January 27, 2014
The effects of Moore’s law on the growth of the ICT industry and computing are well known. A lesser-known but potentially more weighty law is starting to replace Moore’s law in strategic influence. Metcalfe’s law is named after Bob Metcalfe, the inventor of the Ethernet. The law states that the cost of a network expands linearly with increases in the size of the network, but the value of the network increases exponentially. When this is combined with Moore’s law, we are in a world where at the same time as the value of the network goes up with its size, the average costs of technology are falling. This is one of the most important business drivers today. The implication is that there is an ever-widening gap between network-economy companies and those driven by traditional asset leverage models. Traditional business economics focus on economies of scale derived from the capital base of the company, which tends to scale linearly
In practice this means that digital services can attain the level of customer reach and network size, required to capture almost any market, even as the size of the company stays relatively small. This is why network-economy based start-ups have such a huge advantage over asset leverage based incumbents.
The principles behind this are not totally new.
It used to be argued that goods for which the marginal costs, the cost of producing one more unit of customer value, were close to zero were inherently public goods and should be made publicly available. Before the digital era, roads and bridges were commonly used as examples. Maximum benefit from the initial investment is gained only if the use is as unrestricted as possible. People should have free, or almost free access. Once the capital costs have been incurred, the more people there are sharing the benefits, the better it is for the whole value system in the future. This was the economic explanation for why roads were, and still are, under public ownership. The same logic applied to public libraries: a book can be read repeatedly at almost no extra cost.
What used to be called “public goods” is today called “platforms”. A new form of a company is being born!
Once the up-front costs have been incurred and the platform is established, the more people there are who are sharing the benefits, the greater the net present value of the whole value system becomes. A platform company should therefore be as open, as accessible and as supportive as possible, to as many users as possible. This is unequivocally the route to optimum value creation. Moreover, the higher the value of the system, the costlier it becomes to all its members to replace it – creating a major barrier to entry.
Restructuring a firm for the new world would require concurrent relative downsizing of legacy systems and upsizing of the new open platforms. As both are explicitly costly things to do and the financial rewards of the latter are typically deferred, the exercise becomes challenging for incumbents to implement within the constraints of the existing financial frameworks. But it is happening!
Internet scale economies can create almost boundless returns without the company growing at all. The goal of Supercell is to be “as small as possible” as Ilkka Paananen has said. At the beginning of 2013 Tumblr had only 145 employees and 100 million visitors. That meant it had 700.000 visitors per employee. The sheer size of an enterprise will tend to mean less in the digital network business than in the world of physical goods. Companies don’t grow any more in the way they used to! It is the networks that grow!
But something else needs to change too: customer focus has been the dominant mantra in business. Everybody knows that everything should focus on the customer. However this is not enough any more. Up to now, business has focused on the customer as an audience for products, services and marketing communications. In the world of digital networks, the customer will be transformed from being an audience to an actor. The activity of the customer focuses corporate effort.
The central aggregator of enterprise value will no longer be a value chain, but a network space, where these platform companies are fully market-facing and the customer experience is defined by applications connecting to the platform.
The basis of executive power is shifting from being in charge to being connected. New leaders understand that power with people is much more effective than power over people. It is about integrating the best of networked thinking and leveraging the new platforms for value creation.
Thank you Sasu Ristimäki for the iterations and thank you for developing my thinking.
More on the subject: Jeremy Rifkin.
December 8, 2013
The customer of the industrial age was seen as a recipient of value, a consumer of value. Enterprises also viewed customers through the lens of a fairly uniform set of features, leading to customers being seen as having relatively uniform needs. But even commodity products are always a bundle of use contexts, buying patterns, complementary goods and delivery options. Just because a product is a commodity doesn’t mean that customers can’t be diverse in the ways they use the product.
Different customers use products that are manufactured in the same way, with the same product features, differently. This is why customers are today understood to be active contributors to value creation. Without their part, the value of the product could not exist. “Consumption” really means value creation, not value destruction. You could even claim that the word consumer is misleading. It should not be used any more!
The parties “help each other to help each other” in active interaction. Value creation is a process of interaction. As the goal is to create more value together, a critically important new element is the digital code that is attached to the “thing”, the offering, the product or the service.
The Internet of Things is about creating new software code. It is about two new digital layers for all products: (1) an algorithmic, pedagogical layer and (2) a network layer.
