INCREASING RETURNS

The social web, even in the Valley…

…displays some stress marks. There is no question that the network economy is, at worst, winner-take-all, and at best, winner-take-most. The trajectory of increasing returns and a shortage of attention focuses success toward a few points. Stars and hits rise, while the rest languish. Mundane appliances and bulky objects now seem to follow the Hollywood model: A few brands sell like crazy, and the rest sell only a few. It’s a “hits” economy, where resources flow to those that show some life. If a new novel, new product, or new service begins to succeed it is fed more; if it falters, it’s left to wither. Them that has, gets more.

The current great debate is whether the law of increasing returns favors the early or not. In some of the first studies of increasing returns, economist Brian Arthur discovered that when technological competitors, such as the VHS and Betamax video formats, were modeled in a computer, increasing returns favored one technology over the other–to the eventual demise of the unfortunate one (in this case Betamax). And “unfortunate” is the right word. According to Arthur’s research, the technology that came to dominate, thanks to increasing returns, was not necessarily the superior one. It was just the lucky one. Or the early one. Arthur writes: “If a product or a company or a technology–one of many competing in a market–gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company can go on to lock in the market.”

All things being equal, early success has a measurable advantage. But in real life all things are rarely equal. Technologies which seem to be inferior and yet prevail through the dynamics of increased returns often reveal themselves under further study to be slightly superior in key ways. The Sony Betamax format lost to VHS because it couldn’t record for as long as VHS could, and, according to some, because Sony discouraged Beta use for porno–an early use of video. Apple Computer’s superior operating system lost to Windows because Apple had an inferior price–due to its misguided monopolist strategy. The supposedly ergonomic Dvorak keyboard lost to the all-too-familiar QWERTY keyboard because the Dvorak layout really wasn’t any faster.

Being first or best sometimes helps, but not always. The outcome of competition in a network is not determined solely by the abilities of the competitors, but by tiny differences, including luck, that are greatly magnified by the power of positive feedback loops. The fate of competition is “path dependent” on minor nudges and hurdles that can “tip” the system in one direction or another. Final destiny cannot be predicted on the basis of exceptional attributes alone.

 

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-- KK