).


The Strategy

Amazon's strategy (Novel, 2011) is based on three main focuses;

  • To become Earth's most customer-centric company.
  • Modelling on the old economy retail cocktail to offer low prices, large selection and convenience.
  • To provide good customer experience.

Which rules Amazon abides to?

Kelly (1997) described his principles as an interim set of rules of thumb that may not survived more than two generations. Another set of principles will appear, once networks have saturated every space in our lives. Following these set of rules, four particular rules were noted to have been abided by Amazon.

  • The Law of Connection

Consider millions of microchips in each computers silently transmitting information through the cyberspace is the simplest way to describe the law of connection or embracing the dumb power (Kelly, 1997). Jeff Bezos founder of adapted this strategy to develop his online book retailer by exploiting the ubiquity of the internet technology to empower its customers, suppliers, manufacturers, wholesalers, distributors and retailers to retrieve information/supply services on various products through connections of computers via the intelligent network (Kelly, 1997).

  • The Law of Churn

The internet and its technology is constantly changing at a very fast pace. For an e-commerce to survive the change and not become stagnate and die, it must constantly provide innovations and new ideas. This law is a complete opposite to the industrial economy (Kelly, 1997). Amazon's success in surviving this law of disruptions and changes is through its innovation and introduction of new ideas. It invested heavily in customers satisfaction and experience through an increase in the variety of products, services and convenience.

  • The Law of Plentitude

In the traditional industrial economy, value is derived from scarcity unlike in the network economy where value derived from plentiful (Kelly, 1997). What Kelly is explaining here is that as the number of users grow so will the network resulting in an increased in connection and relationship which will provide more profits as user numbers increase. Success breeds success as Amazon offers more book collections and other products to customers it attracts more customers to the site, in return increasing its revenue.

  • The Law of Exponential Value

Consider Kelly's (1997) Fax machine effect of the more plentiful things become the more valuable they became. Amazon grew and continues to grow but there was a loss in its revenue. It continued to improve its efficiency of operation, business model and maintain focus on its customers. Finally, it achieved its first ever annual profit in 2003. Although Amazon's revenues continue to profit in 2005, it was down from 2004 (Rivlin, 2005). Amazon's case is a good example of non-linear success.

Rex Rystedt/Time Life Pictures — Getty Images, 1998

Economy aspects

  • Network effects

Network effect is said to exist in many e-commerce companies, some more than others (Leibowitz, 2002). Network effects are present when a product or service becomes more useful and the number of users is multiplied therefore increasing its value. This is contrary to Leibowitz's (2002) claim that Amazon does not have strong network effects. Amazon demonstrates a number of Kelly's rules of the Network Economy. Amazon has also established itself as having excellent customer service and in return drew more customers to shop through Amazon therefore increasing the value of the site. Customer service is not the only factor for Amazon, it also has customer reviews which demonstrates the network effects within its business model (Amazon, 2012).

  • Economies of scale

Economies of scale are defined by the cost to produce the additional units. The more units that are produced, the less the cost per unit will be and the more profit the company will benefit from it (Liebowitz, 2002). Although Amazon does have numerous delivery centres, it was still able to achieve the economy of scale and offer its customers products at lower costs than its competitors (Novel, 2011). This illustrates the conservative aspects of Amazon's business that has not departed from traditional economics. In turn this demonstrates a blend of new network effects and traditional economies of scale towards the evolved nature of online commerce.

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