Thursday, January 20, 2000 at 1 p.m.

Leslie Walker

Network economics are rewriting the rules of business, and cyberguru Don Tapscott has been chronicling those changes for years. His book "The Digital Economy" was one of the first to describe how the Internet was creating a new infrastructure for commerce. Now "Digital Capital," his new book to be published in May, takes a closer look at business models gaining steam on the Internet. It offers an original language to describe key forces driving business success in the digital economy. There are what he calls "b-webs," for example, or business webs that function almost organically, like business ecosystems.

Don Tapscott

Tapscott describes how b-webs are creating economic value or "digital capital" in new ways by efficiently linking producers, retailers, suppliers, distributors and customers.

Tapscott, who is chairman of the Alliance for Converging Technologies, studied 200 different b-webs in researching his book.

Leslie Walker: Hello everyone and a warm welcome to our guest, Don Tapscott. We are happy to have him here today from his office in Toronto to talk about how the Internet and digital technologies are transforming business. Please send in your questions, from wherever you are, and let's talk!!

Leslie Walker: Hello Don. Could you start with a brief explanation of a business web. What is it, and how is it different, say, from the old economy way that corporations connect with their suppliers and customers?

Don Tapscott: The industrial age corporation did everything from soup to nuts. Henry Ford owned forests in Honduras to get wood for dashboards. He owned power plants and transportation companies. Now because of the Internet, value for customers can be disaggregated and reformed in business webs.

A business web is a new organizational model where suppliers, partners, customers and others cooperate on the Net to create wealth. Industry by industry, these new models are destroying the old model of the firm.

Leslie Walker: Can you give an example of a B-web that shows in what way it is more than just a collection of producers, suppliers and customers hanging out at a Web site?!?

You call MP3 a B-web, for example, but I have a hard time seeing MP3 as more than just a bunch of Web sites bypassing the big record labels and helping musicians connect more directly with consumers.

Don Tapscott: "Just a bunch" may be understating what's occurring here. The collaboration of consumers, content and software distribution sites, like MP3.com, technology manufacturers like Diamond and content providers - mainly musicians - is shaking the foundations of the entire industry.

Sony, Polygram and others are now moving to the Web as the distribution channel for music and trying to create whole new services to create value for their customers.

There will be no record stores in the Year 2005...and the current music industry will have to transform itself if it is to survive.

Leslie Walker: No record stores by 2005--wow, that's pretty radical!

Charlottesville, VA: Give us an example or two of how b-webs are creating economic value or "digital capital" Which companies are on the leading edge of this trend?

Don Tapscott: There are five types of b-webs. Agoras, like e-bay, or the power auction Oasis, are transforming the way that goods and services are sold, price discovery mechanisms, and they are about to wreak havoc in many industries. The Washington Post might consider kissing its classified ads goodbye.

Aggregation b-webs, like E*Trade or Amazon or AOL, aggregate value on the Net and brand it for customers.

Value Chains, like Cisco, tightly integrate value for customers.

Alliances, like Linux, are self-organizing with thousands of volunteer programmers, call them "digital rotarians", creating an operating system that now has 17% server market.

And Distributive Networks like Enron enable the distribution of everything from goods to power, to information, all based on the Internet.

Alexandria, VA: How will the business of education and training change as the Internet matures?

Don Tapscott: Business webs enable us to transform learning to create highly customized, self-paced, student-focused learning environments. This is a historic change from the old "broadcast" model where teachers "transmitted" data and information to students whose goal was to memorize and be able to recall when tested.

But the "drill and kill" model is dying hard as old educational cultures are resistant to change. There are many examples of success stories, however.

Rockville MD: Which business to business exchanges developed so far on the Internet are the best, and why? Also, what do you think of VerticalNet.com?

Don Tapscott: Of the five b-web types, none are "best" but each is transforming business.

There are 2.7 million auctions underway at e-bay (agoras). Online brokerages like e-Schwab (aggregations) now have 1/3rd of retail stock trades, and it will be 2/3rds in 2 years. An entire industry wiped out by a new business model.

Cisco has $14 billion in revenue, and a market value greater than Ford and GM combined...and it ate Lucent's lunch.

Linux (Alliance b-web) has now been embraced by major players like IBM. And Enron has become the Mohammad Ali of distributive networks (it stings like a bee and floats like a butterfly).

Crystal City, VA: How will -or can- b-webs drive the internet infrastructure? Bell Atlantic -phone- and Cox Communications -cable company- both seem impervious to the digital age as we still have nothing other than dial-in modem service available in most of Fairfax County, VA. There is yet no timeline for cable modems nor DSL availability and no one of any technical ability to talk to at either company.
My son -an MCSE- has spent months working with Covad and Bell Atlantic on a DSL connection to his house -both companies blame the other- and finally has given up. Any ideas?

Don Tapscott: Bandwidth is exploding. Nevertheless. This is inexorable in a competitive environment. The real action is not in shipping bits but in providing the new value-added services enabled by the Net.

