Network Economy

Much has been made of the network economy – the idea that a new global economic structure is evolving, one based on innovation, open networks of information and ideas, and rapidly changing product types, business practices and marketplaces (Kelly, 1997). These features are said to be supplanting some of the economic foundations that created so much wealth in the industrial era, such as economies of scale and scarcity of resources.

The network economy may be best understood, however, by examining its key features through the lens of a real-world example. And perhaps no better proponent of the network economy exists than Netflix. Several key features of the Netflix business structure are network economy stalwarts, namely network effects, the internet of things and disruption.

Network Effects
The more members a network has, the more valuable the network becomes. This is not a new economic concept, as the oft-cited example of the fax machine (Leibowitz, 2000) demonstrates, a larger network increases the utility of the network to its users. In the case of the network economy, Netflix demonstrates this principle well – were it not for the large number of subscribers accessing the network, the network simply would be unable to provide the amount and quality of content that it does; a larger network provides a better value proposition for all users.

The Internet of Things
Netflix has successfully leveraged the inter-connected web of millions of ‘dumb devices’ (Kelly, 1997). A simple (usually one-off) login process allows viewers to access the network via PCs, phones and tablets, DVD players and set top boxes, internet refrigerators, and increasingly in hotel rooms and air planes. Furthermore, Netflix keeps track of where the viewer is up to and continues from that point when the viewer switches from device to device.

Disruption
Netflix typifies the concept of disruption brought about by the digital economy. Just as social media and online news sites have made traditional newspapers and magazines much less profitable, so too is the Netflix business model providing challenges for traditional free-to-air TV networks. Netflix has two key advantages here: its video on demand (VOD) format means viewers don’t have to wait for new episodes of their favourite shows, and can delve into back catalogues while terrestrial TV’s one-to-many broadcasting means it can only deliver one program per channel at a time. Secondly, the Netflix subscription model means no advertising – and no interruptions to the content viewers are watching.

While clearly favourable to Netflix in the short term, these features of the network economy may also, ironically, be to its detriment. As other players enter the market (Amazon Prime, HBO Go, Hulu Plus, etc), a race appears to be on to secure exclusive contracts to stream previously produced (or back catalogue) content, and to produce exclusive content of their own.  This drive for exclusivity (Barr, 2015) is causing the formation of smaller closed networks, each needing greater revenue to fund this content. By charting a new course in the video streaming industry, the disruption that Netflix caused may well be the limiting factor to its growth in the future.

Next page: Sharing Economy

References

Barr, T. (2015). Whither Netflix. Australian Journal of Telecommunications and the Digital Economy. Vol.3(2), (pp.12-26). 

Kelly, K. (1997). New Rules for the New Economy: Twelve Dependable Principles for Thriving in a Turbulent World. Wired, 5(9). http://www.wired.com/wired/archive/5.09/newrules_pr.html

Leibowitz, S.J. (2002). Basic economics of the internet from Re-Thinking the Network Economy: The True Forces that Drive the Digital Marketplace. New York: Amacom. (pp. 9 – 24).

Header image copyright 2013 Motionloop. Source: Youtube

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