INCREASING RETURNS

Create feedback loops.

Networks sprout connections and connections sprout feedback loops. There are two elementary kinds of loops: Self-negating loops such as thermostats and toilet bowl valves, which create feedback loops that regulate themselves, and self-reinforcing loops, which are loops that foster runaway growth such as increasing returns and network effects. Thousands of complicated loops are possible using combinations of these two forces. When internet providers first started up, most charged users steeper fees to log on via high-speed modem; the providers feared speedier modems would mean fewer hours of billable online time. The higher fees formed a feedback loop that subsidized the provider’s purchase of better modems, but discouraged users from buying them. But one provider charged less for high speed. This maverick created a loop that rewarded users to buy high-speed modems; they got more per hour and so stayed longer. Although it initially had to sink much more capital into its own modem purchases, the maverick created a huge network of high-speed freaks who not only bought their own deluxe modems but had few alternative places to go at high speed. The maverick provider prospered. As a new economy business concept, understanding feedback is as important as return-on-investment.

 

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This is a blog version of a book of mine first published in 1998. I am re-issuing it (two posts per week) unaltered on its 10th anniversary. Comments welcomed. More details here.
-- KK