Did you say new economy?

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  • 1. IPADE International Week October 2005 Whos Afraid of the Big Bad Wolf?: Internet and the Content Industry in the New(?) Economy Eric Briys
  • 2. Not to be reproduced or quoted without the authors prior consent Content Sharing Knowledge Flashback: The elusive quest for prosperity: What history has in its bag for us n The New Economy: From perspiration to inspiration: The economics of ideas n Consequences: From the optimizing manager to the adaptative manager n The content/media industry: Wrong or right? n Paving the way to the future: Some guidelines n Cyberlibris, The First European Digital Library -2
  • 3. Not to be reproduced or quoted without the authors prior consent The quest for prosperity Sharing Knowledge Whatever the perspective taken, the paramount question is that of wealth: n The wealth of nations, shareholders wealth, managing for value etc This is a challenging quest: Why is it that some are wealthy and successful, n and some fail and stay poor? Yalis question and the cargo cult: How is that you have so much cargo n Jared Diamond and we so little? Cyberlibris, The First European Digital Library -3
  • 4. Not to be reproduced or quoted without the authors prior consent The quest for prosperity Sharing Knowledge Yalis question haunts also corporate boards. n Tons of acronyms and buzzwords were crafted that define value metrics: n SVA, EVA, ROI, EBIT, CFROI, balanced scorecards, value chain, corporate governance Joel Stern Cyberlibris, The First European Digital Library -4
  • 5. Not to be reproduced or quoted without the authors prior consent Back to basics Sharing Knowledge Lets get back to basics: n Put simply, prosperity is the consequence of one thing and one only: Matching talent with capital, and holding both sides accountable. Reuven Brenner In a nutshell: n K T Cyberlibris, The First European Digital Library -5
  • 6. Not to be reproduced or quoted without the authors prior consent Flashback: The history of prosperity Sharing Knowledge Change is a new phenomenon indeed! Malthus was right for 55 centuries out of the last 57. Cyberlibris, The First European Digital Library -6
  • 7. Not to be reproduced or quoted without the authors prior consent Flashback: A parsimonious model Sharing Knowledge Robert Solows model (1956, Nobel Prize 1987) n K = Capital n L = Labor n Y = GDP = F(K, L) = Production Function Max Y - rK - wL with respect to K et L . Robert Solow Outcome: Production grows with population in the steady-state: Hence, no n wealth per capita growth. Does yield cross-country differences n But this is more a model of perspiration than inspiration . n Cyberlibris, The First European Digital Library -7
  • 8. Not to be reproduced or quoted without the authors prior consent Flashback: Perspiration economics Sharing Knowledge n Industrial Revolution: Muscle Power: Why is that whenever I ask for a pair of hands, a brain comes attached? Henry Ford n In Henry Fords days, capital was the scarce resource that organisations were designed to use efficiently, as his assembly lines did: OPTIMIZATION n Alfred Marshall: Principles of Economics: Optimization, Calculus, Marginalism Henry Ford Alfred Marshall n Gilded Age/Robbing Barons: Yes, the Industrial Revolution was also inspired . But, this inspiration, this knowledge was pegged to capital. Lots of people had a thorough knowledge of chemistry, few corporations were producing chemical products though. Hence knowledge was not free !!! Cyberlibris, The First European Digital Library -8
  • 9. Not to be reproduced or quoted without the authors prior consent Perspiration is not enough! Sharing Knowledge K T Hence: In a perspiration world: n The only way to genuine prosperity is to have technological improvements, n that is inspiration, namely IDEAS. This leads us to the Economics of Ideas and the New Economy n Cyberlibris, The First European Digital Library -9
  • 10. Not to be reproduced or quoted without the authors prior consent New economy: Inspiration leads! Sharing Knowledge How to best define the new economy? n Ideas: Ideas improve the technology of production. A new idea allows a given bundle of inputs to produce more or better output Two Keys n Atypical cost structure: The first unit is costly to produce (significant initial outlay), the next units have a low or zero marginal cost Cyberlibris, The First European Digital Library - 10
  • 11. Not to be reproduced or quoted without the authors prior consent New economy: Ideas Sharing Knowledge Are ideas a good just like any other economic good? n Excludability-Rivalry scales n Rivalrous/Divisible Non rivalrous/Non Shapiro / Varian divisible Excludable CD PLAYER TV CABLE Mildly excludable SOFTWARE Non excludable FISH IN THE SEA PYTHAGORE THEOREM Cyberlibris, The First European Digital Library - 11
  • 12. Not to be reproduced or quoted without the authors prior consent New Economy: Atypical cost structure Sharing Knowledge What defines New Economy, according to Daniel Cohen, is its atypical cost n structure, namely a significant (not to say massive) initial outlay and a low marginal cost for the next units Consequence: The pure and perfect competition model falls apart. Firms will n enter only if they can charge a price higher than marginal cost, hence a move away from perfect competitition. Daniel Cohen Why?: n With increasing returns to scale average cost is always greater than marginal cost Cyberlibris, The First European Digital Library - 12
  • 13. Not to be reproduced or quoted without the authors prior consent New Economy: Wrap-up Sharing Knowledge Ideas ---> Non Rivalry ---> Increasing returns ---> Imperfect competition Brad DeLong: We now have an economy that is more specialized in the n high-value added role of creating and commercializing ideas. In a nutshell: n Bradford DeLong T K Cyberlibris, The First European Digital Library - 13
  • 14. Not to be reproduced or quoted without the authors prior consent Managerial consequences Sharing Knowledge Consequences for the manager: optimisation vs adaptation OPTIMISATION ADAPTATION Alfred Marshall Brian Arthur Perspiration Inspiration Value Chain Value constellation, networks Producers --> Consumers Producers competing or co-opeting with consumers Decreasing returns Increasing returns Victorian values of stability Non-linearity, instability, winner take-all Cyberlibris, The First European Digital Library - 14
  • 15. Not to be reproduced or quoted without the authors prior consent Managerial consequences Sharing Knowledge To put it in John Kay's words quot; goals are most likely to be achieved when n pursued indirectly .quot; Obliquity is the name for this. What does it tell us about businesses and the goals they shoud be pursuing? The current fad is for businesses to concentrate on maximizing shareholders n value. Metrics have been crafted that supposedly measure the failure of success in achieving this target. John Kay Cyberlibris, The First European Digital Library - 15
  • 16. Not to be reproduced or quoted without the authors prior consent Managerial consequences Sharing Knowledge The increasing-returns world is a world were things tend to wander off, n where things that get ahead, get further ahead, where things that get down, get further down. How do people, corporations behave in such a world? Should they optimize n la Marshall, strive for the maximization of some metrics such as EVA or rather shoot for more holistic approaches la forest rangers? Well, it seems that the best option you can go for in a complex world (which is n a mixture of Marshall's and increasing returns') is to develop a strong sense of adaptation. After all, when you look at earthquakes or floods, rather complex phenomena n indeed, it is hard to predict them but easy to avoid building your house in an earthquake or flood prone area. Cyberlibris, The First European Digital Library - 16
  • 17. Not to be reproduced or quoted without the authors prior consent Examples Sharing Knowledge Dilbert...