Leslie Walker:
What's the difference between the kind of business web you are talking about and the new business-to-business trading exchanges like Chemdex and MetalSite and the like?

Don Tapscott: Chemdex is primarily an aggregation business web, enabling the purchase of some 200,000 chemicals by commercial customers. The catalog is more complete than any physical store, the chemicals are significantly less expensive, there is great convenience for customers, and overall great value creation.

Chemdex is also evolving to include agoras in its b-web mix, for example - probably soon enabling the auction of products, conditional offers, exchanges, etc.

Trading exchanges are a b-web subtype.

Sorry to sound hung up on taxonomy but we need a language and structure to describe business models in the new economy.

Boston, Mass.: What do you see as the successful business "webs" as you call them being created for local merchants? In the U.S. there is a scramble to get local merchants online, but most remain offline. I was wondering what you think it will take to get most of them online, also, how much of local commerce you think might shift to national or even global Internet players.

Don Tapscott: There is a role for local merchants in the new economy as we all still live (and if we're lucky - work and shop and play) in communities.

I wish my local vegetable merchant was online. They know me and would always deliver tomatoes the way I like them.

Arlington, VA: I love shopping on the web, but c'mon, there will too still be record stores in 2005. The majority of people still are not connected to the internet. D-l'ing sound files takes forever using the slow modems that most people have and will have for some time to come. 2005 is only 5 years away after all.

Don Tapscott: In 2005, there will be high-bandwidth and record companies will unlikely be producing CDs so record stores will be for nostalgia buffs.

Leslie Walker: This idea of yours that business webs create a new kind of capital---digital capital---which somehow gives more value to all its participants seems important. I take it you mean the sum of a b-web is worth more than its parts.

Can you explain why that is--what, exactly, about these web-based business groups creates special value?

Don Tapscott: The motherlode of business webs is digital capital. Digital capital arises when intellectual capital becomes internetworked.

Three components. You can have "human capital" but not need to own it. "Customer capital" is not just a brand or image but a real relationship. And there is capital in new business models as business model innovation determines wealth creation and competitiveness.

Companies that amass digital capital will be those that succeed. In the old economy, companies that had financial capital and physical assets were positioned to create wealth.

Washington, DC: Do you see a serious collapse of many industries because of the changes in commerce?

Don Tapscott: Yes.

Banking is a prime candidate. Walter Wriston (former Chairman of Citibank) asked years ago, "who will create the financial services supermarket? Something called a bank?" He thinks not. Financial services institutions need to rethink their value proposition.

What aggregation b-webs like E-Schwab and E*Trade did to brokerage companies, is about to happen across all financial services. Basically, any industry that is "in the middle" is particularly vulnerable to disintermediation. Agents, brokers, wholesalers, distributors, retailers, advisors, dealers, all need to "reintermediate" - to create new value for customers.

But the reintermediation opportunities are bigger than the disintermediation dangers.

Leslie Walker: Ok, so how would you tell your local vegetable merchant to get online? Do you think local grocers will hook up with the Webvans and Peapods or be crushed by them?

And what about other local merchants like dry cleaners and service providers whose products can't easily be shipped?

Don Tapscott: Rather than simply "going online" or creating a web site, they should create a business web where they partner with their suppliers, with local restaurants, with community groups, catering companies, and of course, families.

They could develop an intimate knowledge of their customers, expanding their market base to new clients, previously inaccessible, evolve their products beyond traditional produce and bundle in new value added services (for which I might happily agree to pay for).

Leslie Walker: determines wealth creation and competitiveness. " Can you elaborate?

What I find intriguing is this idea that the net lets other people and groups contribute electronically to your product or output-sort of like when the gas stations one day asked us all to get out of our cars and start pumping. Netpreneurs are just starting to figure out ways to tap the net for business productivity, right? I guess I'm looking for concrete examples of how business model innovation via the Net creates new value.

Don Tapscott: Every company should think up new value propositions - something they could propose to customers that would be of value. Then disaggregate that value proposition into its elements and assign each to a partner. Reaggregate online as part of a business web mix.

So, years ago, the founders of E*Trade defined a new value proposition for a stock broker - real-time access to the market, great comparative information (like graphing Oracle vs. Microsoft stock over the last year), the ability to do transactions, to handle payments, providing knowledge, advice, participation in third-party discussion groups, etc. They then went through this process of assigning elements to partners. So when I ask for a graph, there's a great third-party software company delivering it to me. This creates value far beyond what my old broker could do and, for better or worse, I'm an empowered investor.

Through this, E*Trade generated not only value for customers, but wealth for shareholders.

This is the new economy.

Washington, DC: What do these new business-to-business market places popping up on line mean to the average consumer? Will they change the prices we pay for retail products or in any way affect consumers directly?

Don Tapscott: One big change is price discovery mechanisms.

Before money, there was barter. Followed by the ancient slave empires where people were auctioned. Later were marketplaces, as in Greece, where buyers and sellers argued over prices. Under feudalism, Kings established prices. Only under the industrial economy did SELLERS establish the price. All this is about to change.

