Sunday, March 13, 2011

The Future of Everything

As some of you know, I’ve been struggling a bit of late with my elevator pitch for the thesis. While clearly it’s not quite down to thirty seconds, I’ve decided to take a real stab at a single formulation of the idea to date. I wrestled a lot with the simplest way to present the ideas, but have settled on basically the order I came to understand them myself. I’m hoping this approach will help make clear the path that’s led me to my current thinking and hopefully help folks to join me on the journey.


In 1937, economist Ronald Coase wrote a seminal paper called The Nature of the Firm, discussing why firms act the way they do, and in particular, why they choose to supply their particular set of services. Coase pointed out that in the process of producing goods, firms choose to supply some services directly, investing in capital assets, employees, etc and coordinating them appropriately. Other services they procure indirectly, simply licensing them from external firms. When firms produce services internally, they have to pay the overhead costs of management. The more services a firm supplies, the greater these costs. Why then Coase asked don’t firms simply get all their services via the market from external providers? He explained the reason they don’t is that externally provided services too come with costs – transaction costs. The cost of finding appropriate partners for instance, the costs of negotiating contracts with them, and the cost of integrating production systems together.

The key insight of the thesis (which, admittedly, some like Shirky had already discovered, although for the record, I came to independently…) is that new communication technologies have radically altered this equation. In the days of Ford, finding costs would have involved poor Henry trudging around to different parts of the country physically inspecting factories. Negotiations would be uncertain and time consuming, and physical production integration would have been difficult if not impossible. Today by contrast, as new communication technologies collapse the cost of collaboration (and IP, more easily shared than physical assets, comes to represent ever-greater portions the value of products), these costs plummet. The Internet facilitates partner finding; clearinghouses and development platforms pre-set contracts; globalization and cloud infrastructures support turn key integrations. As a result, the balance of the production mix for any given firm should reasonably be expected to shift toward greater reliance on external partners.

But I realized this pattern isn’t confined merely to organizational production. Having spent time in school studying so-called New Media Literacy (thank you ProfDaer!!), a movement that explores what the notion of ‘literacy’ should look like in the 21st century, I realized the dynamic is exactly the same as applies to individual cognition processes. The idea here is, fifty years ago, if you wanted to know some fact, say, George Washington’s birthday, it made sense to memorize it… to make that upfront investment, to internalize the data inside your mind. Were you not to do so, to access that fact later on would be a major pain. You’d have to hike to the local library, thumb through the card catalogue, find the relevant book, find the right page, skim through it, and only then would you finally have your desired data. Today by contrast, the benefits of memorizing are mitigated, as anytime you have access to the Internet, you can easily and instantaneously access information via Google. Or in other words, the transaction cost of producing information via external resources has collapsed, such that the method by which we generally perform cognition processes should reasonably be expected to shift toward on demand access to external supplies.

Generalizing, the thesis suggests that fixed investments – in capital production assets, in permanent employees rather than contracted services, in internalized data, in making plans with friends in advance rather than coordinating via txt once out – are only a way to solve the problem of difficult on demand access. As transaction costs lower, these fixed structures become unnecessary. Moreover, they become inefficient… you’re stuck with some particular set of resources, optimal for only some particular set of things, rather than accessing the best, most-tailored solutions the ecosystem has to offer at exactly the times you need them. Worse in cases, you may be forgoing not only the best alternative the network has to offer, but in fact the sum of alternatives, where collaborative production platforms would allow for the channeling of contributions from many sources. As lowered transaction costs grow the network (increasing the potential suppliers who could provide or contribute to a service), it becomes increasingly unlikely your internal capabilities can rival. At the very least, the hurdle and subsequent exposure inherent in upfront investments discourages exploratory innovation and can steer companies toward higher end solutions than the market needs.


So this is the first piece of the thesis: organizations and individuals shouldn’t try to do most things on their own – they should harness the power of collaboration by utilizing external resources. But there then emerges an equally important flip side to the argument, which is the idea that for the things organizations and individuals do do, they should harness the power of collaboration by releasing these resources to others and letting the network help build value on top of them.

