The Rise of the Networked Economy

December 8, 2017



Research on the evolution of industries has continuously been dominated by innovation cycles and waves of development. Main argument being that after an early period of agricultural economy, inventions such as steam power and electricity enabled the industrialization and influenced the way economies have been shaped. With the upcoming digital economy, western economies finally started to experience a backwards shift towards de-industrialization. These trajectories can be plotted as a graph, labelled the “Taylor Bathtub”. It foremost shows that a focus on (digital) services instead of physical production made value creation more dynamic again. 

But it also shows the risen market pressure towards an economy that is highly knowledge and innovation intense, which makes it vulnerable for disruptive technologies and business models. this created new, networked structures that were growing alongside with the technological development. While networks are an old form of organization within the human experience, such digital networking technologies are a main characteristic of the Information Age. They strengthen social and organizational networks in ways that allow an endless expansion and reconfiguration. Also, they allow overcoming the traditional limitations of networking forms and manage complexity even beyond a certain size of the network.  


The Evolution of Industries or “Taylor Bathtub” (Pflaeging et al., 2012)  


But what are the main characteritics of this new type of economy? The “digital economy” or “networked economy” , often also referred to as “new economy” or “information economy”, first of all can be defined as based on the networking of human intelligence. Others describe it as an emerging type of economic environment that is arising from the digitization of fast-growing, multilayered, and highly interactive real-time connections among people, but also among devices and businesses. However, the definitions given still seem too general when trying to understand the scope of this (ongoing) development.


So how to encompass the practical impact of these observations?  A first part of the answer may be found in the technological infrastructure the digital economy is built on. The attribute of “being networked” not only results in new products ( e.g ., online communities), but also in new forms of distribution ( e.g ., streaming), and new business respectively revenue models. Earlier research moreover outlines that today’s economy is driven by technological innovation, digitization, deregulation, high competition, and fix costs, and that it follows some basic laws.


For instance, it follows “Moore's Law”, according to which the processing power of a microchip is doubled every 18 months. Consequently, digital devices are becoming faster and the price level (of a given level of computing power) halves every 18 months. Or, it follows “Huntley’s Law”, according to which investments in IT products and platforms are usually ten times higher in comparison to the costs for the production of traditional goods - which is mainly due to the fact that product cycles are becoming shorter.  To this should be added “Gilder's Law”, which is saying that the total bandwidth of communication systems triples every twelve months, and “Metcalfe's Law”, according to which the value of a network is proportional to the square of the number of nodes. As the network grows, the value of being connected to it is growing exponentially, while the cost per user remains the same or even reduces.


Taken together, these characteristics and laws of the digital economy can be considered as responsible for shortening innovation cycles, forcing organizations to cope with disrupting markets, new entrants and digital substitutes, and their own pace of creative output (time-to-market). Therefore, the digital economy should be defined as: A dynamic and disruptive economic environment, which is driven by the pace and rules of technological innovation and networks, and characterized by a high level of (global) connectedness, and collaboration, but also competition amongst incumbents and new entrants. 







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