Name your price environments, like Priceline, are the beginning of dozens of new price discovery mechanisms. When friction breaks down and everyone has near-perfect information, prices will be a real-time function of supply and demand - or better put, demand and supply.

Washington, DC: Maybe I'm showing my luddite tendencies, but I simply don't see how the loss of record stores could be such a good thing. Think about this: you can get up on a brisk Saturday morning, hop in your car or on your bike, and head down to the local record place. Maybe you grab a coffee along the way, you browse the the titles, hold the CDs in your hands, examine them. Maybe you see a couple of friends there and chat a bit. How can the cyber world - with all of its disconnections, its glitches and its interfaces - possibly replace that experience? And why should we want it to?

Don Tapscott: I think this is a time of great opportunity but I find many people wondering if this smaller world our kids inherit will be a better one.

There's no evidence that the Net is reducing face-to-face communication (like, for example, television which took away 24 hours of the week for the typical baby boomer). For kids today, time online is taken away from time on TV. But there are many tough social issues that we need to tackle. There's nothing inherent in the technology that will ensure that the promise is fulfilled, or that will bring about the dark side. Because it's not technology that designs organizations and schools and families and other institutions - it's people.

I personally think we all need to get involved in shaping the future for the common good.

Charlottesville, VA: What role will digital TV play in the evolution of B-webs?

Don Tapscott: An important one. Digital TV is one variant of interactive multimedia which, in turn, is all part of the Net.

You'll get to be a love interest in the soap opera. And when you see a cool car on the screen, you can take it for a real-time animation test drive.

Arlington, VA: If the music industry stops manufacturing CDs in the next five years, it will alienate more than half the population of the United States.
"Internetworked" is not a word.

Leslie Walker: I, too, want to know more about how CDs are going to disappear from stores so fast.
As for "internetworked," one of Don's specialties is coining new phrases-- though I want to know why he didn't use "E-webs" instead of "B-webs."!!
Seriously, I do agree we need a whole new language to understand the dramatic change that's remaking the business landscape. Everywhere I go, people are no longer speaking the same language, even when it's English!!

Don Tapscott: I think the new language to describe this new world which we developed for "Digital Capital", will be very helpful. I think sometimes we have a dialogue of the deaf underway because we don't have a common taxonomy, or way of discussing these things.

"B"-Webs is obviously a short form for business webs - a new organizational model. However, I think we'll see Governance Webs, Learning Webs, and new models in other industries as well.

As for alienating people, I hope not. The Net is penetrating American homes faster than TV did in the 1950s. There are 80 million youngsters today (the Net Generation) and they're a big force behind MP3, as kids download digital music onto their hard drives and MP3 players. When this becomes easier than playing a CD, and the quality is better, music will take new forms, won't it? Will we have entire "albums" or will we construct our own, from multiple artists, depending on our mood or whether we need good dance music at our party?

I'm being provocative on the 2005 prediction to encourage you to think beyond the old paradigm, if I may use that word.

The key thing is that new business models are destroying the old ones.

Leslie Walker: You write that the challenge for today's business manager is turning digital threat into opportunity, and that the key is innovation. But how can the typical large or middle-size company dramatically change its business model without disrupting its existing human capital--people, after all, are people, and most tend to resist change!


What advice do you offer established, successful, profitable companies? How can they foster entrepreneurial spirit?

Don Tapscott: It's true. Leaders of old paradigms are often the last to embrace the new. Vested interests fight change. And new paradigms are often received with coolness, hostility, or worse.

Established companies need to find the leadership to change their business models. But leadership doesn't just come from the top - it can come from anywhere. Whether you spin out a separate company (Reflect.com from Proctor and Gamble), or transform your existing organization from within (Nortel), you've got to do it.

Punishment is proving to be swift for those that don't.

Advice? Get senior managers using the Web. Personal use is a precondition for comprehension. Create visioning sessions where new value propositions can be imagined. Think 'digital capital' - for example, don't create a Web site that seeks to have many eyeballs. This is the wrong body part. Hearts count, and relationship capital is what generates wealth.

I suppose one suggestion is that everyone should go to Amazon - now - and (advance) order thousands of copies of "Digital Capital" :)

Leslie Walker: That's about all we have time for today, folks!

Don Tapscott: It's been fun.

Thank you for the thoughtful questions, and thank you Leslie for the opportunity to chat.

As a closing note .... I think that leadership for business model innovation is proving to come from anywhere and everywhere within an organization. CEOs and secretaries, and everyone in between, are showing that they have the curiosity and the innovative spirit to rethink how we create value for customers.

This is a very exciting time for all of us. And if we do it right, maybe the new economy will be one of promise fulfilled, and peril unrequited.

Leslie Walker: We're wrapping up today's chat. Thanks to Don Tapscott for taking time to explain his views of the dramatic changes roiling our economy. Thanks, too, to all of you who sent in your questions and two cents!

We hope to see you again in two weeks, when we will be talking about hacking wars and security in the age of electronic commerce. Our guest will be Mike Higgins, president of Para-Protect Inc. of Alexandria.
Hope to see you there!