The idea here is that, just as reduced transaction friction increases the opportunity cost of supplying services internally, so too it increases the opportunity cost of channeling services only to your own outputs. Again, firm behavior provides perhaps the clearest example. Every enterprise faces a choice about how to monetize the services it renders. When a firm produces components of a good, each of these may be monetized vertically, by packaging it with other components and selling the bundle to consumers, or horizontally, by selling it to other suppliers who incorporate it into their own vertical stacks and then sell those to consumers. When transaction costs are high, a firm can only really do the former – the costs of finding interested partners and coordinating licensing with them would be too high. But today the situation is different. While there remains a valid assessment as to the opportunity forgone in not exploiting a component exclusively – using its differentiation to drive consumption of a broader bundle of supplied services – the question that emerges again: can your internal capabilities in producing that bundle, your ability to add value on top of the component, rival not only the best actor in the network, but the sum of all actors?

You can see the dynamic in every organization that offers products as ‘platforms’ rather than merely as finished goods or services. For instance, Google releasing its Android operating system to any device manufacturer or carrier who wants to build products with it (in contrast to Apple, who channels its software almost exclusively to its own products). Or Opentable creating a platform for restaurants to take advantage of and build into their overall products (dining experiences) . But perhaps a best example of this today would be Amazon. Amazon offers a complete, vertically integrated retail product to consumers. On, a digital storefront the company hosts and manages itself, you can purchase goods sitting in Amazon’s warehouses, through Amazon’s payment processing system, shipped to you directly from Amazon’s built from scratch fulfillment system. But critically, each of these services the company offers in its own production stack, it also releases openly for anyone to come along and build value on top of.

Imagine a small e-tailer who specializes in mountain climbing – let’s call it Gear N’ Stuff. Gear N’ Stuff could create a website with interactive maps of mountains in the Northeast, listing what shoes you’d want for each. The company could then link through to Amazon’s programming interfaces and let customers buy and receive shoes through Amazon’s systems, collecting a revenue share on each sale through the company's affiliate fee program. A mom and pop operation, Gear N’ Stuff couldn’t have managed its own warehouses and wouldn’t know anything about accepting digital forms of payment. What they do know though is mountain climbing, something Amazon wouldn’t have the time or expertise to do anything with. Because Amazon has released its capabilities to external innovation, this co-supplier (without having to ask specific permission or create any sort of formal agreement) can add value and drive incremental sales that Amazon couldn’t. Other retailers might use the storefront, handling payment and fulfillment themselves; companies outside retail altogether might license serving capacity from Amazon’s web services business and build value on top of it in areas Amazon would never enter (gaming for instance). Amazon has already made the investments in all these platforms anyway for its own product, why not amortize the costs of these investments as widely as possible by letting others help return revenue using them?

And of course, the dynamics extend beyond merely firms. When then-candidate Obama focused campaign resources in 2008 not on staffing call centers, but on building call-center tools unmanaged volunteers could utilize, he was tapping the power of network production (as in fact he did opening his brand to innovation with remixable symbols like Hope and Change). Of non-profits, before Wikipedia, you had Encarta, Britannica, World Book, etc… who all produced and sold final products 95% the same and 5% differentiated. Wikipedia came along and said instead, we’ll build a platform for information assembly, and anyone can help build value on top of it. Everyone collaborates together. Critically, the dynamic applies equally to individuals. Much has been made of Mark Zuckerberg’s constant nudging of users toward more liberal privacy settings, but he’s right – sharing is the way of the future. When we release information and content – like for instance this blog post! – it makes it available to others to add value on top of. And even if only a tiny percentage of the things we share ‘hit,’ finding that someone, somewhere in the world, at some point in time to whom it’s valuable, that’s fine, as collapsed distribution costs means the act of sharing has become literally free. It’s the back and forth, the collaborative value production, that allows the things we do to truly take off, precisely why skills of production and sharing lie at the heart of new media literacy, and not merely internalization of data as was historically true.


And so in the end, you arrive at this radically new landscape. Horizontal supply layers emerge, who instead of trying to do everything on their own, release services openly for others to build value on top of. In so doing, they optimize resource investments, spreading them across as wide a base as possible, gaining the efficiency and expertise of scale and specialization. Prime systems integrators then come along and swoop up all these layers, saving the burden and exposure of fixed investments by licensing services on demand, building some value independently but then combining it with all the resources the network has to offer via now available horizontal platforms. We come to a world of meshed production, a complex ecosystem of mass collaboration.

