Virtual communities are groups of people who share common interests and needs who come together on-line. Most are drawn by the opportunity to share a sense of community with like-minded strangers-regardless of where they live. But virtual communities are more than just a social phenomena: what starts off being a group drawn together by common interests ends up being a group with a critical mass of purchasing power-based in part on the fact that in communities, members can exchange information with each other on such things as a product's price and quality.

So is America Online a virtual community?

AOL is too broad in focus to really be considered a virtual community. But within AOL there are fledgling virtual communities that are more targeted at specific member needs, like personal finance, sports, or health issues. Motley Fool is a good example of a virtual community in AOL, but there are also hundreds of other emerging communities, both within other proprietary services, on the Internet, and in a vast array of in-depth bulletin board services, such as ESPNet, Amazon.com, and The Cancer Forum.

What incentive do companies have to get into the virtual community business?

Virtual communities are likely to be very threatening to your average company. How many companies want to make it easier for customers to talk to one another about their product or service? But vendors will soon have little choice but to participate. As more and more of their customers join virtual communities, vendors will find themselves in "reverse markets"-markets in which customers seek out vendors and play vendors off of one another, rather than the other way around.

Far-sighted companies will recognize that virtual communities in reality represent a tremendous opportunity to significantly expand their geographic reach at very low cost. Virtual communities also provide companies with the chance to know their customers much better than they ever have before, by giving them the ability to interact with each other and with the company itself. Companies that organize virtual communities can use what they learn to create undreamed of customer loyalty.

Are these opportunities available to all companies?

The ability to organize a virtual community has less to do with the particular business you're in or the assets you have than with your approach to making money and your appetite for risk. The ability to organize a community is ultimately about being willing to champion your customers-even to the extent of inviting them to do business with your competitors.

Why would any company want to do that?

As customers join virtual communities, they're going to want the broadest range of information and product choices possible. Customers who are interested in automobiles are not going to join a community organized by GM if they only have the option of buying a GM car there. They'd be much more likely to join an "independent" community that put the buyer's interest first by offering products and information from all automobile manufacturers. If I'm GM, and the virtual community I organize sells only my products, customers will quickly see that the community exists for my advantage, not theirs, and they'll migrate to another community that better champions their interests. This ability to play vendors off of one another is one of the things that makes virtual communities so powerful. Vendors who try to restrict that choice will simply be fighting the tide-their customer will go elsewhere.

But haven't companies already tried to do something like this and failed?

There have been several attempts to build virtual markets on-line that would pit vendors against each other in order to create lower prices for customers. One company developed an agent technology that enabled customers to go on-line and source the lowest price for a particular music CD from different vendors. It didn't take long for vendors to realize what was happening, and they quickly implemented a blocking technology that prevented the agent from accessing their web sites. They were able to do this because the company offering the agent technology had a very limited customer base (and once the company was blocked from these sites, it had even less chance of enlarging its customer base!). If that company had built a critical mass of customers beforehand then they'd have gotten a much different response from vendors. After all, if your customers have already signed up with a virtual community, you'll find you can't afford not to offer your products there.

In contrast to these early attempts, virtual communities are likely to succeed precisely because they are communities, not markets. In their early stages they're offering value to their members-by providing them with rich information regarding vendors and by allowing them to talk to each other and share experiences about vendors in an engaging and entertaining atmosphere. All of this can be done without the cooperation or participation of the vendors themselves. Then, once a critical mass of customers is in place, the virtual community has much greater negotiating power in dealing with vendors and obtaining their participation and cooperation. In the book, we refer to this as putting community before commerce.

Why is it so dangerous for CEOs to think of their company's on-line presence-and for that matter the decision to start a virtual community business-as a marketing issue?

A lot of companies still view the World Wide Web as just another channel for their marketing communications. In point of fact, online environments create the potential to create entirely new businesses that extend well beyond the boundaries of current organizations. These environments have different economics, different skill sets, different competitors. Looking at this new world through old lenses can mean missing considerable opportunities - and ignoring potential dangerous threats.

Will anybody make money on-line, and if so, how?

Obviously it's still early in the game. There are not yet any good examples of robust virtual communities out there, much less of people who are making a lot of money organizing them. But our extensive work with clients that are heading in this direction-combined with computer models we've built based on this experience-indicates that virtual communities will have the opportunity to create very substantial economic wealth for organizers. This won't happen overnight.

First, you've got to assemble a critical mass of customers. Then the idea is to use increasing returns economics to "lock them in." Those communities that accomplish this will be in a highly attractive competitive position as they begin negotiating with vendors that want to be able to offer their services to the community. That's why we say that the race belongs to the swift. If somebody else locks in your customers before you do, then you've got a problem on your hands..

But why? What will prevent customers from switching to a competing community that has a better offering?

