As the economy worsens, how will Internet businesses adapt?

To answer that question, I re-offer my map of the future of Internet business. The map is based on John Hagel's view that firms will "unbundle" and that there will be three types of companies: infrastructure companies, product creation companies, and customer relation companies. Right now, most companies are an unnatural bundle of those three very different types of companies. As the economy worsens and as cost-cutting becomes paramount, unbundling will become necessary, as it enables companies to be cheaper and more efficient. This also continues with the open systems trend of the web -- i.e. freely distributed APIs, open source software, syndicated content, etc -- as unbundling is only possible when specialized firms can effectively leverage the resources of businesses with different specializations. As an example, in my business, we focus on building niche communities that will serve as customer relations businesses; to most effectively do this, we rely on product creation companies to give us open source software, widgets, and APIs we can access, as well as infrastructure specialists like Amazon.com.

A key challenge for firms as they unbundle will be the need to be able to manage the externalities upon which they are dependent. For instance, in my business, I am very dependent upon external software creators, and have gotten burned and delayed many times. Ultimately, I plan on dealing with this by investing in open source communities, so that I can leverage their technology and influence how they progress. I expect this to lead to new forms of business governance, which will prove to be exciting and revolutionary.

In our current environment, most firms are grossly unprepared to unbundle. They are unfamiliar with how to do this and why it is imperative that they do so. One company that, from my outsider perspective, that looks like they may understand it (though they might not phrase it the way I am) is AdaptiveBlue. I would classify them as a product creation company, as they focus on creating various widgets and tools that create a better web surfing experience. They do NOT seem to be preoccupied with creating a destination site, and they seem to be pushing most of their infrastructure needs out to infrastructure specialists like Amazon.com. (At least that is how it appears to me, though I am not intimately familar with the inner workings or strategy of the company, so perhaps my analysis is distorted as a result).

In contrast, most Internet businesses are a natural by-product of how the Federal Reserve has manipulated the economy: they raised too much cash (because venture capitalists had too much cash, because the Federal Reserve overexpanded the money supply), and thus they have spent too much in areas where they should not be spending (to put it in terms of this blog post, they invested in bundling their firm, rather than unbundling it). Those familiar with Austrian economics will find this to be a classic example of how excessive expansion of the money supply results in overinvestments and malinvestments, which the market will seek to purge once the bubble bursts.

The good news is that as businesses unbundle, we will be in a world that is far more efficient, innovative, and free. The bad news -- or should I say, the challenging news -- is that we have many political and economic obstacles in our way, and most Internet business people are completely clueless as to what is going on. While their ignorance is humorous when one considers that they will be open to any and all information EXCEPT the truth that sets them free, let us hope that this humor does not last much longer, as the longer it lasts, the more our society will regress.