Monday, October 16, 2006

Geography of the Internet Industry (first half)

In Chapter 1 Zook introduces us to geography and how it relates to the development on the internet. He characterizes venture capitalists as "knowledge brokers who acquire and create intelligence through personal (and generally local) networks about industries, market conditions, entrepreneurs, and companies thought a constant process of interactions and observation." (pg 3). He also defines the internet industry with three criteria:
-Internet based company or one whose operation wouldn't be possible without the Internet
-the expectation of extremely fast growth
-financial backing from investors expecting a high return rate

Chapter 2 begins by saying that the world is fascinated with the ability to "distribute information on a real-time basis across the globe." In the early days of the Internet, the main idea was packet switching, which is dividing information into smaller units to send that are put back together when they reach their destination. He goes through the details of the ARPANET and the NSFNET to show how we got the what is now the World Wide Web. The change to the World Wide Web was essential in making the internet a medium of communication. The majority of internet users are in North America and Eastern Europe. It is hard to tell how much of the internet is located in which countries, but the best indicator is the domain name (ex: yahoo.com). The US actually does not have the highest percentage of the population online, the UK does. However, we do have the highest percent of the world's domains. As the internet has grown, the location of domains has increased, but the central cities have remained at the top.

In Chapter 3, Zook compares various indicators, including number of users, number of domain names, top web sites, and internet industry firms regionally, to unveil patterns in the concentration and "clustering" of Internet Industry firms. Trends:
---80 percent of users located outside of major Internet centers
---Top six regions account for:
- 40.6 percent of all domain names in US
- 56.2 percent of US Internet firms
- 61.8 percent of the top web site in the US
(Among these six regions are San Francisco, Los Angeles and New York). Zook's observations in this chapter expands upon his idea that is illustrated throughout the book that the internet industry is embedded in geography, and does not wipe away the importance of locality, geography and other social and normative contexts in commercialization.

Zook's purpose in Chapter four is to detail, define and explain the relationship between various types of knowledge, venture capitalism, and their combined effects on the geography of the internet industry. First, he explains that there are two different types of knowledge codified, and tacit (44-45). According to Zook, "codified knowledge is defined as knowledge that is possible to record or transmit in symbols such as words, drawings, or other technical specifications or that is manifested in some type of concrete form such as a piece of machinery or equipment" (44). This type of knowledge, one can infer, seems to work incredibly well with the internet and our current quality and quantity of information technology. In contrast, Zook points out, "Tacit knowledge is not easily captured in transferable form" (44). On the other hand, tacit knowledge is best understood through observation, social interaction and networking in real life.
Though these different types of knowledge in and of themselves house their own implications for the possibility of electronic transfer, "geographic proximity still plays a significant and even leading role in this process"(50). For example, regions that can successfully create and utilize tacit knowledge will surely be at an advantage in the global market. Likewise, however, regions that don't might be disadvantaged, and may lend better to codified-knowledge transfer (45).
So where does the actual geography fit in, then, if each type of knowledge already self-selects a certain type of transfer that complements it best? Well, Zook says many centure capitalists choose to "leverage non-market factors, reduce costs and increase the quality of information" by restricting their investment to nearby companies (56). This way, essentially, they can access certain tacit knowledge that they wouldn't otherwise be able to access.

Chapter 5, "Connecting Venture Capital to the Geography of the Internet Industry," is extremely well written by Zook who thorough discusses the geographical impact venture capital has had on the development of the Internet industry. During the dot.com boom the acquisition of venture capital was a strategic asset, as investors immediately responded to the success of yahoo and Netscape by investing more capital into Internet industry. Attempting to capitalize off 1st mover's advantages and the success of EBay and Amazon, the large amounts of capital invested also facilitated the expansion of many companies within the Internet industry.
Zook argues that the increase of venture capital invested resulted in placing a high premium on time and obtaining what he terms "smart money." By smart money Zook simply means capital that derives from not only a wealthy but highly influential and connected source. Ironically, with so much risk involved in investing, starting and maintaining an Internet industry; the biggest problem for many entrepreneurs was finding people who recognize the potential of the business as worthwhile. Thus "as a result regions with more risk capital available or in which it was easier for entrepreneurs to get access to this capital were better environments for the entrepreneurial activity surrounding the creation of the Internet industry." (61) Location therefore became a strategic choice for entrepreneurs of the Internet industry. Moreover, with a premium placed on time, lead investors preferred to invest locally. Due to the accessibility of capital and the means to explore new ideas, San Francisco became the hub of the Internet industry. Lastly, the clustering of companies in the Internet industry also stems from the interpretation of money as a social relation. Zook argues that "venture capital investing depends upon no monetary inputs such as knowledge and investors prefer to be close to companies in order to monitor and assist." (76)
By analyzing data, Zook drew a number of conclusions about the affect on venture capital on the geography of the Internet industry. Reflecting the important role venture capital played in the development of the Internet industry, Zook concluded that venture capital did indeed contribute to the clustering of the Internet industry. Another interesting conclusion was that "although they (dot.com companies) were based on the use of technology, many of these companies are not technology companies per se."(75)

Chapter 6, Finance and the Brokering of Knowledge, shows that venture capitalists spend a lot of time building and sustaining their social networks. They offer a variety of non-monetary inputs of which entrepreneurs value the most. Therefore, Zook calls venture capitalists "knowledge brokers" that choose promising industries to invest in. The internet industry values the knowledge of venture capitalists who will validate their companies and spread the word of a good sound investment. However, local investors have better access to the tacit knowledge about the company and its industry. As word spreads, tacit knowledge loses its value, and thus quick access to knowledge is important. To venture capitalists, online access isn't the same as making deals in person. Personal relationships are key to investment knowledge and determine a VCs traction in a regions "deal flow." Local contacts are usually the most productive in producing deal flow. Proximity is important even after the investment due to active involvement of the VCs in their companies. VCs also support entrepreneurs by providing advice on how to grow a company. One investor said "the way you add value is to be close." If a VC is located in the center of a system he/she is provided with valuable local tacit knowledge of which entrepreneurs value most.


Discussion Questions:
1) Zook referred to the firms with more domain names and higher rank (visited more often by users) as more "important." Do you think that these dominant sites are really the most "important" or do you think that there are outside commercial factors that drive their success within the Internet Industry? What are these factors and how do they change the internet industry as a whole?

2)Is tacit knowledge more valuable in the information age than codified knowledge? If so, is it work sacrificing cyberspace geography in order to have access to this tacit knowledge? Furthermore, as a member of the Internet Industry, is there a way to achieve a balance such that you can maximize your internet network (through which you'd acquire codified knowledge), your social network (through which you would acquire tacit knowledge) and your profits (without which, you likely wouldn't have the choice of where to situate your corporation or its assets to begin with)?

3) Do you think location is as significant a factor in the geography of the Internet industry today? With increasing globalization, do you think the status of Silicon Valley as the hub of the Internet industry could eventually be challenged? Do you think the risk of investing in the Internet industry has increased or decreased since the initial dot.com craze?

4) As people become more comfortable with making transactions through cyberspace, is it possible to acquire the valuable tacit knowledge and close relationships that Zook talks about through other communications modes other than just personal face-to-face communication?

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