Managing Business Models in the Net Economy: the case of Spotify

13 
 
1.1 Brief History of the Internet 
The Internet in its embryonic form (ARPANET) was born in the 1960s as a project 
of the Ministry of Defense of the United States. During the Cold War any 
centralized “control center” would be a prime target in a nuclear attack. This 
problem gave birth to the idea of a decentralized network with redundant 
connections. In the late 1960s a few computers were already connected. In the 
1970s the network created by the Ministry of Defense then grew with all the 
universities in the United States and some other defense-oriented companies and 
institutes of research. 
The ARPANET led then to the development of protocols
1
 for internetworking, but 
the first real applications were built about ten years later: in 1982 the term 
“Internet” - chosen because the instrument was designed to connect disparate 
networks across the country and even the world - was used for the first time, and 
the TCP/IP protocol was defined and standardized. The TCP/IP protocol was 
designed to break large amounts of information into small packets, which were to 
be identified with a source and a destination. The source was called “sender’s IP 
address” and the destination the “receiver’s IP address”. 
Commercial Internet Service Providers (ISPs) began to emerge in the late 1980s 
and early 1990s. At this phase, the Internet could already be defined as a vast 
collection of networks of computers that were interconnected both physically and 
through their ability to encode and decode certain specialized communication 
protocols. 
In 1990, there were 100,000 computers connected. The following year, the 
CERN
2
 developed the HTML language and the source code for the first World 
Wide Web browser. In two years, the number of computers rose from 100,000 to 
one million. In 1999, the number of computers connected to the Internet was 200 
million. 
According to current estimates, at the end of the year 2013, the number of people 
who had access to the Internet exceeded 2.4 billion, increased by 566.4% in the 
last ten years. 
                                            
1
 A protocol in this sense is simply a specification of how computers exchange information 
2
 European Organization for Nuclear Research
14 
 
 
Figure 1.1 – Number of Internet user per 100 inhabitants. Source: Web. 
 
The high-rate of evolution of the technology has meant that the quantity of data 
(and so of information) increased dramatically. As a result, the number of 
services available with a connection to the Internet rose in the last 30 years. In its 
early stage, the Internet allowed transfers of a limited quantity of data (like a text 
containing letters and numbers) in a few minutes. Nowadays, users can benefit 
from a variety of services like fast download of large amounts of data, e-mail, 
instant messaging, rapid transfer of multimedia files (music, video, pictures), real 
time videoconferences, and so forth.  
Nowadays, the Internet can be accessed almost anywhere by numerous means, 
including mobile Internet devices. Mobile phones, data cards, handheld game 
consoles and cellular routers allow users to connect to the Internet wirelessly. 
Within the limitations imposed by small screens and other limited facilities of such 
pocket-sized devices, the services of the Internet, including email and the web, 
may be available. 
The Internet radically revolutionized the communication and exchange of any 
kind of information. For this reason, it can be considered one of the most 
important inventions of the last century.
15 
 
“The Net is much more than just another technology development; the Net 
represents something qualitatively new, an unprecedented, powerful, universal 
communications medium. Far surpassing radio and television, this medium is 
digital, infinitely richer, and interactive.” [26] 
G.T. Lumpkin, Gregory G. Dess 
1.1.1 The evolution of Web 2.0 
The Internet space where users could navigate at the beginning is now called 
Web 1.0. It was an early stage of the conceptual evolution of the World Wide 
Web, centered around a top-down approach to the use of the web and its user 
interface. In this reality, information was not dynamic, being updated only by the 
webmaster. Technologically, Web 1.0 was concentrated on presenting, not 
creating. Thus, user-generated content was not available, or existed only in 
limited quantity. 
The concept of Web 2.0 began with a conference brainstorming session between 
Tim O’Reilly and MediaLive International. 
Web 2.0 describes World Wide Web sites that use technology beyond the static 
pages of earlier Web sites. Web 2.0 is the network as a platform, spanning all 
connected devices. Web 2.0 applications are those that make the most of the 
intrinsic advantages of that platform by delivering software as a continually-
updated service that gets better the more people use it, consuming and remixing 
data from multiple sources. Individual users, while providing their own data and 
services in a form that allows remixing by others, create a network effect through 
an ‘architecture of participation’, and go beyond the page metaphor of Web 1.0 to 
deliver rich user experiences [29]. Instead of merely ‘reading’, a user is invited to 
'write' as well, or contribute to the content available to everyone in a user friendly 
way. 
All these interactive aspects of the new Web 2.0 made the Internet even more 
important in the last decade, with particular reference to the economic aspect.
16 
 
1.2 The Internet and the global economy 
“The information revolution is sweeping through our economy. No company can 
escape its effects. Dramatic reductions in the cost of obtaining, processing, and 
transmitting information are changing the way we do business.” [35] 
Michael E. Porter 
 
