Entropy and the Digital Economy
Working with companies that want to harness the power of the digital economy in their business model has alerted 2cv to the similarities between this shift in emphasis and entropic processes we are taught in our science lessons at school.
As a reminder, entropic processes are those in which the physical property of entropy, an expression of disorder or randomness, tends to increase. In the universe, movement from order to disorder is favoured. Science teachers often use the example of the tidiness of teenagers' bedrooms. The natural order of things is that they get increasingly untidy much to the annoyance of their parents.
Conceptually the production and creation of packaged goods and experiences is against the natural order of things which is why we need to expend a lot of effort and energy to manufacture them. This effort is required to overcome the natural tendency of entropy to undo your good work. In contrast, entropy and the digital economy have a natural affinity since the digital world allows for some products to be sliced up in to micro products without degradation in functionality - a newspaper article rather than the whole newspaper still has value to people. This is clearly something the physical economy cannot always allow. After all what is the market for half a TV or one tenth of a car? The digital economy however, makes it possible to create a market for one tenth, or less even, the usage of a car or consumption of a DVD as exemplified by Streetcar and LoveFilm.
This has an impact on likely successful business models for brands and businesses wishing to exploit the web commercially. Here we have to first make a distinction between consumers buying a digital product and consumers buying through a digital store. Manufacturers can sell physical products through websites but by and large these will be substituting the sales of people going in to retail.
A digital product is a different matter altogether. A digital product is a packaged product in the physical world that has been atomised into smaller products, examples of this are newspapers, books, videogames. The boom in apps also harnesses this atomisation. Outside of the simple games that are available in app stores, many apps have quite discrete and limited functions whose economics would be rendered untenable if they relied on winning physical distribution or building traffic to their own digital distribution network. In short, atomisation of apps is successful because the supply side conditions are optimal.
The challenge comes for businesses that are reliant on physical packaged goods for their profits but are trying to launch digital version of their product (rather than sell their products digitally). Understanding how the product can be atomised to maximise its potential is key.
This starts with understanding the delivery required for the product. Products which have to be packaged and ordered in the physical world to be consumed, don't need to enter into the digital world. You can't digitise the baked bean… yet.
Next, we must undertake an assessment of where the true value of the item lies in the digital world. Taking the example of newspapers; in a digital age, information is available freely and quickly, Twitter can provide opinion faster than any printing or digital press, lengthier discussion can still be found on countless forums and in comments threads. However, what all this 'opinion' lacks is a quality filter and filtering a large volume of opinions into ones you want to listen to takes time. Newspapers can no longer be the gatekeepers of information, their digital products must be seen as a time-saving device - they filter so we don't have to. The value their digital product adds is one of guaranteed quality saving the consumer both time and effort.
Once the source of value is identified, it must be packaged - digitally packaged, of course. What facilitates the value (i.e. what form does it need to be in)? How much is it worth - in a digital world where so much is free, can you charge for it directly? What is the payment mechanism? Can it be monetised indirectly? Can it sell/monetise enough to turn a profit?
Barriers to digital entry (e.g. trust issues with payment? Online engagement of audience?) must also be considered in order to construct a business model with breadth and longevity.
Entropy loves disorder, so overtime there will be a tendency for disorder to be created out of order. In many ways, the web is a facilitator of this disorder because it is created from the ground up rather than the top down. Importantly the web is also highly searchable so disorder does not come with obfuscation, unlike in the example of the tidiness of a teenager's bedroom which while the bedroom is searchable any search is made more difficult with increasing disorder.
Our work with various media owners and suppliers of digital entertainment shows how success can be achieved in a world where audiences are more fractured, savvy and in control. If harnessed intelligently, the digital economy provides a huge opportunity for better products and more satisfied customers; not to mention smarter and more focused revenue generation.