There are tons of complexities I’m of course leaving off here. The mechanics of why distributed collaboration can now compete with internal production… a change in degree creating a change in kind, as the huge redundancy and aggregating power of digital networks comes to approximate the quality assurance of command-and-control structures. The counterpoint benefits of internal processes and the limits of network production. Specifics of this new resource allocation system where investments are made then shared as platforms, where investments are made jointly, and where investments distributed within populations can be collected and harnessed. The massive displacement this all implies, but also the incredible gains to efficiency and sustainability. The implications for the media industry, for education, for government, politics, social relations, social action, sustainability, medicine, and other areas. It’s I suppose what happens in an ‘elevator pitch,’ but I’ll of course continue posting on these subjects in the hope they too may eventually become clear.

The other day, I ended up watching the movie Castaway with my roommate. While I sat there, I couldn’t stop thinking, the thing that would have driven me crazy wouldn’t be the rain, or the heat, the constant physical duress, or even the daily dose of raw crab and coconut. It would be the isolation. And not simply in an emotional sense, but in an informational, a productive one. Any of my friends who’ve gone to dinner with me know how antsy I get in the three minutes between when someone asks a question we don’t know the answer to and I pull out my cell to Google it. Watching the movie, I couldn’t stop thinking the agony I would feel being stuck on an island, wanting to know something, even something trivial, and realizing there was simply no way that information could ever be accessed. On recognizing the staggering inefficiency of having to reinvent absolutely everything for myself. The knowledge that if I had some thought, some idea, produced some innovation – it would be lost to history, it could never be communicated to anyone, no one beside me would ever be able to do anything with it.

The problem with traditional production is it’s like being on an island. Every process needs to be recreated and every output is thrown away, inaccessible to anyone beside the individual or organization that created it. I’m doing a research project at work right now around digital news and the different players in the space. It kills me to know that there must be a thousand other people who’ve done this exact exercise and moreover, when I finish, it’ll be locked away on our corporate servers somewhere, almost certainly never to be touched or built on again. (I remember feeling the same way in school, knowing every paper I wrote, at least one of the millions of graduate students from the last fifteen years must have written exactly, if only I could access it).

Why shouldn’t we open the project up, do it collaboratively say via wiki? We could create a grid on all the players that would evolve constantly over time, such that no one would ever have to do it again from scratch and we wouldn’t just keep circling over on ourselves. For any official use, each organization would of course have to do their own vetting, and the unique strategies that would be launched off this information would certainly be kept proprietary. It would be a question merely of creating a shared resource layer for commodity information we have no differentiation in producing and there would in fact be huge benefits for everyone, given the distributed stocks of knowledge involved, in producing collaboratively. It would be akin to what certain companies in the pharmaceutical industry have done around diabetes research and the open genome project. Or even more basically, akin to shared infrastructures like highway and electricity systems we all support together and then all reap the non-rivalrous benefits of, shifting the locus of competition to layers higher up the stack where true differentiation can occur.

The media revolution taking place today is unquestionably as profound a change as any previously, from the printing press, to mechanical recorded media, to the telephone, telegraph, and interactive communication, to broadcast mass media. More though, the Internet, the frictionless connection of everyone to everyone, is a revolution of societal organization. In the Neolithic revolution, man first emerged from Hanks’ Castaway plight and realized that if we work together, if we form societies, we can achieve infinitely more than we can as individuals and individual groups. In the Industrial Revolution, we realized that if we temporarily suspend the constraints of market interaction and form little communes (companies) where we invest upfront and all work together in an organized way, we can overcome the difficulties and uncertainty of markets and do some cool things we couldn't do previously.

Today though, we come to a third (perhaps final?) stage in this evolution, where the stop-gap measure that was industrial organization becomes, while never irrelevant, less and less necessary. We come to a world of ubiquitous connectivity where we collectively pursue humanity’s promise, constantly endeavoring onward and upward as we build on each other’s progress rather than simply recreating and then reburying it. Coordination becomes less important, but collaboration paramount, as everyone begins working together-apart to drive the staggering, unprecedented innovation and value creation of the coming century.

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