The Internet is a low cost standard with fast interactivity. The advent of this new 
technology completely revolutionized the way in which people and firms 
interrelate, transforming the competitive landscape in many industries while at the 
same time creating whole new industries. 
Furthermore, the large amount of data and the rapid speed at which it can be 
exchanged and transferred has even altered the way the economy works and the 
way in which companies and customers interact in the market. 
Companies have no choice if they want to stay competitive. The key question is 
not whether to deploy Internet technology, but how to deploy it, how to take it as 
a vital resource for upgrading their capabilities and growing their businesses. 
Several technologies have been invented in the last century, but none of them 
have made an impact such as the information technology revolution and the 
Internet on the global economy.  
What makes the Internet a better technology than all its predecessors? Does it 
really have the potential to transform competitive landscapes? 
1.2.1 Competitive Landscape-Changing properties of the Internet 
As Afuah and Tucci (2003) asserted, the Internet has 10 important properties that 
make it an essential instrument in influencing economy and industrial 
profitability.[2] 
1. Mediating Technology. The Internet is a mediating technology that 
interconnects interdependent parties. The connections enabled by the 
Internet might be useful in the business-to-business (B2B), the  
business-to-consumer (B2C) or the consumer-to-business (C2B) 
environments. In either case, the Internet facilitates exchange 
relationships among parties distributed in time and space. A firm might
17 
 
also exploit this advantage to learn more about its end users: this will 
allow a two-way flow of information. 
2. Universality. This property allows the Internet to both enlarge and 
shrink the world. Anyone anywhere in the world can potentially make 
his or her products available to anyone anywhere else, which is 
properly enlarging the world. At the same time, a skilled engineer in 
India does not have to move to California to work in the Silicon Valley; 
this means shrinking the world. More generally, the Internet allows 
contact with a larger number of people without necessarily having to be 
in close physical proximity. 
3. Network Externalities. This feature is becoming more and more 
important after the advent of Web 2.0 (see 1.1.1). The Internet 
becomes more valuable to users as more people take advantage of it. 
We can straightforwardly observe some examples of these advantages: 
a VoIP call service or a telephone system, an auction house like eBay, 
a social network like Facebook or Twitter. The more the users use the 
services, the more benefits there will be for everybody.  
4. Distribution Channel. For some products, like those with a high 
information/bits contents (multimedia contents, music, pictures, video, 
text and research data, tickets, insurances…), the Internet acts as a 
fast and cheap distribution channel. These kinds of contents can be 
delivered instantaneously, without any cost of outbound logistics. 
5. Time moderator. As it shrinks and enlarges distances, the Internet 
also shrinks and enlarges time. Instant delivery is not only cheaper, is 
also faster: the customer can immediately get his/her ticket or music 
album instead of waiting some time for shipping. Likewise, a potential 
customer can instantly get information about a product s/he is willing to 
buy from the comfort of their home as opposed to having to visit a 
physical dealer. The Internet can also enlarge time for a manager who 
is not be able to be in two far-away meetings from 8.00 am to 10.00 
am: he can attend one virtually, with a video call. 
6. Information asymmetry shrinker. Every now and then, in a 
transaction, one party has important information that another does not.
18 
 
Such asymmetries might be a source of advantage for some players. 
The Web reduces some of these information asymmetries, by making 
any kind of information easily available. 
7. Infinite virtual capacity. For many information-intensive businesses, 
advances in computer technology enable a much larger scale of 
operation than was previously possible. Suppliers, vendors, and on-line 
sellers now have more memory and computing power. Therefore, they 
can collect more data on customers, enabling them to offer 
personalized products and services to better help customers discover 
their needs. 
8. Low cost standard. The Internet and the Web are standards open to 
everyone everywhere and are very easy to use. To have Internet 
access costs very little and almost everyone can afford it, except for 
some developing countries. This is one of the most important features 
of this instrument. 
9. Creative destroyer. The new surprising features of the Internet might 
also create problems or even be destructive in many industries. In the 
newspaper industry, for instance: web pages can deliver information 
immediately without any investment in a printing press. This tears down 
a large part of the barriers to entry that exist in the newspaper 
business, but at the same time allows entrepreneurs to focus on new 
businesses.  
10. Transaction-Cost reducer. Transaction costs are the costs of 
searching for sellers and buyers, collecting information, negotiating, 
writing, monitoring and enforcing contracts. The Internet reduces these 
transaction costs because all the information can be obtained more 
easily through the web. 
To summarize, the Internet has had a profound impact on many if not all the 
primary activities of firms in information-based industries and of many retailers. 
All the technology-driven initiatives have been changing the way businesses 
interact with each other and with customers. All these instruments are also 
creating new business opportunities.