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BOOK REVIEW net gain. expanding markets through virtual communities John Hagel III and Arthur G. Armstrong, 1997 Harvard Business School Press. ISBN: ISBN: 0-875-84759-5 "Humans have an innate desire for connection. The net provides yet another tool to fulfill that desire. And community members will spread the word about product quality (or lack thereof), 'systemizing word of mouth' and thus rewarding companies that provide excellent value." Reviewed by Kathy Gill @ the reviewers Kathy E. Gill is the owner of dotPARAGON, a Web Design and a Communications Consulting firm. Much of the information in this book is dated, but it serves as foreshadowing for the "way of the web" in 1999. It is not an easy read and there is redundancy. However, as a reference or resource book, it is a recommended purchase if you know little about virtual communities or if you need to convince the number-crunchers of the benefits of expanding a corporate web site. The first three chapters provide foundation for the argument that the Web is shifting economic power to the consumer. This section also outlines the framework underlying the theory of markets with increasing returns. Today, given the Microsoft/DOJ case, most who follow technology have at least heard of the theory of increasing returns. In 1997, the theory was not as accepted as it is today; even today, it is not universally accepted. Free market theory rests on several precepts. One of these is equal access to information [see why it's called a theory?]. When one party "gains access to more information, that party tends to be able to extract more value from transactions...." In other words, if you have more information, you get the better side of a deal. This is why insider trading is illegal. In graphic detail, the authors illustrate how the traditional "vendor surplus" (excess rent or excess profit) in a normal supply-demand curve will shift, in the aggregate, to community members, in large part because of increased information dissemination. The result is that the virtual community price moves closer to the actual supply curve. The rise in online auctions (such as Onsale.Com) mirrors this phenomenon. The vendor sets a minimum price and the community members bid for a fixed (and known) supply of the product. Some will (probably) pay more than others for the same product. But the price paid per individual will be less than the standard "where supply curve and demand curve intersect" price point. That's because retail establishment prices become the ceiling on the auction bid price. The authors assert that virtual communities have the potential to turn the information power game on its proverbial ear. For example, Absolute Mac provides a service today where a potential Mac customer can have instant access to the prices of various vendors for a given model. [http://www.absolutemac.com/] This is much quicker (and easier) than having to call or visit web sites to comparison shop. [Macintosh users fit the authors' definition of "topical" communities.] Given sufficient size, a virtual community could become a forum for transactions, for in addition to charging for banner ads, the community organizer could extract a commission on each transaction. A finder's fee, as it were. Hypothesized in the book, there are several "click and get rewards" sites now on the web. And today, some companies pay not for eyeballs (how many people see an ad) or for click-throughs, but instead, grant a commission on each sale. Examples include "Click Rewards" [http://www.clickrewards.com/] and Amazon.Com's associate network. The authors contend that there are three types of virtual community in the consumer market: geographic, demographic and topical. For the business-to-business market, they define four possible communties: "vertical industry communities," functional communities, geographic communities, and "business category communities." The definitions are less important than the process of defining potential community members. The authors stress being the first out of the gate, and Amazon.Com is following their recommendations to the letter. It's the "heavy upfront investment" for phenomenal long-term results mindset. "Even Microsoft and Federal Express found it slow going early on," they note. Much of the focus is on the consumer market, and one example used extensively is The Motley Fool. At the time of writing, The Motley Fool community [individuals interested in investment advice] was restricted to members of America Online, where it debuted in 1994. Today, The Motley Fool [http://www.fool.com/] has risen from relative obscurity to become one of the most-consulted financial forums in the online world. In less than five years. Thus, it was an excellent choice to illustrate the power of community. Fool community members have access to "investment school," breaking business news, "quotes, news, charts and data," and a host of online brokers. There is a daily e-mail newsletter (subscription request, not unsolicited). And you can register and maintain your investment portfolio on TheFool web site. Moreover, the online proprietors [two brothers] also have a half-dozen best sellers. Sold online on their web site through Amazon.Com (of course). One of the key points of the book, illustrated well with this example, is that the community must be established before economic returns will accrue to the organizer. A phenomenon that the authors did not address (or anticipate?) is that of the open software movement. The Linux user/developer community demonstrates many of the theories in the book. And a recent Linux analyst described the exponential growth of this upstart operating system, illustrating perfectly the growth curve of a product with increasing returns. How does this relate to net.gain (and the web)? The medium that makes it possible for distributed software authorship is the Web. Online forums, e-mail lists, the Linux web sites -- all make it possible for thousands of software designers to collaborate from around the world. And as the authors postulate, "if successful, virtual communities will spawn new industries... software design ..." In short, the book marries economic theory with organizational dynamics. The psychology of the online community is not dramatically different from that of the "analog" [face-to-face or "real" world] community -- whether it's a church group, professional association, or sports-related group (fans or players). They close with a chapter on what this means, functionally, for corporate management structure and responsibilities. Humans have an innate desire for connection. The net provides yet another tool to fulfill that desire. And community members will spread the word about product quality (or lack thereof), "systemizing word of mouth" and thus rewarding companies that provide excellent value. Communities have the potential to change not only the corporate and economic structure around us, but also how individuals manage their lives. "Souls in search of relationship, colleagues in search of teamwork, customers in search of products, suppliers in search of markets: the virtual community might have a place for them all." © Internet Technical Group Last update: March 6, 1999 URL: http://www.sandia.gov/itg/newsletter/mar99/review_netgain.html hosted by Sandia National Labs Disclaimer: Neither Sandia Corporation, the United States Government, nor any agency thereof, nor any of their employees makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately-owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by Sandia Corporation, the United States Government, or any agency thereof. The views and opinions expressed herein do not necessarily state or reflect those of Sandia Corporation, the United States Government or any agency thereof.