Virtual communities will most likely change the game and help companies develop closer ties to their customers. If loyalty is defined in terms of repeat purchases or "coming back for more," communities are a tremendous vehicle for increasing loyalty to a vendor's products. This is not because vendors will enjoy monopolies in communities, because communities will offer a full range of competing products. Loyalty will be driven by the relationship a supplier develops one-on-one with customers, through customized advertising, two-way sharing of information, and possibly customized products. It will be reinforced by the fact that communities attract enthusiasts, and these enthusiasts will form virtual "fan clubs" around products and suppliers. Assuming that a vendor has access to the community's member profiles, it will be alerted sooner than in the off-line world if a customer has stopped purchasing. It will then be able to target marketing efforts at that customer, wooing her back before she has time to accustom herself to a rival product. <P> <B>Do you agree with the experts who predict that the future of on-line commerce will be modeled on the broadcast industry, with players like PointCast and Microsoft sending customized programming to the desktop, supported by advertising revenues? <P> We don't maintain that virtual communities are the only model for success online. Broadcast may also flourish. But broadcast reduces the opportunity to become much more targeted in terms of advertising and marketing to customers. What the broadcast model misses, is that the primary activity online is people communicating with each other. Broadcast assumes the primary value is in accessing information, not communicating. <P> <B>How big a business would we be talking about in ten years, and what are likely to be the major expenses? <P> Our analysis shows that with an initial investment of around $15 million, a virtual community could grow into a nearly $700 million business by year ten, which would represent more than $4 billion in market value. Revenues will come mostly from advertising and from transaction commissions. Of course, these results will differ depending on the focus of the virtual community. <P> No matter what type of community, the largest expenses starting out will be for member acquisition, but these expenses are really preemptive investments in unique assets. This is because-getting back to the idea of an increasing returns business that we just described-a critical mass of members unleashes a series of other opportunities that, as time goes on, become more and more expensive for your competitors to take advantage of. Projecting the cost structure some years out again depends on the community, but in the example of a consumer travel community that we use in the book, we see expenses in year five evening out so that that particular company will be spending as much on acquiring advertisers, vendors, and non-member-generated content as in acquiring members. <P> <B>In general, which kinds of companies will survive, and which will flourish in this new world? <P> Many of the things that companies used to be able to rely on for competitive advantage are going to erode in this new environment. Things like size and brand are going to be worth a lot less. Size becomes less important because less investment is required to create the distribution capability needed to reach your target customers. Brand becomes less important because information is more readily accessible on individual products. You no longer have to rely on brand as a guarantee of quality and value. So, if today you're relying on scale and brand, it's time to being rethinking your value proposition. <P> What will matter in this new environment is the quality and value of individual products and services, rather than having the biggest advertising budget or the most dominant relationship with retailers. If your products can't stand the intense scrutiny they'll be subjected to in the virtual community environment, then you're going to have a problem competing, no matter how big you are. These factors mean virtual communities will help create the opportunity for "piranha economics" to take hold. Piranha economics are where the big fish gets eaten by the smaller fish. For today's bigger companies, this should be a real source of concern. <P> What won't matter in order to compete successfully in the on-line economy is whether your company is technology-based. Contrary to many a CEO's fear, entering the virtual community business is not a technology play. You don't have to come up with technological innovation after innovation in this business because what is important is your ability to acquire and understand your community members. For example, in the book we give CEOs guidelines for building a technology strategy that hinges upon using existing technology, keeping away from flashy technology at the customer interface that doesn't add value, and oustourcing whenever possible.

At the heart of Hagel and Singer's solution is the "infomediary" that sits between the customer and vendor. For the consumer, the infomediary acts as a trustworthy agent who knows the needs and habits of the client. For the vendor, the infomediary is the holy grail of consumer behavior, a marketer's dream. The infomediary brokers client information to vendors in exchange for goods and services for the consumer. The result? Happy consumers, satisfied marketers, and a very lucrative business model that awaits those entrepreneurs and companies that are bold enough to embrace the idea. The authors painstakingly outline the challenges and opportunities of developing an infomediary business and go as far as to peg the potential market cap of a dominant player at $20 billion by its fifth year of operation. While the idea of software agents is nothing new, Hagel and Singer may be breathing new life into the idea at just the right time. And even if infomediaries never arise, following the thinking of Hagel and Singer is well worth the price of admission. For marketers, managers, entrepreneurs, and just about anyone who thinks about e-commerce. Highly recommended. --Harry C. Edwards

The premise is practical and devoid of "change the world" promises. That very pragmatism, says Hagel, will drive enterprises to adopt it. In this book, he provides a clear view of the business implications of Web services: its distinct capabilities, its power to deliver near-term profits, and its potential to drive long-term growth.

Drawing from the experiences of pioneering adopters, Hagel shows how Web services will enable companies of all sizes to:

- Realize bottom-line savings quickly with modest investment
- Leverage investments in existing applications and create more flexibility
- Target specific areas for near-term cost reduction
- Establish-or leave-business relationships fluidly and inexpensively
- Create leveraged growth platforms for long-term competitiveness

A landmark book for CEOs, strategists, and IT managers, Out of the Box addresses near-term cost concerns and requirements for future success. As it discusses Web services, it provides deep insights into business strategy. At its core, this book tackles the most fundamental business issue facing managers today: how to continue to create value as competition intensifies. It also outlines innovative approaches to business process management and organization.

John Hagel III is a business consultant based in Silicon Valley, and is coauthor of two best-selling books, Net Gain and Net Worth. He has served as a senior executive with various technology companies and spent sixteen years as a Partner at McKinsey & Company, Inc.

Managers are understandably skeptical of the promises of new technologies. Now, leading business strategist John Hagel III has a refreshing message for managers burned by over-hyped technologies yet pressured to find innovative ways to deliver more value with fewer resources. Out of the Box tackles the most fundamental business issue facing managers today: how to continue to create value as competition intensifies. The book's practical advice will enable companies of all sizes to realize bottom-line savings quickly with modest investment, and create leveraged growth platforms for long-term competitiveness. For any manager who must envision and execute the next IT/business strategy, and the strategy after that, this book will prove to be a rich source of new ideas and a landmark in shaping their thinking.