College of Entrepreneurial Studies (CES)
The Frictionless Economy
Any consideration of business venture possibilities must include those created
and enlarged by the Internet.
In his book, The Road Ahead, Bill Gates of Microsoft writes of
"friction-free capitalism" made possible by developments in
communications, chief among them the Internet and its World Wide Web.
In this context, "friction" is everything that keeps markets
from functioning as the "perfect competition" of economics textbooks.
This friction can be a function of distance between buyer and seller,
costs of overcoming this distance, and incomplete or incorrect information.
Friction manifests itself by causing barriers to entry for new competitors,
limiting the number of outlets from which the consumer has to choose.
Large companies, with multiple sales outlets, and economies of scale,
have greater power to direct the marketplace.
The degree of friction in the developed world has been decreasing for
some years now. Affordable air travel, overnight delivery, improved telephone
and fax communications have shortened distances. Credit cards and toll-free
numbers have spawned at-home shopping from sources across the country.
The Web has taken the friction in our economy down another notch. In
principle, we can sell products and services to a worldwide audience as
easily and effectively as our largest multi-national competitor.
The Web can also be a powerful research assistant. Virtually every major
business puts product and service information on the Web, including business
directory services and magazines. Programs that search the Web on keywords
provided by the user help in finding the specific information needed.
Test the resources available for searching the Web on a topic of interest
to you, such as our coffee shop example. Visit sites of major companies
in the industry. Search the archives of business magazines for articles
that give background and statistics.
In a recent Wall Street Journal article, William M. Bulkeley suggests
that there are lessons-CES/ to be learned from the "winners:"
- Get businesses to pay, not the consumer.
Some Web ventures have thrived by using the Internet's communications
advantages to reverse the traditional buyer-seller relationship. For
example, a site for computer-game fans offers free demonstrations
and reviews of new games while collecting fees from game makers for
the number of web-surfers who view their ads.
- Web surfers are bargain hunters.
When users see that the Web can save them money over real-world transactions,
they flock in -- as a host of electronic brokerage firms have discovered.
The cost of buying stocks on-line is well below what full-service or
even discount brokers charge for telephone transactions.
- Offer a huge selection.
Companies can profit on-line by exploiting the Net's ability to reference
vast amounts of information. Amazon.com, Inc. is probably the best-known
example. The company's Web site lets buyers browse among millions of
titles, most of which are stored in distributors' warehouses rather
than its own.
- Don't quit your day job; Web-link it.
Some specialty retailers have found that listing their products on
the Web can create a market for a line of products that is not feasible
or only marginal in the local market. Some have said that the
best Web businesses are those whose customers are spread over an area
an inch deep and 3,000 miles wide.
To Bulkeley's list, we can add the following:
- Sell to an affinity group
As an exercise, use a search engine to find information on specialized
hobbies and interests. I doubt that any that you can think of is not
addressed in some form on the Web.
- Sell the tools of the Web
Product sales on the Web brings with it business opportunities to serve
these operations. Web site hosts, Web page designers, clip art sellers,
and those promising to build traffic to our Web site are harder to avoid
than to find.
- Match buyers with sellers
Who would have thought that one of the most successful business models
would be on-line auction houses, featuring a wide variety of items put
up for sale by individuals, not businesses.
For many of these ventures, "business model" is a key phrase.
It is not enough merely to establish a presence on the Web. You must find
a way to make that presence pay. Surfers are used to site content being
free, as many media companies have found out. Advertisers will pay for
visitors ("eyeballs") but for this model to work, these visitors
have to buy something in sufficient numbers to left a continuing relationship.