The pedagogical layer teaches the customer to create more value, and accordingly teaches the company to develop. As the customer’s need set is expanded beyond the pre-set features of the offering, the definition of the product changes and becomes more complex. The more complex the product, the more opportunities there are for the company to learn something that will later make a difference.
When a customer teaches a firm what she wants or how she wants it, the customer and the firm are also cooperating on the sale of a product, changing the industrial approach to sales and marketing. The marketing and sales departments used to be the customer’s proxy, with the exclusive role of interpreting changing customer needs. Internet-based business necessarily transforms the marketing function and sales specialists by formally integrating the customer into every part of the organization. The customer of tomorrow interacts with, and should influence, every process.
In the age of the Internet of Things, all products are software products. The value of the code may determine the value potential of a product more than the physical product itself. The effectiveness of an offering is related to how well it packages the learning from past activities and how it increases the users options for value creation through network connections in the present. The offering transfers information via pre-packaged content and through live, emergent presence in the Internet.
A product or a service should be pictured as a node in a network with links to other use cases, supplementary services and complementary features surrounding the product. The more relevant the links are considered to be, the richer the product will become. The task today is to visualize the product in the broadest sense possible.
The second task is to visualize connections, the networks of things. The study of isolated parts offers little help in understanding how connected parts work in combination and what emerges as the result of network connections. Every link and relationship serves as a model for what is possible. What new relational technologies are making possible for manufacturing industries is a much, much richer repertoire than what we were used to in a traditional firm.
The ability to create value in a remarkably more efficient and resource-wise way corresponds to possibilities for interaction with other relevant parts and actors. If interdependent links are few, poor, or constraining, the activity and value potential will be limited.
Amyarta Sen has written that wealth should not be measured by what we have but what we can do. New links and new relationships create new potentials for action. Technology creates new opportunity spaces for more efficient and more sustainable practices.
The Internet of Things creates totally new openings for digitally native, resource-wise practices.
Thank you Rafael Ramirez
November 15, 2013
The creative era we live in is an age of unprecedented possibility compared with the industrial age. Totally new opportunities are systematically being created. One of the best examples of this is the SLUSH event that took place in Helsinki on November 13th and 14th. SLUSH is a two-day startup conference, a meeting point and a coming together of roughly 6000 people belonging to the international startup ecosystem. There are entrepreneurs, investors, startup founders, employees and students taking part.
The democratization of technology that is taking place at the moment does not determine social and organizational change, but does create new opportunity spaces for new social practices. Some things are becoming much easier than before and some things are becoming possible, perhaps for the first time. The vibrant startup culture proves this point.
There are very few isolated geniuses. But there are many bright people who have continued and improved the work of others. Capable people always have capable peers, people who act as filters connecting them with people and connecting them with high quality information. The goal of SLUSH is to “gather the connections that startups need to thrive on the global stage.”
In a sense, creative people are more remixers of other peoples’ ideas than inventors. Technology and development are not isolated acts by independent thinkers, but a complex storyline, where the storytellers and curators, are more important than the heroic inventors, if there ever were any.
Businesses and non-profits like SLUSH, more than government, seem to be driving the changes in education that are required for the knowledge-based economy. The government-run education systems are lagging behind the transformation of learning that is evolving.
Learners are teachers and teachers are learners during the two hectic days of SLUSH. Creating learning connections is more valuable today than creating learning content.
Information is becoming a process of continuous iteration and networked negotiation. Information networks are the architecture of work and a valuable, shared resource. These networks are the new commons.
In the new commons people with many ties are better informed and have more signalling power, while those outside the commons and with few ties may be left behind.
The real forte of SLUSH is that as we engage in new relationships, we are creating new potentials for action. Every human relationship, every connection, serves as a model for what is possible.
The Internet era has proven that we are capable of working together competitively/cooperatively and building social communities that some time ago many would have dismissed as impossible dreams.
Thus we don’t yet have a good idea of what cannot be done by connected people working together in new ways.
“We can walk on water” as @pvesterbacka from Rovio says in a very compelling way.
Thank you Miki Kuusi, Ilkka Kivimäki, Peter Vesterbacka, Inka Mero and the whole team! And yes, Supercell! It was a great party!
More on commons.